Series 66: Regulations

A customer opens an account at a brokerage firm to purchase securities in an offering. The customer must receive the disclosure document/prospectus: A. no later than the confirmation of the sale B. no later than the settlement of the transaction C. within 7 days of the transaction D. within 90 days of the transaction

The best answer is A. NASAA states that "failing to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus," is an unethical practice.

Under the Uniform Securities Act, the registration of an agent may be denied, suspended or revoked if the: I application contains false statements; or omits required information II applicant has been arrested for a securities related matter III applicant has been charged by the Securities and Exchange Commission with a securities felony A. I only B. II and III only C. I and III only D. I, II, III

The best answer is A. An agent's registration application will be denied if it is incomplete or if it contains false statements. An agent's registration will be denied if the agent was convicted of a misdemeanor involving securities or monies; or any felony; within the past 10 years. The application will not be denied if the agent has been arrested on a securities matter (he could be innocent!); nor will it be denied if the applicant is charged by the SEC with a securities felony (again, he could be innocent). The key word here is conviction - for registration to be denied, one must be "convicted" of the offense, not just "accused" of the offense.

A Registered Investment Adviser who is also a registered representative manages a client's account, charging the client both commissions on trades and an advisory fee. Which statement is TRUE? A. This is not unethical as long as disclosure is made to the client B. This is unethical because a client cannot be charged both commissions and advisory fees at the same time C. This is not unethical because a client can be charged both commissions and advisory fees at the same time D. This is not unethical as long as the total charges are fair and reasonable

The best answer is A. An investment adviser that charges advisory fees to a client for recommending securities; and then charges commissions to that client on trades performed; would be engaging in an unethical practice if the adviser did NOT disclose the 2 sources of revenue. As long as disclosure is given to the customer (and the charges are fair), this is OK. The overriding theme here is that all charges to customers must be disclosed.

A broker-dealer located in State A makes an offer of securities to a customer whose principal residence is in State B. The customer has temporarily moved to State C and has asked the post office in State B to forward the mail to the customer's address in State C. Which State Administrator(s) has (have) jurisdiction over the offer? I State A II State B III State C A. I only B. I and II only C. I and III only D. II and III only

The best answer is A. Because the broker-dealer is located in State A, that State Administrator has jurisdiction. Normally, if an offer is received in a State (B in this case), then State B's Administrator would have jurisdiction. But the offer was never received in State B because it was forwarded by the post office on to State C. Thus, an offer was never made in State B and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in State C, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to State C and should not be subject to the law of State C on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

The directors of a company decide to offer shares of the company from the company's unissued stock directly to company employees. The proceeds of the sale go to the company, but the directors take a commission from the employees on these sales. All of the following statements are true EXCEPT: A. this is a non-issuer transaction B. the directors are defined as agents of the issuer C. the directors must be registered D. the securities must be registered

The best answer is A. Because the company is issuing these shares and the proceeds are going to the issuer, this is an issuer transaction. Because an agent is defined as an individual who effects securities transactions for either a broker-dealer OR an issuer, the directors are considered to be agents of the issuer and must be registered. Since common stock is a non-exempt security, it also must be registered to be sold in the State.

Broker-dealers may charge: A. commissions on recommended transactions B. advisory fees on recommended transactions C. both commissions and advisory fees on recommended transactions D. commissions, advisory fees and performance fees on recommended transactions

The best answer is A. Broker-dealers charge commissions. Investment advisers charge advisory fees. Each is a legally separate entity. Brokers do not charge advisory fees - to do so they would have to establish a separate investment adviser subsidiary that is registered with the State. Investment advisers do not charge commissions - to do so, they would have to establish a separate broker-dealer that is registered with the State.

All of the following information is included on an applicant's registration application EXCEPT: A. Educational history of applicant B. Business history of applicant C. Conviction record of applicant D. Financial condition of applicant

The best answer is A. Educational history is not part of a registration application. The applicant's business history, financial condition and record of any convictions for securities law violations are part of the application.

If a representative that transacts business in a State terminates employment with an investment adviser, notice must be given to the Administrator by the: I Investment Adviser II Officer or Director of the Investment Adviser III Investment Adviser Representative A. I only B. I and III C. II and III D. I, II, III

The best answer is A. If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. Notice that this is different than the requirement for a broker-dealer, where both the terminated agent and the broker-dealer must notify the Administrator. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

Which of the following are ALWAYS reasons why an agent would be denied registration in a state? I The agent was convicted of a drug felony 7 years ago II The agent was convicted of a securities misdemeanor 8 years ago III The agent was convicted of drunk driving 5 years ago IV The agent is the subject of a securities litigation that has not yet settled A. I and II only B. III and IV only C. II and IV only D. I, II, III, IV

The best answer is A. Registration as an agent will be denied if that person has been convicted of any misdemeanor involving securities or monies; or any felony; within the past 10 years. Thus, conviction on a drug felony 7 years ago will cause denial of registration; as will conviction of a securities misdemeanor 8 years ago. A drunk driving conviction is a misdemeanor in some States; and a felony in others. The law requires denial of registration for persons convicted of any felony within the past 10 years - but whether a drunk driving conviction is a felony or misdemeanor depends on that State. Pending litigation that is not settled is not a cause for denial of registration.

Which statement is TRUE about registration of broker-dealers, investment advisers and their agents in a State? A. Registration as a broker-dealer or investment adviser expires 1 year from its effective date of January 1st B. A firm that has both broker-dealer and investment adviser entities, when registering one entity, automatically registers the other entity in the State C. When a broker-dealer's registration is renewed in the State, this automatically renews the registration of its agents D. When an agent is terminated by a broker-dealer, only the broker-dealer is obligated to notify the State

The best answer is A. Registration of broker-dealers, investment advisers and their agents expires on December 31st of each year unless renewed. If a firm has both a broker-dealer entity and an investment adviser entity, each must register separately in the State. Registration renewal by the broker-dealer or adviser does not automatically renew the registration of the firm's agents. A registration renewal is filed by the firm on each agent's behalf at the end of each year. When an agent is terminated, both the agent and the firm (broker-dealer or investment adviser) are obligated to notify the State under the Uniform Securities Act. Note, however, that many States are changing this to only require notice by the firm under a newer version of this Act, but this is still the minority of States, and thus, is not tested.

A customer buys 1,000 shares of XYZZ stock in a margin account and pays the required 50% margin on settlement date. The customer requests that the broker-dealer transfer the securities into the customer's name and ship them to his home address. Which statement is TRUE? A. This request cannot be honored because the securities must be paid for, in full, to process a transfer and ship request B. This request cannot be honored because all customer securities must be held in a depository C. This request cannot be honored unless the customer makes it in writing D. This request should be honored as given

The best answer is A. Securities held in margin accounts cannot be transferred and shipped - they are kept in "street" name as collateral for the customer margin loan. The customer must pay off the loan on the securities in order for the brokerage firm to transfer them into his or her name and ship them. There is no requirement for such a request to be made in writing.

An agent of a broker-dealer puts up a website that promotes the benefits of dollar cost averaging, including the caveat that it is suitable for investors only if they can maintain their periodic payments regardless of economic conditions and that it requires a long-term investment time horizon. If the website is viewed by an individual in another State where both the broker-dealer and agent are not registered, which of the following disclosures are required on the site in order not to be in violation of the Uniform Securities Act in that State? I "The broker-dealer or agent may only transact business in the State if registered in the State or if exempted or excluded from registration" II "Follow ups or individualized responses to persons in the State that involve either effecting or attempting to effect transactions in securities will not be made absent compliance with State registration requirements or an applicable exemption or exclusion" III "The services being offered do not represent an offer to sell securities or a solicitation of an offer to buy the securities in the State unless the subject securities are registered or are subject to an applicable exclusion" IV "The Securities and Exchange Commission has not approved, nor has it disapproved of offering made in this advertisement" A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is A. Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site: "The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and "Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). There is no requirement to give a disclaimer regarding whether securities being offered are registered or exempt in the State; and the SEC has nothing to do with State law, so Choice IV does not apply (it does apply to prospectus disclosure on new issues of non-exempt securities registered under the 1933 Act, however).

Under the provisions of Rule 147 of the Securities Act of 1933, all of the following would be prohibited when making an intrastate sale of securities EXCEPT: A. directly negotiating with the client in the State where the offering is being made B. only offering the securities over the telephone to potential clients in the State C. soliciting clients in the State by telephone, followed by mailing a prospectus to each potential client D. using the Internet as the means of making the offering to clients in the State

The best answer is A. The Act of 1933 prohibits the "use of the mails or other means of interstate commerce" to offer or sell securities unless the securities are either registered with the SEC or are exempt from registration. Thus, the Feds have no jurisdiction if a transaction stays wholly within 1 State - then only that State has jurisdiction under its Blue Sky law. Rule 147 spells out the requirements to obtain an Intrastate Exemption from Federal registration from the SEC. As part of the offering procedure, the "mails or other means of interstate commerce" cannot be used to make the offering. This includes the telephone and the Internet. Thus, the sale must be negotiated face-to-face with each potential purchaser in that State. It cannot be offered or sold to 1 person outside that State. Needless to say, this is an exemption that is almost never used!

Which statements are TRUE about the use of testimonials in advertising? I Testimonials are permitted in broker-dealer advertising II Testimonials are prohibited in broker-dealer advertising III Testimonials are permitted in investment adviser advertising IV Testimonials are prohibited in investment adviser advertising A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Broker-dealers are permitted to use testimonials in their advertising. If they are used, it must be disclosed if the maker of the testimonial was paid; and if the maker of the testimonial is presented as an "expert," the maker's qualifications must be stated. Regarding testimonials by investment advisers in advertising, the Investment Advisers Act of 1940 prohibits their use- period. Because of federal supremacy, this prohibition applies at the State level.

An issuer hires an agent and registers that individual to distribute an offering of its securities. Which statement is TRUE under NASAA rules? A. If the agent solicits transactions in a State where the agent is not registered, the issuer can be held liable B. If the agent finishes distributing this securities offering and there is time left until the agent's registration lapses at year end, he or she can work for another issuer distributing that issuer's securities C. The agent is only permitted to sell the issuer's securities to employees of that issuer D. The agent must also affiliate with a registered broker-dealer in order to distribute the offering of securities

The best answer is A. The definition of an "agent" under State law is an individual who represents a broker-dealer or issuer effecting, or attempting to effect, purchases or sales of securities. Thus, Choice D is incorrect. An example of an agent of an issuer would be a general partner of a limited partnership who hires a "wholesaler" to market partnership units to investors. This individual is an agent of the issuer, marketing securities to the public and the agent must be registered in the State where the agent resides to do so. The agent must also be registered in each State where he or she solicits individuals to buy partnership units. Choice B is false because if this person goes to work for another issuer, that issuer must register this person as an agent of that issuer. Choice C gets at an exclusion from the definition of an "agent" which is given to an employee of an issuer who only sells that issuer's securities to issuer employees without being compensated for those sales. This exclusion from registration is designed for issuer employees who place employee funds in stock purchases of that employer through stock option or retirement plans. It has no bearing on this question.

A Registered Investment Adviser (RIA) tells his customers that they can analyze his performance by reviewing charts that he has presented. The RIA must: A. tell the customers that charts can be difficult to interpret and there may be hazards in viewing only charts B. explain that performance charts cannot be used to compare the past performance of one adviser against the performance of other advisers C. explain that current fund performance is predicted by prior years' performance charts D. tell the customers that the use of performance charts to assess prior results is approved by the SEC because the Investment Advisers Act of 1940 dictates the content of these charts

The best answer is A. Using performance charts alone is not the best way to analyze an adviser's performance. In their financial statements, advisers also disclose their investment methods, investment objectives, expenses, etc. and these should be considered as well. If an adviser tells a customer to just look at his or her charts to analyze performance, the adviser should also disclose that charts alone do not give the "full" picture, and that making decisions solely on this basis is not really in the customer's best interest.

All of the following actions would be permitted under the Uniform Securities Act EXCEPT: A. engaging in wash trades for a customer B. engaging in tax swaps for a customer C. omitting facts when making a recommendation to a customer D. recommending unregistered exempt securities to a customer

The best answer is A. Wash trades are quick "in and out" trades in a stock to create the appearance of trading activity, without any actual change of ownership. This is an unethical practice also known as "painting the tape" - since the ticker tape is being "painted" with phony trades. Tax swaps involve selling a security that has depreciated at year end to realize a loss for tax purposes; and then buying a similarly depreciated security early in the next year to re-establish a roughly equivalent position. This is permitted. One can omit facts when making a recommendation to a customer - the unethical practice would be to omit material facts when making a recommendation. Finally, one can recommend unregistered exempt securities (such as U.S. Governments) - the unethical practice is to recommend unregistered non-exempt securities.

A registered agent that oversees discretionary accounts for many clients has been trading the accounts with increasing frequency. It is unlikely that the agent would be accused of "churning" these accounts if: A. each transaction is approved by the branch manager promptly B. these are wrap accounts charging a flat annual fee C. the transactions are suitable for the customers D. the securities being traded are exempt

The best answer is B. "Churning" is the excessive trading of a customer's account in order to generate commission income for the representative. Flat fee "wrap" accounts that "wrap" all services into a single annual fee take away the incentive to churn. Even if the transactions are suitable for the customer, excessive trading to generate commissions is still an unethical practice. And it makes no difference if the securities involved are exempt or non-exempt; churning of any account with any security is an unethical practice.

When offering a new issue to an elderly customer, the agent prepares a large-type summary to make it easier for the customer to understand the details of the offering. Which statement is TRUE? A. This action is appropriate because it is in the best interests of the customer B. This action is a violation of the Uniform Securities Act C. This action is only permitted if the changes to the prospectus are approved by the SEC D. This action is only permitted if the prospectus is filed with the Administrator

The best answer is B. A prospectus cannot be altered, highlighted, or summarized. It is a legally prepared document that cannot be changed before it is delivered to the purchaser of a new issue security. Note that the SEC does not approve new issue offerings, nor does it approve the documents filed in connection with the sale of those offerings, making Choice C incorrect.

A person who renders advice on variable annuities for a fee; and who then sells the annuities, charging a commission, MUST: I register as an investment adviser in that State II register as a broker-dealer in that State III register as an agent in that State A. I only B. I and II C. I and III D. None of the above

The best answer is B. A variable annuity is defined as a non-exempt security under the Uniform Securities Act. If advice is rendered for a fee about variable annuities, then registration as an investment adviser would be required. If a variable annuity is sold for a commission, then the firm must register as a broker-dealer as well.

Which statements are TRUE regarding licenses held by broker-dealers and agents? I If a broker-dealer's license is suspended, all of its agents' licenses are suspended II If an agent's license is suspended, the broker-dealer's license is suspended III If the broker-dealer's license is suspended, its agents may become associated with another broker-dealer A. I only B. I and III C. II and III D. I, II, III

The best answer is B. An agent's license is effective only if that individual is associated with a broker-dealer. If the broker-dealer's license is revoked, all of its agents' licenses are revoked. However, those agents may associate with another broker-dealer, and can be licensed through the new firm. If an agent's license is revoked, it has no effect on the broker-dealer.

An investment adviser, in business for 5 years, has experienced substantial cost increases this year and has decided that its current management fees are too low. The adviser wishes to raise its fee from 1.50% of assets under management to 2.00% of assets under management starting in the new year. The investment adviser should: A. make the change immediately and include the new information in its next annual report B. send a letter to clients detailing the upcoming change and permit the customers to decide if they wish to continue with the new terms as of January 1st of the next calendar year C. not make any change, but should aggregate more assets under management to increase its revenue D. not make any change until notice has been given to the Administrator and approval of the Administrator has been received.

The best answer is B. Changing the management fee is a change to the terms of the advisory contract. The customer must be informed of the proposed change, and can either renew the contract at the new terms; or can choose to terminate the contract at the end of its life. Also note that the adviser's Form ADV would need to be amended to reflect the change in fees (either within 30 days of the change, or at the end-of-year annual update of the Form ADV, since the change is happening as of the beginning of the new year).

Which transaction is NOT exempt from State registration requirements? A. A trade placed by a customer to buy non-investment grade bonds that was not solicited by the broker-dealer B. A purchase of common stock that results from the placement of an advertisement offering the securities in an out-of-state newspaper that is read C. An offer to sell general obligation bonds to a bank located in another state D. A private placement offered to 6 retail investors in the state

The best answer is B. Choice A is an exempt transaction because the trade was unsolicited. Choice B is non-exempt because common stock was purchased in the state via a solicitation - it makes no difference that the solicitation came from outside the State. Choice C is a transaction with an institution and is exempt. Finally, a private placement in a state is a sale to no more than 10 investors and is exempt. Also remember that these exemptions only apply to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt.

All of the following would be considered market manipulation under the Uniform Securities Act EXCEPT: A. giving fictitious quotes B. commingling customer funds with broker-dealer funds C. spreading rumors that may affect the securities prices positively D. effecting trades at the close of the market to affect the closing price

The best answer is B. Commingling customer funds with broker-dealer funds is prohibited, but is not market manipulation. Giving fictitious quotes, spreading rumors of a sensational nature, and effecting trades at the close of the market to affect the closing price, are examples of manipulative practices.

Which of the following is NOT market manipulation? A. Fictitious quotes B. Commingling customer funds C. Effecting trades at the close of the market to affect the closing price D. Spreading rumors of a sensational nature

The best answer is B. Commingling customer funds with broker-dealer funds is prohibited, but is not market manipulation. Giving fictitious quotes, spreading rumors of a sensational nature, and effecting trades at the close of the market to affect the closing price, are examples of manipulative practices.

Which of the following statements are TRUE regarding the suspension of a broker-dealer's registration and an agent's registration through that broker-dealer? I If a broker-dealer's registration is suspended, the agent's registration through that broker-dealer ceases to be effective II If an agent's registration is suspended, the broker-dealer's registration ceases to be effective III The Administrator may revoke a registration solely if it is in the public good IV The Administrator may revoke a registration if it is in the public good and the person has violated the Uniform Securities Act A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. If a broker-dealer's registration is suspended, the agent's registration through that broker-dealer ceases to be effective. However, if an agent's registration is suspended, it has no effect on the broker-dealer's registration. The Administrator may revoke a registration if it is in the public good and the person has violated some aspect of the Act. Registration cannot be revoked solely because it is in the public good.

Securities traded on the Midwest (Chicago) Stock Exchange are NOT exempt from which requirement of the Uniform Securities Act? A. Registration B. Anti-fraud C. Filing of advertising and sales literature D. All of the above

The best answer is B. If a security is exempt (exchange listed issues are exempt from under the State law "blue chip" exemption), then the issue is exempt from the registration requirement in that State. Furthermore, if a security or transaction is exempt, then it is also exempt from any rules that the Administrator may impose regarding the filing of advertising in that State. However, the anti-fraud provisions of the Act cover all offerings, whether exempt or non-exempt.

An investment adviser is registered in State A and State B. An investment adviser representative of that firm: A. must register in both State A and State B B. must register in any State where the representative solicits customers to buy investment advice C. must register only in the State where the representative has the majority of his or her clients D. does not need to register in a State as long as the investment adviser is registered in that State

The best answer is B. If an IAR (Investment Adviser Representative) of an investment adviser resides in the State; or is a non-resident that solicits customers in a State; then the IAR must be registered in the State.

Ms. Muffy Vanderbilt is an entrepreneurial socialite who has successfully worked as a fund raiser for a not-for-profit organization for the past 10 years. Because of her success at raising money and her extensive list of social contacts, she is recruited by an investment advisory firm to become a representative. Ms. Vanderbilt would be permitted to: I state to customers that she has 10 years of experience in the industry II use the title "investment adviser representative" on her business card III state to customers that she is registered as a representative with the SEC A. I only B. II only C. II and III D. I, II, III

The best answer is B. This representative did not work for an advisory firm for the past 10 years. She worked for a not-for-profit organization as a fund raiser - so choice I is a misrepresentation and is prohibited. Choice II is fine - she is an investment adviser representative and can put this on her business card. Choice III is another misrepresentation. Only the investment advisory firm registers with the SEC - there is no registration of adviser representatives with the SEC. The representatives are only registered in each State where they are located, or where they solicit business.

Under SEC rules regarding taking custody of client funds: A. custody can only be taken for clients who have at least $1,000,000 under management; or a net worth of at least $2,000,000 B. customers must be notified of the location where the funds are being held C. customers must receive semi-annual account statements D. the advisory firm must be audited, on a surprise basis, at least semi-annually

The best answer is B. If an investment adviser takes custody of customer funds, the adviser must: segregate the customer funds and securities from those of the investment adviser. Note, however, that it is permitted for one customer's funds and securities to be "commingled" with those of other customers - this is the norm when an investment adviser opens an "omnibus" account at a broker-dealer. maintain any account holding customer funds or securities in the name of the investment adviser as trustee for the customer(s). notify the customer, in writing, of the place and manner in which funds and securities will be maintained. Any subsequent change in this requires written notice to the customer. send to each customer, at least quarterly, an itemized account statement. arrange for an independent public accountant to audit the firm annually; with the audit conducted on a "surprise" basis. The report of the independent accountant must be filed promptly with the SEC.

Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customer B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year

The best answer is B. If the adviser is prohibited from taking custody of client funds or securities by the State Administrator, the adviser can trade the customer account under a limited power of attorney - this is normal practice. So Choice B is the correct answer. The adviser cannot buy securities for a customer and then delay delivery of the securities to the client - this is an unethical practice. If an adviser is prohibited from taking custody, it cannot hold customer funds and securities, making Choice C incorrect. There is nothing precluding an adviser from taking a prepaid advisory fee, but if the adviser accepts $500 or more of prepaid fees, 6 months or more in advance of rendering services, this is defined as "taking custody" under NASAA rules.

Investment advisers may be compensated: A. based on a percentage of capital gains or losses in the account B. based on a percentage of the value of all assets under management C. based on the level of trading activity in the account D. based on any of the above choices

The best answer is B. Investment advisers cannot be compensated based solely on capital gains achieved. The fee arrangement can be based on a percentage of all assets under management.

Under NASAA rules, within 120 days of year end, the customer of an investment adviser must receive: A. the investment adviser's audited financial statements B. Form ADV Part 2A if there are material changes C. Form ADV Part 1 D. a written prospectus supplement

The best answer is B. NASAA rules require that within 120 days of fiscal year end, the adviser must send each customer a revised Brochure (Form ADV Part 2A) and Brochure Supplement (Form ADV Part 2B) if there are material changes. Instead of sending the entire Brochure, the adviser can simply send the "Summary of Material Changes" section to the Brochure, along with an offer of the revised Brochure. Also note that this annual procedure is not required if there are no material changes to the Brochure.

If the issuer of a federal covered security has filed notice in a State for an initial public offering, then: A. no filing notice is required for any subsequent secondary offerings of that issuer in that State B. filing notice is required for each subsequent secondary offering of that issuer in that State C. registration of each subsequent offering of that issuer is required in that State D. registration of each subsequent offering of that issuer is required only by rule or order of the Administrator

The best answer is B. Notice filings in the State for federal covered securities are required for both initial offerings in the State and each secondary offering in the State (and a filing fee must be paid to the State with each "notice"!).

Under the provisions of the Uniform Securities Act, required records for broker-dealers must be kept in accordance with the provisions of the: A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Investment Advisers Act of 1940 D. Uniform Securities Act as adopted in that State

The best answer is B. Part of NSMIA is that federal law has supremacy over state law when it comes to recordkeeping rules, capital requirements and custody rules. Since the SEC sets broker-dealer recordkeeping rules under the Securities Exchange Act of 1934, the State can only have a rule requiring that records be kept in conformity with the Act of 1934's requirements.

Which statements are TRUE regarding the post-registration requirements of the Uniform Securities Act? I Broker-dealers are subject to post-registration requirements II Broker-dealers are not subject to post-registration requirements III Agents of broker-dealers are subject to post-registration requirements IV Agents of broker-dealers are not subject to post-registration requirements A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Post-registration requirements cover such things as maintaining books and records; making required filings with the Administrator; giving reports to customers; and filing advertising and sales literature with the State. These are requirements for both broker-dealers and investment advisers. This portion of the Uniform Securities Act does not apply to their agents, however.

To protect against identity theft and theft of funds, client instructions received electronically must be: A. encrypted B. authenticated C. monitored D. refused

The best answer is B. To protect against identity theft and theft of funds, customer instructions received electronically must be authenticated, to make sure that the instruction actually came from that client.

To be registered as an agent in a State, the Administrator can require which of the following? I Minimum Net Capital II Minimum Surety Bond Coverage III Minimum grade on a qualification examination IV Payment of filing fees A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. To register as an agent in a State, the Administrator can require the passing of a qualification examination; the payment of filing fees; and the posting of a surety bond. The minimum Net Capital (or Net Worth) requirements are only imposed for registration as a broker-dealer or investment adviser.

Under the provisions of the Prudent Investor Act, all of the following statements are true regarding the management of trust accounts with multiple beneficiaries EXCEPT the fiduciary: A. must manage the trust impartially, taking into account the differing needs of the trust beneficiaries B. is judged based on the performance of each individual investment chosen in the account C. should seek to maximize portfolio performance and can assume extra risk consistent with the beneficiaries' investment objectives and needs D. is permitted to delegate investment decisions to qualified agents without needing consent of the beneficiaries

The best answer is B. The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management. In any trust with multiple beneficiaries, the fiduciary must act impartially and must consider the needs of each beneficiary.

After reviewing a large customer's account, an investment adviser determines that there is a conflict of interest between the adviser and the customer. Which action should be taken by the adviser? A. The adviser should refrain from giving the customer investment advice until the State Administrator has been notified of the conflict B. The adviser should notify the customer about the conflict in writing and let the customer decide what action to take, if any C. The adviser should terminate the relationship with the customer D. The adviser is under no obligation to take any action since it has a fiduciary relationship with the customer

The best answer is B. The basic rule on conflicts of interest is that they must be disclosed to the customer in writing. Then it is up to the customer to determine what course of action to take, if any, because of the existence of the conflict.

An investment adviser wants to charge a monthly fee to customers that engage in frequent options trading, equal to 6% of monthly options transaction volume. The adviser includes the options transaction fee in the brochure filed with the Administrator and discusses the fee with each customer that engages in options transactions. Which statement is TRUE? A. The monthly options transaction fee can be charged to customers because it has been disclosed to both the adviser's customers and to the State Administrator B. The monthly options transaction fee cannot be charged to customers because it is excessive C. The charging of a monthly options transaction fee is permitted without restriction D. The monthly options transaction fee is not permitted because such fees can only be charged quarterly or annually

The best answer is B. The overriding issue here is the fact that charging excessive fees is a prohibited practice - and a fee equal to 6% of options transactions is excessive. You could make an argument that because the fee was discussed with the customers and disclosed in the adviser's brochure, that makes it OK - but this is not the case.

Under Uniform State Law, an agent is permitted to sell securities for more than 1 broker-dealer: A. only if the types of securities offered by each broker-dealer are mutually exclusive B. only if the agent is separately registered with each broker-dealer C. only if one broker-dealer solely offers exempt securities and the other broker-dealer solely offers non-exempt securities D. under no circumstances

The best answer is B. The typical arrangement is that an agent is only registered with one broker-dealer, both at the Federal and State level. However, in rare cases, an agent may be "dual registered." This occurs most often if one broker-dealer sells a very limited product range (say limited partnerships only) and the individual wants to be licensed to sell another type of product (say mutual funds) to his customers. He or she can associate with another broker-dealer that only sells mutual funds. To do so, the dual affiliation is disclosed on both the Federal and State registration applications submitted by each of the broker-dealers to register that agent.

A registration application in a State filed by an Investment Adviser becomes effective: A. on a date so determined by the Administrator B. at noon, the 30th day after the application is filed C. at noon, the 45th day after the application is filed D. at noon, the 60th day after the application is filed

The best answer is B. The wording in the Uniform Securities Act is that: "If no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after an application is filed." It then goes on to say that: "The Administrator may by rule or order specify an earlier effective date and may by order defer the effective date until noon of the thirtieth day after the filing of any amendment."

A customer signature is needed to open a: A. cash account B. margin account C. both of the above D. neither of the above

The best answer is B. There is no customer signature required on a new account form - this allows cash accounts to be opened over the phone, if a firm so desires. However, a customer signature is required on the hypothecation agreement needed to open a margin account - this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer.

An investment adviser personally owns the stock of a company that he or she wants to recommend to customers. Which statement is TRUE? A. The adviser is prohibited from recommending the stock to his or her customers B. The adviser must disclose his or her personal ownership position to the customer C. The adviser must sell that position to his or her customers D. The adviser's interests are aligned with those of the customer and the adviser can make the recommendation without taking any additional action

The best answer is B. This is a conflict of interest that must be disclosed to the customer. The issue boils down to this - if an adviser owns a stock personally that he is recommending to a customer, is he doing this in order to drive up the price of the stock to have a gain on his personal portfolio? Or, is he doing it because it is the best recommendation for the customer?

A registered investment adviser lives in State X. The adviser does business with 1 client in State A and 1 client in State B. The adviser gives seminars about investing to groups of potential customers in State C. The adviser is required to register in: A. State X only B. States X and C only C. States X, A, and C D. States, X, A, B, and C

The best answer is B. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: originates in the Administrator's State; is directed into the Administrator's State; or is accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. This adviser is physically located in State X, so the adviser must register in State X. Because the adviser has no location in States A and B, and only has 1 client in each of these States, the adviser qualifies for a "de minimis" exemption and does not have to register in those States. The adviser is giving investment seminars to "groups" of potential customers in State C. This activity requires the adviser to be registered in State C.

A person with no place of business in a State, who gives advice on securities to an insurance company, is: A. exempt from the anti-fraud provisions of the Uniform Securities Act B. exempt from registration as an investment adviser in the State C. exempt from the advertising filing requirement even if the Administrator so requires D. not defined as an investment adviser under the Uniform Securities Act

The best answer is B. Under the Uniform Securities Act, an adviser with no place of business in the State, that solely renders advice about securities in that State to other advisers; federal covered advisers; broker-dealers, banks, trusts; savings and loans; investment companies; insurance companies; and employee benefit plans with assets of at least $1,000,000; is exempt from registration in that State. Everyone is subject to the anti-fraud rules, so Choice A is incorrect. The only exemption from the Administrator's filing of advertising rules is for advertisements about federal covered securities, exempt securities or exempt transactions.

An accountant has a wealthy client base and has developed the trust of his customers over many years by providing tax preparation services and sound tax advice. The accountant has been requested by many of these customers to make suitable securities recommendations. The accountant has decided to offer such services, billing the customers at his regular hourly rate. Under the Uniform Securities Act, the accountant is: A. excluded from the definition of an investment adviser since he is a "professional" that is only giving incidental advice B. excluded from the definition of an investment adviser since he is not charging an advisory fee based on a percentage of assets under management C. included under the definition of an adviser because he is receiving separate compensation for giving advice about securities D. included under the definition of an investment adviser, since "professionals" are not offered an exclusion from the definition of an investment adviser

The best answer is C. "Professionals" such as lawyers, accountants, engineers, and teachers who only give incidental advice about investing in securities; and who do not separately charge for giving advice; are excluded from the definition of an investment adviser. This accountant is charging for advice; and it is a regular part of his business; thus he falls under the definition and must register with the State.

The registration of a broker-dealer may be revoked for which of the following reasons? I The firm does not maintain required records II The firm does not file financial reports with the Administrator III The firm does not file advertising with the Administrator IV The firm does not file customer complaints with the Administrator A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. A broker-dealer's registration may be revoked if the firm fails to maintain required records, fails to file financial reports with the Administrator or fails to file advertising with the Administrator, if required to do so. There is no requirement under the Uniform Securities Act for customer complaints to be filed with the Administrator.

Misstatements of material fact in a securities registration are violations of the Act for which of the following persons? I Issuer II Directors of the issuer III Underwriter IV Agents of the underwriter A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. Agents are not involved in the filing of registration statements for securities; therefore, they are not responsible for the contents of the registration statement. However, issuers, directors of issuers, and underwriters are all involved in preparing a securities registration statement and have liability for material omissions under the Act.

Lincoln Investments is registered as a broker-dealer and as an investment adviser. When opening an account for a customer, the firm has the customer sign a statement that discloses that transactions recommended by Lincoln Advisers are effected through Lincoln Brokerage, which earns commissions on those trades. Obtaining the signed statement would NOT be required if: A. Lincoln Advisers recommends the purchase of a security and Lincoln Brokerage sells the customer that security out of its inventory B. Lincoln Advisers recommends the sale of a security and Lincoln Brokerage executes the sale acting as agent in the OTC market C. the customer effects a trade through Lincoln Brokerage that was not recommended by Lincoln Advisers D. the customer signs a waiver covering all disclosures that are legally required

The best answer is C. All conflicts of interest must be disclosed, in writing, to customers. If an adviser refers its trades to an affiliated broker-dealer that will earn commissions or markups on those transactions, this is a conflict that must be disclosed. The customer cannot sign a waiver stating that conflict of interest disclosures do not have to be made by the adviser. Since the law requires these disclosures, the adviser cannot get around the law by having the customer sign a waiver. Finally, if the customer effects a trade through the broker-dealer that was not recommended by the affiliated adviser, no conflict of interest exists and there is no disclosure obligation.

A customer wishes to make an investment in growth mutual funds for an Individual Retirement Account. All of the following statements by an agent are prohibited EXCEPT: A. "The fund has averaged a 20% annual growth rate in the past and is guaranteed to produce the same growth rate in the future" B. "Last year, the fund paid out dividends of $1.00 per share and capital gains of $.50 per share, for a total income yield of $1.50" C. "The fund yielded 20% last year and is expected to yield the same this year, though the actual yield may be more or less" D. "The fund is registered with the SEC, which has approved of the fund's shares"

The best answer is C. An agent cannot guarantee a return to a customer (Choice A), nor can an agent state that income from a fund consists of both dividends and capital gains (the income portion consists solely of dividends), nor can the agent state that the SEC approves of the fund. It is perfectly acceptable to state the historical yield for the fund, and then to state that similar results are expected in the future, although the actual result may be more or less.

Which of the following individuals are defined as an agent under the Uniform Securities Act? I An individual who represents an issuer in selling exempt securities II An individual who represents an issuer in selling non-exempt securities III An individual who represents a broker-dealer in selling exempt securities IV An individual who represents a broker-dealer in selling non-exempt securities A. II and IV only B. III and IV only C. II, III, and IV D. I, II, III, IV

The best answer is C. An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt. Individuals who represent issuers in trading exempt securities or in exempt transactions are not defined as agents. However, an individual who represents an issuer selling non-exempt securities is an agent, and must be registered.

A client of a RIA dies. His attorney calls the RIA and instructs him to sell 500 shares of ABC at the market and deposit the proceeds to the client's checking account. The RIA should: A. accept the trade verbally and follow the attorney's instructions B. get a copy of a power of attorney that authorizes the attorney to act on behalf of the client C. get a copy of the client's will to see what is allowed and what is not allowed D. require the attorney to send the instructions in writing either by e-mail or fax

The best answer is C. An attorney for a client does not have trading authorization over that client's account, unless the client gave the attorney trading authorization in a written power of attorney. Regardless, any power of attorney dies with the client and is void. The assets in the deceased client's account must be transferred to an account for the estate before anything can be done in the account - so get a copy of the will and see if the attorney is appointed the executor over the estate. As executor, the attorney would then be permitted to effect transactions in the account.

A Registered Investment Adviser and a Broker-Dealer are owned by the same parent company. The RIA has received information from the BD's research department that it is about to change its rating of DEF Corporation from Neutral to Negative. The RIA sells its holding of DEF Corporation and then has its IARs call its list of clients to advise them that they may want to consider selling the security. The RIA has engaged in: A. selling away B. backing away C. front running D. shadowing

The best answer is C. Because the RIA sold its position first, and then called its clients telling them to sell, the RIA has "front run" its clients. The RIA was probably able to sell its own holding at a higher price than the price at which the clients will be able to sell later. This is a prohibited unethical practice. Also note that this is also "trading ahead of research" but this is not given as a choice.

A surety bond requirement for registration of a broker-dealer: A. protects each customer against loss of principal in the event of the failure of the broker-dealer B. can be met by using the broker-dealer's existing fidelity bond coverage C. can be used by any person who has an enforceable legal claim against the broker-dealer D. can be met by giving the State a lien on the broker-dealer's real property in lieu of posting cash, securities, or an indemnity policy

The best answer is C. Broker-dealers, as a condition of registration in a State, can be required to post a surety bond. This must be posted as either cash, securities, or an indemnity policy issued by an insurance company. In the event that there is a legal action taken against the broker-dealer in the State, the bond can be used to pay any claims against the broker-dealer that are affirmed by a court of law.

Which statement is FALSE regarding registration and licensing requirement for broker-dealers and investment advisers in a State? A. A broker-dealer with no place of business in a State that solely offers securities to non-institutional customers must register B. A broker-dealer with no place of business in a State that solely offers municipal securities must register C. An investment adviser with no place of business in a State that only deals with institutional customers must register D. An investment adviser with no place of business in a State that offers its services to a limited number of non-institutional customers is exempt from registering in the state

The best answer is C. Choice A is true - a broker-dealer with no place of business in a State that deals with non-institutional clients in the State (this means the general public) must be registered in the State. Choice B is true - a broker-dealer with no place of business in a State that solely offers exempt securities must also register, as must its agents. "Exempt" only means that the securities being offered are exempt from State registration - the broker-dealers and agents that sell exempt securities must still be registered in the State. Choice C is false - an investment adviser with no place of business in a State that only deals with institutional clients is EXEMPT from registration. If the adviser with no office in the State offers its services to the general public in the State, then it must register. Choice D is true - an adviser with no place of business in a State that offers its services to no more than 5 prospective customers in the State within a 12 month period is exempt from registering (the de minimis exemption).

Which of the following is considered to be "churning"? A. Exchanging income fund shares for growth fund shares for a customer who has a capital gains investment objective B. Day trading by an agent with discretionary authority in a customer margin account where the customer has a speculative investment objective C. Recommending trades in a customer account with the objective of producing commissions for the agent D. Swapping a municipal bond for another municipal bond to obtain a capital loss deduction

The best answer is C. Churning is the excessive trading of a customer's account with the intention of generating commissions for the agent. Exchanging mutual fund shares for a customer (Choice A) is not churning. Day trading in a discretionary account for a customer who wishes to speculate would be churning only if the trading was considered to be excessive - so Choice B is not churning. Performing a municipal bond tax swap for a customer (Choice D) is not churning either.

An agent owns an ice cream and sweets shop that has been extremely successful. She wants to expand and open new locations, and wants to sell shares of the shop to her friends and other family members. Which statement is TRUE about this activity? A. This is a permitted activity because the shares are not being sold to the general public B. This is the illegal activity known as selling away that is prohibited under NASAA rules C. This is an unethical activity unless the agent obtains permission in writing from her employing broker-dealer to sell the shares D. This activity is permitted because it does not interfere with the agent's employment obligation to her broker-dealer

The best answer is C. If an agent wishes to sell a security that is not being offered by his or her firm, the agent is "selling away" from the firm. This is prohibited under both FINRA and NASAA rules unless the agent gets written approval of the firm to engage in the transaction. All securities transactions effected by agents must be known to the employing firm and must be supervised by the employing firm. Note that selling away is not illegal - there is no law stating that selling away is prohibited. Rather, it is an unethical practice if an agent "sells away" without the permission of his or her firm.

Which of the following come under the jurisdiction of the State Administrator? I A mailing of sales literature to a customer in that State II A mailing of sales literature to a customer in a neighboring State III A television broadcast from within that State, received in that State IV A television broadcast from a neighboring State, received in that State A. I and II only B. III and IV only C. I, II, and III D. I, II, III, IV

The best answer is C. If an offer of securities is directed into a State, it comes under the jurisdiction of that State Administrator. Thus, Choices I and II clearly fall under the Administrator's jurisdiction. Regarding television broadcasts, the interpretation is that if the broadcast originates in the State; and is received in the State; then it falls under the jurisdiction of State Administrator in the receiving State. If the broadcast originates in another State; and is received in the State; then it does not fall under the jurisdiction of the State Administrator in the receiving State. Simplified, this means that only the Administrator in the State from which the broadcast originated has jurisdiction. Thus, Choice III is correct; and Choice IV is incorrect.

A trainee that has not yet been registered as an agent of a broker-dealer would: A. be permitted to accept unsolicited orders from customers B. be permitted to make "cold calls" to prospective customers C. be permitted to report completed trades to customers D. not be permitted to have any contact with either existing or prospective customers

The best answer is C. Individuals that are not registered as agents in the State cannot recommend securities to customers, nor can they accept customer orders - either solicited or unsolicited. They may perform clerical functions, such as reporting completed transactions to customers.

It is an unethical business practice for an investment adviser to borrow money from a: A. bank that is the adviser's client B. broker-dealer that is the adviser's client C. pension fund that is the adviser's client D. any of the above

The best answer is C. Investment advisers and their agents are prohibited from borrowing money from customers - unless the customer is in the business of lending money (which is the case with banks and broker-dealers).

If a non-resident agent engages in conduct prohibited under the Uniform Securities Act, that individual can be subpoenaed: A. only in the Administrator's State B. only in the agent's State of residence C. in either the agent's or Administrator's State D. only in the State where the violation occurred

The best answer is C. The Administrator has jurisdiction over offers that enter the State or originate from the State. The Administrator's subpoena power extends to the source of the offer, as well as to where the offer was received.

The Administrator, by order, can deny any exemption from registration for which of the following? I A municipal bond issued by another state, sold in the Administrator's state II An isolated non-issuer transaction III A sale of securities to a bank trust department IV A private placement A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. The Administrator is permitted to modify the Uniform Securities Act in his or her State, and thus, can change any "exempt" transaction. However, the Administrator cannot change the exemption from registration given to the securities specified as exempt under the Act, such as U.S. Government or municipal bonds.

The Administrator can take which of the following actions? I Coordinate inspections with those conducted by the Securities and Exchange Commission II Inspect a broker-dealer located in another State that does business in the Administrator's State III Require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness IV Suspend the constitutional privilege against self-incrimination available to an individual A. I and III B. II and IV C. I, II, III D. I, II, III, IV

The best answer is C. The Administrator may coordinate inspections with those conducted by the Securities and Exchange Commission; may inspect a broker-dealer located in another State that does business in the Administrator's State; and may require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness. However, the Administrator cannot suspend the constitutional privilege against self-incrimination available to an individual, since this Federal law (5th Amendment to the Constitution) supersedes any State law.

An investment adviser wishes to include a clause in its advisory contract that "all controversies that may arise between the customer and us shall be determined by binding mediation." Which statement is TRUE? A. This clause is permitted in advisory contracts under NASAA rules B. This clause is permitted because mediation is a negotiated settlement process that avoids the adversarial nature of litigation C. This clause is prohibited because it requires the customer to waive his or her right to reject the mediator's settlement proposal that is permitted under Federal and State law D. This clause is prohibited because only a mandatory arbitration requirement is permitted in a broker-dealer's or investment adviser's contract with a customer

The best answer is C. This is interesting. There is no such thing as "binding mediation" - only "binding arbitration." Disputes can be handled by arbitration, mediation, or litigation. Arbitration is binding on all parties. Mediation, on the other hand, is simply a negotiation between the parties and is non-binding - either side can reject the decision of the mediator. So a contract that calls for "binding mediation" is unenforceable.

Federal securities laws supersede the provisions of the Uniform Securities in all of the following areas EXCEPT: A. registration requirements applicable to securities offerings B. registration requirements applicable to investment advisers C. investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct D. broker-dealer capital, custody, financial responsibility and recordkeeping requirements

The best answer is C. The National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."

A portfolio manager at an investment advisory firm buys 100,000 shares of ABCD stock in a private placement for his personal account. One year later, the company goes public and the portfolio manager purchases 2,000,000 shares of the IPO for the adviser's customers. This action is a violation known as: A. free riding and withholding B. insider trading C. an undisclosed conflict of interest D. churning the accounts of customers

The best answer is C. The adviser must disclose to its customers that it owns the stock that it is purchasing for its customers. The conflict here is simple: Is the adviser buying the stock for its customers because it believes it is a great investment; or is it buying the stock for its customers because the large purchase will push the price up, giving the adviser a large profit on its proprietary position in that stock? Free Riding and Withholding is the prohibited practice of withholding a "hot" IPO from sale to the public, with the agent or firm buying that position for itself instead. Then the agent or firm can take a "free ride" on the price when the issue opens for trading in the aftermarket. This does not apply to this situation.

During the past year, an agent of a registered broker-dealer has offered partnership units to wealthy investors in a private placement. The agent finds that he has been named in a civil lawsuit filed by one of the buyers of the private placement units, claiming that untrue statements were made by the agent in connection with the sale of the issue. Which of the following is a defense against the buyer's claim that is most likely to be upheld by a court of law? A. The agent can claim that the buyer was informed of all material facts and is filing a frivolous lawsuit to extract a large settlement from the agent B. The agent can claim that because the investor was wealthy, he or she is "sophisticated" and understood the merits of the transaction prior to entering into a contract to buy the partnership unit C. The agent can claim that he took reasonable care to ensure that no untrue statements were made at, or before, the sale of the securities and that the agent did not, and could not, know of the untrue statement D. The agent does not have to make a showing in a court of law because the burden of proof rests on the claimant and not on the defendant in civil suits

The best answer is C. The agent is being accused of making untrue statements when selling a security to a customer. Making untrue statements of material fact or omitting statements of material fact when selling securities is fraudulent. However, if the agent can show that he took reasonable care to ensure that no untrue statements were made in connection with the sale of the security and that the agent did not, and could not, know of the untrue statement, then the court will reject the claim of the customer. This is the only defense of the 4 choices offered that addresses the customer's claim. The other defenses offered do not address the customer's claim (e.g., the suit is frivolous; the customer is wealthy and knew what he was doing, etc.)

What is the sales charge on a mutual fund called? A. 12b-1 fee B. commission C. load D. mark-up

The best answer is C. The sales charge on a mutual fund is also called the sales load. The maximum sales charge is 8 ½% of the Public Offering Price under FINRA rules. In contrast, 12b-1 fees are annual charges against net assets that can be used to pay for soliciting new investment into the fund. The maximum permitted annual 12b-1 fee is .75% under FINRA rules.

The fiduciary engaged in the administration of a trust finds that, under the directions of the trust document, there is a conflict of interest relating to a proposed investment. Under the provisions of the Prudent Investor Act, the fiduciary: A. should do nothing and permit the investment to be made B. is permitted to allow the investment as long as it is made in accordance with the Prudent Investor rule C. should ask the settlor of the trust to amend the trust document by express provision, expanding or restricting the provisions of the trust document for this investment D. should not permit the investment, otherwise the fiduciary is subject to liability for breach of fiduciary responsibility

The best answer is C. There can be different types of conflicts of interest regarding a trust investment. The trustee cannot "self-deal" - an example of such a conflict is the trustee borrowing money personally from the trust account. This is outright prohibited. The trustee is supposed to make investments to meet the needs of the account beneficiaries. There can be conflicts between the beneficiaries' needs - and the trustee is supposed to choose investments to best meet the needs of ALL of the beneficiaries. If the document does not give enough guidance for the investments that are permitted to meet these needs where there is such a conflict, then the trustee should go to the trust grantor or settlor for specific guidance on the permitted investments and the trust document must be amended for this.

The intentional omission of material facts when offering or selling a security can result in: I Civil liability II Criminal liability III Criminal penalties A. I only B. II only C. II and III only D. I, II, III

The best answer is C. This is a subtle question. The willful omission of material facts can result in Criminal Liability and Criminal Penalties. The unintentional omission of material facts when offering or selling a security results in Civil Liability under the Act.

An investment adviser representative gives a new client who has agreed to buy advisory services the "brochure," but did not obtain the client's signature attesting to this fact at that time. In the brochure is a paragraph stating that the client has the "2 day right of rescission." Which statement is TRUE about this under NASAA rules? A. The IA and IAR have failed to comply with NASAA rules because the customer signature must be obtained at, or prior to, entering into an oral or written advisory contract B. The IA and IAR have complied with NASAA rules because the client has been given the "2 day right of rescission" C. The IA and IAR have failed to comply with NASAA rules because the customer must be given 5 business days after signing the contract to rescind without penalty D. The IA and IAR have complied with NASAA rules because the customer was provided with the brochure, at or prior to, entering into the advisory contract

The best answer is C. Under NASAA Rules, the Form ADV Part 2A ("Brochure") and Part 2B ("Brochure Supplement") must be delivered to customers: no less than 48 hours prior to entering into either an oral or written advisory contract with a customer (a "2 day free look") - meaning the customer gets the Brochure and Supplement 48 hours prior to signing the contract; or alternatively the customer can sign the contract and be given the Brochure and Supplement, and then has 5 business days to terminate without penalty. In this case, because the customer did not receive the brochure 48 hours to signing the advisory contract, the customer must be given 5 business days to rescind. (Note: This is the NASAA rule - the SEC rule under the Investment Advisers Act of 1940 is NOT the same - it simply requires delivery of the Brochure and Supplement, at or prior to, entering into any advisory contract.)

ABC Corporation has its common stock listed on the New York Stock Exchange. Which of the following ABC issues is (are) EXEMPT from State registration? I ABC preferred stock II ABC Convertible debentures III Warrants to buy ABC common stock IV Limited partnership units where ABC is the general partner in the venture A. II only B. I and III C. I, II, III D. I, II, III, IV

The best answer is C. Under the "blue chip" exemption, if a corporation has its stock listed on a national securities exchange, then any securities offerings of that issuer are exempt from registration under State law. Thus, if ABC Corporation has its common stock listed on the New York Stock Exchange, then ABC preferred stock, ABC bonds, and ABC rights and warrants would all be exempt as well. Thus, Choices I, II, and III are true. Also note that under the National Securities Markets Improvement Act of 1996, these are now defined as federal covered securities, which are only registered with the SEC; the States cannot require registration for these issues. Choice IV is a very different animal. A partnership where ABC Corporation is a general partner is a different legal entity than ABC Corporation itself; and the securities sold by the partnership are not an issue of ABC Corp. - rather, they are an issue of that partnership. Thus, these limited partnership units are a non-exempt offering under this interpretation and must be registered (unless another exemption is available).

Under the NASAA Statement of Policy on unethical practices, the release of customer information to which of the following would NOT be "unethical"? I Securities and Exchange Commission II Internal Revenue Service III Self-Regulatory Organizations IV Registered broker-dealers A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. Under the NASAA Statement of Policy, information about a customer account cannot be divulged to anyone other than that customer, unless the customer gives authorization. The only exception is if the information request comes from a governmental authority such as the SEC, IRS or a self-regulatory organization like FINRA.

Which statements are TRUE about civil suits brought under the provisions of the Uniform Securities Act? I A civil suit may be brought by any person who has been damaged by the actions of a broker-dealer, investment adviser or their agents II If the plaintiff wins the suit, the seller is liable to the buyer for the cost of the securities, any interest earned, legal fees, and court costs III The seller will not be held liable by the court if, in the exercise of reasonable care, he or she could not have known about the untrue statement or misleading omission of fact IV Third parties that have a financial interest in the seller's actions can also be held liable under the Act A. I and II B. III and IV C. I, II, III D. I, II, III, IV

The best answer is D. All of the choices are true. The buyer of a security sold illegally under the Uniform Securities Act can file a civil lawsuit against the seller. If the buyer wins the suit, the seller must refund the money paid for the security (net of its current value); plus interest, attorney's fees and court costs. Any "interested third parties" to the sale, such as the agent's broker-dealer can also be named in the suit and held liable. The seller's only defense in this type of suit is that, in the exercise of reasonable care, he did not know, and could not have known, of the untrue statement or misleading omission that was made in the offer of the securities.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, prohibited business practices include: I being deliberately selective in the information told to a customer II giving inaccurate statements about an issuer's projected earnings III telling a customer that a company is about to be listed on the New York Stock Exchange without knowing the truth of the statement A. II only B. II and III C. III only D. I, II, III

The best answer is D. All of the choices given are violations of the Act - being deliberately selective in the information told to a customer; giving inaccurate statements about an issuer's projected earnings; or telling a customer that an exchange listing is expected without knowing the truth of the statement.

The Administrator is empowered to revoke the registration of an investment adviser if the investment adviser: I has ceased operating as a business in that State II has been judged to be mentally incompetent III has relocated, and has not notified the Administrator of the new business location IV fails to pay required filing fees to the State A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. The Administrator can revoke the registration of an investment adviser if the Administrator has determined that the firm has ceased business operations or if the firm moves and does not file a new address with the Administrator (remember, the Administrator wants to know where the firm is physically located, so that if there is a complaint, the Administrator can find you!). If the investment adviser is judged to be mentally incompetent in a court of law, then legally that person does not have the capacity to be in business and the Administrator would revoke the registration. Finally, not paying required fees will also cause registration revocation.

Which of the following persons is required to register as an investment adviser under the Uniform Securities Act? A. An attorney who writes a legal opinion included in the registration statement filed with the State for a new non-exempt securities offering B. A broker-dealer who gives investment advice in the regular course of business executing transactions for customers C. An agent of a broker-dealer who gives investment advice as part of his or her regular duties and who charges a fee for such advice D. A broker-dealer that charges an annual flat fee to customers for both investment advice and portfolio trade executions

The best answer is D. An attorney that renders a legal opinion is not giving advice about investing in securities - the opinion covers the validity and legality of the securities offering. A broker-dealer is not considered to be an investment adviser unless it charges separately for advice. If the broker-dealer's compensation comes solely from commissions, then the broker-dealer does not fall under the investment adviser definition. On the other hand, if a broker-dealer offers an account that charges a flat fee or a fee as a percentage of assets - this is a "wrap" account that is an advisory product and registration at the State level as an adviser is required (thus, Choice D would have to register in the State as an investment adviser). Regarding Choice C, be careful! Choice C defines an "investment adviser representative" that would have to register at the State level - it does not define an "investment adviser."

The Administrator is empowered to require the registration of a: A. municipal bond of another State sold in that State B. U.S. Government bond sold in that State C. Federal covered security sold in that State D. security sold in an exempt transaction in that State

The best answer is D. As a general rule, the Administrator cannot revoke the exemption from registration granted to the specific "exempt" securities listed in the Uniform Securities Act, such as U.S. Governments, Agencies, or Municipals. In addition, the State Administrator cannot require the registration of "federal covered" securities in the State (but can require a "notice" filing). (Also note that the Administrator does have the power to compel registration of non-profit issues, such as Church Bonds, due to major abuses that have occurred with these.) However, the Administrator can deny the claim of an exempt transaction and make that security be registered.

A customer opens an advisory account by depositing $2,000,000. Under Uniform State Law, which of the following fee arrangements is permitted? A. Annual account fee B. Performance fee C. Hourly fee D. All of the above

The best answer is D. Because the Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,000,000), NASAA cannot prohibit the charging of a performance fee for this customer who is investing $2,000,000. (Remember that Federal law supersedes State law; in the absence of a Federal law, then only that State law applies.) An annual account fee, or an hourly fee arrangement, would always be acceptable.

Under the Uniform Securities Act, an investment adviser may be formed as any of the following EXCEPT a(n): A. corporation B. partnership C. association D. broker-dealer

The best answer is D. Investment advisers (and broker-dealers) can be formed as any legal operating entity, such as a corporation, partnership, sole proprietorship, association, etc. Investment advisers cannot be formed as broker-dealers; nor can broker-dealers be formed as investment advisers. Each is a legally separate entity, and each is regulated separately.

An investment adviser may be compensated with which of the following? I Wrap fees charged to customers for all services rendered by the adviser II Soft dollars paid by an executing broker to the adviser in return for trades sent to the broker by the adviser III 12b-1 fees paid by a mutual fund to the adviser based on annual net assets IV Commissions paid to an affiliated broker-dealer on trades recommended by the adviser A. I and II B. III and IV C. I, II, III D. I, II, III, IV

The best answer is D. Investment advisers can collect wrap fees. This is a flat annual fee covering all services rendered, including recommendations, asset allocation and trade execution - so all services are "wrapped" into a flat annual fee. Investment advisers can receive "soft dollar" compensation. In return for directing full commission trades to an executing broker, the executing broker gives the adviser research, recommendations, trading algorithms, and similar items of value. The SEC permits these "soft dollar" items to be given by the broker-dealer to the adviser as long as they ultimately benefit the adviser's investors. Investment advisers can receive 12b-1 fees. These are flat annual fees paid by mutual funds to brokers and advisers that place customers in the fund. The 12b-1 fees are used to attract new investment in the fund. The typical fee is .50% of assets under management annually, paid by the fund to the broker or adviser. These mutual fund share purchases have no up-front sales charge. Investment advisers cannot take commissions on trades that they do, but they can direct their trades to an affiliated broker-dealer for execution. The affiliated broker-dealer is permitted to charge commissions. Also note that such an arrangement is a conflict of interest that must be disclosed to the customer at the time of entering into the advisory contract.

NASAA has the power to set record retention rules for a Federal Covered Adviser that cover which of the following records? I Communications to 2 or more persons II E-mails to clients III Trial balances IV General ledger A. I and II only B. III and IV only C. I and IV only D. None of the above

The best answer is D. NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies! NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management).

Which statements regarding registration of a security in a State are FALSE? I Registration is effective for a time period of 1 year II Once registration is declared effective in a State, it is effective in any other State in which a registration statement is filed III A registration statement can be filed in a State by a person other than an issuer IV To maintain registration in a State quarterly and annual financial statements must be filed with the Administrator A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Registration statements filed in a State are good for 1 year, so Choice I is true. Once registration is declared effective in one State, it is not automatically effective in any other State in which a registration statement is filed. Each State acts independently, making Choice II false. A registration statement can be filed by an underwriter or attorney acting for an issuer; or it can be filed by anyone who has securities that need to be State registered in order for them to be sold; making Choice III true. There is no State filing of an issuer's quarterly and annual financial statements - these are required to be filed by SEC-registered issuers under the Act of 1934 and are public documents, so Choice IV is false.

An agent registered in the State of New York has been referred to new potential clients in the State of Florida, where the agent is not registered. These clients are dual American-Brazilian citizens, who spend most of their time in Brazil. The agent files a registration application in the State of Florida and also files a registration in Brazil to sell securities there. The Brazilian securities regulator denies the registration. This action on the part of the Brazilian regulator: A. cannot affect the registration of the agent in the State of New York B. cannot affect the registration of the agent in the States of New York and Florida C. can cause the Administrator of the State of Florida to deny the registration application but cannot affect the agent's registration in the State of New York because he is already registered there D. can cause the Administrator of the State of Florida to deny the registration application and can cause the Administrator of the State of New York to suspend or revoke the agent's registration

The best answer is D. The Uniform Securities Act permits the Administrator to deny registration to an applicant or to revoke the registration of an agent based on actions taken by another securities or banking regulator, including foreign regulators.

A lawyer, representing one of your clients who has an individual account, calls and tells you that he has just been given trading authorization to effect securities transactions for the customer. He places an order to buy $10,000 worth of a stock which trades on the NYSE. Which statement is TRUE? A. You can submit the order as given as long as the branch manager approves of the transaction B. You can submit the order as long as you mark the order ticket "unsolicited" C. You can call the customer and, upon verbal confirmation that the lawyer has been given trading authorization, you can submit the order D. You can call the customer and ask him if he wants to buy the $10,000 worth of stock and, upon his verbal authorization, you can submit the order

The best answer is D. Third party trade authorization must be given in writing - verbal authorization is not legally acceptable. No mention is made of whether the lawyer has been given written trading authorization (third party trading authorization) over the account by the customer. Thus, the customer is the only one who is able to trade the account. Please note that a customer's attorney does NOT have an implicit power of attorney over a customer's account. The customer must give a written power to anyone that the customer wishes to have trade his or her account.

An agent of a broker-dealer, both of whom are located in State A, accepts an order from a customer located in State B where they have no offices. Who must register in State B? A. The broker-dealer B. The agent C. Neither the broker-dealer nor the agent D. Both the broker-dealer and the agent

The best answer is D. This question isn't very clear, but here goes. We don't know if the customer located in State B is an existing customer that is vacationing in State B or a new customer in State B. So let's assume that he is a new customer. We also don't know if the broker-dealer is doing only a few transactions in State B, and qualifies for a "de minimis" exemption (and this is only offered by a minority of States), so let's assume that this also is not the case. The exemption given to "unsolicited customer transactions" only applies to the requirement for the securities to be registered in the State - it has nothing to do with the requirement that broker-dealers and agents that are doing business in the State must be registered in the State. So, the broker-dealer located in State A and its agent, even though they have no office in State B, are doing business in State B, and must register in State B.

All of the following statements are true regarding the private placement exemption under Uniform State Law EXCEPT: A. offers can be made to no more than 10 persons in a 12 month period to qualify for the exemption B. all purchases must be made for long term investment C. no commissions may be paid to anyone other than for transactions with financial and institutional investors D. all payments made by subscribers must be deposited to an escrow account until the offering is completed

The best answer is D. To qualify for a private placement exemption within a State, offers can be made to no more than 10 persons in a 12 month period. All purchases must be made for long term investment; and no commissions may be paid to anyone other than for transactions with financial and institutional investors. It is not true that all payments made by subscribers must be deposited to an escrow account until the offering is completed. The issuer or broker-dealer handling the offer is allowed to accept monies from buyers of the issue; and may deposit the monies to their own accounts.

An investment adviser would be allowed to lend money to a customer in which of the following situations? A. The customer informs the adviser that he has been fired from his job and needs the funds on an emergency basis to meet his monthly living expenses until he finds a new job B. The customer is an old college buddy of the adviser and is going through a nasty divorce and he needs the funds to pay for court- ordered child support C. The customer has received a margin call in his brokerage account maintained at an unaffiliated broker-dealer and does not wish to sell those securities since they are likely to appreciate in the near future D. The customer is a partner in the advisory firm who needs a cash distribution from the firm to meet required minimum tax payments due

The best answer is D. Under NASAA rules, the prohibition on borrowing money from customers or lending money to customers is completely straightforward. If a customer is in "financial hardship" or the customer is an "old friend" or the customer "needs money," these are not reasons that allow the rule to be ignored. However, a partner of an advisory firm could borrow money from the firm - this is done all the time. Firms lend money routinely to their officers and partners (and often to their employees too). An officer or partner is not a "customer" for purposes of this rule. These are owners of the advisory firm, not customers.

An agent of a broker-dealer recommends a specific stock to a customer and says that the stock will most likely increase substantially in value within the next couple of months. The customer invests in the stock and its market price plummets. The customer is upset about the decline in value and wants all of his original commission refunded. Which statement is TRUE? A. The agent is allowed to refund all of the commission originally received from the transaction with the specific authorization of the agent's broker-dealer B. The agent is only allowed to refund a portion of the commission originally received from the transaction with the specific authorization of the agent's broker-dealer C. The agent is allowed to discount the commission based on a formula set forth by the State Administrator D. The agent cannot refund the commission

The best answer is D. When an agent recommends the purchase of a stock, he or she is only allowed to accept the normal commission for the transaction. The agent cannot rebate any commission if the stock decreases in value; nor can the agent accept any larger commission based on an increase in value of the recommended stock. The only time that a refund would be made is if there was an error made by the agent or the firm, which is not the case here. The recommendation was made in good faith by the representative.