PP Series 66 Chapter 1 Questions

All of the following persons are excluded from the definition of a broker-dealer or are exempt from registration as a broker-dealer under the Uniform Securities Act, EXCEPT a firm: A with an office in the State that effects trades exclusively with other broker-dealers B with no office in the State that effects trades exclusively with trust companies and other financial institutions C with no office in a State with a broker-dealer "de minimis" exemption that has a few clients in the State in the preceding 12 months D with an office in that State that is a trust company that deals with the public

The best answer is A. A firm is not defined as a broker-dealer if it has no place of business in the State and transacts solely with issuers, other broker-dealers, and financial institutions. However, if a firm that effects securities trades has an office in a State, it is defined as a broker-dealer and must register in the State. Thus, the broker-dealer in Choice A must register and the broker-dealer in Choice B is not required to register. The "de minimis" exemption for broker-dealers is only offered in a minority of States, and typically applies to out-of-state broker-dealers who only have 3 or fewer clients in that State. In Choice C, the State has a broker-dealer "de minimis" exemption and would not be required to register. Banks, S&L's, and trust companies are also excluded from the definition of a broker-dealer, so no registration as a broker-dealer is required in Choice D

Annual renewal of registration as an agent or an investment adviser in each State is made by filing: A Form U-4 within 30 days of the date that renewal statements are sent out B Form U-4 within 60 days of the date that renewal statements are sent out C Form U-6 within 30 days of the date that renewal statements are sent out D Form U-6 within 60 days of the date that renewal statements are sent out

The best answer is A. A standard registration form (Form U-4) in used for federal and state registration of agents and state registration of investment adviser representatives. CRD and IARD send out renewal statements for each registered person in mid-November, and these must be filed, amended (if necessary), and paid for, by mid-December. If this does not occur, that person's registration will expire on December 31st.

An agent of a broker-dealer is: A required to renew his or her registration with the State by December 31st of each year B required to renew his or her registration with the State annually, based on the date the initial registration application was filed C required to renew his or her registration with the State at the discretion of the Administrator D not required to renew his or her registration with the State once the initial registration application has been filed

The best answer is A. All State registrations (broker-dealer, investment adviser, and agent) expire on December 31st of each year unless renewed.

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

The best answer is A. 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. If an agent's license is revoked, that agent cannot associate with another broker-dealer.

Under the NASAA Statement of Policy on unethical practices, an investment adviser may: A accept a verbal order from a customer to sell a security position where the customer has not given the adviser trading authority B accept a verbal order from a customer's spouse to sell a security position where the customer has not given the spouse trading authority C open an account for a customer upon the verbal instructions of the customer's spouse D close an account for a customer upon the verbal instructions of the customer's spouse

The best answer is A. An investment adviser may accept a verbal order from the customer - after all, the account belongs to the customer and the adviser must follow the customer's instructions! Instructions about a customer's account cannot be accepted from anyone other than the customer, unless there is a trading authorization signed by the customer. Thus, a spouse cannot effect trades in a customer's individual account unless the customer gives the spouse trading authorization. Only the customer can open an account for him or herself - another person cannot open an account for that customer.

Under the Uniform Securities Act, which of the following is NOT an issuer transaction? A Trade of a NASDAQ listed security B Redemption of a mutual fund share C Purchase of alimited partnershipinterest from the sponsor D Purchase of an initial public offering from an underwriter

The best answer is A. An issuer transaction is one where the issuer is either on the sell-side or the buy-side of the transaction. A trade of a NASDAQ listed security is a regular secondary market transaction - this is a non-issuer transaction - making Choice A the correct answer. The issuance of a mutual fund share, or redemption of a mutual fund share, is an issuer transaction. The issuer is receiving the proceeds from the purchase of the fund shares; and is paying the proceeds from a redemption of the fund shares. The sponsor is the issuer of a limited partnership offering - thus buying a limited partnership interest from the sponsor is an issuer transaction. Finally, the purchase of an initial public offering from an underwriter is also an issuer transaction, since the underwriter forwards the net proceeds of the offering to the issuer.

Under the Uniform Securities Act, when is an agent permitted to use the term "approved" when discussing his or her registration with a customer? A: If the agent solely states that such approval relates only to the agent meeting theAdministrator'squalification requirements B: If the agent provides the customer with a written statement that he or she has been approved by the Administrator C: If the agent passes the Series 63 or Series 66 examination D: If the agent makes this disclosure to fewer than 10 customers in a 12 month period

The best answer is A. As a general rule, an agent cannot state that he or she is approved by the Administrator; he or she is simply registered in the State. However, it can be stated that the agent has passed the required qualification examination (the Series 63 or Series 66), since this is a true statement. (Please note that the wording in this question is not that precise; but all of the other choices are absolutely wrong).

The State Administrator has the power to do which of the following to a federal covered adviser? A Increase the number of audits that the Administrator makes of the adviser B Establish minimum financial requirements that are more stringent than the requirements of the Investment Advisers Act of 1940 C Require the adviser to file financial reports other than those filed under the Investment Advisers Act of 1940 D Require the adviser to keep records other than those required under the Investment Advisers Act of 1940

The best answer is A. Because of federal supremacy, the State Administrator cannot require anything of a federal covered adviser that is already covered under the Investment Advisers Act of 1940. The State Administrator can, however, audit any adviser, federal covered or not, who does business 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 andperformance feeson 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.

A client of an investment adviser brings his father to a consultation with his investment adviser representative to discuss investment alternatives for the father. The meeting is concluded. Two weeks later, the parent telephones the investment adviser representative, inquiring about the tax status of the client. The investment adviser representative should: A refuse to disclose any information about the client B disclose the requested information but communicate the father's request and the response given in a written communication to the client C disclose the requested information but communicate the father's request and the response given to the investment adviser D disclose the information

The best answer is A. Customer account privacy rules require that customer information not be disclosed to others unless the customer so authorizes. It makes no difference that the person requesting the information is the father of the customer. In order to give out the information to the father, the customer must approve.

A retired customer, who has an investment objective of high current income and safety of principal, directs an agent to buy 500 shares of an unlisted speculative stock. The agent should: A inform the customer that the trade is unsuitable and execute the transaction as directed if the customer insists B refuse the transaction C refer the customer to the StateAdministrator D refer the customer to theSecurities and Exchange Commission

The best answer is A. If a customer directs a trade, the agent must follow the customer's instructions. Please note that the broker-dealer will probably have some internal procedures to document that this trade was unsolicited and that the customer directed that the unsuitable trade be performed.

A "non-issuer" corporation directs its employees to solicit orders for non-exempt securities. For this work, the corporation is paying commissions to the employees. Under the Uniform Securities Act, the corporation: A falls under the definition of a "broker-dealer" which must be registered B falls under the definition of an "issuer" that must register C falls under the definition of an "investment adviser" that must register D is exempt from the definition of a "broker-dealer" and does not have to registered

The best answer is A. If the corporation is a "non-issuer," it is not selling its own securities. It is selling the securities of other companies - which is the definition of a "broker-dealer." Furthermore, since it is paying a commission to its agents, the transactions are not exempt. This firm must be registered as a broker-dealer and its agents are required to be registered as well.

An agent of a broker-dealer wishes to withdraw his registration. If there is a customer complaint, the Administrator: A retains jurisdiction over the resigned agent for a period of 1 year B retains jurisdiction over the resigned agent for a period of 3 years C retains jurisdiction over the resigned agent for a period of 5 years D has no authority over the agent as the agent is no longer employed by the broker-dealer

The best answer is A. If there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 1 year from the withdrawal date. If an agent resigns from a broker-dealer, both the agent and the broker-dealer must notify the Administrator promptly of the withdrawal. The withdrawal does not become effective for 30 days.

An investment adviser may receive a percentage of gains and losses in a client's account: A under no circumstances B only if specifically agreed in writing by both the customer and adviser C only if a written agreement is approved in advance by theAdministrator D without restriction

The best answer is A. Investment advisers are prohibited from being compensated based on a percentage of gains and losses in an account. They may be compensated based on a percentage of all assets under management.

An investment adviser, age 33 and married, needs cash for the down payment to buy her first house. She asks her father if he can "help out" with the down payment. Her father is one of her advisory clients. Which statement is TRUE about this situation? A The investment adviser can accept the money from her father if he gives it as a gift B The investment adviser can accept the money from her father if he gives it as a loan C The investment adviser cannot accept the money from the father, whether given as a loan or a gift D The investment adviser can only accept the money from her father if there is a written agreement that details the terms and conditions

The best answer is A. Investment advisers cannot lend money to customers or borrow money from customers. The only exception is if the customer is a bank, broker-dealer, or affiliated company of the adviser. Note that an investment adviser can accept a gift!

An individual that has not yet passed the appropriate State licensing examination for agent registration in a State would be permitted to: A: answer a phone call from a client B: make a recommendation to a client C: make a cold call to a potential client D: write an order ticket for an unsolicited client order

The best answer is A. Prior to being licensed as an agent, an individual can only perform clerical functions. The individual cannot solicit potential customers, cannot make recommendations, cannot perform a suitability determination and cannot write order tickets. These are promotional activities. What are considered to be clerical functions include the entering of orders that have already been taken from customers; reporting completed trades to customers; taking new account information (such as name, address etc.); and responding to customer questions about account items (such as "What is the current buying power in my account?").

A registered securities agent solicits a customer to buy mutual fund shares. The customer buys 200 shares, sending a check made out to the fund's custodian bank to the agent. The agent does not record the trade on the books of the broker-dealer. Under the Uniform Securities Act, this action is: A: a prohibited business practice B: allowed, since the transaction is recorded on the books of the mutual fund C: allowed, since mutual funds are exempt from the requirement to record all transactions on the books of the broker-dealer D: allowed as long as no commission is taken on the trade

The best answer is A. Private securities transactions are a prohibited business practice under the Act. All trades effected by an agent must be recorded on the books of the broker-dealer.

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.

Investment adviser representatives that have a place of business in the State: I must register with the State if they are affiliated with a federal covered adviser II are not required to register with the State if they are affiliated with a Federal covered adviser III must register with the State if they are affiliated with an investment adviser that is registered with the State IV are not required to register with the State if they are affiliated with an investment adviser that is registered with the State A I and III B I and IV C II and III D II and IV

The best answer is A. States require registration of investment advisers that are not "federal covered advisers." They require "notice filings" from federal covered advisers doing business in their States.Even though State registration is not required for federal covered advisers, each State can (and does) require the registration of any investment adviser representative - whether they are affiliated with a federal covered adviser or a state registered adviser. This is State law because the SEC only requires the registration of the adviser - not its representatives - at the Federal level. There would be no supervision of investment adviser representatives unless the State filled that role; and the State is happy to be the "local policeman on the beat" doing just that.

Making an intentional omission of material fact when recommending a security to a customer would be considered fraudulent if: A a reasonable man would attach decision making importance to the omitted information B the information was not available to the general public at the time that the recommendation was made C the maker of the recommendation did not perform due diligence to determine the relevancy of the omitted information D under the circumstances, the maker of the recommendation did not, and could not, have known of the importance of the omitted information to the buyer of the securities

The best answer is A. The "reasonable man" test is used by courts in determining if an offer of a security was made fraudulently. Since a fraud is deemed to occur if there was an omission or misstatement of material fact when the offer of the securities was made, the court looks to see if a "reasonable man" would attach decision making importance to the omitted or misstated information. If the answer is yes, then a securities fraud has occurred.

The purpose of the Uniform Securities Act is to protect investors from: A investment fraud B aggressive sales pitches C financial loss D moral turpitude

The best answer is A. The purpose of the Uniform Securities Act is to protect the public from investment fraud. (By the way, moral turpitude is a gross violation of the standards of moral conduct - it has nothing to do with offering securities!)

Which statements are TRUE regarding joint accounts? I An order to buy or sell may be accepted from any single account owner II An order to buy or sell can only be accepted from all account owners jointly III An order to draw a check on the account can be made by any single account owner IV An order to draw a check from the account must be made by all of the account owners jointly A I and III B I and IV C II and III D II and IV

The best answer is A. The rules for joint accounts are that orders can be entered by any single owner of the account (either to buy or sell); an order to draw a check can be made by any single owner; however any checks must be drawn to full account name - that is, they must be made payable to all of the owners of the account.

The term "broker-dealer" includes which of the following? I A person in the business of trading securities for his own account or for the account of other persons II Agents who execute trades for broker-dealers III Financial Institutions regulated under federal banking laws IV Issuers of securities A I only B I and II C III and IV D I, II, III, IV

The best answer is A. The term "broker-dealer" is defined as a person who: Engages in the business of effecting securities transactions for the account of others Engages in the business of trading for his own account (known as "proprietary trading") Persons NOT considered to be "broker-dealers" include: Agents: These are individuals who represent the broker-dealer when performing securities transactions, basically sales representatives Banks, Savings Institutions, and Trust Companies: These firms are separately regulated under State and Federal banking laws. Issuers: (except when an issuer effects transactions other than with respect to its own securities)

An individual acts as a finder, facilitating mergers and acquisitions of companies that are both publicly and privately held. The individual searches for companies that appear to be compatible and that will either enjoy a revenue enhancement or cost reduction benefit from the transaction. The individual just introduces the parties to the proposed transaction, but has no involvement in the agreements or valuation. Upon the closing of the deal, the individual is paid a percentage of the transaction. Under NASAA rules, this individual A needs to register as a broker-dealer in the State because he or she is receiving transaction based compensation B needs to register as an investment adviser in the State because he or she is giving advice about investing in securities C does not need to register as a broker-dealer in the State because the clients involved are institutional investors D does not need to register as an investment adviser in the State because he or she has no involvement in the agreements or valuation

The best answer is A. This is a bit vague, but NASAA's (and the SEC's) stance on finders is that if they receive compensation that is "transaction based" - such as in this case because the finder will be paid a fee contingent on the closing of the deal - then the finder is a "statutory broker-dealer" that must be registered. This individual is not an investment adviser, because investment advisers do not earn transaction-based compensation. They earn an advisory fee, that is either a flat fee or a percentage fee - but they cannot earn a fee on each transaction (otherwise they become broker-dealers).

An agent tells a customer "I cannot sell you that stock, but if you want to buy it, let me know and I can sell it to you." The agent has attempted to induce a(n): A offer to purchase from the customer B offer to sell from the customer C sale from the customer D purchase from the customer

The best answer is A. This one is interesting. If an agent is not registered in a given State, then that agent cannot solicit orders to buy or sell securities in that State. The agent appears to believe that if the transaction is unsolicited, then it is OK to take an order from that customer. However, this exemption only applies to the registration of securities and not to the registration of agents. The agent has attempted to induce an offer to buy (purchase) from the customer. This would be unethical if the agent were not registered in the customer's State.

If a new securities issue is being registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the easiest method of State registration is Registration by: A Coordination B Qualification C Filing D Certification

The best answer is A. Under Registration by Coordination, the filing information given to the Securities and Exchange Commission for Federal registration is filed with the State. When the Federal registration becomes effective, the State registration is effective. Note that registration by filing (or notification) cannot be used for new issues. It is only available for issuers that have already registered securities in the State.

If a broker-dealer receives an unsolicited customer order to buy a security for a customer, this is a(n): A exempt transaction B non-exempt transaction C exempt security D non-exempt security

The best answer is A. Unsolicited customer orders are defined as an "exempt transaction" under the Uniform Securities Act, whether the securities involved are exempt or non-exempt.

Which person would be required to register as a broker-dealer in a State? A A person with no place of business in the State who conducts securities transactions with the issuer of non-exempt securities B A person with no place of business in the State who represents an issuer in the sale of exempt securities to non-institutional customers for compensation C A person with no place of business in the State who represents an issuer in the sale of non-exempt securities to the issuer's employees without receiving compensation D A person with no place of business in a State who conducts securities transactions with financial institutions in the State for compensation

The best answer is B. Choice A is excluded from registration as a broker-dealer because it has no office in the State and is only dealing with issuers - it is not dealing with the general public. Choice B is defined as a broker-dealer because the firm is selling securities to retail customers in the State for compensation. It makes no difference whether the securities involved are exempt or non-exempt. Choice C is excluded from the definition because this is an employee of an issuer that represents the issuer, selling its securities to the issuer's employees (for example, selling that issuer's securities to the employees that choose that investment option in the company's 401(k) plan). Choice D is excluded from registration as a broker-dealer because it has no office in the State and is only dealing with financial institutions - it is not dealing with the general public.

A market maker in ABCD stock is currently quoting the stock in the OTCBB at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to sell 800 shares of ABCD at $42.50, the market maker: A must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C must send the order to a stock exchange floor for execution D is not required to take any action

The best answer is B. Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently offering the stock at $43.00 - this is the price at which he is willing to sell up to 1,000 shares. Since this customer is willing to accept less to sell - $42.50 for up to 800 shares, the customer's offer must be displayed in the market. Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.

NASAA Model Rule 502 (c) applies to: I State registered advisers in its entiretyI I State Covered advisers only to the extent that the conduct is fraudulent or deceptive III Federal Covered advisers in its entirety IV Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive A I and III B I and IV C II and III D II and IV

The best answer is B. NASAA Rule 502 (c) sets the rules for investment advisory contracts. As a NASAA rule, it only covers State-registered advisers. Federal covered advisers are subject the rules of the Investment Advisers Act of 1940, however the rule says that it applies to Federal covered advisers to the extent that the alleged conduct is fraudulent or deceptive. The rule requires that advisory contracts provide in writing: The services to be provided, the term of the contract, the fee formula, the amount of prepaid fee to be returned for early termination and any grant of discretionary power; That no direct or indirect assignment or transfer of the contract is permitted without consent of the client; That the investment adviser shall not be compensated based on capital gains (unless the client is wealthy, with either $1MM of assets under management or $2.1MM of net worth - this is set under the Investment Advisers Act of 1940); and That if the investment adviser is a partnership, the adviser will notify the client within a reasonable time of any change in the membership of the partnership. The rule also prohibits any provision that waives compliance with the rule or with the Investment Advisers Act of 1940; and prohibits an advisory contract that is contrary to Section 205 of the Investment Advisers Act of 1940 (Section 205 prohibits compensation based on gain or loss).

An IAR has opened an account for a new customer. The customer is "on the road" for 3-4 weeks per month and has given the IAR verbal authorization to trade her account on a discretionary basis. The IAR sends the customer a written power of attorney for signature and return. 1 week after opening the account, the IAR hears of a good investment opportunity and buys 500 shares of the XYZ stock at $50 for the customer's account. 3 weeks later, the stock declines and the IAR sells the stock at $30 per share. The customer never returned the signed power of attorney. Liability for the loss rests with the: A customer B investment advisory firm C investment adviser representative D all of the above

The best answer is B. The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to 10 business days; as long as a written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion. (Please note that if the investment adviser is also a registered broker-dealer, the rules of FINRA would not permit this - FINRA requires written power of attorney from the customer prior to exercising discretion in the customer's account). Because oral discretion can be taken for up to 10 days, the IAR had the authority to buy the stock. However, the IAR did not have the authority to sell the stock at a loss 3 weeks later unless either the client directed the trade or the client returned the signed power of attorney (which is not the case here). Because the IAR did not have authority to sell the shares, any loss is the responsibility of the employing firm (the investment adviser). The IAR is simply an agent of the firm - the account is the property of the firm, not the agent. The investment advisory firm is liable for the loss.

What item could a State Administrator require a broker-dealer operating as a sole proprietor to file with the State that would not be required to be filed with the SEC? A Balance Sheet B Surety Bond C Statement of Net Capital D Form BD

The best answer is B. Unlike Investment Advisers, who register either with the SEC or the State, Broker-Dealers are required to register with BOTH the SEC and in each State in which they have an office or solicit or conduct securities business. The form that is filed to register with the SEC is the Form BD (Broker-Dealer). The same form is filed in each State, along with the payment of a registration fee. The BD's balance sheet and computed Net Capital (liquid net worth) are filed with both the SEC and the State. The item that only the State can require (not the SEC) is the posting of a surety bond. A surety bond posted in the State is a dollar amount ($10,000 is the recommended amount stated in the Uniform Securities Act, but each State sets its own requirement) that the State can seize if it finds that the BD has violated State law.

An individual works as both a registered agent for a broker-dealer and a representative of an investment adviser, both of which are owned by the same parent company. The individual's sister has started up a successful e-tailing company that she wishes to expand. She asks her brother to sell private placement units of her company to his customers in return for a 20% commission that she will pay. Which statement is TRUE? A This action is prohibited because the commission amount to be paid is excessive B The action cannot be taken unless the brother obtains written permission of the broker-dealer C The partnership units cannot be sold to the agent's customers unless they are registered in the State D The partnership units cannot be sold to the agent's customers unless separate records are kept covering these transactions

The best answer is B. All securities transactions effected by agents of broker-dealers must be known to the firm and supervised by that firm. If the agent sells the private placement units to his customers, he has committed a violation known as "selling away" from his firm. He has sold his customers securities in transactions that the firm does not know about; yet the customers will think that they bought the securities from the broker-dealer (rather, they are buying the securities from the agent's sister!). The only way for an agent to "sell away" from the firm is to get the firm's permission in writing to sell the private placement units. Also note that Choice A has some merit, since a 20% commission seems high, but Choice B is the better answer.

Under the Uniform Securities Act, which individual is defined as an "agent"? A A principal of a broker-dealer B A secretary who takes customer orders C A clerk who solely performs clerical functions D A silent partner of a broker-dealer

The best answer is B. An agent is defined as any individual who represents an issuer or broker-dealer in effecting securities transactions. A sales representative who makes recommendations or who writes customer orders falls under the definition. The definition excludes principals of broker-dealers; clerical employees who do not take customer orders; and silent partners.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged both the advisory fee and a commission on each trade II The account may not be charged an advisory fee and a commission on each trade III This is an unethical practice IV This is not an unethical practice A I and III B I and IV C II and III D II and IV

The best answer is B. An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

An investment adviser is registered in 5 States. The firm develops a relationship with 4 customers in a State in which it is not registered and where it does not have an office. According to the Uniform Securities Act, which statement is TRUE? A The firm must register as an IA in the new State because it is already dealing with customers in 5 other States B The firm is not required to register in the new State because it qualifies for the de minimis exemption C The firm must register in the new State because it is defined as an investment adviser D The firm is not required to register in the new State because it has become a Federal covered adviser once it deals in more than 5 States

The best answer is B. Because the firm does not have an office in the State and it is dealing with 5 or fewer clients (this rule applies to retail clients - it can deal with as many institutional clients as it wants), it qualifies for the de minimis exemption from registration. If the firm had 6 or more retail clients in the new State, or had an office in the new State, it would be required to register. A mid-size adviser with $25 million or more of assets under management COULD become a "federal covered" adviser if it is already required to be registered in 15 or more States; not 5. The firm is defined as an investment adviser in the new State, but it is exempt from registration in that State because it qualifies for the de minimis exemption.

An existing customer of a broker-dealer registered in State "A" is vacationing in State "B." Which statement is TRUE? A The broker-dealer may only solicit the customer in State "B" if it has been registered in State "B" B The broker-dealer may solicit the customer in State "B" without registering in State "B" C The broker-dealer is prohibited from making any communication into a State unless it has a branch office in that State D The broker-dealer must notify theAdministratorin State "B" prior to any solicitation in that State

The best answer is B. If a broker-dealer effects a transaction in a State, unless an exemption is available, the broker-dealer must be registered in that State. One of the exemptions available covers the instance where an existing customer of a registered broker-dealer is vacationing in another State. That customer may be contacted while on vacation in the other State, without the broker-dealer being required to register in that State.

If a representative that transacts business in a State terminates employment with an investment adviser: A notice must be given to the Administrator by the representative only B notice must be given to the Administrator by the investment adviser only C notice must be given to the Administrator by both the investment adviser and the representative D no notice is required to be given to the Administrator

The best answer is B. 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.

A sales representative who intentionally embezzles funds from a customer: I has committed a felony II has committed a fraudulent and misleading Act III is subject to civil liability IV is subject to possible fines and/or imprisonment A I and III only B I and IV only C II and III only D II and IV only

The best answer is B. If a sales representative intentionally embezzles monies from a customer, that is considered to be a felony, since the action was willful (theft is theft!). In this case, the individual is subject to possible fines and/or imprisonment.

A customer wishes to buy 1 share of Walt Disney Company stock, which she intends to frame and give to her 6-year old nephew as a present. The stock is trading for $25 per share; however the commission for executing the trade will be $100 since this is an odd lot. Which statement is TRUE? A Prior to buying the share, the written permission of one of the parents of the nephew must be obtained B Prior to buying the share, the fact that the commission will be unusually high must be disclosed C Prior to buying the share, another customer must be located to buy the remaining 99 shares, so that a round lot of 100 shares can be traded D Prior to buying the share, the nephew must provide proof of identity so that the share can be registered in his name

The best answer is B. If there will be unusual charges for effecting a transaction, these must be disclosed to the customer. While this 1 share of stock only costs $25, the commission will be $100 - this is very high relative to the cost of the share and must be disclosed. Also note that in this scenario, the $100 charge seems reasonable, since it costs more to buy an "odd lot" than to buy a round lot of stock.

Michael Michaelson has an MBA in finance and has taught classes at a local college for the past 15 years. He has decided to use his knowledge and acumen in the private sector and registers in the State as an investment adviser. His business will be creating financial plans and implementing them for clients. Michael requests a waiver from the State Administrator from having to pass the Series 65/66 exam based on his educational and teaching background and receives it. He registers as an IA in the State. He wishes to publish an advertisement for his new business. Michael can state which of the following in the advertisement? A "Because of my extensive finance background, I have been approved by the State to sell financial plans without having to take the examination required of other advisers" B "My fee schedule, which is non-negotiable, is comparable to that charged by other advisers that do not have my extensive finance background" C "As a registered investment adviser in the State, I have been certified to create financial plans" D "I have 15 years of experience as an investment adviser in the State"

The best answer is B. In Choice A, Mike cannot say that he was "approved" by the Administrator, nor can he say he was "certified" (Choice C) by the Administrator. Choice B is a reasonable and true statement. Choice D is misleading because Mike has 15 years' experience as a teacher of finance; not as an investment adviser.

An investment adviser based in Beverly Hills, California whose clientele consists of wealthy entertainment celebrities, invests its clients' monies with the objectives of growth and income, along with safety of principal. The adviser allocates customer monies across various equity funds, bond funds, REITs and RELPs, and collects an annual advisory fee equal to 1% of assets. The adviser is recommending to its clients partnership units in rental condominiums being built in Las Vegas, Nevada. The developer of the condominiums will pay a 6% commission to the adviser for each real estate partnership unit sold. Which statement is TRUE? A The investment adviser is not permitted to collect both an annual advisory fee and a commission on the sale of securities recommended to customers B The investment adviser must disclose the potential conflict of interest to any customer prior to the sale of the partnership unit to that customer C The investment adviser can only collect the real estate commission on the sale of the partnership unit if it reduces its annual advisory fee by at least 50% of the commission charge D The investment adviser is not permitted to offer securities investments originating in any State other than California

The best answer is B. Investment advisers are normally compensated by advisory fees. Normally, the adviser cannot take advisory fees for management of assets and commissions on recommended transactions, since this is a conflict of interest. However, if the conflict of interest is disclosed to the customer in advance of the purchase, and the customer still wishes to buy that security, then this is permitted. There is no regulation requiring advisers to rebate part of commissions received on recommended transactions to customers; nor is there any prohibition on offering "out-of-state" investments, as long as the security is registered in the State where offered (or is exempt from registration in that State).

An individual represents a broker-dealer in a State selling fee-based brokerage accounts as an independent contractor. This individual is not an employee of the broker-dealer. Which statement is TRUE regarding registration of the independent contractor and the broker-dealer in the State? A The broker-dealer must register in the State but the independent contractor is excluded from registration because he is not an employee of the broker-dealer B The broker-dealer must register in the State and the independent contractor must register in the State as an agent of the broker-dealer C The independent contractor must register as an agent of the broker-dealer in the State but the broker-dealer is excluded from registration in the State D Neither the broker-dealer nor the independent contractor are required to register in the State because the account is fee-based and not commission based

The best answer is B. Just because an individual is an independent contractor and not an employee does not mean that they are not required to be registered in the State. Any individual who represents a broker-dealer selling securities is an agent who must be registered (unless an exemption is available). Note that many brokerage firms and broker-dealers that have agents that work out of their homes, legally structure these arrangements as "independent contractor" relationships and not as employment relationships. Then the employing firm is not responsible for health and pension benefits that are given to employees. However, these independent contractors are still defined as "agents" that must register in the State. And, of course, the agent's broker-dealer must be registered in the State.

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.

A customer requests his agent to perform a securities trade privately, without it being recorded on the books and records of the broker-dealer. Which statement is TRUE? A This is an exempt transaction and the customer's request can be honored B This is a prohibited practice because all transactions effected by agents must be recorded on the books and records of the broker-dealer C The representative must always follow the customer's instructions as given and perform the transaction privately D The representative can only execute the transaction for the customer if the securities involved are exempt

The best answer is B. Private securities transactions are prohibited. All transactions effected by representatives must be recorded on the books and records of the employing broker-dealer and must be supervised by that broker-dealer.

Which statements are TRUE about the filing of the annual surprise audit results with the Administrator by investment advisers? I Only advisers that take custody must be audited II All advisers must be audited III Audit results must be filed with the Administrator within 60 days of completion of the audit IV Audit results must be filed with the Administrator within 120 days of completion of the audit A I and III B I and IV C II and III D II and IV

The best answer is B. The NASAA custody rule requires that each adviser that takes custody be audited on a "surprise" basis annually, so the actual date of the audit is only known to the CPA. There is no audit requirement for advisers that do not take custody. After the CPA shows up for the audit and completes the examination, a copy of the auditor's report and financial statements must be filed with the Administrator within 120 days of completion.

The statute of limitations for filing a claim alleging a criminal violation of the Uniform Securities Act is: A 3 years B 5 years C 10 years D Unlimited

The best answer is B. The statute of limitations for filing claims under the Uniform Securities Act is 5 years. (Note, in contrast, that Federal law is 3 years).

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

The best answer is B. 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. There are no Civil Penalties.

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.

The State Administrator receives a complaint about a Federal Covered adviser which has made a notice filing in the State, alleging that the adviser stole from him. Which statement is TRUE about this? A The Administrator cannot take action because the adviser is Federal Covered B The Administrator can investigate the complaint C The Administrator must refer the complaint to the SEC and tell the client that it is doing so D The Administrator can rescind the registration of the adviser

The best answer is B. While NSMIA (National Securities Markets Improvements Act of 1996) partitioned responsibility for investment adviser supervision between the Federal government (Federal Covered Advisers) and the States (State-registered advisers), it retained State jurisdiction to investigate and enforce any violation of State law with respect to fraud or deceit, covering all advisers, whether State-registered or Federal Covered.

What constitutes "taking custody" under the NASAA rule for investment advisers? A An employee of an advisory firm who is given discretionary authority to trade the account by a client B A client who signs a power of attorney, giving the adviser the right to trade on the client's behalf C An employee of an advisory firm acting as a trustee for a firm D An introducing broker-dealer receiving checks made out to the carrying broker-dealer that are to be deposited at a broker-dealer

The best answer is C. Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Finally, having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have access to client funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

An investment adviser that claims that it is a "fee only" adviser could be compensated based on: I a percentage of assets under management II a flat annual or hourly fee for all work performed for wealthy investors III 12b-1 fees paid by mutual funds IV a performance based fee for wealthy investors A I, II, III B III and IV C I, II, IV D I, II, III, IV

The best answer is C. Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,100,000 as permitted under the Investment Advisers Act of 1940). (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.) An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it sells. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.

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).

A broker-dealer is a subsidiary of a company that is listed on the New York Stock Exchange. An agent of the broker-dealer believes that the parent company's stock is a good investment and wants to recommend it to her customers. Which statement is TRUE about this? A: This is permitted because the company qualifies for a "blue chip" exemption under the Uniform Securities Act B: This is an unethical business practice and is prohibited C: This is permitted only if the agent discloses the existence of the relationship verbally when making the recommendation and it is disclosed in writing on the confirmation D: This is permitted only if the agent opens a joint account with the customer to purchase the recommended stock of the parent company

The best answer is C. This question does not address reality! As an internal policy, most broker-dealers prohibit their agents from recommending the stock of their publicly traded parent company - because of the inherent conflict of interest. For example, an agent for Merrill Lynch cannot recommend the purchase of Bank of America stock (B of A owns Merrill). However, let's move to the theoretical and, evidently, the test world. This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the transaction (this is done by disclosing it in writing on the trade confirmation).

An Investment Adviser Representative enters into a contract with a new client for advisory services and provides the client with a glossy copy of Form ADV Part 2 (the "Brochure") and the Brochure Supplement. When he gets back to the office, he realizes that he forgot to have the client sign that the Brochure was received. The IAR: A: is not required to do anything because the customer received the Brochure and Brochure Supplement B: must have the customer sign within 48 hours that the Brochure was received C: must have the customer sign the contract and give the customer 5 business days to terminate the contract without penalty D: must rescind the contract immediately

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.)

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

An agent's registration becomes effective: A: immediately when filed in the State B: 10 days after filing in the State C: 30 days after filing in the State D: 90 days after filing in the State

The best answer is C. An agent's registration becomes effective after 30 days have passed since meeting all registration filing and qualification requirements.

Bonds issued by a church located in Sullivan County, in the State of Indiana, are being offered to congregants of affiliated churches in the State of Illinois. Which statement is TRUE? A The bonds are only exempt securities if the offer is made to church congregants in Illinois and not to the general public B The bonds are only exempt securities when being offered to residents of the State of Illinois C The bonds are only exempt securities in either Indiana or Illinois, as long as a notice filing specifying the material terms of the offer is made in the State D The bonds are non-exempt securities that must be registered in each State where offered

The best answer is C. Bonds issued by not-for-profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator: can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offering can provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days) can disallow the exemption, providing the grounds for denial or suspension can require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering)

A representative is making a presentation to a married couple, ages 77 and 81, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statements made by the representative would be misleading and fraudulent? I "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" II "I do not earn any commissions when I sell you an EIA" III "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" IV "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company" A I and III B I and II C I, II, III D I, II, III, IV

The best answer is C. Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice I is a misleading statement. Technically the salesperson does not earn a commission, but he or she does earn a very steep sales charge, so Choice II is misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice III a misleading statement. Choice IV is true - the contracts have a minimum guaranteed rate of return (like around 4%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.

Which of the following are defined as securities under the Uniform Securities Act? I Warehouse receipt II Collateralized Mortgage Obligation III Fixed Annuity Contract IV Pre-organization certificate A II only B III and IV C I, II, and IV D I, II, III, IV

The best answer is C. Fixed annuity contracts are excluded from the definition of a security, since the insurance company bears the investment risk. Please note, in contrast, that variable annuities issued by insurance companies, are defined as securities. Pre-organization certificates (such as limited partnership subscription agreements); warehouse receipts; and collateralized mortgage obligations all fall under the definition of a security.

Which statements are TRUE about registration as an agent? I Registration becomes invalid if the agent terminates employment with the broker-dealer II Registration is valid immediately after passing the Uniform Securities Exam III Registration is valid until December 31st of that year A I only B I and II C I and III D II and III

The best answer is C. If an agent leaves a firm, his registration becomes invalid. Agents must be employed by a firm to be registered. Registration becomes effective 30 days after filing, assuming that the individual has passed the Series 63 or 66 exam. Registrations expire automatically on December 31st of each year, unless renewed.

After being solicited by an agent of ABC Brokerage, a customer bought 1,000 shares of XYZZ stock (an OTCBB issue) at $15 per share. The stock rapidly declined to $8 per share, and the customer sold the shares. Six months later, the customer received a written offer of rescission from the broker-dealer, stating that the stock had not been registered in the State where the customer lives. Which statement is TRUE about the customer accepting the offer? A The buyer cannot accept the offer of rescission because he no longer owns the stock B The offer must be accepted verbally within 30 days of receipt C The offer must be accepted in writing within 30 days of receipt D The offer cannot be accepted unless the Administrator holds a hearing within 15 days of receipt

The best answer is C. If an offer of rescission is made to the buyer, then the seller must either accept in writing in 30 days or the offer is void. The seller is offering to refund any loss to the buyer and would only do this if the offer of the securities to the buyer violated State law. Note that the buyer of the securities is not required to still own the securities to accept the offer. Remember that the buyer experienced a loss, and the buyer can sue the seller if the securities were not legally offered in the State. If the buyer accepts the rescission offer, then the buyer will give up the right to sue the seller.

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.

An investment adviser personally has a short position of 10,000 shares of ABC stock. The investment adviser believes that the short ABC Corp. position would be a good investment for one of his customers who is bearish on the stock and transfers his short ABC Corp. stock position to that customer at the current market price. This action is: A prohibited because short sales can only be effected on an up-tick B permitted since the adviser believes that it is in the best interests of the client C an unethical business practice unless the conflict of interest was disclosed in advance to the client and the client gave written consent D an unethical business practice because all securities transactions for customers must be effected in the public market

The best answer is C. It is an unethical business practice for an investment adviser to take an opposite position to that being recommended to the customer. To close out the short position, the investment adviser is "buying" this stock that is being "sold short" by his customer. To do so, the conflict of interest must be disclosed in advance to the customer. In addition, when an adviser takes the opposite side of a recommended transaction to a client, the client must give written consent to that trade.

ACME Securities is a registered broker-dealer in State A. ACME is soliciting individuals to work for the firm in their spare time, from a home office. For selling ACME's products to customers, these individuals will be paid 25% of commissions generated. Since these individuals are not working in ACME's office, ACME has classified them as independent contractors. Which statement is TRUE? A These individuals are not required to be registered as representatives in State A because they are not ACME employees B These individuals must register themselves as representatives in State A because they are not ACME employees C These individuals must be registered as representatives in State A by ACME Securities D These individuals only need to be registered in State A by ACME if they become full-time representatives

The best answer is C. Just because an individual is an independent contractor and not an employee does not mean that they are not required to be registered in the State. Any individual who represents a broker-dealer selling securities is an agent who must be registered (unless an exemption is available). Note that many brokerage firms and broker-dealers that have agents that work out of their homes, legally structure these arrangements as "independent contractor" relationships and not as employment relationships. Then the employing firm is not responsible for health and pension benefits that are given to employees. However, these independent contractors are still defined as "agents" that must register in the State. And, of course, the agent's broker-dealer must be registered in the State.

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A 10 business days following the end of the month in which the transaction was effected B 20 business days following the end of the month in which the transaction was effected C 10 business days following the end of the quarter in which the transaction was effected D 20 business days following the end of the quarter in which the transaction was effected

The best answer is C. NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

Registration of securities in a State by Filing becomes effective: A when the filing with the State is completed B 2 business days after the filing with the State is completed C 5 business days after the filing with the State is completed D when the Federal registration becomes effective

The best answer is C. Registration of securities in a State by filing becomes effective on the 5th business day after filing (unless the Administrator allows a shorter period).

An investment adviser has 3 managing partners and 3 investment adviser representatives. All of the partners have completed the Certified Financial Planner (CFP) program and received the designation. The 3 IARs have been enrolled in a CFP preparation course and are scheduled to take the next CFP exam. The IA publishes an advertisement that states: "All of our partners are Certified Financial Planners." This advertisement is: A fraudulent and misleading B unethical because an advertisement cannot include the qualifications of the firm's principals C permitted since it is true D permitted only after the IARs pass their CFP exams

The best answer is C. Since the 3 partners of the firm all have their CFPs, this is a true statement and is not misleading.

Which of the following statements by an agent are prohibited under the Uniform Securities Act? I "All securities registered for trading on an exchange are suitable for you to invest in" II "All securities registered for trading on NASDAQ are speculative" III "All small capitalization securities that are not listed on NASDAQ are unregistered" IV "Some securities are traded in more than one market" A I and III only B II and IV only C I, II, III D I, II, III, IV

The best answer is C. Stating that "All securities registered on an exchange are suitable investments" is untrue and unethical. Stating that all NASDAQ securities are speculative (Choice II) is also untrue - there are many large capitalization NASDAQ issues that are "safe" - such as Microsoft. Small capitalization issues included on NASDAQ are registered, so Choice III is untrue. It is true that some securities may be traded in more than one market (e.g., dual listings on both the NYSE and NASDAQ), making Choice IV true.

If the Administrator summarily suspends a registration of an agent, which of the following statements are TRUE? I The Administrator must notify the agent promptly that the order has been entered II The Administrator must obtain a court order prior to issuing its own order III An opportunity for a hearing must be given within 15 days of written request IV The individual is prohibited from acting as an agent in that State A I and II only B III and IV only C I, III and IV D I, II, III, IV

The best answer is C. The Administrator is permitted to summarily suspend a registration, which means that he or she can take this action without obtaining a court order. If the administrator does this, the agent must be notified promptly of the action and the reasons for the action; and the agent must be given the opportunity for a hearing within 15 days of the agent making a written request.

An Investment Adviser is screening companies for their investment potential and finds what he believes to be an undiscovered growth stock. The adviser puts in an order to buy 10,000 shares, which is executed in 2-5,000 share purchases at different prices. What is the most appropriate way for the adviser to distribute these shares to his client's accounts? A: The clients that pay the highest advisory fees should get the better-priced shares B: The clients that have the largest accounts should get the better-priced shares C: The shares should be distributed pro-rata across all client accounts D: The shares should be distributed on a random basis across all client accounts

The best answer is C. The typical procedure for handling trades executed in a single block is to allocate the securities equally among clients at a uniform price on a pro rata basis. This is the typical disclosure made to clients. Depending on market conditions, the adviser may not be able to purchase the security for all clients at the same price. Instead, it may have to purchase the security over several days at different prices. In such a case, each client should receive a pro rata allocation at the weighted average price.

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.

Which of the following can cause the Administrator to deny an application for registration? A The applicant was convicted of a Driving Under the Influence misdemeanor 4 years ago B The applicant plead guilty to a minor traffic violation 2 years ago C The applicant is the subject of an order from a Canadian court suspending registration as a securities representative D The applicant declared bankruptcy in another State 5 years ago

The best answer is C. This one is pretty easy to get down to a 50/50 question. Choices A and B are not reasons for denying registration. The only DUI that can result in a denial of registration is a "felony" DUI conviction within the past 10 years - not a "misdemeanor" DUI conviction or a minor traffic violation. The key to determining whether Choice C or Choice D is the answer is based on whether we are talking in the "present tense" or "past tense." Because the applicant in Choice C is (present tense) under suspension by another "court of competent jurisdiction" (Canada has a robust legal system), this individual will be denied registration in the State. Regarding Choice D, the applicant must currently be insolvent to be denied registration. This person declared bankruptcy 5 years ago (past tense), so maybe he or she cleaned up his or her act and is now solvent (we don't know). If that applicant is currently solvent, then registration would not be denied.

Which of the following are defined as "issuers" under the Uniform Securities Act? I For corporate securities, the corporation itself is the issuer II For collateral trust certificates, the person performing the functions of depositor under the Trust agreement is the issuer III For equipment trust certificates, the corporation is the issuer IV For oil and gas program fractional interests, the owner of the minerals is the issuer A I only B II and III only C I, II, and III only D I, II, III, IV

The best answer is C. Under the Uniform Securities Act, issuers of securities must register the issue in the State (unless an exemption is available). The legal definition of the "issuer" depends on the type of security being issued. For corporate securities, the corporation itself is the issuer. For collateral trust certificates, the person performing the functions of depositor under the Trust agreement is the issuer. For equipment trust certificates, the corporation is the issuer. Finally, for oil and gas program fractional interests, the Act states that there is no defined "issuer." (Note: States have been concerned for many years about sales of highly risky oil and gas exploration deals to unsophisticated investors. The legal wording of "no issuer" is a "technicality" that makes a person offering oil and gas units to investors register in the State under the toughest method - Registration by Qualification. The easier methods cannot be used.)

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is: A permitted if the IAR opens a joint account with the customer; contributes capital; and shares in proportion to the capital contributed B permitted only if the IAR charges a lower advisory fee to the client C permitted only if the Investment Adviser does not charge an advisory fee D prohibited

The best answer is D. Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

An investment adviser that is a sole proprietor finds that its net worth (net capital) has fallen below the minimum requirement. What asset can an owner of the advisory firm contribute to bring the net worth back above the minimum requirement? A A copyright on a book owned by the individual B A couch from the owner's home C An automobile owned by the individual D A mutual fund position owned by the individual

The best answer is D. Net capital is really the adviser's "liquid net worth." It is liquid assets minus all liabilities. For an adviser that is an individual, excluded from assets that count in net capital are any non-liquid assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, home, home furnishings, automobiles and any other personal items that cannot be readily converted to cash. Basically, this means that the only assets that count in the computation for an individual adviser are cash, accounts receivable and marketable securities positions. Note, however, that if the adviser is a partnership or corporation, the computation is permitted to include automobiles and furnishings used in the adviser's business. Why State law permits this is anyone's guess, but this point should be known for the exam!

An investment adviser is considered to "take custody" of funds or securities from a customer if it: A exercises discretionary authority by placing trades of securities for that customer B accepts a check from the customer made payable to the fund custodian to buy a mutual fund C accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D receives quarterly management fees from the custodian by direct deduction with client consent

The best answer is D. Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account. Exercising discretionary authority limited to trading or accepting commissions are not "taking custody." This is a limited power of attorney which limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody. Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

Which State-registered investment advisers MUST report that they take custody on Form ADV? I An adviser that is affiliated with a parent bank or trust company II An adviser that directly deducts management fees each quarter from client accounts III An adviser that has discretionary authority over client accounts under a limited power of attorney IV An adviser that acts as a trustee for a client where the grantor of the trust is the client A I and III B I and IV C II and III D II and IV

The best answer is D. Taking custody means that the adviser is holding customer funds or securities or has the ability to access customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition. Securities must either be held in customer name, or held in adviser name, with the adviser being the trustee for the customer. Thus, if the adviser is appointed as trustee over the customer's account, custody has been taken. A limited power of attorney limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody.

An investment adviser has been experiencing a business decline due to a weak local economy and a weak investment outlook. To rebuild her business base, the investment adviser puts an advertisement in the local newspaper that says: "Because times are tough for all of us, we are offering, for a limited time only, a free investment consultation and free year-end tax preparation to anyone who signs a 1-year advisory contract for an introductory rate of only $25 per month." This is permitted: A under no circumstances B as long as the duration of the limited time offer is included in the advertisement C as long as the adviser accepts all potential clients that respond to the offer made in the advertisement D only if the word "free" is removed twice from the advertisement

The best answer is D. "Free" offers of services cannot be conditioned on buying something. They must be truly "free." So either the adviser must remove the words "free" from the offer of a consultation and "free" from the offer of year-end tax preparation, since they are conditioned on buying a $25 a month contract; or the adviser must get rid of the condition that a contract be purchased for $25 a month for these "free" services.

Under the Uniform Securities Act, a sole proprietor who provides advice for compensation about fixed income annuity contracts: A must register as anagent B must register as aninvestment adviser C must register as abroker-dealer D need not register

The best answer is D. A person who gives advice about securities for a fee must register as an investment adviser in a State. Since this person is giving advice about fixed annuity contracts (which are an insurance product - they are NOT a security) - there is no requirement for this person to register as either an investment adviser, broker-dealer, or agent, in the State.

Under the Uniform Securities Act, a person could give advice about all of the following securities without having to register in the State as an investment adviser EXCEPT: A Treasury Bonds B Ginnie Mae Pass-Through Certificates C Fannie Mae Debentures D State General Obligation Bonds

The best answer is D. A person who gives investment advice relating solely to U.S. Government securities (including Agency securities), is excluded from Federal registration under the Investment Advisers Act of 1940. Any person excluded from registration with the SEC under the Investment Advisers Act of 1940 is a "federal covered adviser" and cannot be required to register in the State. Note that if the person gives advice about municipal bonds (Choice D), that person is not excluded and must register.

Misstatements of material fact in a securities registration are violations of the Act for all of the following persons EXCEPT: A: issuers B: directors of issuers C: underwriters D: agents

The best answer is D. 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.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices is prohibited? A Buying a stock on one exchange and selling the stock short on another exchange to lock in a temporary price differential B Using discretion as to when a customer order to buy 1,000 shares of a specific stock is placed C Using discretion as to what security to buy with written authorization from a customer D Using discretion as to what security to buy with oral authorization from a customer

The best answer is D. Buying a stock on one exchange and selling the stock short on another exchange to lock in a temporary price differential is known as "arbitrage," and is a perfectly legal trading strategy. If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." Prior to effecting a discretionary trade, written authorization must be obtained from the customer. Note, however, that selection of price and/or time of execution by an agent is permitted at any time without written authorization.

All of the following may be required by the Administrator to maintain registration EXCEPT the filing of: A financial reports with the Administrator B renewal fees with the Administrator C sales literature with the Administrator D a renewalconsent to service of processwith the Administrator

The best answer is D. Consent to service of process is only filed with initial registration applications; it is not required for renewals. The Administrator can require the filing of financial reports, advertising and sales literature, and the payment of renewal fees.

Which of the following is NOT defined as correspondence? A: Written letter to a client B: E-mail C: Instant message D: Group e-mail

The best answer is D. Correspondence is an item of an individual nature to a customer and includes a written communication, an e-mail or an instant message. A group e-mail would fall under the definition of "sales literature." Sales literature is defined as a communication to 25 or more existing or prospective customers.

Transactions in which of the following securities are exempt from the anti-fraud provisions of the Uniform Securities Act? I U.S. Government bonds II U.S. Government agency bonds III Municipal bonds IV Corporate bonds A: I and II only B: III and IV only C: I, II, III D: None of the above

The best answer is D. Fraud is fraud is fraud for all securities and transactions, whether exempt or non-exempt. Nothing is exempt from the anti-fraud provisions of the Uniform Securities Act.

If an adviser is suspicious about a customer's account activity and believes that there may be illegal activity, then the adviser: I must file a CTR report with FinCEN II must file an SAR report with FinCEN III in 15 days IV in 30 days A I and III B I and IV C II and III D II and IV

The best answer is D. If an adviser is suspicious about a customer opening an account, then a "Suspicious Activities Report" must be filed with FinCEN (Financial Crimes Enforcement Network - part of the Department of Treasury) within 30 days. The customer cannot be told that the report is being filed.

If an agent withdraws from employment from a broker-dealer, the withdrawal takes effect: A promptly B within 5 days C within 10 days D within 30 days

The best answer is D. If an agent withdraws from registration, the withdrawal does not take effect for 30 days (or sooner, if the Administrator so permits).

Investment advisers may be formed as: I Partnerships II Corporations III Associations A: I only B: II only C: III only D: I, II, III

The best answer is D. Legally, an investment adviser is a "person," which is any legal operating entity. Advisers can be formed as corporations, partnerships, associations, etc., since these are all legal "persons" with authority to operate in a State.

Which of the following statements may be made by an agent about a new securities issue that is being registered by coordination? A: "Because these securities are being registered with theSecurities and Exchange Commission, you are guaranteed that the issue is safe" . B: "Once registration is effective, this means that both theAdministratorand the Securities and Exchange Commission have approved of the offering" C: "The issue is selling out fast to institutional investors" D: "The security is being registered in the State and with the Securities and Exchange Commission"

The best answer is D. Making untrue or coercive statements is a violation of the Act. Stating that the security is registered with the State and the Securities and Exchange Commission is true if the issue is being registered by coordination. Stating that "you are guaranteed;" stating that "the Administrator or SEC approved;" or stating that "the issue is selling out fast;" are all either untrue or coercive statements and are prohibited.

Under the Uniform Securities Act, all of the following statements are true regarding recordkeeping requirements EXCEPT: A records must be kept for time periods set by the Administrator B the same records are not required to be kept for bothbroker-dealersandinvestment advisers C theAdministratormay inspect records at will D an annual audit must be scheduled with the Administrator

The best answer is D. Regarding record keeping rules, broker-dealers and investment advisers registered with the SEC must keep their records for the time period prescribed under Federal law, unless the Administrator specifies a different time period. It is true that different records would be required to be kept by broker-dealers than those required for investment advisers, since these are two very different businesses. The Administrator or its representatives may inspect the records at any time. It is not true that an annual inspection must be scheduled with the Administrator - the Administrator can inspect records at will.

Which of the following are requirements for an internet communication (a website) posted by a broker-dealer, agent, investment adviser or investment adviser representative? I The communication must be limited to the dissemination of general information on products or services II The communication must include a firewall or other implemented procedure to ensure that prior to any subsequent communication with prospective clients in the State, that the broker-dealer, agent, investment adviser, or investment adviser representative are registered in the State, or are exempt or excluded from registration III The communication must include a legend that states that: "The broker-dealer, agent, investment adviser or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration" IV The communication must include a legend that states that: "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." A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. 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). The internet communication cannot be overtly promotional; and the broker-dealer or investment adviser must put in a firewall or procedures that make sure that viewers of the site are not contacted by agents or investment adviser representatives to buy securities or advisory services unless the agent or IAR is appropriately registered in the State.

A broker-dealer based in State X also has an office in State Y. Which statements are TRUE? I The Administrator of State Y has the right to inspect the broker-dealer's office in State Y II If the majority of the broker-dealer's business is in State Y, the Administrator of State Y has the right to inspect the broker-dealer's office in State X III If a fraudulent act is committed by the broker-dealer in State X, the Administrator of State Y has jurisdiction if the action harmed customers in State Y IV The Administrator of State X has the right to inspect the broker-dealer's office in State X A I and II only B III and IV only C I, III and IV D I, II, III, IV

The best answer is D. Since this broker-dealer has an office in State Y, then the Administrator of State Y has the right to inspect that office. The Administrator of a State has the authority to audit or inspect the records of a broker-dealer in or out of the State. Thus, the Administrator of State X could inspect the records of the offices in both State X and State Y; and the Administrator of State Y could inspect the offices in both State Y and State X. As long as customers in State Y were involved, then the Administrator of State Y has jurisdiction, even though the fraud took place in State X. Finally, the Administrator of State X has the right to inspect the branch in State X.

Which of the following is NOT typically required to be included in the State registration application of a broker-dealer or investment adviser? A Consent to service of process B Business history of applicant C Fingerprints of the officers D Books and records of the broker-dealer used by the applicant

The best answer is D. State registration applications for a broker-dealer or investment adviser must include: The applicant's form and place of organization; The applicant's proposed method of business; The qualifications and business history of the applicant and each of its officers or partners; Any injunction, administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business; and any conviction of a felony; The applicant's financial condition and history; and Any information to be furnished to a client (the "brochure") if the applicant is an investment adviser. Also note that the initial application must be accompanied by a consent to service of process, which appoints the Administrator as attorney for the applicant. Any lawsuits filed in court against a broker-dealer or investment adviser will result in a subpoena sent to the Administrator; who will then forward it to the registrant (broker-dealer or investment adviser) that is being sued. As part of the registration application, fingerprints are required by most states (Choice C). However, if the applicant already has fingerprints on file with FINRA as part of a U-4 filing, then the State will not require an additional fingerprint filing. Note that there is no requirement for filing of the books and records of the broker-dealer as part of the application, making Choice D the best one offered. (Note, however, that the Administrator has the power to inspect books and records of a BD or IA at will.)

What can the State Securities Administrator do during an investigation? I Subpoena individuals II Request documents and records III Issue a warrant for an individual's arrest IV Compel testimony of an individual A II only B I and III only C II and IV only D I, II and IV

The best answer is D. The Administrator cannot issue an arrest warrant - this must be issued by a court of law. The Administrator has the power to subpoena individuals, can require the production of documents and records and can require (compel) an individual to testify.

Under the Uniform Securities Act, registration as an investment adviser automatically registers all of the following EXCEPT: A officers of the investment adviser B directors of the investment adviser C partners of the investment adviser D employees of the investment adviser

The best answer is D. The registration application for an investment adviser names all of the partners, officers and directors of the advisory firm. These are all registered when the investment adviser registration is granted (but the Administrator may make these persons pass a test as a condition of registration). Each investment adviser representative must be separately registered through the investment adviser.

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 elderly customer in Florida wishes to open a securities account with an agent that is located and registered only in the State of New York. The customer's adult children have their primary residence in the State of New York. The agent tells the customer that he can only open the account if the customer uses his children's New York address. This is: A: permitted since the customer has a valid New York address B:permitted if the parent signs an affidavit that he or she is a legal resident of the State of New York C: prohibited because the adult children must have an account with the agent in New York in order for an account to be opened for the parent who resides in Florida D: prohibited because the agent is aware that the customer is not a New York resident and the agent must be registered in the State of Florida for the account to be opened

The best answer is D. This is a situation that is not uncommon. The elderly parent lives in Florida; the adult kids live in New York. In order for the agent who is only registered in New York to open an account for the parent, the agent must be registered in Florida. The parent cannot use the kids' New York address to make it appear that the parent is a resident of New York - since this is a lie!

Which of the following is a non-exempt security under Uniform State Law? A NASDAQlisted issues B Church bonds C Equipment Trust Certificates D Corporate bonds offered to fewer than 5 investors

The best answer is D. Under Uniform State Law, exchange and NASDAQ listed issues are exempt securities in that State; as are not-for-profit issues and equipment trust certificates (which are issued by common carriers subject to I.C.C. regulation). Corporate bonds of issuers that are exchange listed are exempt securities as well - but there is no mention of this in Choice D. Corporate bonds offered to 5 or fewer investors would qualify as an exempt transaction; not as an exempt security.

Which of the following securities is NOT exempt from the registration requirements of the Uniform Securities Act? A U.S. Government Bonds B Debenturesof a New York Stock Exchange listed company C Stockissued by a charitable corporation D Limited PartnershipInterests

The best answer is D. Under the Uniform Securities Act, U.S. Government bonds; securities issued by Exchange listed companies ("blue-chips"); and securities issued by charitable organizations are exempt. Limited partnership interests are defined as a security under the Act and are non-exempt.