S63 Practice Questions
Under the Uniform Securities Act, the term "agent" refers to individuals who act on behalf of a broker-dealer or issuer in effecting securities transactions. Which of the following individuals are NOT included in the definition of an agent?
1) A lawyer acting on behalf of an issuer in preparing documents describing the issuance of nonexempt securities 2) A lawyer acting on behalf of a broker-dealer who prepares documents describing the sales or purchase of securities to the general public 3) A partner or officer of a broker-dealer whose only securities activity is the purchase of shares of an issuer for his personal investment account 4) An officer of an issuer who sells shares of the issuer's stock to employees without receiving any special compensation An agent is described in the Uniform Securities Act as an individual, other than a broker-dealer or issuer, who represents a broker-dealer or issuer in effecting transactions in securities. The lawyer is not engaged in effecting securities transactions on behalf of the issuer or broker-dealer. Therefore, the lawyer is not considered an agent subject to regulation by the Uniform Securities Act. A partner (or anyone else) of a securities firm making a personal investment does not make him an agent. An officer of an issuer not receiving any compensation for sales of the issuer's stock to employees is not an agent under the USA.
An agent would be engaged in a prohibited practice if he
1) sold a nonexempt, unregistered security to an individual who has a net worth in excess of $2 million 2) aggressively traded, on a daily basis, a discretionary account with long-term growth as an objective An agent cannot lawfully sell an unregistered, nonexempt security other than in an exempt transaction. The sale to the wealthy individual is not an exempt transaction as would be the sale to a financial institution. Day trading in an account with long-term growth as an objective would constitute an unsuitable transaction and, therefore, is prohibited under USA. Sharing commissions is only permitted with agents of the same or affiliated broker-dealers. Remember that investment adviser representatives never may share in the gains and losses in a customer's account in the same fashion that agents can.
Unless qualifying for an exemption, which of the following advisory fee structures is NOT allowed under the USA?
Fees based on a percentage of the change in value of funds from quarter to quarter Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures.
The Uniform Securities Act contains a number of broad references to activity that might be construed as being in violation of the act's anti-fraud provisions. An individual making a sales presentation for which of the following would be exempt from the anti-fraud provisions of the Uniform Securities Act?
Fixed annuities
An agent is registered in State X but not in State Y. The agent sells a resident of State X a new State Y municipal revenue bond. If the bond is not registered for sale in State X, which of the following statements is TRUE?
The sale was legal because the bond is not required to be registered for sale in State X. Any municipal bond is considered an exempt security under the Uniform Securities Act. Therefore, the sale of an exempt unregistered security by a properly registered agent is perfectly legal.
For purposes of safeguarding customer information, which of the following would be considered a covered account?
The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.
Which of the following transactions are exempt from the registration provisions of the USA?
Isolated nonissuer transactions, unsolicited transactions effected through a broker-dealer, and transactions between issuers and underwriters are all exempt transactions under the provisions of the USA. As long as there are no more than 10 subscribers to pre-organization certificates, the transaction is exempt.
Which of the following would be a permissible activity for an agent?
Placing an order in an existing discretionary account without specific authorization for that trade Did you read this carefully? This is an existing discretionary account. That means the agent has the authority to initiate trades without contacting the client. Borrowing money from a client is only permitted if the client is in the business of lending money. More than likely, your mother is not a bank (certainly not on this exam). We can't do third-party trading without the documentation in hand, and we can never trade on inside information.
Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act,
Sharon must be registered in State X in order to accept the order Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state which is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside.
Which of the following is NOT a security?
Term life insurance policy
Under the Howey test, a Supreme Court Case that established the standards for defining an investment contract, which of the following is a characteristic of a security?
The Supreme Court in the Howey case established standards for identifying a security. The four criteria associated with the Howey test are (1) an investment of money (2) in a common enterprise with (3) expectation of profits (4) solely from the efforts of others. The Howey test contains no standard referring to income distributions, guaranteed or otherwise.
In an effort to combat money-laundering, financial institutions are required to file reports with FinCEN for each cash transaction
The currency transaction report (CTR) must be filed with the Financial Crimes Enforcement Network (FinCEN) whenever a cash transaction in excess of $10,000 is made at a financial institution (including broker-dealers).
Under the USA, which of the following is considered a broker-dealer in a state?
XYZ broker-dealer with an office in the state whose only clients are insurance companies Anytime the question tells you that there is a place of business in the state, regardless of who its clients are, the firm is considered a broker-dealer in that state and is required to register as such.
Under the Uniform Securities Act, the term broker-dealer would include
a person with no office in the state who effects securities transactions with no more than 5 individual residents of the state in any 12-month period
When discussing cybersecurity, the term "covered account" refers to
a personal or family account for which the firm must provide data protection "Covered accounts" are those opened by individuals or families (not businesses) at financial institutions where there is a reasonably foreseeable risk to customers or to the safety and soundness of the institution from identity theft.
As appropriate to the scale and complexity of a firm's business, elements of an effective practice framework for managing conflicts of interest include all of the following EXCEPT
ensuring that the firm remains solvent for protection of customers and employees alike Managing conflicts of interest does not take into consideration making enough money to remain solvent.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is permissible for an agent to do all of the following EXCEPT
open a joint account with a customer with written consent of the employing broker-dealer In order for an agent to open a joint account with a client, written consent of both the client and the employing broker-dealer is required. Exempt securities are unregistered because they are exempt from registration, so solicitations for trades are no problem. Splitting commissions with agents of the same broker-dealer or different broker-dealers under common control is also permitted. However, 2 registered agents representing nonaffiliated broker-dealers may never share commissions. The Policy does permit commission charges to reflect the quality and quantity of services provided to the client.
One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser
shall obtain client consent before completion of the transaction In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: The client receives full written disclosure as to the capacity in which the adviser proposes to act Consent of the client
While your application for registration as an agent is pending, you are permitted to
sell fixed annuities While registration as an agent is pending, the individual may participate in no activity that requires that registration. However, because fixed annuities are not securities, the applicant can sell them (assuming that he is licensed to sell insurance - but that is not part of the question).
An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act,
the agent is describing a guaranteed security A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that your client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if suitable.
Trade confirmations sent by broker-dealers to their customers must always include
the amount of commission charged Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.
According to the Uniform Securities Act, an offer or a sale does not exist if it is a(n)
1) reclassification of the issuer's securities 2) bona fide pledge or loan 3) act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares 4) stock dividend of stock other than the issuer's for which nothing of value was given
Which of the following is NOT a security?
A $1,000,000 whole life insurance policy Under the Uniform Securities Act, whole life insurance policies are not securities. Condominiums used as a personal residence are not securities, but when a rental pool arrangement exists, third-party management seeking profit for the investor exists, which meets the Howey definition of an investment contract.
Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the USA?
A modest commission is paid to the agents who sell the offering to noninstitutional clients. A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. For a private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the seller must reasonably believe (nice to have it in writing, but not required), they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes.
Steven is registered as an agent with Maple Leaf Securities, a Canadian broker-dealer located in Toronto with no offices in the United States. One of Steven's clients has recently made a permanent move to Florida. Which of the following statements with respect to Steven is CORRECT?
As long as the only dealings with this client are with a previously established Canadian tax qualified retirement plan, Steven only has to file an application and a consent to service of process. Canadians have their equivalent of our IRA called an RRSP and, as long as the account is opened in Canada with a properly registered agent, that agent may continue to handle transactions in that account for clients who move out of the country.
As used in the Uniform Securities Act, included in the term institutional investor would be
Banks and investment companies Institutional investors include banks, insurance and investment companies, and, as long as they have assets not less than $1 million, employee benefit plans. Although each of these is included in the term accredited investor, that term, as used in federal law (the term is not found in the USA), also includes certain individuals, and they would never be considered institutional investors under the USA.
All of the following would be defined as exempt transactions EXCEPT
Joe Smith, an employee in the consumer lending department of Amalgamated National Bank, buys securities from ABC Securities, a broker-dealer registered in the state The purchase of securities from a broker-dealer by an employee of a bank is a nonexempt transaction because it is a sale of a security by a broker-dealer to a member of the public. Transactions between broker-dealers and issuers, transactions between banks, and between banks and insurance companies are exempt because they occur between financial institutions. Exempt transactions are most often identified by the transaction's parties, rather than the type of security involved.
An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may
conduct business with the client as usual Even though the college program is referred to as a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.
The compliance officer of a broker-dealer notices that an agent has been purchasing shares of KAPCO common stock for customer accounts over the past two months. Further investigation reveals that over 73% of the agent's clients have this stock in their accounts. This might be an indication of
not following proper suitability rules
According to the Uniform Securities Act, which of the following would be considered exempt transactions?
1) The sale of a unlisted corporate bond by an executor of an estate 2) An unsolicited order from an individual client to purchase a nonexempt, unregistered security Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.
An Administrator may summarily suspend a registration pending final determination of proceedings under the USA. However, the Administrator may NOT enter a final order without
1) appropriate prior notice to the registrant 2) an opportunity for a hearing 3) findings of fact and conclusions of law A registrant is not required to provide written acknowledgement before an order is issued.
Under the provisions of the Uniform Securities Act, securities exempt from registration requirements include
1) securities issued by the U.S. government 2) securities issued by a building and loan association organized under the laws of any state and authorized to do business in this state 3) bonds issued by an insurance company organized under the laws of any state and authorized to do business in this state Securities exempt from registration requirements include securities issued by the state or U.S. government; securities issued by foreign governments with whom the U.S. maintains diplomatic relations; and any securities issued by savings and loan or building and loan associations, insurance companies, and credit unions authorized to do business in this state.
Which of the following would be least likely to meet the cyber security definition of a covered account?
A business account held by a company listed on the NYSE In general, business accounts are not included in the term covered account. There could be an exception for a sole proprietorship or other small business where there is a reasonably foreseeable risk to customers due to the inability of the customer to provide adequate internal safeguards. That is unlikely to be the case with a listed company.
Under the Uniform Securities Act, which of the following is an offer or a sale?
A gift of stock given as a bonus with a purchase of a parcel of real estate A gift of securities given as a bonus for any purchase is considered part of the purchase. Stock splits, bona fide gifts, and bona fide pledges or loans made with no purpose of evading the act are not considered sales.
Which of the following would have to register as an investment adviser under the Uniform Securities Act?
A petroleum engineer who frequently is a paid speaker at seminars dealing with investment opportunities in oil and gas exploration limited partnerships Although engineers are included in the list of professionals excluded from the definition of investment adviser, that is only the case when any advice they give is incidental to the practice of their profession. Acting as a paid speaker for an investment seminar "crosses the line".
Which of the following statements relating to the registration requirements of broker-dealers is TRUE?
A registration becomes effective at noon, 30 days after the application has been filed, providing the registration is not in the process of denial.
Which of the following is defined as fraud under the Uniform Securities Act?
An agent engages in transactions that his state legislature has declared fraudulent but no judicial body or case law has found such transaction to be fraudulent.
Under the Uniform Securities Act, who automatically becomes registered as an agent when a broker-dealer firm's registration becomes effective
Any partner, officer, or director of the firm who is active as an agent in the firm's securities business. All three are listed in Form BD
An agent submits a list of recommendations to a customer that includes 5 different securities. The customer chooses to buy a round lot of 1 of the 5 securities recommended (a stock in which the agent's broker-dealer makes a market). The firm, in completing the trade, charges a markup that is larger than normal for a stock transaction. Is this allowable under the Uniform Securities Act?
No, under the circumstances given, it is a prohibited practice to charge a higher than normal markup. In this case, there would appear to be no justification because the customer bought a round lot, the normal trading unit of stock. The firm is a market maker, so the security is being sold from their inventory and the stock is on the company's recommended list.
An open-end investment company registered under the Investment Company Act of 1940 would most likely use the process known as
Notice filing Mutual funds are federal covered securities and, if required by the state Administrator, are only required to engage in notice filing.
Which of the following actions would be considered a violation of the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents?
The agent places an order to buy stock without requesting any suitability information, and the agent marks the ticket "unsolicited order" Failure to obtain suitability information is a violation of the USA, and falsely marking a trade unsolicited is a violation of the antifraud NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.
A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers?
Your free subscription will start once we have received your name and mailing or email address. A free offer must not only be free of financial cost, it must be free of any other burden or commitment.
Which of the following is the least suitable recommendation for an elderly widow who needs current income?
Zero-coupon bonds Zero-coupon bonds provide no income, while the other choices do provide income. For someone who needs income, zero-coupon bonds would be the least suitable of the choices shown.
In general, a broker-dealer will disclose any changes to its fee schedule
by notifying clients of the change in advance Most broker-dealers disclose fee changes at least 30 days in advance and there is no requirement whatsoever to notify the Administrator
If a manufacturing company in the registration process with the SEC is considering registering its securities in a state, the method that it would use to register in the state is
coordination Coordination is the method used for nonexempt companies that are registering with the SEC. Qualification is for intrastate registration of those companies not registered with the SEC. Notice filing is the procedure whereby federal covered investment companies notify the states in which they want to issue shares and to whom they must pay a fee.
In conducting investigations, the Administrator may NOT
make investigations outside the state to determine whether violations of the USA have occurred in that other state
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT
markups and markdowns on trades done as a principal There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
An applicant for registration as an investment adviser discloses on its application to the Administrator that it plans to use palm readers to help determine which investments are most suitable for their clients. Under the Uniform Securities Act, the Administrator
may only justify denial for reasons listed in the Uniform Securities Act
Bryan, an agent registered with a broker-dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is
not an unethical sales practice This practice is ethical providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem.
It would not be a prohibited practice under the Uniform Securities Act for an agent to tell a client that
registered nonexempt securities may properly be sold in the state Nonexempt securities are those that must register. The Administrator never approves of any security, passing a licensing exam does not give one the right to assert one's qualifications, and performance-based compensation is never permitted for agents.
Under the USA, which of the following is NOT a security?
A condominium purchased as a primary residence
Securities of which of the following issuers are federal covered?
All securities of an issuer whose common stock is listed on any national exchange, such as the NYSE (New York Stock Exchange) or the NYSE American LLC (formerly known as the American Stock Exchange), or the Nasdaq Stock Market are exempt from state registration, including any securities of the same issuer senior to such securities. All registered investment company securities are also exempt from state registration.
Which of the following would be considered fraud under the Uniform Securities Act?
An agent knowingly sold a nonregistered nonexempt security in a nonexempt transaction because he thought it would eventually become registered Fraud occurs when a person covered under the USA knowingly violates a provision of the law; the agent knew the security was not registered and fraudulently sold it.
Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction?
An agent sells U.S. Treasury notes to an individual client Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, sales by fiduciaries, or unsolicited transactions are all exempt.
All of the following are exempt transactions under the USA EXCEPT
An initial sale of shares to in-state residents is an intrastate initial public offering and must be registered with the state securities Administrator. A securities transaction by an executor, a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator, or a rescission offer, sale, and purchase are exempt transactions.
Which of the following is defined as a security under the Uniform Securities Act?
An investment contract As a result of the Howey decision, investment contracts are defined as (and often serve as a synonym for) a security under the Uniform Securities Act. A modified endowment policy is an insurance policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. Commodity futures contracts and the commodities themselves are not securities.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following are prohibited practices?
Churning and commingling Short selling is a legitimate trading technique. Churning and commingling funds are prohibited.
Under the Uniform Securities Act, the term person would include
a political subdivision; an unincorporated association; an inter vivos trust The term person has an extremely broad definition. It is best to remember the three things that are not persons: minors, individuals who have been judged incompetent, and deceased individuals. Minors can have passports; any natural person would include them and they are not persons under the act.
A broker-dealer would NOT be acting unethically if the firm was
acting as agent for both buyer and seller on a transaction A broker-dealer may act as agent for both buyer and seller in a transaction. All the other activities represent market manipulation and are, therefore, unethical practices.
When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted
as a contra-party to the trade In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra-party to the other side of the trade.
If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has
failed to disclose material information
Under the Uniform Securities Act, registration would NOT be required of
individuals employed by issuers of non-exempt issues who work on the company's assembly line Employees of issuers who have nothing to do with the sale of the issuer's securities, such as working on the assembly line, are not doing anything that requires registration under the act. Broker-dealers, individuals soliciting for new clients for the broker-dealer, and those supervising securities sales activities of the broker-dealer are required to register in the appropriate states.
An employee of a commercial bank selling the bank's bonds to its banking clients is acting in the capacity of a(n)
person excluded from the definition of an agent Commercial banks are included in that group of issuers of exempt securities whose individuals representing them in the sale of their securities are excluded from the definition of agent.
All of the following statements are consistent with the Uniform Securities Act EXCEPT
state Administrators do not require consent to service of process to be submitted with notice filings for covered securities The Administrator will require the filing of a consent to service of process with any securities registration. Notice filing is the state registration procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states.
An issuer employs its officers and directors to sell newly issued shares of the company to the public. To comply with the USA, the officers and directors would have to be registered as agents of
the issuer Unless something in the question indicates that the securities being issued are exempt, employees, including officers and directors, who sell shares of their companies to the public fall under the definition of agent under the USA.
An individual employed by a federal covered adviser would be required to become registered as an IAR in the state if
the only clients receiving the individual's advice are large pension plans organized for employees of municipalities located in the state where that individual maintains an office Individuals performing the duties of an IAR for a federal covered investment adviser are only required to register in states in which they maintain a place of business. Although pension plans (as long as the total assets of the plan are at least $1 million) are considered institutional investors for exemption purposes, that exemption only applies when the individual has no place of business in the state.
Registration by qualification is effective
when determined by the Administrator. Qualification is the only form of registration where the timing of the effective date is determined by the Administrator.
Under the Uniform Securities Act, if no stop order is pending, a registration under coordination will become effective
when the issue is declared effective with the SEC The registration method known as coordination contemplates that state registration, in the absence of a stop order, becomes effective simultaneously with the federal effective date declared by the SEC.
Differences between static and interactive content on social media include
1) Only static content needs pre-approval 2) Only interactive content can be commented on by others
Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include
1) a charge when a client requests that a stock certificate be issued in his name 2) the interest charged by the firm on money owed by customers in their margin accounts If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those first that are also registered as investment advisers.
An investment adviser would be exempt from registration under the Uniform Securities Act if it had no place of business in this state and its only clients were
1) banks 2) insurance companies 3) registered investment companies 4) other investment advisers
If a broker-dealer wishes to conduct operations on the premises of a financial institution, it is required to
1) disclose both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution 2) make a reasonable attempt to be in a location physically distinct from that where retail deposits are taken 3) attempt to obtain written acknowledgement from customers that they have received and read the disclaimers It is not necessary that there be any relationship between the BD and the institution other than a business one.
An agent has been recommending that customers buy common stock in XYZ Company. If on a visit to XYZ he overhears unreleased news that XYZ has just lost its biggest account, the agent should
1) discuss the situation with his supervisory principal 2) stop recommending the security to customers and prospects Whenever an agent has concerns about matters involving the broker-dealer's customers, such concerns should be shared with the agent's supervising principal. It is appropriate that the agent stop recommending XYZ stock to customers and prospects.
When it comes to borrowing and lending money, the NASAA Model Rules prohibit activity that would compromise the objectivity of securities professionals. Which of the following are NOT prohibited practices?
1) A broker-dealer lending money to a client to purchase additional securities 2) An agent taking out a car loan from a bank whose branch manager is a client of that agent 3) An investment adviser borrowing money from an affiliated broker-dealer Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker-dealers are also in that business. When a client has a margin account, the broker-dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation as the loan is from the bank, not the manager. Loans are also permitted between affiliates.
Which of the following statements is (are) TRUE?
1) A person required to register as an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular business headquartered in this state, may be subject to notice filing fees required by the state Administrator. 2) Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of notice filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers. A person who conducts business exclusively with banks and savings institutions is a broker-dealer under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator.
Under the Uniform Securities Act, the Administrator may deny or revoke the exemption from registration for which of the following?
1) A security issued by a nonprofit organization 2) Investment contracts of employee benefit plans 3) An exempt transaction not involving a federal covered security The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by non-profit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.
Which of the following are exempt transactions as defined in the Uniform Securities Act?
1) An agent fills a buy order based upon an unsolicited request from an existing client to purchase a nonexempt security 2) the sale of unlisted securities by a trustee in bankruptcy Unsolicited customer orders, regardless of the type of security involved, are always exempt transactions as are sales by fiduciaries. The private placement exemption is limited to 10-noninstitutional offerees, so 14 purchasers would certainly be over the limit. While a security issued by a foreign government with which we have diplomatic relations is an exempt security, a solicited sale by an agent to an individual client is not an exempt transaction.
Under the Uniform Securities Act, requirements for registration may include which of the following?
1) An announcement of the application for registration in one or more newspapers in the state 2) Minimum capital requirements for broker-dealers who do not have custody of client securities or funds A published announcement may be required by the Administrator. The Administrator may also establish minimum capital requirements for broker-dealers, whether or not they maintain custody. However, the Administrator may require a bond only of persons who have custody or discretion. Agents may never have custody, only broker-dealers and investment advisers are permitted to do so.
Which of the following would subject an agent to a denial of registration?
1) Conviction of a securities-related misdemeanor eight years ago 2) Failure to pay filing fees Conviction, not merely an arrest, for a misdemeanor involving securities within the past ten years, and failure to pay filing fees are grounds for denial. Loss of a civil suit not related to the securities industry is not a cause for denial to an agent or IAR.
Under the USA, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective?
1) Coordination 2) Notice filing Under the NSMIA, the Administrator may request copies of the documents filed with the SEC, but does not review them because of lack of jurisdiction. There is some review of the information filed in a registration by coordination, but, since the primary responsibility falls upon the SEC, the states generally just spot check the documents. However, registration by qualification or application for professional licensing becomes effective only after an active review of registration information and upon order of the Administrator.
Before taking any disciplinary action with respect to a registration under the Uniform Securities Act, the Administrator must always do which of the following?
1) Find that the action is in the public interest 2) Cite a cause listed in the act Disciplinary actions with respect to registration may be taken by the Administrator after a finding of public interest and cause. Court orders are required only for legal action, such as seeking an injunction or appointment of a receiver over an adviser's assets.
In which of the following circumstances has John, employed at AAA Securities Corporation, made an offer as defined in the USA?
1) John calls a long-standing client, Brenda, to indicate that a security on his firm's restricted list is suitable for her portfolio. John indicates that he cannot sell the securities unless Brenda requests them on an unsolicited basis. Brenda considers making the purchase but ultimately declines. 2) John discovers that Brenda has inherited shares in a manufacturing firm trading on the New York Stock Exchange, and suggests that she sell them to him in a private transaction in which no commission would be charged. Under the USA, the term "offer" includes an attempt to dispose of securities for value, or a solicitation of an offer to buy a security. Gifts, whether legal or not, are not considered an offer.
An investment adviser is preparing an advertisement. Which of the following would be acceptable?
1) Offering to provide its investment recommendations for the past 12 months 2) Promoting its system of charts and formulas while mentioning its limitations and difficulties Any mention of investment recommendations in any investment adviser's advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the investment adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. No outside endorsements are ever allowable on the exam.
Which of the following is considered a sale of securities under the Uniform Securities Act?
1) Redemption of mutual funds shares worth $10,000 2) Disposition of stock for which cash consideration is received Redemption of mutual fund shares is always treated as a sale by the redeeming shareholder. The exchange of securities in a merger is not considered a sale under the act. Any disposition (liquidation) of securities that involves cash consideration, or in which the shareholder has a choice of cash or securities, is a sale.
Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act?
1) The investment adviser charges a fee of 1% of the average value of the account portfolio during the year. 2) The investment adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the investment adviser or $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.
The James Henry Company (JHC), an SEC-registered securities broker-dealer with offices in Chicago and Los Angeles, limits its clientele to banks and trust companies. JHC makes a sale of US government securities to the Wall Street Bank located in New York City. Which of the following statements is (are) TRUE under the Uniform Securities Act?
1) The security itself is exempt from registration. 2) The transaction is exempt. 3) The broker-dealer is not required to be registered in the state of New York. The sale involves a U.S. government security, which is exempt from the registration requirements under the act. The transaction itself is also exempt because it involves a sale to a financial institution. Remember, in an exempt transaction, the security subject of the transaction need not be registered with the state in which the transaction takes place. In this example, the security was already exempt, but that does not diminish the fact that the transaction is exempt. The fact that the firm limits its clientele to financial institutions, such as banks, and that the broker-dealer has no office in New York means that, under the Uniform Securities Act, the firm is not considered a broker-dealer in that state. Therefore, the broker-dealer is not required to be registered in the state of New York.
Under the Uniform Securities Act, which of the following are NOT considered investment advisers or investment adviser representatives in this state?
1) United Trust Company of America 2) An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an investment adviser representative. A trust company is not an investment adviser under the USA. An investment adviser with no office in the state, that does business exclusively with other investment advisers located in that state, is also excluded as an investment adviser under the USA.
Which of the following are exempt transactions under the Uniform Securities Act?
1) XYZ Company signs an agreement to sell 1 million shares of its stock to ABC broker-dealer, who will then act as an underwriter in marketing the shares to the public. 2) Mr. Jones sells 100 shares of an unregistered security he owns to his next--door neighbor for $1,000. 3) A customer calls a registered agent and asks to buy 1,000 shares of SPHG, a company the agent is not familiar with, and the agent fills the order. Transactions between an issuer and an underwriter, isolated nonissuer transactions (Mr. Jones), and unsolicited nonissuer transactions (SPGH) are exempt under the Uniform Securities Act.
Under the Uniform Securities Act, a limited offering transaction would be considered an exempt transaction if
1) the offer is directed to no more than 10 individuals during any 12-month period 2) the issuer believes that each noninstitutional purchaser is buying the securities for investment purposes 3) commissions are not paid to agents of the broker-dealer offering the securities to noninstitutional clients In order for a limited offering transaction (private placement) to remain an exempt transaction under the Uniform Securities Act, the offer may be directed to no more than 10 individuals during any 12-month period. When the securities are purchased, payment is made but, no commissions may be paid to agents on sales to noninstitutional buyers. Finally, the issuer must have a reasonable belief that each noninstitutional buyer is buying the securities is for investment purposes.
As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that any time within 6 months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be
a prohibited guarantee against loss Offering to buy back a stock at its original cost, even without paying interest, it a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud and, in any event, we must always select the answer that best addresses the question - in this case, a guaranteed price.
Under the Uniform Securities Act, an officer who sells an issuer's nonexempt securities to the public is considered
an agent of the issuer subject to registration An officer of an issuer who sells the issuer's nonexempt securities to the public is acting as an agent and must register. Don't assume the sales are made in an exempt transaction unless something indicates that to be the case. However, an officer who sells an issuer's securities, exempt or not, to existing employees without compensation, is not an agent.
According to the USA, the sale of a security to an insurance company is
an exempt transaction When a security is sold to a financial institution, such as an insurance company, a bank, or an investment company, the USA considers that to be an exempt transaction. It has nothing to do with whether or not the security is exempt. For example, under the USA, securities issued by an insurance company are exempt from registration only if the insurance company is authorized to do business in the state. But, that has nothing to do with the status of the transaction, only the registration requirement (or lack thereof) for the securities issued by the insurance company.
Under the Uniform Securities Act, an individual representing an issuer in the sale of its securities to the general public is defined as an agent if the issuer is
an insurance company authorized to do business in the state Agents represent broker-dealers or issuers. However, an individual representing an issuer in the sale of certain exempt securities or in an exempt transaction is not an agent. Even when authorized to do business in the state, an insurance company is not one of the exempt issuers qualifying for the exemption from agent's registration for those who selling the company's securities while representing the company. Banks and trust companies, yes, but not insurance companies. Please see the list in your LEM.
The National Securities Markets Improvement Act of 1996 (NSMIA)
defined the term "federal covered adviser" The NSMIA defined the term "federal covered adviser" (sometimes just shown as covered adviser on the exam), referring to advisers who must register with the SEC or who are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. Fraud is a legal concept which is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered a prohibited practice for a broker-dealer to
have a history of repeatedly delaying the delivery of securities to its customers
A customer with liquid net worth of $25,000 tells an agent that she has $1,000 to invest. Explaining how diversification can reduce risk, the agent recommends that the customer purchase 8 different over-the-counter stocks, each trading at approximately $1 per share. With regard to the above situation,
high-risk penny stocks are not suitable recommendations for this low-net-worth customer Regardless of diversification, low-priced stocks are not suitable for a low net worth customer. Risk is not necessarily diversified away by simply increasing the number of risky securities. Risk is only reduced by diversifying many securities whose patterns of returns are not correlated. Churning is not indicated here because there is no trading shown other than the initial purchases.
An investor who resides in New York reads a newspaper ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been made in
neither New Jersey nor New York An offer is not made when a newspaper is circulated but not published in the state, or if it is published in the state but has more than two-thirds of its circulation outside of the state.
When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is
the ability of the customer to move funds out of the account on multiple occasions A covered account is an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions. Where the money goes is less of a factor than the frequency of transactions. The only time when a single transaction account might be covered is if there is reason to believe that the identity of the customer is at risk—not likely when wiring to a family member. Institutions are not included in the definition and owning the stock underlying the sale of a call option means the option is covered—totally different from the topic here.
A Canadian broker-dealer is registered in the Province of Alberta. The firm has clients who vacation in Arizona, New Mexico and Texas and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act,
this is permissible if the broker-dealer is properly registered in Alberta, deals only with existing clients, and registers in each of the states The Uniform Securities Act provides for a type of limited registration for Canadian broker-dealers and their agents. They must be properly registered in their home Canadian province, file a consent to service of process, and file the appropriate application form.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be prohibited for an agent
to borrow money or securities from a client who is a member of his immediate family The only circumstances under which an agent may borrow from a client is if the client is in the lending business
An applicant for registration as an IAR in this state was convicted 4 years ago of a nonfinancially related crime in another state. Under that state's laws, the crime was a misdemeanor, but under this state's laws, it is a felony. When viewing this IAR's application, the Administrator will
treat the crime as a nonfinancial misdemeanor Even though the crime is a felony in the state where registration is being sought, the applicant's record shows a misdemeanor and, therefore, this individual would not be subject to statutory disqualification.
Under the Uniform Securities Act, an employee of a licensed broker-dealer firm is allowed to sell securities as an unregistered agent when
under no circumstances It is unlawful for a person to transact business as a representative of a broker-dealer unless that person is registered, even if the securities are exempt.
An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state
upon discovery that the broker-dealer's license had been suspended in another state Suspension (or revocation) of a broker-dealer's registration in another state is adequate cause for this state's Administrator to initiate the process to suspend the broker-dealer's registration in his state. A felony committed by an agent of the broker-dealer is not usually cause for the Administrator to initiate a proceeding against the broker-dealer. It is only when the question states that the individual is an officer, director, or partner of the firm, or the agent's actions are due to failure to supervise, that action against the firm will generally commence. The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal (it is FINRA who maintains jurisdiction for 2 years). It is only the discovery of new facts unknown to the Administrator at the time of initial registration that can lead to a proceeding.
An Administrator may deny or revoke a security's exemption
without a hearing if the issuer is given an opportunity for a hearing after the revocation An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.
