Unit 4 Test

Which of the following can issue stock? A) A corporation B) The U.S. Treasury C) A city D) A state

A Corporations issue stock. Federal and state governments, including municipalities can issue debt securities, but not equity securities. Even though the Savings Bonds advertisements read, "Take stock in America, buy U.S. Savings Bonds," that is a fiction because you can't buy stock in a government and, of course, buying bonds is lending money.

The Uniform Securities Act would consider which of the following insurance products to be a security? A) Variable life insurance B) Modified endowment life insurance C) Fixed annuity D) Mortgage life insurance

A The key is the word variable. Insurance products are excluded from the definition of a security unless the word variable is part of the description. So, variable life and variable annuities are securities—the rest are not.

Each of the following persons is able to issue securities EXCEPT A) a partnership B) an individual C) a credit union D) a corporation

B Individuals (natural persons) cannot issue securities. You can't sell stock in yourself.

The U.S. Supreme Court case resulting in the decision that an investment contract is a security is the A) Muller case B) Howey case C) Golub case D) Steiner case

B It was the Howey case in 1946 where the decision ruled that an investment contract meeting the 4 prongs: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others, is a security.

Which of the following is NOT an accredited investor? A) An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year. B) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. C) A registered open-end investment company with net assets of $600,000. D) An individual with a net worth, including the value of her primary residence, that is greater than $1 million.

D an individual with a net worth, *excluding* the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past 2 years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.

Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? A) Ken, the largest shareholder in ABC Corporation, sells 100,000 shares in a registered secondary transaction. B) Barb, the largest shareholder in XYZ Corporation, purchases an additional 50,000 shares on the NYSE. C) In its capacity as a market maker, LMN Securities Co. sells 200 shares of GEMCO common stock to the corporate treasurer of GEMCO, buying for the company's investment account. D) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm.

D An issuer transaction is one in which the issuer receives the proceeds of the sale. When GEMCO sold those donated shares to the market maker, the proceeds were received by the issuer (GEMCO).

The USA defines all of the following as securities EXCEPT A) debentures B) U.S. Treasury bills C) unlisted stock D) commodity futures

D The term security encompasses a wide range of investments. The best thing is to remember the 6 items that are not securities. Included in that list are commodity futures.

All of the following must be specified in the state registration statement of the security except A) the total amount of the security that will be offered in this state B) all other states where the security is currently registered or will be registered C) the total amount of the security that will be offered in each state D) a stop order from any other state that affects the offering of the security within that state

C It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes the amount to be sold in this state must be disclosed.

Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for nonexempt securities only B) fraudulent for exempt securities only C) not fraudulent if there was willful intent to omit the information D) fraudulent for both exempt and nonexempt securities

D Material facts are facts that an investor relies on to make investment decisions. The willful omission of a material fact in the sale, purchase, or offer of a security is fraudulent. This applies whether the security offered is exempt or nonexempt.

A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) under no circumstances B) if approved by a principal C) without restriction D) if accompanied by an unmarked prospectus

A The prospectus is a legal document and may not be altered.

**The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency B) Bonds that are obligations of the People's Republic of North Korea C) Common stock issued by life insurance companies authorized to conduct insurance sales in that state D) Commercial paper with no more than 9 months to maturity that is in 1 of the 3 highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000

C A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates, but if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries who do not qualify.

Which of the following statements made by an investment adviser would violate the anti-fraud provisions of the Uniform Securities Act? A) "Our fees are nonnegotiable." (when Form ADV Part 2A clearly indicates otherwise) B) "We have over $40 billion in assets under management representing both institutional and retail clients." C) "We believe that fundamental analysis is the best way to select stocks for our clients." D) "We require any associated person determining general investment advice to be a CFA."

A Stating an untruth would be considered fraud. If the Form ADV Part 2 says that the fees are negotiable, you can't state that they are not. An adviser may certainly state which method of analysis he thinks is best. A firm can also set whatever standards it wishes, even though none are required by the regulatory bodies. As far as bragging about the amount of AUM, if you've got them, it is okay to flaunt them.

An agent can sell an unregistered security to one of the firm's retail customers under each of the following circumstances EXCEPT A) if the security being purchased is an exempt security B) if the transaction is initiated at the request of the customer C) if the agent is not registered in the client's state D) if the security being purchased is a warrant to purchase stock that is NYSE listed

C When engaging in securities transactions with retail clients, agents must always be registered in the state of residence of that client. As long as the agent is properly licensed, if the security being purchased is exempt or it is being purchased in an exempt transaction (such as an unsolicited trade), registration of the security is not required. Federal covered securities, such as those listed on the NYSE, are also exempt from registration. That exemption carries over to warrants and rights issued by that company.