S66 Section 1 L&R Quiz - 1/8

All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) hypothecating customer securities held in margin accounts B) conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer C) effecting a transaction with no change in beneficial ownership D) recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy

A) hypothecating customer securities held in margin accounts The normal method of financing customer margin accounts is by hypothecating their securities so there is nothing dishonest or unethical happening. U7LO4

As used in the Uniform Securities Act, the term institutional investor would NOT include A) individuals qualifying as accredited investors B) savings institutions C) investment companies D) employee benefit plans with assets of no less than $1 million

A) individuals qualifying as accredited investors Institutional investors include banks, savings institutions, insurance and investment companies, and 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. U4LO3

Which of the following statements regarding the Investment Advisers Act of 1940 and the adviser's brochure is CORRECT? A) Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure. B) Each client must receive the brochure no later than the entry into the advisory contract. C) Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500. D) Each client must receive the brochure no later than 48 hours after entering into the advisory contract.

B) Each client must receive the brochure no later than the entry into the advisory contract. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The summary includes an offer to provide a copy of the updated brochure and information on how the client may obtain it. There is no 48-hour rule under federal law, as there is for state law, and in any event, that law has a 48-hour in advance requirement. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure. U6LO4

As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT A) a civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed B) a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors C) a tax attorney who manages investment portfolios for 50 clients D) a portfolio manager who limits advice to municipal securities exclusively

B) a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors The plumber would not be considered an investment adviser because two of the three "prongs" are missing—advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition, provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.​ U1LO3

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transaction except A) a sale of nonexempt securities to a broker-dealer B) a sale of securities to an individual investor with a net worth of more than $5 million C) a sale of unregistered nonexempt securities in an unsolicited transaction D) a sale of securities to a bank

B) a sale of securities to an individual investor with a net worth of more than $5 million Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions. U4LO3

The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT A) an adviser who maintains an office in only one state, advises only residents of that state (none of whom is a private fund), and gives advice relating solely to securities not traded on any national exchange B) an adviser whose only clients are banks C) an adviser whose only clients are venture capital funds D) an adviser whose only clients are insurance companies

B) an adviser whose only clients are banks Advising banks only does not qualify one for the exemption. Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities. U1LO4

Under the NSMIA, state securities Administrators retain authority to A) regulate the securities registration and offering process for registered investment companies B) enforce antifraud provisions C) impose state registration requirements on all investment advisers D) forward all filing fees received from issuers, broker-dealers, and agents to the SEC

B) enforce antifraud provisions Administrators are not prohibited from enforcing the antifraud provisions of state and federal securities laws. Investment companies and SEC-registered advisers are exempt from state registration, but they may be required to pay state filing fees. U4LO4

Under the USA, all of the following issues would be exempt from registration EXCEPT A) bonds issued by the city of New Orleans B) stock issued by an insurance company not offering policies in this state C) stock issued by savings and loan association authorized to do business in this state D) an investment contract issued in connection with an employee stock purchase plan

B) stock issued by an insurance company not offering policies in this state Had the insurance company been authorized to do business in this state, its securities offering would be exempt. U4LO3

With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for A) 5 years B) 3 years C) 5 years, the first 2 in the principal office of the adviser D) 3 years, the first 2 in the principal office of the adviser

C) 5 years, the first 2 in the principal office of the adviser For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser. U1LO5

Jessica is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former college friend requesting a contribution to the friend's political campaign for governor of State Y. As it happens, Jessica's firm provides advisory services to State Y's employee retirement fund and Jessica actively solicits business from other state agencies. Which of the following actions would be permitted to Jessica under the SEC's pay-to-play rule without causing any concerns to her firm? A) Donating a maximum of $250 to the campaign B) Donating a maximum of $350 to the campaign C) Donating a maximum of $150 to the campaign D) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign

C) Donating a maximum of $150 to the campaign Jessica's solicitation activities define her as a covered employee. The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state that Jessica cannot vote, the lower limit applies. U7LO6

Under Section 303 of the Uniform Securities Act, in order for an issue to register using coordination, it must simultaneously register under the provisions of A) the Uniform Securities Act B) the Investment Company Act of 1940 C) the Securities Act of 1933 D) the Securities Exchange Act of 1934

C) the Securities Act of 1933 Registration by coordination is a form of state registration that coordinates state registration of a security with simultaneous federal registration of that security. Securities are registered at the federal level under the Securities Act of 1933. U4LO3

An agent unintentionally sells nonexempt securities that have not been registered. Under the Uniform Securities Act, the broker-dealer may write a letter and offer to buy back the security plus interest, minus any income received. The client gives up the right against the firm to bring action in court if he does not respond within how many days of receipt of the letter? A) 20 B) 60 C) 15 D) 30

D) 30 The right of rescission under the Uniform Securities Act allows the customer 30 days to respond to a rescission letter from a broker-dealer offering to buy back securities sold illegally. If the customer does not accept or reject the offer, the customer waives his right to bring court action against the adviser for the improper sale. U5LO3

According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing? A) 90 B) 60 C) 30 D) 45

D) 45 The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application. U1LO5

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration. B) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. C) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration.

D) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received. U1LO6

Under the Uniform Securities Act, when an IAR acting in the capacity of trustee of a family trust executes a transaction on behalf of the trust, it is A) an exempt security B) a violation of the trustee's fiduciary responsibility C) an exempt transaction D) a nonexempt transaction

D) a nonexempt transaction Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question. U4LO3

Which of the following transactions would NOT be exempt under the Uniform Securities Act? A) A registered dealer sells Canadian government securities to a retail client. B) The executor of an estate sells securities to liquidate the property. C) Securities are sold that were collateral for a defaulted loan. D) A customer calls his broker-dealer and submits an order to purchase a specific security.

A) A registered dealer sells Canadian government securities to a retail client. Unsolicited, nonissuer transactions (customer calls the broker-dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees in bankruptcy, or conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not. U4LO3

A person who renders investment advice solely with respect to securities issued by the U.S. government A) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements B) is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940 C) need not be federal registered under the Investment Advisers Act of 1940 but must register in any state in which it has an office D) must be registered both with the SEC and the state

A) is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996. U1LO3

The National Securities Markets Improvement Act of 1996 (NSMIA) A) overcame the restrictions of selling securities in interstate commerce B) defined the term "federal covered adviser" C) created a national market system D) created the concept of fraud, as used in the Uniform Securities Act

B) defined the term "federal covered adviser" The NSMIA defined the term "federal covered adviser," 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 and 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. U1LO5

As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime 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) a right of rescission B) a violation of the antifraud provisions of the Uniform Securities Act C) a prohibited guarantee against loss D) an offer that could only be made to accredited investors

C) a prohibited guarantee against loss Offering to buy back a stock at its original cost, even without paying interest, is 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. U6LO3

As a federal covered security, the KAPCO Growth Fund is required to notice file under the laws of State A. State A's Administrator can require the issuer to provide copies of A) the schedule of compensation to the fund manager B) a listing of the officers and directors of the issuer C) a report of the amount of the federal covered security sold in the state D) proxy statements

C) a report of the amount of the federal covered security sold in the state Because those companies that are required to notice file are levied a fee based on the amount of securities sold in the state, information relating to the amount of sales in the state must be reported. U4LO3

If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must A) amend the registration statement within 60 days of the material change B) submit an entirely new registration form within 30 days of the material change in information C) update the information on the registration on the next annual renewal date D) amend or update the information promptly regardless of the renewal date

D) amend or update the information promptly regardless of the renewal date When material information changes, the registrant must promptly amend or update the information regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker-dealers, and securities. However, the Uniform Securities Act does not define the term "promptly." U3LO5

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 A) safekeeping of customer funds and securities B) the cost of overnight delivery services C) interest on debit balances in margin accounts D) markups and markdowns on trades done as a principal

D) 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. U6LO1

Under the USA, all of the following are exempt transactions EXCEPT A) transaction executed by a trustee in bankruptcy B) unsolicited customer orders C) a sale of a primary offering registered with the SEC D) isolated nonissuer transaction

C) a sale of a primary offering registered with the SEC In almost every instance, an issuer transaction—that is, one for the benefit of the issuer—will not be considered an exempt transaction. Exempt transactions include isolated nonissuer transactions; transactions between an issuer and an underwriter; transactions by an executor, Administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements. U4LO3

Profit Partners, LLC (PPL), a federal covered investment adviser, sends correspondence regarding its past performance to prospective retail clients in State A. PPL does not maintain a place of business and is not registered in State A. Because PPL is soliciting for new business there, the Administrator of State A A) would be able to bring a claim against PPL for showing past performance in a communication with prospective clients. B) would be able to bring a claim against PPL for soliciting without being properly registered in the state. C) would be able to bring a claim against PPL if it was discovered that the antifraud provisions of the Uniform Securities Act had been violated. D) would have no jurisdiction over PPL because the firm is a federal covered investment adviser.

C) would be able to bring a claim against PPL if it was discovered that the antifraud provisions of the Uniform Securities Act had been violated. In general, Administrators have no jurisdiction over the activities of federal covered investment advisers. The situation is different, however, when a covered adviser pursues an activity in the Administrator's state that violates the antifraud provisions of the Uniform Securities Act. In that case, the Administrator can take action against the covered adviser. The showing of past performance is permitted as long as the required conditions are met; nothing in the answer choice indicates that the communication is not in compliance. U5LO1

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) Beth must obtain consent of any advisory client whenever a sale is made as principal B) selling out of inventory to advisory clients would be considered an unethical business practice C) the amount of commission charged for this transaction must be clearly disclosed D) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation

D) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required. U6LO1

Under the Uniform Securities Act, which of the following is NOT an exempt transaction? A) A sale of securities by the executor of an estate B) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid C) The sale of a non-Nasdaq over-the-counter stock to a closed-end investment company D) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer

D) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer In the case of a U.S. government security, the security is exempt, but the transaction is not. All the other choices are exempt transactions because they are either to an institutional investor, existing owners for no consideration, or by certain fiduciaries, such as an executor. U4LO3

Included among the powers of the Administrator is the ability to A) request the court to appoint a receiver to freeze the bank accounts of a broker-dealer who is the subject of an injunction B) sentence an investment adviser representative who has been convicted of fraud to a prison sentence, not to exceed 3 years C) arrest an agent who violates the USA D) deny the registration of a securities professional, if doing so is in the public interest

D) deny the registration of a securities professional, if doing so is in the public interest If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, et cetera. Although the maximum prison sentence under the USA is 3 years, it is the courts that do the sentencing, not the Administrator. U5LO2

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? I. Broker-dealers must maintain customer ledgers for 3 years. II. Investment advisers must keep partnership records for 3 years after the partnership is terminated. III. Agents must keep customer records for 3 years. IV. Investment adviser representatives must maintain records for 5 years.

I and II Recordkeeping requirements for broker-dealers are 3 years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs. U3LO5

Which of the following transactions are exempt from registration under the Uniform Securities Act? I. A trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders. II. An offer of a securities investment is directed to 10 individuals in the state during a 12month consecutive period. III. A sale of securities by the trustee of the Lorgan Family Children's Trust. IV. Agents for an entrepreneur offer pre-organization certificates to fewer than 10 investors in the state for a modest commission.

I and II Transactions by fiduciaries, such as a trustee in a bankruptcy reorganization, are exempt from registration. But only a trustee in bankruptcy is afforded this exemption, not for a family trust. An offer of a securities investment to 10 or fewer individuals (called a private placement) is also exempt from registration. Offers of pre-organization certificates are not exempt when compensation is paid. U4LO3

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 U.S. 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? I. The security itself is exempt from registration. II. The transaction is exempt. III. The broker-dealer is not required to be registered in the state of New York.

I, II, and III 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. U4LO3

In conducting investigations, the Administrator may I. require a person to file a statement in writing and under oath II. publish information of any violation over the vigorous objections of a violator III. make investigations both inside the state and in other states to determine whether violations of the USA have occurred in his state IV. make investigations outside the state to determine whether violations of the USA have occurred in that other state

I, II, and III U5LO2

Which of the following would be a nonissuer transaction? XYZ Corporation sells 100,000 shares of previously issued common stock out of its treasury. II. GEMCO Mutual Fund sells 100,000 shares of XYZ Corporation common stock out of its portfolio. III. Curt sells 1,000 shares of Giggle common stock to Chuck in an isolated transaction. IV. Dave reinvests his dividend into additional shares of GEMCO Mutual Fund.

II and III In a nonissuer transaction, the proceeds of the sale go to someone other than the issuer. When a mutual fund liquidates a holding in its portfolio, the fund receives the proceeds, not the issuer. One individual selling his stock to another is the classic example of an isolated nonissuer transaction. A corporation selling stock out of its treasury receives the money from the sale, and dividend reinvestment purchases shares directly from the mutual fund. U4LO2

Under the Uniform Securities Act, which of the following statements are TRUE regarding private placements? I. They are offered to no more than 10 persons in a state in a 12-month period. II. They may be offered to an unlimited number of institutional investors. III. Institutional buyers need not be purchasing for investment.

II and III Private placements are transactions resulting from offers to no more than 10 noninstitutional persons (retail clients) in 12 months for investment purposes only. The offeror must be convinced that buyers are purchasing for investment. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. However, sales to institutional purchasers are exempt from the limitations regarding number of sales, resale restrictions, and commissions. They may, therefore, be offered to more than 10 persons. (Remember that the term person is defined very broadly in the act.) U4LO3