Series 63

definition of a broker dealer:

"in the business of effecting securities transactions."

define 12b-1 fees

12B-1 Fee' An annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25-1%

define: viatical

A viatical settlement (from the Latin "Viaticum") is the sale of a policy owner's existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with a lump sum.

The Uniform Securities Act requires investment advisory firms to keep their books and records for: a. Five years b. Three years c. Two years d. One year

A. 5 years

Which of the following choices is not considered a security? A. A variable annuity set up as a retirement plan B. Call options on a gold futures contract C. American Depositary Receipts D. A Treasury bond futures contract

A. Under the Act, futures contracts are not securities. However, options on commodity futures contracts are considered securities. Variable products (annuities, life insurance policies) and ADRs are also defined as securities.

n which of the following situations does the registration of a broker-dealer result in an Administrator automatically registering an individual of the firm as an agent? A. The individual is an attorney who represents the firm B. The individual is a director of the broker-dealer and is actively engaged in the business of the firm C. The individual is an agent of the broker-dealer and is registered in another state D. The individual had been previously employed by the broker-dealer

B The registration of a broker-dealer in a state will automatically constitute the registration of an individual as an agent if this person is actively engaged in the business of the firm and is a partner, director, officer, or occupies a similar status.

Which of the following choices is considered a fraudulent act? A. Withholding any fact about an issuer in discussions with clients B. Omitting a fact that is relevant to making an investment decision C. Misstating a fact about an issuer in a discussion with a client D. Neglecting to obtain relevant information about an investor

B This is an example of a question you could encounter where the answers may appear to be almost identical. Withholding material facts is considered fraudulent. Material facts are those that a reasonable person would want to know in order to make an informed investment decision. Withholding any fact about an issuer sounds similar, but is too broad to rise to the level of fraud. Remember, fraud implies intent to deceive. Withholding any fact is not fraud. Here is why. Think of the phone number of an issuer, or other random items that may be interesting. Those are facts. Withholding that information is not fraud, since it may not be relevant to making an informed investment decision. Misstating a fact could be accidental and, therefore, not fraud. Neglecting to obtain relevant information is not fraud. It is a bad business practice. It may be unethical, but it is not defined as fraud.

If a broker-dealer transfers a customer's securities into the firm's trading account, the firm is guilty of: a. Parking b. Commingling c. Coordinating d. Asset allocation

B Under the Uniform Securities Act, broker-dealers are prohibited from commingling client securities with the firm's securities. **Brer-dealers may commingle clients' cash with the firm's cash. Investment advisers may not commingle either client's cash or securities with their own.**

XYZ Inc. is an investment adviser. One of its institutional clients would like to sell 1,000 shares of ABC stock. XYZ believes that this would be a suitable investment for another institutional client. XYZ proposes to arrange a trade between the two clients and would charge each customer a small fee for its services. This would allow each client to receive a better price than either could obtain in the open market. Which of the following statements is TRUE in this situation? A. This is permitted since the two clients are institutional investors, but would not be permitted if they were not institutional investors B. This is permitted if XYZ discloses to each client that it is acting as a broker for both parties in the trade and receives each client's written consent C. This is permitted if XYZ discloses to the buyer that it is representing the seller in the transaction and receives the buyer's written permission D. This is not permitted under any circumstances unless XYZ waives any fee for arranging the transaction

B. An investment adviser that wishes to act as a broker for both a client and another person when effecting a securities transaction for a client must (1) disclose the capacity in which it is acting prior to the completion of the transaction and (2) obtain the client's written consent. Since both parties to the trade are clients, the disclosure and consent requirements apply to both.

Under what circumstances may the Administrator of State X issue a cease-and-desist order on behalf of the Administrator of State Y? a. Only when the agent involved is also registered in State X b. Only if the Administrator in State X receives a written request from the Administrator of State Y c. Anytime the Administrator of State X believes that the agent is about to violate the law in State X d. Never

C The USA gives the Administrator the power to issue a cease-and-desist order anytime he believes that anyone has violated the securities laws of his state or believes that someone is about to do so. The Administrator of State X has no jurisdiction in State Y. (75763)

Which TWO of the following actions would fall under the jurisdiction of a state securities Administrator? The purchase of options through the Internet by a state resident The sale of long-term certificates of deposit by a bank The delivery of securities to a customer who is a resident of a particular state The offer of securities by an out-of-state broker-dealer to a resident of the state A. I and II B. I and III C. I and IV D. III and IV

C. State securities Administrators have jurisdiction over securities transactions that are: Originated in their state Directed to and received in their state Accepted in their state Delivery of securities to a particular state does not fall under an Administrator's jurisdiction, nor do general commercial banking transactions

Which of the following brochure delivery periods applies to investment advisers under the Uniform Securities Act? A. If an ADV or brochure is not provided, clients must be given 10 days to rescind the contract B. Clients must receive the adviser's brochure or ADV Part 2 five business days prior to signing a contract or the client has 48 hours to cancel without penalty C. If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty D. Clients must receive the adviser's brochure or ADV Part 2 at least 48 hours prior to signing a contract in order to rescind

C. Under the Uniform Securities Act, all clients must receive the adviser's brochure or ADV Part 2 no later than the time they enter into an agreement with the adviser. If the client is not given an ADV Part 2 or brochure at least 48 hours before signing the contract, then the contract must specify that the client has five days to rescind the contract.

Which of the following actions by an agent of a broker-dealer is considered an unethical business practice? a.Soliciting a client to sell a specific security while simultaneously recommending to another client to buy the same security b.Accepting an unsolicited trade for an unregistered, nonexempt security c.Placing a discretionary order in a margin account d.Selling shares in a friend's business outside the agent's normal course of employment

D It is considered an unethical business practice for an agent of a broker-dealer to effect transactions in securities and not record them on the books of the broker-dealer. While choice (d) doesn't clearly state that the agent is failing to notify the broker-dealer, it can be inferred from the phrase "outside the agent's normal course of employment." The other choices represent honest and ethical activities that agents of a broker-dealer should take regarding transactions by their clients.

According to the Uniform Securities Act, when does a broker-dealer registrations expire? A. When the Administrator declares it to be no longer effective B. When the broker-dealer notifies the Administrator that it no longer has an office in the state C. One year from the effective date D. On December 31

D Under the Uniform Securities Act, all securities professionals' registrations expire annually on December 31. Thereafter, they must be renewed by the firm. Choice (c) applies to registration of securities by the issuers.

Prior felony convictions must be disclosed on Form U4 if the conviction occurred: A. Within the last two years B. Within the last five years C. Within the last 10 years D. At any time

D. This question is an example of a "hair splitter" that sometimes occurs on the real exam. The fine point of the question is whether you must disclose something versus whether or not that situation would affect your employment. Agents are required to disclose all felony charges or convictions on Form U4 regardless of when they occurred. There is no time frame. If an applicant had a felony conviction 20 years ago, it must be disclosed. On the other hand, an agent will be statutorily disqualified if the conviction was within the last 10 years. The agent may be registered if she requests and receives permission at a special hearing. The Administrator may reject the application of anyone convicted of a felony regardless of when it occurred if the Administrator shows it is in the public interest to do so. As a follow-up point, applicants must also disclose all securities-related misdemeanors, charges or convictions, regardless of when they occurred.

Which of the following choices is NOT a security under the USA? a. A viatical settlement b. A short-term unsecured promissory note in denominations of $45,000 each c. A limited partnership to produce a Broadway show d. A Treasury bond futures contract

Futures contracts are not considered securities. Limited partnerships are defined as securities. Under the USA, a viatical is a security. Short-term notes are securities that may be exempt from registration. (89608)

Which of the following choices does not meet the definition of a security under the Uniform Securities Act? a. Participation in multilevel marketing arrangements b. Variable life insurance policies c. Whole life insurance policies d. Rights received due to a corporate rights offering

c Life insurance generally does not meet the definition of a security. This is true because traditional insurance policies such as whole life promise to pay a fixed sum of money. Since variable life insurance policies do not pay a fixed sum of money they meet the definition of a security. The other two choices listed are defined as securities under the Act.

define: blue sky laws

lawsregulating the sale of securities, intended to protect the public from fraud

Under the USA what is the statute of limitations for criminal violations of the Act is:

5 years

An agent received a written complaint from a client. The next day, the client called the agent to apologize for the anger and tells the agent to disregard it. Which of the following statements is TRUE? A. The agent must forward the complaint to a supervisor B. The agent must forward the complaint to a supervisor who will then file it with the state Administrator C. The agent may disregard the complaint since the client rescinded verbally within 24 hours D. The agent may not contact the client until the issue is resolved

A An agent must forward all written complaints to a supervisor even if the client rescinds the complaint. The supervisor is not required to submit the complaint to the Administrator. A copy of the complaint and any response must be maintained by the broker-dealer.

According to the Uniform Securities Act, which of the following persons must register with the state Administrator? A. A person who represents a non-exempt issuer in sales to the public B. A person who represents an exempt issuer in sales to the public C. A person who represents a non-exempt issuer in an investment banking transaction with a broker-dealer D. A person who represents a non-exempt issuer in sales to existing employees, and is not compensated

A Persons who represent exempt issuers are not defined as an agent so there is no need for registration. Persons who represent non-exempt issuers in sales to the public are defined as agents and must be registered whether or not they receive compensation. Persons who represent non-exempt issuers in sales to existing employees are only defined as agents (and must be registered) if they receive compensation related to the transaction(s). Choice (c) is an example of an exempt transaction. In this case the person is not defined as an agent so no registration is required.

An agent tells his supervisor that 12 years ago, a company that the agent founded had to declare bankruptcy. The agent just discovered that the county has recently imposed a tax lien on rental property that he is refinancing. The agent is disputing the assessment. Which of the following issues is the agent required to disclose? a. The tax lien b. The bankruptcy c. The refinancing d. None of the above

A Registered personnel must disclose all unsatisfied judgments and tax liens on Form U4 within 30 days. (FINRA has fined and temporarily suspended people for failing to make these disclosures promptly.) The bankruptcy does not need to be disclosed since it occurred more than 10 years ago.

Which of the following statements about a cease-and-desist order is NOT TRUE? A. It is issued when or before a violation has occurred B. It must have been issued by the SEC C. It must have been authorized by the Administrator D. It may be issued against anyone who is engaging in activities prohibited by the Uniform Securities Act

Administrators will authorize a cease-and-desist order if they believe a violation of the Act is about to occur or if the Act has already been violated. The order does not need to come from the SEC.

What attributes must an order ticket contain?

All order tickets must contain: *The terms and conditions of the order (e.g., limit order, market order, etc.) *Whether the order is solicited or unsolicited •The account name or designation for which the order is entered •The identity of the registered representative (if any) responsible for the account •The identity of anyone else who accepted or entered the order for the client •Whether the order involved the exercise of discretionary authority •The time at which the firm received the order •The time and price at which the order was executed, or modified or cancelled (to the extent possible)

An agent conducts a public sales seminar regarding investing in U.S. Treasuries Funds. Which of the following statements would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A. The issuer has registered these securities with the SEC B. Everyone should own Treasuries C. This is a great opportunity for long-term investors D. Please take a prospectus on your way out

Any blanket statement that everyone should own a specific security violates the prohibition against making unsuitable recommendations to investors. There are very few securities that are suitable for all investors. Also, this is a public seminar and there is no indication that the agent has asked the prospective investors anything about their financial situation or objectives. How does he know that this security is appropriate for anyone who might walk in?

The withdrawal of an agent's registration generally becomes effective: a. 15 days after filing b. 30 days after filing c. 45 days after filing d. Immediately

B The withdrawal of an agent's registration generally becomes effective 30 days after filing. The Administrator may initiate proceedings against an agent up to one year from the effective date of the withdrawal

define: buying on margin

Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally.

define: Custody

custody exists -- When an investment adviser has access to customer funds and securities Custody arrangements are covered by securities regulations

A broker-dealer is registered in State X, but not in State Y. The firm does not have an office in State Y, but does have some institutional clients in that state. The agent who handles these accounts has developed several contacts in State Y and wants to begin soliciting retail clients in State Y. The agent consults the Compliance Department. A new employee in that department tells the agent that he may solicit retail clients in State Y since he is exempt from registration in that state. What should the agent do? A. Begin contacting clients in State Y immediately since the agent has the approval of the broker-dealer B. Tell the registration department to begin the application process since the agent and the broker-dealer will need to register in State Y once the agent has five retail clients there C. Refrain from soliciting retail clients in State Y until the agent and the broker-dealer are registered in State Y D. Begin soliciting retail clients in State Y immediately since the agent is exempt from registration in that state as long as he does not maintain an office there

C. Generally, both the broker-dealer and its agent must be registered in a state before they may do business there, which includes soliciting clients. There is an exemption for broker-dealers and their agents who do not have an office in the state and do business only with certain institutional clients, such as other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, or pension plans. In this question, the agent loses this exemption once he begins to solicit retail clients in State Y. Both the broker-dealer and the agent need to register in State Y before the agent may begin soliciting retail clients in that state.

Bruce is an insurance agent. His father John is an investment adviser. Bruce receives 25 basis points for every client he refers to John. Under the Uniform Securities Act, Bruce: a. Is defined as a finder b. Is exempt from registration c. May need to register as an investment adviser d. May need to register as an investment adviser representative

D Explanation: Correct. The USA defines an investment adviser representative as anyone who "solicits, offers, or negotiates for the sale of or sells investment advisory services." Many states require solicitors to register as investment adviser representatives (even though they do not manage assets or provide advice). Some states, however, have special registration provisions just for solicitors.

define: cross trading

DEFINITION of 'Cross Trade' A practice where buy and sell orders for the same stock are offset without recording the trade on the exchange, which is outlawed on most major stock exchanges.

Shares of a mutual fund & their significance: In reviewing prices for a mutual fund, an investor notices that the fund has three listings, one for Class A shares, another for Class B shares, and a third for Class C shares. The distinctions among the three classes of shares would most likely reflect different: a. Investment objectives b. Minimum purchase requirements c. Distribution arrangements d. Sales charges and 12b-1 fees

Explanation: Classes of shares in mutual funds are distinguished by their sales charges. Generally, Class A shares have front-end sales charges and low or no 12b-1 fees. Class B shares have contingent deferred sales charges and higher 12b-1 fees and often convert to Class A shares after a set number of years. Class C shares have a higher 12b-1 fee than Class A shares and they might also have a small front-end load or a small contingent deferred sales charge if the investor sells the shares within 12 to 18 months.

Which of the following choices is a custodian's primary goal under the Uniform Prudent Investor Act? a. Limiting capital losses b. Maximizing return c. Preserving purchasing power d. Investing with an eye toward the risk/reward profile of the entire account

Explanation: Correct. No class or type of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and assesses the risk/reward composition of the account when determining if an asset mix is acceptable. The standard of prudence is applied to the entire portfolio as opposed to individual investments.

A person working for a broker-dealer gives information relating to prices and sales of securities but receives no direct compensation related to these activities. This individual: a. Does not need to be licensed b. Must be licensed as a broker-dealer c. Must be licensed as an agent d. Must be licensed as an investment adviser representative

It is not just about affecting a transaction. if you receive *no direct (transaction-related) compensation* then you do not need to be registered

define: exculpatory clause

a clause that says the agent cannot be liable for something -- he is absolved from any liability arising out fo his advice -- the USA says F that, nuh uh. Those don't mean shit to me. I'll still hold you accountable

define: matched sale

When 2 or more agents affect transactions to create a leading appearance of trading volume in LRR stock. This type of market manipulation is sometimes referred to as a matched sale and is considered a violation of securities law. If the agents worked at the same broker-dealer and had received prior written permission from their firm, the transactions would still be considered a prohibited business practice.

An agent receives a letter from an irate client. The letter is the fifth in the last six months and the language is abusive. The agent forwards it to his supervisor. The supervisor decides against a reply and discards the letter. In this instance, which of the following statements is TRUE? A. The supervisor is entitled to decide how to handle such situations B. If the supervisor forwards the complaint to the Administrator, this is acceptable C. The Uniform Securities Act requires that all material complaints be forwarded to the Administrator D. The Uniform Securities Act requires that a response be made to all written complaints

When an agent receives a complaint in writing, it must be forwarded to a designated supervisor. The complaint must be kept on file, along with any action taken to remedy the complaint. The fact that the complaint was the fifth in the last six months and the language abusive has no bearing on how the complaint should be handled. By discarding the letter, the supervisor acted in a prohibited and improper manner.

A client is traveling and would like her investment adviser representative to pay some personal bills while she is away. Under the Uniform Securities Act, such an activity: I. Should be backed up in writing II. Constitutes custody III. Falls outside the scope of securities market regulations a. I only b. I and II only c. II and III only d. I, II, and III

When an investment adviser has access to customer funds and securities, custody exists. Investment advisers would not normally pay personal bills such as rent, credit card, or cable television on behalf of their clients. Written authorization is required for this type of activity and usually is referred to as full discretionary authority. Custody arrangements are covered by securities regulations. (

define: front-running

front-running, is an illegal practice where an agent buys or sells a security hoping to benefit from a large order placed by a client.

define: investment advisor

in the business of providing investment advice, or soliciting clients for an investment adviser— (Some states do require solicitors for investment advisers to register as investment adviser representatives.)

Can a IAR sell a security to someone in another state If the IAR is not registered there?

no. basically under no situations. Doesn't matter if it was unsolicited or not. Only exception is they are vacationing there but live in the state in which you are registered.

define: unauthorized trading

unauthorized trading takes place when an agent places an order from a client without permission. Choice (d),

An agent who is registered in State A contacts a client in State B. The broker-dealer is registered in State B but not the agent. The agent may: a. Not sell the security b. Sell the security if it is a federal covered security c. Sell the security upon notification to a superior d. Sell the security because this is an exempt transaction

A In order to sell a security in a state, the broker-dealer and the agent must both be registered in the state. Therefore, the agent may not sell the security

Bonds may be required of all of the following entities, EXCEPT: a. Investment advisers who do not have discretionary authority or custody of client funds or securities b. Investment advisers who have discretionary authority but do not have custody of client funds or securities c. Broker-dealers who do not have discretionary authority d. Broker-dealers who have discretionary authority

A Investment advisers may need to post a bond if they have discretionary authority over client accounts or have custody of client funds or securities. A bond guarantees that funds are available so that legal fees and fines can be met, if assessed against a broker-dealer or investment adviser. The bond is waived if the investment adviser meets certain minimum financial requirements, determined by the Administrator. Broker-dealers often have custody of client assets (although this is not universal). Broker-dealers who have custody or discretion over client accounts may also be required to post a bond. Generally, most broker-dealers have custody of client funds. Again, the Administrator may waive this bonding requirement if the broker-dealer's net capital exceeds a specified amount, which is determined by the Administrator.

Under the Uniform Securities Act, which of the following statements is/are FALSE concerning the definition of a broker-dealer? A person who has no place of business in a state and effects transactions only with institutional buyers is not considered a broker-dealer A person who has no place of business in a state and effects transactions only with other broker-dealers is not considered a broker-dealer A person who has no place of business in a state and effects transactions with fewer than five clients is not considered a broker-dealer A person who has a place of business in State A and selling to existing clients who are temporarily in State B is considered to be a broker-dealer in State A A. III only B. I and III only C. II and IV only D. I, II, and IV only

A Only choice (III) is false since there is no de minimis exemption from the definition of a broker-dealer. Choices (I), (II), and (IV) are true statements since the definition of a broker-dealer does not include a person who has no place of business in a state and deals exclusively with other broker-dealers, institutional clients and existing clients who are temporarily in another state.

define: consent to service process

A Consent to Service of Process is an irrevocable appointment of the Administrator as the applicant's attorney to receive and process any noncriminal legal complaints. This instrument must be provided when applying for registration as an agent, broker-dealer, investment adviser, or investment adviser representative.

define: covered call

A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities.

A sole proprietor who was registered as a broker-dealer is now charging a separate fee for securities advice. According to the Uniform Securities Act, the sole proprietor: A. Has an exemption from registration as an investment adviser B. Would need to register as an investment adviser C. Must change from sole proprietor to another business structure in order to become an investment adviser D. Must only register if the activities are called financial planning

Any business entity not specifically exempted from registration and charging a separate fee for administering advice, is subject to registration as an investment adviser. Broker-dealers are excluded from the definition of investment adviser if they provided only incidental advice with no separate, identifiable charge.

An agent of a broker-dealer executes a securities transaction that is not recorded on the broker-dealer's books and records. According to NASAA Statements of Policy, this would NOT be an unethical business practice if the agent had done which of the following? A. The agent received the broker-dealer's oral authorization to execute the transaction B. The agent received the broker-dealer's written authorization prior to the execution of the transaction C. The agent received the broker-dealer's written authorization after the execution of the transaction D. This type of transaction is considered an unethical business practice regardless of receiving the broker-dealer's authorization

B Generally, it is considered an unethical business practice for an agent to effect securities transactions and not record them on the broker-dealer's books and records. However, according to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may effect transactions not recorded on the books and records of the broker-dealer if the transactions are authorized in writing in advance by the broker-dealer of their execution.

Which of the following statements is TRUE regarding custody of client funds and securities by investment advisers? a. Investment advisers may not have custody of client funds and securities unless the adviser is also registered as a broker-dealer b. Investment advisers must notify the Administrator if they have custody of client funds and securities c. Custody of client funds or securities by an investment adviser is a violation of the Uniform Securities Act d. The Administrator may not permit an investment adviser to have custody of client funds or securities unless the adviser has been in operation for at least 10 years

B Investment advisers must notify the Administrator if they have custody of client funds and securities. The Administrator has the power to permit or deny an adviser from maintaining custody of client funds and securities.

A client who does not have a discretionary account with a broker-dealer instructs her agent to buy 200 shares of Microsoft when the price is right. Which of the following statements is TRUE? a. The agent may not accept this order since the client does not have a discretionary account b. The agent may accept this order c. The agent may only accept this order if the client has a margin account d. The agent has committed a violation by accepting this order

B It is generally considered an unethical business practice to execute discretionary power in a client's account without obtaining the client's written permission. An agent may use her discretionary power without the client's written permission if the discretion only relates to time and/or price. Since the client has disclosed that she wants to buy, together with the name and quantity of the security, the agent may accept and execute the order.

A broker-dealer agent enters an order ticket for a customer. The order ticket must contain all of the following information, EXCEPT the: A. Time of entry B. Price of the security at the time of receipt C. Price of the security at the time of execution D. Agent's identifying information

B An order ticket does not need to include the price of the security at the time the order was received. It does need the price at the time it was executed as well as the time of execution (or cancellation). The ticket should also identify the personnel (if any) responsible for the account and the specific individual who entered the order on the client's behalf. (75867)

Under the Uniform Securities Act, which of the following choices is NOT considered a security? a. A certificate of interest in an oil and gas leasing program b. An equity-indexed annuity c. A multi-level distributorship agreement d. A certificate of interest in a real estate investment trust

B Any insurance policy, endowment policy, or annuity contract, under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically, is not considered a security. A variable annuity is a security.

Antoine is an agent for Cyberspace Securities. One of his clients, Mr. Mole, works for the research department at TransGalaxy, Inc. Until now, Mr. Mole has invested in bond mutual funds and conservative stock funds. Today he calls Antoine and places an order for 10,000 shares of TransGalaxy. Which of the following statements is TRUE? a. Antoine must accept the order since he may not knowingly fail to follow client instructions b. Antoine should bring this order attention of a supervisor immediately, since it may indicate insider trading c. Antoine must refuse to accept the order, since investors may not purchase stock in companies for which they work d. Antoine must accept this order since it is unsolicited

B It is illegal for an agent to use insider information. It may also be a violation of the USA to assist an investor who is using insider information. A situation like this should be treated as a red flag that should be brought to the attention of a supervisor.

Mark W. is an agent of Broker-Dealer X. Unknown to his firm, Mark spends his evenings trading the stock of a small, unlisted company through Internet bulletin boards. He dominates and controls the trading in this stock. Under the Uniform Securities Act, which of the following statements is TRUE of Mark's activities? a. Blue-Sky laws do not apply to activities on the Internet b. Mark W. may have to register as a broker-dealer c. The clients of Mark W. would not be able to use a letter of rescission d. There is no real violation unless a client has lost money and complained

B Mark W. appears to be in the business of effecting transactions in securities for others and for his own account, and may need to register as a broker-dealer in those states in which he is doing business. The fact that he is using the Internet does not provide an exemption.

Under the Uniform Securities Act, a person effecting transactions in commodities: A. Is subject to oversight by the Administrator B. Does not meet the definition of an agent C. Avoids the definition of an agent only if the person's duties are merely clerical D. Is automatically considered an agent if her employer is a broker-dealer

B Since commodities are not securities, a person effecting transactions in commodities is not considered an agent. (75475)

Under the Uniform Securities Act, a person's registration may be revoked or denied for which of the following reasons? The person was convicted of a non-securities-related misdemeanor three years ago The person was convicted of a drug-related felony seven years ago There is mounting evidence that the individual is involved in a securities-related fraud The person was convicted of a securities-related misdemeanor six years ago A. I and IV only B. II and IV only C. II and III only D. I, II, and IV only

B Under the Uniform Securities Act, the Administrator may deny, revoke, cancel, or withdraw the registration of any person if he has been convicted within the past 10 years of any felony or any misdemeanor involving a security. The Administrator may not take any action if a person has been accused or indicted, but has not been convicted. (75506)

Which of the following choices is considered a securities offering? a. An investor receives more shares due to a stock split b. An investor receives a stock dividend c. An investor purchased bonds and receives a warrant as a bonus d. An investor receives a tender offer

C According to the Uniform Securities Act, the security that the investor received as a bonus would be considered a stock offering. The Act specifically states that a stock dividend, or shares received due to a corporate action is never considered an offer or offer to sell a security. A tender offer is an offer to buy a security from existing shareholders.

A client buys unregistered securities at the suggestion of an agent. The agent has the client sign a waiver as to the noncompliance of the transaction with law, absolving the agent of any wrongdoing. The waiver the client signed is: a. Acceptable b. Acceptable with the Administrator's approval c. Null and void d. Subject to civil liability and criminal penalty

C Explanation: Correct. Clients may not sign waivers absolving agents from wrongdoing. Such statements are sometimes called exculpatory clauses. These waivers would be null and void under the Uniform Securities Act.

According to the Uniform Securities Act, an Administrator is NOT allowed to demand that broker-dealers do which of the following? a. Approve their advertising prior to use b. Ensure that their advertising is maintained and available for inspection c. File their advertising related to federal covered securities with their state Administrator prior to use d. Review their advertising for accuracy prior to use

C According to the Uniform Securities Act, all advertising used by a broker-dealer must be supervised and checked for errors. They are also required to keep a file that is subject to audit by the Administrator. However, the Administrator does not regulate advertising that addresses only federal covered securities.

Under the Uniform Securities Act, a state Administrator may NOT: a. Conduct investigations involving broker-dealers domiciled in other states b. Conduct an investigation without proof of wrongdoing c. Enjoin an investment adviser from participating in the securities business d. Issue subpoenas to individuals outside the state

C A court has the power to enjoin (prohibit) an investment adviser from participation in the securities business, but the state Administrator does not

Which of the following actions would violate the NASAA Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A. A broker-dealer executes a transaction in a margin account shortly before the client's signed margin account agreement arrives in the mail B. A broker-dealer states that it will charge extra for certain transactions C. An agent creates a marketing brochure for distribution to clients that includes only the positive facts from the prospectus D. An agent opens a joint account with a client with the written permission of her employer

C A marketing brochure that contained only the positive facts from the prospectus and none of the negative ones (risk factors) would be considered misleading and deceptive. A broker-dealer may execute an initial transaction in a margin account as long as a properly executed (signed) written margin agreement is obtained promptly afterward. A broker-dealer may charge a client a higher-than-normal commission under certain circumstances, such as when a security is particularly difficult to obtain, as long as this is disclosed to the client. An agent may open a joint account with a client as long as she has the written permission of both the broker-dealer and the client

All of the following products are securities, EXCEPT a(n): A. Life insurance subaccount B. Variable universal life insurance policy C. Universal life insurance policy with a substantial cash value D. Annuity contract with several subaccounts

C A universal life insurance policy is not a security. Unlike a life insurance subaccount, choice (a), or a variable universal life insurance policy, choice (b), universal life insurance policies are not considered securities. Universal life insurance policies accumulate a cash value, but the rate of return that the policy owner receives is fixed by the insurance company. By contrast, in a variable policy, the investor has a separate account and may choose investment options called subaccounts, and the return will vary according to the options the owner selects.

A Canadian broker-dealer may continue to effect transactions for its Canadian clients who are in the U.S. temporarily, provided it does which of the following? a.Establishes an office in the appropriate state b.Limits its business to trading Canadian securities c.Registers with the appropriate state d.Limits its business to trading exempt securities

C According to the Uniform Securities Act, a Canadian broker-dealer may continue to transact business with its existing Canadian clients who are in a state temporarily (less than 183 days), provided it registers with the state. The agent who is handling the clients' accounts must register with the state as well.

Zweispiel Company is registered as both a broker-dealer and an investment adviser. As a broker-dealer, the firm makes a market in WXYZ stock. Zweispiel believes that this stock would be a very good investment for one of its advisory clients and would like to sell the client some stock from its market-maker account. Which of the following statements is TRUE? a. Zweispiel may sell the stock to the client as long as the security is suitable for the account b. Zweispiel may sell the stock to the client as long as it does not charge a commission for the transaction c. Zweispiel may sell the stock to the client as long as it discloses, prior to the completion of the transaction, that it is acting as a principal and it obtains the client's written consent d. Zweispiel is not permitted to effect this transaction under any circumstances due to the conflict of interest

C An investment adviser that wishes to act as principal for its own account must (1) disclose the capacity in which it is acting prior to the completion of the transaction, and (2) obtain the client's written consent.

A mutual fund may be described as a no-load fund only if the fund has no: 12b-1 fees in excess of .25% of the fund's average annual net assets 12b-1 fees in excess of .50% of the fund's assets under management Front-end loads Back-end loads A. I only B. I and III only C. I, III, and IV only D. I, II, III, and IV

C Explanation: Incorrect. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices in Connection with Investment Company Shares, a no-load fund may not have any sales charges (loads). It is also prohibited from charging 12b-1 fees that are greater than twenty-five basis points (.25%) of the fund's average annual net assets.

Which of the following investors may be charged performance fees by investment advisers? a. Accredited investors under Regulation D b. Exempt investors c. Qualified clients d. None, since investment advisers are prohibited from charging performance

C Explanation: Under the Investment Advisers Act of 1940 and the NASAA Model Rules, advisers are prohibited from charging performance fees—fees that are tied to the account's performance. There is an exception for qualified clients. A qualified client is an institutional or retail client with at least $1,000,000 under management with the adviser or who has a net worth in excess of $2,000,000. If the client is an individual, then the net worth calculation may NOT include the value of the client s primary residence. An accredited investor under Regulation D is not the same as a qualified client, choice (a). For example, someone with a total net worth of $1,000,000 excluding their home, would be an accredited investor according to Regulation D, but not a qualified client.

After buying a large block of stock for herself, an agent is overheard telling another employee that after her purchase she recommended the same stock to a number of her clients who also purchased it. After completing the clients' orders, the agent sold her stock for a large profit. The agent's prohibited action is best described as: A. Cross trading B. Making unsuitable recommendations C. Front-running D. Excessive trading

C Front-running is the prohibited practice of a broker-dealer or agent buying or selling stock before the public release of proprietary information concerning a large block order. In this question, another form of front-running is exemplified by the agent buying a stock and then recommending that her clients buy the same stock. After the recommendation to her clients, the agent would likely benefit from the potential increase in the stock's price. Even if the client recommendations are suitable, it is unethical for the agent to put herself before her clients.

Market manipulation includes: Disseminating false quotations or information Buying a security on one exchange and selling it short on another Creating a misleading appearance of trading in a stock A. III only B. I and II only C. I and III only D. I, II, and III

C Market manipulation would include disseminating false quotations or information, or creating a misleading appearance of trading in a stock. Buying a security on one exchange and selling it short on another (arbitrage) would not be considered market manipulation.

Which of the following choices warrants the denial of registration by the Administrator? A. The registrant was arrested for insider trading B. The registrant was charged in a stock manipulation scheme C. The registrant was convicted of a drug-related felony D. The registrant was convicted of a misdemeanor

C The Administrator may deny registration for any felony conviction, not just those involving securities. Registration can also be denied if there is a misdemeanor conviction involving securities. Being arrested or charged with a criminal act falls short of being convicted.

IA Incorporated is an investment adviser. BD Securities is a brokerage firm with offices down the hall. IA Incorporated and BD Securities have an agreement under which IA directs brokerage transactions to BD and receives a 15% rebate on the commissions that BD charges. This arrangement is: a. A conflict of interest and an unethical business practice b. Acceptable, provided BD is also registered as an investment adviser c. Acceptable, provided IA discloses the arrangement to its clients in writing d. Acceptable, provided the arrangement is in writing and filed with the Administrator

C The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that an investment adviser must disclose all conflicts of interests in writing to clients. These conflicts include the scenario described in this question where the investment adviser (or any of its employees) is receiving compensation (a rebate) for the execution of client transactions.

Which of the following choices is NOT a broker-dealer in state B? I. An agent in state A who contacts a client in state B II. A corporation that sells commercial paper every other week in state B III. A broker-dealer registered in state A, where its only office is located, which has only insurance companies as clients in state B IV. A bank trust department that buys and sells securities for its customers a. I only b. III only c. IV only d. I, II, III, and IV

D Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, and who deals only with institutional investors, is not a broker-dealer.

Offering which of the following goods or services would be a violation of soft-dollar practices if the broker-dealer provides them to the adviser in exchange for executing transactions? a. Third-party research b. Market data services c. Trading software used to route orders to a market center d. Assistance concerning its compliance responsibilities *The real question, what is legally approved softdollar exchanges?

D An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. This practice is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars EXCLUDES: compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, or the correction of trading errors.

A customer wishes to liquidate $50,000 from her existing holdings and invest the proceeds in three different mutual fund families. The agent fails to notify the customer that it may be advantageous to invest the entire $50,000 with one fund family. This activity could potentially be: a. Churning b. Switching c. Selling dividends d. Engaging in breakpoint sales

D The registered representative should advise the client that she could save money because of the quantity discount option on large purchases available through purchases at sales charge breakpoints. Failure to notify a client that they would be eligible for a breakpoint could be considered a breakpoint sale.

According to the Uniform Securities Act, a security is said to be guaranteed as to: I. Prevention of investment loss II. Interest III. Dividends IV. Principal a. I only b. I and IV only c. II and IV only d. II, III, and IV only

D Under the Uniform Securities Act, by definition, the term guaranteed refers to a security for which payment of dividends, interest, and principal are guaranteed. For example, the U.S. Treasury guarantees the interest on the bonds it issues. A utility can also guarantee payments of dividends on its securities, though, of course, if the utility goes bankrupt, the guarantee does not mean much. This is a definitional term only. Do not confuse this with guaranteeing a customer profits or something similar.

A person is applying for registration as an agent. The applicant filed for bankruptcy nine years ago. The agent's home is currently in foreclosure, and there is a tax lien on the property. Which of these issues is the agent required to disclose? A. The bankruptcy B. The tax lien C. The foreclosure D. Both (a) and (b)

D All applicants for registration must disclose any personal bankruptcies, or bankruptcies of entities that they controlled, on Form U4 that occurred within the last 10 years, choice (a). Applicants must also disclose all unsatisfied judgments and tax liens, choice (b). The foreclosure proceedings, choice (c), do not need to be disclosed on Form U4. The applicant would not need to disclose the bankruptcy if it had occurred more than 10 years ago. The responsibility to disclose these financial events continues as long as someone is registered. A bankruptcy, tax lien, or unsatisfied judgment needs to be disclosed within 30 days after it occurs. FINRA has fined and temporarily suspended people for failing to make these disclosures promptly.

An investment adviser's compensation could be based on: A. share of capital gains B. Any agreement that the client and investment adviser mutually sign C. A percentage of capital appreciation of the net assets in the client's account D. A percentage of the value of the fund averaged over a prescribed period

D An investment adviser's compensation could be based on a percentage of the value of the fund averaged over a prescribed period. An investment adviser may not receive compensation on the basis of sharing in capital gains or a percentage of the appreciation in the account, even if the client signed an agreement to do so.

An investment adviser is registered in State A and State B. A broker-dealer is registered only in State A. The client of the investment adviser is a resident of State B. The investment adviser asks the broker-dealer to purchase a nonexempt security, which is registered in State B, for the advisory client. The broker-dealer: A. Should refuse the order because the broker-dealer is not registered in the state in which the client resides B. May accept the order as long as this practice does not occur with any regularity C. May accept the order only if the client places the order D. May accept the order if the broker-dealer has no place of business in State B

D This question is very tricky. Here is the point you need to watch for. The business relationship is between the broker-dealer and the investment adviser, not the advisory client. In other words, the investment adviser is the broker-dealer's customer. The transaction is being requested by the investment adviser, who is considered an institution. As a reminder, the term broker-dealer EXCLUDES any person who (1) has no place of business in the state and (2) transacts business with or through a financial institution or institutional buyer, whether acting for itself or as a trustee.' bc the "client" is another insitution, so, the BD doesn't need to be registered there *if* theyd o not have an office there.

Roberta Smith has passed the Uniform Securities Agent State Law Examination but has not been granted registration by the Administrator. She may participate in: a. Prospecting personally b. Prospecting by mail only c. Accepting unsolicited orders only d. None of the activities of an agenT

D Until the Administrator grants registration, an applicant who has passed the Uniform Securities Agent State Law Examination may not transact any business

An applicant for registration as an investment adviser indicates that the firm will base its investment decisions on psychic readings and other nonfinancial criteria. According to the Uniform Securities Act: A. The Administrator may deny/postpone registration only for those reasons specified in the law B. The Administrator may act in the public interest and deny registration C. The Administrator must review the track record of the applicant to ascertain the feasibility of such criteria for investing D. The Administrator should encourage alternative methods of analysis and grant registration if there is a reasonable basis for this methodology

Explanation: Correct. The state Administrator must cite reasons found in state law to disqualify a person from registration (e.g., a felony conviction, violation of commodities laws, misleading statements, etc.). The Administrator may deny registration if it is in the public interest AND if any provision of the USA has been or will be violated. While basing investment decisions on psychic readings may be a debatable proposition, the law does not say anything about methods of analysis for advisers, except that it is a disclosure item. Looking at it another way, the Administrator does not want to be in the role of determining which methods of analysis are better than others. (89514)

An investment adviser is registered in State A, where all of its offices are currently located. One of its representatives lives in State B and is in the process of opening a satellite office there to see if she can attract more clients in State B. Right now, the adviser's only clients in State B are institutions. What must take place before the IAR may commence doing business from her new office? a. The investment adviser must register in State B b. The investment adviser representative must register in State B c. Both the investment adviser and the investment adviser representative must register in State B d. Neither the investment adviser nor the investment adviser representative needs to register in State B since the firm's only clients there are institutions

Explanation: Incorrect. An adviser with no place of business in a state and whose only clients in that state are institutions does not need to register there. In this case, however, the adviser loses the exemption as soon as it opens an office in State B. Both the adviser and its representative must register in State B before the IAR may start soliciting clients from his new office.

A broker-dealer that is registered in State A is underwriting the IPO for a local company, which will not be listed. As required, the broker-dealer is making the final prospectus available electronically to all purchasers. How long does the broker-dealer need to keep the prospectus on file electronically? A. 25 days B. 40 days C. 90 days D. 270 days

Explanation: Incorrect. All investors who purchase new issues must receive prospectuses, which may be made available electronically. A firm that sells a new issue in the aftermarket shortly after it begins trading may also be required to give prospectuses to its customers. This obligation to provide a prospectus continues for 25 days after the effective date for securities that will be listed on a national exchange. For secondary offerings of securities that will trade over-the-counter (securities that are not eligible to be listed), this obligation lasts for 40 days. In this question, the offering is an IPO that will not be listed, which means the prospectus must be available for 90 days.

define: form B/D

Form BD is the Uniform Application for Broker-Dealer Registration. Broker-Dealers must file this form to register with the Securities and Exchange Commission, the self-regulatory organizations, and jurisdictions through the Central Registration Depository ("CRD") system, operated by FINRA. 2.

Under the National Securities Markets Improvement Act (NSMIA) investment advisers are required to register at the state level or the federal level, unless exempt. Which TWO of the following statements are TRUE regarding investment advisers with $95 million of assets under management? I. They generally must register in any states in which they will conduct business. II. They are exempt from state registration. III. They must register with the SEC if the state in which they conduct business has no requirement for registration of investment advisers. IV. They generally must register with the SEC if their clients are all retail investors. a. I and II b. I and III c. I and IV d. II and III

NSMIA, the National Securities Markets Improvement Act, was created to eliminate some of the dual requirements of federal and state securities law. Investment advisers with less than $100 million of assets under management (AUM) are generally exempt from federal or SEC registration and are required to register at the state level. If the state in which the adviser conducts business does not provide for the registration of investment advisers, they must register with the SEC. **Investment advisers with AUM of $100 million up to $110 million may register with the SEC. If the adviser's AUM exceed $110 million, it must register with the SEC. An investment adviser registered with the SEC is referred to as a federal covered adviser.**

A registered investment adviser is normally required to post a surety bond to satisfy the Uniform Securities Act requirements. Under which TWO of the following conditions could this requirement be waived? I. The investment adviser does not maintain custody of client assets II. The investment adviser has a net worth of $50,000 III. The investment adviser is a subsidiary of a broker-dealer IV. The investment adviser maintains custody of customer assets a. I and II b. II and III c. II and IV d. III and IV requirement could be waived by the Administrator.

A If an investment adviser does not maintain custody of client assets and has a minimum net worth of $35,000, the surety bonding

All of the following securities are considered federal covered, EXCEPT a(n): a. Regulation D, Rule 505 offerings b. Regulation D, Rule 506 offerings c. Investment companies registered under the Investment Company Act of 1940 d. Bank holding companies listed on national exchanges

A Securities issued under Rule (Section) 505 of Regulation D are not federal covered securities. They must be registered in every state in which they are sold, unless they qualify for another exemption. Securities issued under Rule 506 of Regulation D, however, are federal covered. All securities listed on the national exchanges are federal covered securities.

An agent misrepresents the risks associated with U.S. Treasury bills, notes, and bonds. Under the Uniform Securities Act, which of the following statements would BEST describe the consequences? a. This is viewed as unethical b. There are potential civil liabilities and the client may sue for damages c. U.S. Treasuries are subject to federal jurisdiction and, therefore, any liabilities incurred because of the misrepresentation of risk would be handled through federal courts and the SEC, not through states under the Uniform Securities Act d. Since these are exempt securities and not subject to credit risk, there is no potential misrepresentation of risk

B Explanation: Correct. Misrepresenting the investment risks of a security could lead to civil liabilities, as clients have the right to sue to recover their losses. U.S. Treasury bills, bonds, and notes are securities and the fact that they are exempt securities is irrelevant if misrepresentations are made. Choice (a) is a true statement; however, it is fraudulent rather than unethical.

A broker-dealer may need to file all of the following material with the Administrator, EXCEPT: a. The prospectus for an oil and gas limited partnership b. The marketing materials for a new issue of municipal bonds c. The sales literature for an issue that will be sold within the Administrator's state only d. A form letter distributed to an adviser's current clients explaining the benefits of a variable annuity

B Generally, the Administrator may require the filing of "any prospectus, pamphlet, circular, form letter, advertisement or other sales literature or advertising communication" intended for distribution to investors or prospective investors. However, the Administrator may not require that sales materials related to exempt securities, exempt transactions, or federal covered securities be filed. Municipal securities, choice (b), are exempt securities.

An Administrator who requires the posting of a bond may: I. Accept cash II. Accept securities III. Use discretion as to whether the type of securities and the amount of the deposit are appropriate IV. Use discretion whether to accept a deposit of cash or securities instead of a bond a. I only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV

B Explanation: The state Administrator may accept a deposit of cash or securities in lieu of a bond. The Administrator may determine the type of securities acceptable for deposit but may not altogether disallow deposits of securities in lieu of a bond.

A newly hired employee is applying for registration as an agent in State Z. What information does the agent need to disclose on his application for registration (Form U4)? I.Any alias that the agent has used II. A real estate partnership that the agent controlled that declared bankruptcy five years ago III.The agent has an unsatisfied judgment against him as the result of an auto accident IV.The fact that the agent's house is in foreclosure a. I and II only b. II and III only c. I, II, and III only d. I, II, III, and IV

C Explanation: An applicant for registration must disclose any alias used, choice (I). The applicant must also disclose any personal bankruptcies or bankruptcies of entities that he controlled during the last 10 years, choice (II), and unsatisfied judgments, choice (III). Tax liens must also be reported. A foreclosure is not a reportable item on Form U4.

Under the Uniform Securities Act, a person who sells securities in violation of state securities law is civilly liable for which TWO of the following penalties? I. Fines II. Interest III. Punitive damages IV. Attorney fees a. I and III b. I and IV c. II and III d. II and IV

D A person who sells securities in violation of state securities law is civilly liable for principal, interest, reasonable attorney fees, and court costs.

An order ticket must include all of the following information, EXCEPT the: a. Account number for which the order was entered b. Price and time at which it was executed c. Time of entry d. Client's name

D An order ticket must include the client's account number, the price and time at which the order was executed, and the time the order was entered (to the extent feasible). While there must be some designation identifying which account the order is for, it can be an account number or some other designation. The client's name is not a specific requirement.

Under the Uniform Securities Act, which of the following choices BEST describes the term inspectorial powers? a. The state Administrator's power to delegate responsibility to a self-regulatory organization b. The state Administrator's power to have special investigators review the records of registered investment advisers c. The state Administrator's power to apply the stop-order test d. The state Administrator's power to subpoena records within and outside the state

D Inspectorial powers refer to the right of the state Administrator to inspect or review any records, both within and outside the state, in order to carry out the provisions of the Uniform Securities Act.

All of the following statements are TRUE regarding the preparation and maintenance of records by investment advisers and broker-dealers, EXCEPT: a. The Administrator may determine that the records prepared by investment advisers and broker-dealers may be different b. All records must be preserved for a period determined by the Administrator c. Correcting amendments must be filed promptly if information in a document previously filed becomes inaccurate d. Only an Administrator within the same state may examine the records of an investment adviser or broker-dealer

D Explanation: Correct. An Administrator may inspect the records of a broker-dealer or investment adviser located within or outside the state. All of the other statements regarding recordkeeping are correct

If it is in the public interest, all of the following actions may be used by the Administrator as grounds for denial of an application for registration as an agent, EXCEPT in the case where the registrant: a. Violated federal commodities laws within the past 10 years b. Failed to disclose a six-month gap of employment on the U4 c. Sold unregistered, non-exempt securities in another state without acknowledgement from investors d. Withdrew from registration as an agent in another state

D Explanation: Correct. Withdrawal from registration as a broker-dealer or an agent is a voluntary procedure and does not imply wrongdoing by the registrant. All the other choices are reasons for the Administrator to deny an application for registration.

The Uniform Securities Act requires that an investment adviser deliver a written disclosure document to an advisory client or prospective advisory client. In which TWO of the following situations is the adviser NOT required to send this document to clients? I. The firm advises only investment companies but does not send its brochure to them II. The firm sends a newsletter to subscription clients who pay an annual fee of $120 III. The firm has no office in the state IV. The firm advises only institutional investors a. I and II b. II and III c. I and IV d. II and IV

A According to the Uniform Securities Act Rule 203, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) either 48 hours before or at the time of opening the account. Exceptions to this rule include an adviser whose clients are only investment companies or where the contract is for impersonal services for which the client pays a fee of less than $500. Please note, while an investment company is an institutional investor, not all institutional investors are investment companies. An investment adviser is required to provide the brochure to institutional investors other than investment companies. While there are many exemptions regarding institutional investors, this rule is NOT one of them

Which TWO forms must an agent obtain from a client in order to purchase securities in a margin account? I. A signed hypothecation agreement II. A signed loan consent agreement III. A signed credit agreement IV. A signed new account form a. I and III b. I and IV c. II and III d. II and IV

A Explanation: An agent of a broker-dealer must obtain from a client written authorization to open a margin account at a broker-dealer. It is considered an unethical business practice for an agent to allow a client to execute transactions in a margin account without the client's written authorization. The client would sign a document referred to as a margin agreement, which would include an hypothecation agreement and a credit agreement. A loan consent agreement is not mandatory. Clients are not required to sign new account forms.

A broker-dealer has been selling unregistered, nonexempt securities in nonexempt transactions without the permission of the state securities Administrator. What action would the state Administrator most likely take? a. Require the broker-dealer to offer letters of rescission b. Bring an action in criminal court against the broker-dealer c. Sue the broker-dealer in civil court d. There is no violation and therefore no action will be taken by the Administrator Explanation: Incorrect. In the absence of fraud, there is a violation if securities are illegally offered in a particular state when they should have been registered. The Administrator would most likely require the broker-dealer to offer a letter of rescission whereby the broker-dealer must offer to repurchase the securities at their original cost plus interest.

A Explanation: In the absence of fraud, there is a violation if securities are illegally offered in a particular state when they should have been registered. The Administrator would most likely require the broker-dealer to offer a letter of rescission whereby the broker-dealer must offer to repurchase the securities at their original cost plus interest.

Which of the following communications would be exempt from the sales literature and advertising filing requirements of the Uniform Securities Act? a. A brochure on U.S. Treasury securities b. A form letter used to prospect for small business retirement plans c. An ad espousing the tax advantages of condominium investments d. A group e-mail sent to several existing clients explaining the advantages of annuity investing

A Explanation: The Administrator may require the filing of sales literature and advertising for nonexempt securities. Ads concerning exempt securities (such as Treasuries) are not subject to the filing requirements under the USA. Individual correspondence is not subject to filing with the Administrator, but form letters and group e-mails that are considered sales literature, must be filed

Under the Uniform Securities Act, which of the following issuers are NOT required to file a registration statement with the state Administrator? I. Companies with stock quoted on the Over-The-Counter Bulletin Board (OTCBB) II. Federal savings and loan associations III. Registered investment companies IV. Companies registered with the Securities and Exchange Commission (SEC) a.II and III only b.I and IV only c.II, III, and IV only d.I, II, III, and IV

A Choice (II) is an exempt issuer and would not be required to file a registration statement. Choice (III) is an issuer of federal covered securities and would not be required to file a registration statement. It may, however, need to notice-file with the Administrator. Notice filing applies to certain federal covered securities. The notice filing includes the Consent to Service of Process, payment of a filing fee, and may include copies of material filed with the SEC as part the issuer's federal registration. This is NOT considered a registration. With regards to choices (I) and (IV), companies that register with the SEC may still be required to file a registration statement with the Administrator -- for example, securities that are quoted on the Over-The-Counter Bulletin Board (OTCBB).

A Canadian broker-dealer could contact someone in the United States under which of the following circumstances? a. The person has had an account with the firm for some time and is on vacation in Arizona b. The person is a former client, who had an account with the firm for many years, but has recently moved to Maine c. The person is a prospective client who lives in Canada but is currently on an extended vacation in the United States d. The person is an American citizen who is thinking of moving to Canada

A Explanation: A Canadian broker-dealer may continue to do business with its existing clients who are in the U.S. temporarily. The firm must have a preexisting relationship with the client and may not solicit prospective clients.

An agent contacts a client and provides seven valid reasons why Dolphin Corporation shares represent an attractive purchase. He neglects to mention that the Chief Financial Officer has just resigned and that Dolphin is under investigation by a number of regulatory authorities. The client makes a purchase of Dolphin shares. Which of the following statements is NOT TRUE? a. The agent faces no civil liabilities since he gave valid reasons why the client should purchase Dolphin stock b. The client could recover the full purchase price paid for Dolphin stock c. The agent has committed a civil violation d. The client may file a lawsuit in state court

A Explanation: A purchaser has the right to bring a civil lawsuit if he believes the seller of the securities omits or makes an untrue statement concerning a material fact. This is a civil violation of the Act. The client has the right to recover the full purchase price + interest + court costs and attorney fees.

An agent selling investment products on the premises of a bank should always: a. Disclose to clients that these products are not FDIC-insured b. Explain the differences between the FDIC and SIPC c. Collect signed waivers of compliance from clients d. Disclose to clients that she is an employee of the broker-dealer and not an employee of the bank

A Explanation: An agent selling investment products on the premises of a bank must always disclose that these products are NOT FDIC-insured, that they are not bank deposits or guaranteed by the bank, and that they are subject to investment risks, including the loss of principal.

A couple has a 529 College Savings Plan Account for each of their two children, ages 2 and 16. How should these accounts be invested? a. The two-year-old's account should be invested primarily in equity securities while the 16-year-old's account should be invested mainly in money-market and fixed-income securities b. The two-year-old's account should be invested primarily in equity securities while the 16-year-old's account should be invested mainly in municipal securities c. Both accounts should be invested mainly in money-market and fixed-income securities so that the principal is preserved d. Both accounts should be invested primarily in equity securities to provide capital appreciation

A Explanation: Correct. As a child approaches college age, the investments in a 529 College Savings Plan should be shifted from growth-focused investments, such as equities, to less volatile, more stable investments, such as fixed-income and market-money securities. Thus, the two-year-old's account should be allocated mainly to equity securities, while the 16-year-old's account should be invested primarily in fixed-income and money-market securities. **One of the main reasons for purchasing municipal securities is that they generate tax-exempt income. Interest earned from municipal securities is free from federal income taxes, and sometimes from state income taxes as well. Investment gains in 529 Savings Accounts are tax-free as long as the money is withdrawn for college expenses. Thus, municipal securities would usually not be the best choice for an account in which the investor is already receiving significant tax advantages.** This is the reason that choice (a) is a better answer than choice (b).

An unregistered agent who is an employee of a licensed broker-dealer is allowed to sell exempt securities to the public: a. Under no circumstances b. If it is an exempt transaction c. Because the security is exempt d. If the employee is not paid a salary or commission

A Explanation: Incorrect. An individual who sells securities (whether or not the securities are exempt) must be registered as an agent in order to sell such securities to the public for a licensed broker-dealer.

Who is the one person an agent discuss MNPI with?

An immediate supervisor

Which of the following investors are considered accredited under Regulation D of the Securities Act of 1933? I. A portfolio manager at a mutual fund company II. Banks III. Any senior officer of a publicly traded company IV. Individuals with a net worth of $1 million or more a. I and II only b. II and IV only c. III only d. I, III, and IV only

B Regulation D is a federal regulation, but still required knowledge for the exam. Institutions, such as banks, are specified in the regulation. A person who meets the financial test of either annual income of $200,000, or a net worth of $1 million, is also considered accredited. While it is possible that a portfolio manager or a senior officer would be accredited in real life, no single professional is specified in the definition of an accredited investor. **Senior officers are included only if they are senior officers of the issuer of the Regulation D offering.** Just being a senior officer of any institution is not enough to be included in the definition.

What information may an issuer change by amending its registration statement after it receives an effective date? a. The public offering price b. The number of shares c. The underwriting spread d. Nothing

B Under the Uniform Securities Act, an issuer may amend its registration statement to increase the number of shares being sold after the statement has been declared effective by the Administrator. The issuer does not need to file a new registration statement for this purpose. The issuer may not amend its statement to change the public offering price of the securities, or the underwriters' compensation or commission schedule

In order for an investment adviser to maintain custody of funds and securities: a. The firm must have a three-year track record of no violations b. The investment adviser must notify the Administrator and there must be no rule against custody c. The Administrator must give permission to the investment adviser d. At least $100,000 in Treasury bills must be posted as security

B Explanation: Correct. An adviser must notify the Administrator of its intention to maintain custody of client funds and securities. In some cases, an Administrator may adopt a rule prohibiting an investment adviser from taking possession.

The Administrator may require a broker-dealer to take all the following actions, EXCEPT: a.Maintain a minimum net capital b.Register all its employees as agents c.Post a bond d.Make its records available to the Administrator upon request

B Explanation: Correct. Not all of a brokerage firm's employees need to be registered.

Which of the following choices is NOT a security? a. A mining trust b. A universal life insurance policy c. A variable universal life insurance policy d. A voting trust certificate

B Explanation: Incorrect. A universal life insurance policy is a type of permanent life insurance policy that is regulated by the insurance commissioner. Variable products, voting trust certificates, and oil, gas, and mining interests are securities according to the Uniform Securities Act.

A Canadian broker-dealer has many clients who vacation frequently in the United States. In order to continue doing business with these customers while they are in the United States, the broker-dealer must file all the following material with the Administrator, EXCEPT: a. A Consent to Service of Process b. A Form B/D c. A copy of current registration filed in Canada d. Proof of membership in a self-regulatory organization

B A Canadian broker-dealer may continue to do business with any clients in the United States with whom it has a bona fide preexisting relationship and who are here temporarily—not permanent residents of the United States. According to the Uniform Securities Act, the broker-dealer must be registered properly in Canada and must file the following documents with the Administrator: a Consent to Service of Process, a copy of the registration document filed with its Canadian regulator at the provincial level, and proof that it is regulated by a self-regulatory entity, such as an exchange. The Canadian broker-dealer may act only in a limited capacity in the states. Generally, it must restrict its activities to existing clients temporarily in the state and to certain institutions.

A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE? a. The withdrawal will become effective within 60 days after the application is received by the Administrator b. The withdrawal will become effective when the Administrator determines whether there is an action for revocation of the firm's license pending at the time the application was filed c. By filing an application to withdraw, the firm agrees to settle all charges currently pending without admitting or denying them d. The Administrator has two years after the date the firm's registration is withdrawn to initiate a proceeding for revocation of its license

B An application for withdrawal generally becomes effective 30 (not 60) days after it was filed. However, the withdrawal will not become effective until the Administrator declares whether there are proceedings pending or instituted against the firm at the time the application for withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days after the application was filed.) The Administrator has one year (not two) after the registration is withdrawn to begin revocation or suspension proceedings against the firm. In practical terms, the reason for this is because if violations have occurred in a state and the broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the B/D for up to one year after the withdrawal. The cause of action may carry over to other states. This prevents a B/D from avoiding the consequences of rule violations.

An agent inadvertently sold an unregistered, nonexempt security to a client. Under the Uniform Securities Act, which of the following actions may be taken? I. Getting the security registered as soon as possible II. Buying the security back from the customer III. Paying the customer the maximum legal rate of interest, less dividend or interest income received from the date of purchase a. I and II only b. I and III only c. II and III only d. I, II, and III

B If an agent discovers that she has inadvertently sold an unregistered, nonexempt security to a customer, the agent may offer to repurchase the security from the customer through a letter of rescission and pay the customer the maximum legal rate of interest less dividend or interest income received from the date of purchase. The customer must respond to the letter of rescission within 30 days or the customer waives the right to sue

According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning private placements? a. The offer may not be made to more than 10 persons in that state during any 12-month period b. The offer may be made to 35 or fewer persons in that state during any 12-month period c. The offer may be made to any number of institutional investors during any 12-month period d. Commissions may not be paid if the buyers are noninstitutional customers

B This is another example of a question where the entire point hinges on the word "NOT". This is typical of regulatory examinations, where it is important to understand what the question is asking. In this situation, you are supposed to recognize which of the following items is false. This means three of them are true. If you can identify which answers are true, then you can narrow down the false statement (which is the correct answer) by process of elimination. Under the Uniform Securities Act, any transaction involving no more than 10 persons (there is no limit on institutional accounts) during any 12-month period is considered an exempt transaction known as a private placement, if the following conditions are met. The seller believes that all the noninstitutional buyers are purchasing for investment purposes only and no commission or other remuneration is paid for soliciting noninstitutional buyers. Choice (b) refers to a situation for private placements under Regulation D of the Securities Act of 1933.

Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals? a. Broker-dealers with no place of business in a state and a limited number of noninstitutional clients in a state must register b. Broker-dealers with no place of business in a state, who limit their agents to selling exempt securities in a state, need not register c. Investment advisers with no place of business in a state and whose only clients are institutional investors in the state need not register d. Investment advisers with no place of business in a state and a limited number of noninstitutional clients need not register

B When you encounter a question that is asking you to find a NOT TRUE statement, you should immediately realize that three of the choices are true, but that you are looking for the one FALSE statement (choice). There is never an exemption from registration for broker-dealers even if they have no place of business in a state and limit their agents' activities to selling exempt securities. It is the securities that are exempt, not the agents or the broker-dealer selling those securities. Choice (b) is definitely a false statement. Choice (a) is a true statement. Broker-dealers must always register. Choice (c) is a true statement. In this situation, the investment adviser is exempt from registration. Choice (d) is tricky, because it is a little vague. What does it mean to say "a limited number of noninstitutional clients"? This sort of situation is common on regulatory exams. Remember, investment advisers with no place of business in a state may still do business in that state without registering, provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. That is a limited number. While there is an assumption taking place here, (d) is not the best choice compared to choice (b), which we know is always false. It may help you to remember that there is no de minimis exemption for broker-dealers with no place of business in a state and a limited number of noninstitutional clients.

A Canadian broker-dealer has many clients who vacation frequently in the United States. In order to continue doing business with these customers while they are in the United States, the broker-dealer must file all the following material with the Administrator, EXCEPT: a. A Consent to Service of Process b. A Form B/D c. A copy of current registration filed in Canada d. Proof of membership in a self-regulatory organization

B A Canadian broker-dealer may continue to do business with any clients in the United States with whom it has a bona fide preexisting relationship and who are here temporarily—not permanent residents of the United States. According to the Uniform Securities Act, the broker-dealer must be registered properly in Canada and must file the following documents with the Administrator: a Consent to Service of Process, a copy of the registration document filed with its Canadian regulator at the provincial level, and proof that it is regulated by a self-regulatory entity, such as an exchange. The Canadian broker-dealer may act only in a limited capacity in the states. Generally, it must restrict its activities to existing clients temporarily in the state and to certain institutions.

A client purchases 200 shares of XAM stock and pays his broker-dealer the required sum of money. The client requests the securities be shipped directly to his home. Which of the following statements is TRUE regarding this transaction? a. A client may not request the securities be delivered to his home b. The broker-dealer should honor the client's request c. The broker-dealer may delay the delivery of securities to the client's home for a period of one month d. The broker-dealer may charge the client twice the normal commission rate on this type of transaction

B A client is allowed to purchase securities and request that they be shipped to his home for safekeeping. It is considered an unethical business practice for a broker-dealer to engage in a pattern of unreasonable and unjustifiable delays in delivering securities purchased by clients.

Which of the following firms would NOT be required to register as a broker-dealer in State P? a. A firm located in State P that sells federal covered securities b. A firm without an office in State P that sells municipal securities to pension plans, banks, and other institutional investors in State P c. A discount brokerage firm with an office in State P that executes transactions for clients that are mainly out-of-state d. A firm with no office in State P that sells municipal securities to clients that are residents of State P

B Explanation: A firm without a place of business in State P that does business only with institutional clients in State P would not be required to register as a broker-dealer in State

A new client approaches an agent regarding opening a new account but refuses to discuss his financial status. The agent should: a. Sell any type of securities b. Accept only unsolicited orders until more information is known c. Not open an account for this individual d. Sell only high-grade securities

B Explanation: An agent may not solicit orders from a client when no information about the client's financial status is known.

Which of the following funds may an agent describe as no-load? a. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of less than 1% b. A fund with no front-end sales charges or contingent deferred sales charges together with a 12b-1 fee of .25% c. A fund with no front-end sales charges, but having a contingent deferred sales charge of 1% and no 12b-1 fee d. A fund with no front-end sales charges, but having a contingent deferred sales charge of less than 1% and no 12b-1 fee

B Explanation: An investment company (mutual fund) may be called a no-load fund only if it has no front-end sales charges, no contingent deferred sales charge, and a 12b-1 fee that is equal to or less than .25% of the fund's average asset value.

An insurance agent works in an office building down the hall from a broker-dealer. They are not affiliated. What compensation may the agent receive from the broker-dealer in exchange for referrals? a. Discounted commissions b. Insurance referrals c. Commissions d. 12b-1 fees

B Explanation: Only individuals who are registered agents may receive monetary compensation from a broker-dealer based on the sale of a security. In this scenario, the insurance agent is not licensed and may not receive compensation in the form of commissions or fees, or soft-dollar compensation (noncash compensation) in the form of discounted commissions. If a broker-dealer wants to refer its clients to an insurance professional, this is permitted. Only licensed insurance professionals may be compensated for the sale of life insurance

Under the Uniform Securities Act, which of the following choices is NOT a security? a. Non-traded REITs b. Stock futures c. Keogh Participation Units d. Options on currency futures

B Explanation: Under the Uniform Securities Act, futures, forwards, currencies, and commodities are not considered securities. Although futures are not securities, options on futures are. While a Keogh Plan is not a security, a participation unit in the plan is defined as a security. A real estate investment trust is a security regardless of how or if it is traded.

A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE? a. The withdrawal will become effective within 60 days after the application is received by the Administrator b. The withdrawal will become effective when the Administrator determines whether there is an action for revocation of the firm's license pending at the time the application was filed c. By filing an application to withdraw, the firm agrees to settle all charges currently pending without admitting or denying them d. The Administrator has two years after the date the firm's registration is withdrawn to initiate a proceeding for revocation of its license

B Explanation: Incorrect. An application for withdrawal generally becomes effective 30 (not 60) days after it was filed. However, the withdrawal will not become effective until the Administrator declares whether there are proceedings pending or instituted against the firm at the time the application for withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days after the application was filed.) The Administrator has one year (not two) after the registration is withdrawn to begin revocation or suspension proceedings against the firm. In practical terms, the reason for this is because if violations have occurred in a state and the broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the B/D for up to one year after the withdrawal. The cause of action may carry over to other states. This prevents a B/D from avoiding the consequences of rule violations.

A woman owns a very successful bike shop. She wants to expand her business and is planning a public offering to sell shares to the public. She will help to market the shares but will not receive direct compensation for her efforts. According to the Uniform Securities Act, the owner must: a.Register as a broker-dealer b.Register the securities c.Register as an investment adviser d.Register as a solicitor

B Explanation: The question states that the owner is conducting a public offering of securities. All securities offerings must be registered unless they can qualify for an exemption. There is nothing in the stem to indicate that the offering qualifies for an exemption. The owner does not meet the definition of a broker-dealer and does not need to register as one. She is not "in the business of effecting securities transactions." She is an issuer—issuers are specifically excluded from the definition of a broker-dealer, choice (a). In addition, she is not in the business of providing investment advice, or soliciting clients for an investment adviser—she does not need to register as an investment adviser, choices (c) and (d). (Some states do require solicitors for investment advisers to register as investment adviser representatives.)

Which of the following statements is TRUE concerning the posting of bonds by a broker-dealer? a. The bond may be waived if the broker-dealer has been in business for at least 10 years b. There is no bond requirement if the broker-dealer does not have custody or discretionary authority c. The Administrator may not waive the bond requirement for any broker-dealer d. There is no bond requirement if the broker-dealer is registered in another state

B Not every broker-dealer maintains custody of client assets. Some, for example, employ clearing firms to take care of this responsibility. **The Administrator may require broker-dealers to post bonds if they have custody of, or discretionary authority over, client funds or securities. The bond is waived if the broker-dealer's net capital exceeds a specified amount. The Administrator may determine this amount.**

If an agent violates the Uniform Securities Act, the Administrator may NOT: a. Release information about the violation on its Web site b. Arrest suspects if they refuse to cooperate with an investigation c. Subpoena a witness d. Administer an oath

B The Administrator is not a law enforcement officer. However, the Administrator has the ability to subpoena witnesses, administer oaths, and release information regarding violations to increase investor awareness.

An agent is concerned that many customers do not bother to read the prospectus before investing in a mutual fund. Under SEC rules, the agent may take which of the following actions to help his clients become better-educated investors? a. The agent may type a large font version of the prospectus for the clients' benefit, provided the large print version has been reviewed and approved by the firm's chief legal counsel b. The agent may underline or highlight key content areas within the prospectus, but must remind customers that the points emphasized are of no more or no less importance than the balance of the material contained in the full prospectus c. The agent may give clients a summary prospectus d. The agent may summarize the prospectus, provided a registered principal approves the resulting abbreviated document and attaches a written notice to all recipients that a full version of the prospectus is available upon request

C In the case of mutual funds, clients may be given a copy of a summary prospectus instead of the entire (statutory) prospectus, provided the whole prospectus is available free of charge on the fund's Web site. A copy of the statutory prospectus (electronic or paper) must be made available to any investor that wants this document at no charge and within three business days of the request. **An agent or IAR should never underline, highlight, or summarize any portion of the prospectus or preliminary prospectus for a client, even if the agent's or IAR's intentions are simply to help the client (as in this question). Pointing out specific information implies that certain portions of the prospectus are more important than others and that the customer does not need to review the entire document.**

Which of the following statements is NOT TRUE about federal covered advisers? a. They are not subject to registration as investment advisers under the Uniform Securities Act b. They are not subject to state record-keeping requirements c. They are not subject to the antifraud provisions of the Uniform Securities Act d. Investment adviser representatives of federal covered advisers can be required to register in a state if they have a place of business there

C Explanation: Correct. The antifraud provisions of the Uniform Securities Act cover "all persons," including federal covered advisers.

All of the following practices are prohibited, EXCEPT: a. Sharing in the profits of a client's account without any contribution to the account b. Executing a solicited order for an unregistered, nonexempt security c. Sharing of a commission on a trade by two agents of a broker-dealer d. Excessive trading in a client's account

C Explanation: Incorrect. Agents employed by the same firm are permitted to share commissions on a trade.

A broker-dealer is a registered market maker in a Nasdaq security. The broker-dealer's current quote states that the firm is prepared to sell to clients 200 shares at $21.00 per share and buy from clients 200 shares at $20.50 per share. Which of the following activities by the broker-dealer would NOT be considered an unethical or dishonest business practice? a. Failing to sell 100 shares to a client at $21.00 per share b. Failing to buy 100 shares from a client at $20.50 per share c. Failing to sell 200 shares to a client at $20.75 per share d. Failing to buy 200 shares from a client at $20.50 per share

C A broker-dealer is required to buy from a client or sell to a client any security at its stated or quoted prices. This broker-dealer's quotes reflect the fact that it is willing to buy up to 200 shares at $20.50 and sell up to 200 shares at $21.00. The broker-dealer is not required to sell shares at a price superior ($20.75) to its quoted prices. The broker-dealer could sell the securities at the superior price, but is not required to do so.

Under the Uniform Securities Act, which of the following is NOT considered an offer or an offer to sell? a. An agent attempts to sell a security but the client refuses b. A solicitation to buy a security for value c. A gift of nonassessable securities d. The receipt of a warrant with the purchase of a bond

C An offer is any attempt to buy or sell a security for value. **A gift of nonassessable securities is not considered a sale or an offer to sell. Nonassessable means that the issuer of the security has no legal claim on the owner for additional payments.** A warrant that is attached to another offering is also considered an offer.

An agent of a broker-dealer has a business relationship with an agent of another broker-dealer. They both own a large quantity of LRR stock. Which of the following statements is TRUE if both agents buy and sell large amounts of LRR stock to increase its trading volume? a. This action is permissible if the agents receive prior written approval of their broker-dealers b. This action is not permissible since the agents are employed by two different broker-dealers c. This action may be considered market manipulation d. This action is considered a matched sale and is an allowable type of securities transaction

C The action by the two agents may be considered manipulation. The agents may not effect transactions to create the false or misleading appearance of trading volume in LRR stock. This type of market manipulation is sometimes referred to as a matched sale and is considered a violation of securities law. If the agents worked at the same broker-dealer and had received prior written permission from their firm, the transactions would still be considered a prohibited business practice.

Which of the following persons is NOT excluded from the definition of a broker-dealer under the Uniform Securities Act? a. A bank b. An agent c. An investment adviser d. An issuer

C This is an example of a question that must be read very carefully. When you are asked "Who is NOT excluded?" you are essentially being asked, "Which one of these might be considered a broker-dealer?" ("Not excluded" means "Which ONE of the following".) This question is one that tests the letter of the law, a potential event on the real exam. **According to the Uniform Securities Act, a bank, an agent, and an issuer are all specifically excluded from the definition of a broker-dealer. An investment adviser has no specific exclusion.** However, if it performs the activities that fit the definition of a broker-dealer, it must register as such. For example, if an investment adviser effects agency cross transactions or conducts principal transactions with clients, the adviser is acting a broker-dealer.

A broker-dealer keeps customer-owned, street-name securities and the broker-dealer's securities together in a way that may not clearly indicate who owns which shares. This could be considered: a. Sharing in profits and losses with a customer b. A fraudulent act c. Commingling d. Conversion

C = Commingling

A broker-dealer is participating in an initial public offering of a security that will be listed on Nasdaq. Which of the following documents is the broker-dealer required to deliver to a client who purchases in the after-market immediately after completion of the offering? a. There is no requirement for additional documentation b. A research report c. A final prospectus d. A list of all of the broker-dealers involved in the offering

C A client purchasing securities as part of an offering must receive either a final prospectus or a preliminary prospectus along with an additional document from the broker-dealer executing the transaction. The final prospectus must be provided for a certain period after the completion of the offering. For an IPO, if it is listed on the NYSE or Nasdaq, after-market prospectus delivery is 25 days. If the security will be quoted in the OTCBB or Pink Market, the period is 90 days for an IPO, and 40 days for a subsequent (follow-on) offering.

Under the Uniform Securities Act, an institutional investor: a. Has a minimum of $1.5 million invested in securities b. Has a minimum of $100 million under management c. Is designated by rule or order of the Administrator d. Is anyone who falls under the definition of an accredited investor

C Explanation: According to Section 201(c) of the Uniform Securities Act, an institutional investor is an investment company, investment adviser, broker-dealer, bank, trust company, savings and loan, insurance company, employee benefit plan with at least $10,000,000 of assets, government entities, or any other entity designated by rule or order of the Administrator. Accredited investors are defined in federal law (Regulation D), not the Uniform Securities Act.

Which of the following documents must be filed with the state Administrator for registration of all broker-dealers, investment advisers, agents, and investment adviser representatives? a. Form U4 b. Form ADV Parts 1 and 2 c. The Consent to Service of Process d. Fingerprint cards for all registered employees

C Explanation: The Consent to Service of Process appoints the state Administrator to serve as the applicant's attorney for the purpose of receiving and processing noncriminal complaints. It is required of all registrants when they file for registration in a state. The other forms listed may or may not be filed by certain persons, but the Consent to Service of Process is the only form that is required of ALL persons.

Which of the following activities would NOT meet the definition of an exempt transaction under the Uniform Securities Act? a. A bankruptcy trustee liquidates a debtor's securities and divides the proceeds among its creditors b. An agent sells a client shares in a Canadian venture capital fund after the client agrees to sign a form stating that the transaction was unsolicited c. An agent sells units in a Canadian limited partnership to several of her clients d. An issuer distributes shares in an IPO to the lead underwriter

C Explanation: This is another example of a question where the entire point hinges on the word "NOT". This is typical of regulatory examinations so it is important to understand what the question is asking. In this situation, you are supposed to recognize which of the following items is not defined as an exempt transaction. This means three of them are exempt. If you can identify which ones are exempt, then you can narrow down the correct answer by process of elimination. In choice (c), the sales appear to have been solicited and there is no indication that the partnership qualifies for any other exemption. As an aside, you may be required to know that nonissuer transactions in certain Canadian securities are exempt, but the securities must be (1) issued by an entity that files reports with the Canadian regulators and be (2) listed on the Toronto Stock Exchange. Choice (b) is exempt because the sale is unsolicited. Transactions by a trustee as part of bankruptcy proceedings are exempt, choice (a), as is a transaction between an issuer and an underwriter, choice (d).

When opening a margin account, which TWO of the following MUST be signed? I. A loan consent form II. A hypothecation agreement III. A margin account form IV. Trading authorization a. I and III b. I and IV c. II and III d. II and IV

C Explanation: When opening a margin account, a customer must sign both a hypothecation agreement and a margin account form. The loan consent form is used when a customer authorizes the member to lend his securities, and is not required. Trading authorization is also not required.

According to the NASAA Model Rules for Sales of Securities at Financial Institutions, a networking arrangement between a financial institution and a broker-dealer must: a. Be renewed every year by December 31 b. Be filed with the state securities Administrator c. Set forth the compensation schedule for both parties d. Specify which functional regulator will be in charge of examining the broker-dealer's operations at the financial institution

C Explanation: Correct. A networking arrangement is an agreement between a broker-dealer and a bank (or a savings and loan or credit union) under which the broker-dealer does business at a retail banking location. According to the NASAA Model Rules, these agreements must be in writing and must specify how both the bank and the broker-dealer will be compensated. The agreement must also state the duties and responsibilities of both the broker-dealer and the bank, and must provide that the broker's supervisory personnel and state regulators will have access to the bank to examine the records maintained there.

A no-load mutual fund has no: I. 12b-1 fees II. Front-end sales charges III. Contingent deferred sales charges a. I only b. I and II only c. II and III only d. I, II, and III

C Explanation: Correct. A no-load mutual fund may not have any front-end sales charges (loads) or any contingent deferred sales charges (back-end loads). It may have a 12b-1 fee as long as this fee does not total more than .25% of the fund's average annual net assets.

The state Administrator has suspended Heathrow Securities, a broker-dealer. Which of the following statements concerning the broker-dealer is TRUE? a. The firm is allowed to accept unsolicited orders b. The only activity the firm may not participate in is new issue distributions c. The firm may apply to the state court for a review of the order d. The firm may continue business as usual during the appeal process

C Explanation: Correct. Although the firm may apply to the state court to review the Administrator's order, there is no stay of the order. The firm is still suspended during the appeal process and cannot participate in any securities-related activities in that state.

An investment adviser with no place of business in a state will not be required to register with the Administrator under which of the following conditions? a. The adviser has not been the subject of any disciplinary action b. The adviser has been in business for 10 years c. The adviser will provide advice only to mutual funds d. The adviser will provide advice only to 401(k) plans with assets of at least $500,000

C Explanation: Correct. An adviser with no place of business in a state who only provides advice to mutual funds (a type of investment company), other investment advisers, broker-dealers, banks, trust companies, insurance companies, saving and loan associations, and employee benefit plans such as a **401(k) where the minimum amount of the assets is $1,000,000, is exempt from registration.**

An investor has been saving for her two children's college education using mutual funds in a taxable account. Her investment profile indicates that she is in a high tax bracket. The oldest child will be starting college in the fall. The younger one will be beginning college in three years. Which of the following allocations would you recommend for the investor's assets? a. 50% in stock funds, 50% in bond funds b. 30% in an S&P 500 Index fund, 60% in municipal and corporate bond funds, and 10% in a money-market fund c. 25% in municipal bond funds, 25% in an S&P 500 Index fund, and 50% in money-market funds d. 80% in long-term bond funds and 20% in money-market funds

C Explanation: Correct. As a child approaches college age, a suitable investment strategy is to rebalance. Typically, the portfolio should hold fewer growth-oriented securities, such as equities, and should increase income-oriented securities, such as bonds and money-market funds. Once a child begins to attend college, most of the funds should be invested in money-market funds or other types of short-term investments that are liquid with very little risk of declining in value. Municipal bonds are appropriate for this investor since she is in a high tax bracket and the funds are being held in a taxable account.

According to the Uniform Securities Act, if an employee of an issuer is soliciting employees of that issuer for the purpose of selling securities, which of the following statements is TRUE? a. The employee could receive commissions without being registered as an agent b. The employee would never be considered an agent of the issuer c. The employee would be considered an agent if she received commissions or other remuneration d. If the employee was an officer or director of the issuer, she could receive commissions and would not be considered an agent

C Explanation: Correct. Generally, an employee of an issuer soliciting employees of that issuer for the purpose of selling securities would be considered an agent of the issuer if the employee received commissions or other remuneration (such as a bonus based on securities sales). According to the USA, these transactions are not exempt if the employee receives a commission.

A client lists capital preservation as his only investment objective. The agent recommends that the client purchase blue-chip stocks and investment-grade bonds. The agent then tells the client to sell some of the stock every two weeks. According to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the agent has: a. Engaged in unauthorized trading b. Churned the account c. Made unsuitable recommendations d. Done nothing wrong

C Explanation: Correct. Stocks (even blue-chips) and bonds are not appropriate investments for someone whose sole objective is capital preservation. Money-market securities or a money-market fund would be the only appropriate recommendation under these circumstances. Arguably, the agent has also churned the account, choice (b), by advising the client to sell some of these securities every two weeks. However, choice (c) is the best answer here since the securities were not suitable in the first place. Both recommendations to purchase these securities and then sell them were unsuitable.

According to the Uniform Securities Act, which of the following investment advisers would be exempt from registration? a. An adviser with no place of business in the state, with 10 clients, all of whom are accredited investors b. An adviser with no place of business in the state and only six clients who have a net worth of at least $1 million each c. An adviser with no place of business in the state and fewer than six retail clients d. An adviser with an office in the state, with five or fewer retail clients

C Explanation: Correct. There is no investment adviser exemption based on net worth in the Uniform Securities Act. (In federal securities law, there is a securities registration exemption for private placements to accredited investors.) If an adviser does not have a place of business in a particular state and limits clientele to institutional investors **(or no more than five retail investors),** the adviser is exempt from registration.

A husband wishes to buy stock in his wife's account. Under the Uniform Securities Act, which of the following statements is TRUE? a. The agent may accept this order if it is suitable b. The agent may accept this order if the wife provided oral authorization within the last 10 days c. The husband must have written trading authorization for the account d. Under no circumstances may a spouse place orders in the other spouse's account

C Explanation: Correct. To place orders in the account, trading authorization must be signed by the owner of the account giving the third party the right to do so. Without trading authorization, this is a prohibited practice. The agent may not accept the order regardless of its suitability for the wife. Also, an agent of a broker-dealer may not accept oral authorization from the wife with a 10 day grace period. Do not confuse this with the fact that an investment adviser may exercise discretion for 10 days if provided with oral authorization. Choice (d) is simply wrong.

Under the USA, which of the following transactions would NOT be considered exempt? a. An offer to an investment company b. A transaction by an executor of an estate c. An unsolicited issuer transaction effected through a registered broker-dealer d. A transaction by a trustee that is involved in a bankruptcy proceeding

C Explanation: Correct. Under the Uniform Securities Act, any offer to an investment company or other institutional investor, a transaction by an executor of an estate, or a trustee involved in a bankruptcy, would be defined as an exempt transaction. An unsolicited nonissuer transaction may qualify as an exempted transaction.

Under the Uniform Securities Act, all of the following choices describe an investment adviser representative, EXCEPT: a.A person who makes recommendations or gives advice regarding securities b.A person who negotiates the sale of investment advisory services c.A person acting in a ministerial capacity who speaks with clients of the firm d.A person who conducts wealth planning seminars for an investment adviser

C Explanation: Correct. Clerical personnel, i.e., people acting in a ministerial capacity, do not meet the definition of an investment adviser representative. The other three choices are all covered under the USA's definition of an investment adviser representative.

An agent's registration is: a. Considered an indication that the Administrator considers those securities sold by the agent to be properly registered b. Transferrable to another broker-dealer without filing a new Form U4 as long as the agent is sponsored within 30 days c. Effective only during the period in which the agent is associated with a properly registered broker-dealer d. Effective in all states where the broker-dealer is registered or where the broker-dealer's registration is pending

C Explanation: Incorrect. An agent's registration is effective only during the period in which the agent is employed by a properly registered broker-dealer. An agent may not transact business unless associated with a broker-dealer. An agent's registration has no impact on the registration of securities, choice (a), nor can it be transferred without filing Form U4. An agent is not registered automatically in every state in which his employer, the broker-dealer, is registered.

Agents may use their own judgment when effecting transactions by deciding which of the following choices without obtaining the client's written consent? I. Price II. Security III. Time a. III only b. I and II only c. I and III only d. I, II, and III

C Explanation: Incorrect. If an agent does not have written discretionary authority, the agent may only decide the price and/or time of the transaction.

An agent's recommendations have made a client a lot of money over the last two years. The client is so pleased that he tells the agent that she can keep 5% of any gains in his account from now on. Which of the following statements is TRUE? a. This is acceptable as long as the broker-dealer and the client agree in writing b. This is acceptable if the broker-dealer is also registered as an investment adviser c. This is not acceptable unless the agent is also registered as an IAR d. This is not acceptable since it is considered to be sharing in the client's profits

D Explanation: Correct. Sharing in the profits and/or losses in a client's account is generally not permitted. There is an exception if the client and the agent have a joint account, the client and the broker-dealer consent to the arrangement in writing, and profits and losses are shared in proportion to the capital that each contributed to the account. Choice (a) is only partially correct since there is no mention of a joint account and the agent did not contribute capital to the account. Under certain circumstances an investment adviser may charge a performance fee, but the clients must be qualified. To be qualified, the client must have either $1 million managed by the IA or a net worth of $2 million.

The members of NASAA include Administrators from: I. All 50 states II. The District of Columbia III. Puerto Rico IV. The U.S. Virgin Islands a. I only b. I and II only c. I, II, and III only d. I, II, III, and IV

D The members of the North American Securities Administrators Association (NASAA) include Administrators from all 50 states, the District of Columbia, Puerto Rico, Canada, Mexico, and the U.S. Virgin Islands.

An agent's application includes which of the following choices? I. A filing fee II. Work history III. A Consent to Service of Process a. I and II only b. I and III only c. II and III only d. I, II, and III

D ALL Explanation: Correct. An agent's application contains all of the items listed.

A woman in State A is reading a daily financial newspaper that contains an advertisement that could be interpreted as an offer to sell securities. The newspaper is published in State B, but its circulation is spread evenly throughout the United States. According to the Uniform Securities Act, which of the following statements is TRUE regarding the advertisement? a. The offer is made in State A only b. The offer is made in State A and State B c. The offer is made in State B only d. The offer is made in neither State A nor State B

D An offer such as this generally would be made in the state in which the newspaper is published (in this case, State A). However, if more than two-thirds of the newspaper's circulation is outside its state of publication, the offer is not considered to be made in any state. Since that is the condition that applies in this situation, an offer is not considered to be made in either State A or State B. In whatever state the offer is accepted, that state's Administrator would have jurisdiction.

Under the Uniform Securities Act, an investment adviser who has no place of business in a state is exempt from registration in that state if the adviser provides advice in which of the following situations? I. The adviser had no more than five clients in that state within the last 12 months II. The adviser had no more than 15 clients in that state within the last 12 months III. The adviser provided advice only to investment companies in that state IV. The adviser provided advice only to insurance companies in that state a. I and IV only b. II and IV only c. III and IV only d. I, III, and IV only

D Explanation: An adviser whose clients are all institutions or who has no more than five clients in a state is exempt from registration, provided that the adviser has no place of business in that state.

Which of the following activities BEST describes churning? a. Moving assets between the client's cash and margin accounts daily b. Charging an asset-based fee that includes commissions to a client with a buy-and-hold strategy c. Recommending selling a security for a loss and buying it back within 30 days d. Actively trading an account to generate commissions

D Explanation: Churning is defined as excessive trading activity in a client's account, with particular attention paid to buy-and-sell transactions that are in conflict with the financial objectives of the client. Choice (b) is an example of reverse churning. Choice (c) is a wash sale. Choice (a) is just a distracter choice.

Under the Uniform Securities Act, which of the following choices would be considered a nonissuer transaction? a. A primary offering sold by a broker-dealer b. The sale of a security executed by an agent of the issuer c. The sale of a new issue in a private placement d. The sale of an NYSE-listed security

D Explanation: A nonissuer transaction is a purchase or sale of a security whereby the issuer does not benefit, directly or indirectly. A trade between two investors for IBM stock on the New York Stock Exchange (a secondary-market trade) would be an example of a nonissuer transaction.

Under what circumstances are agents permitted to sell securities to clients in transactions that are not recorded on the books and records of their employing broker-dealer? a. The securities are exempt under the Uniform Securities Act b. The agent will not receive compensation for the transaction c. The purchaser is a member of the agent's immediate family d. This is generally not permitted under any circumstances

D Explanation: Effecting client transactions that are not recorded on the books and records of the agent's employer is a prohibited practice, regardless of the type of security or client involved. It is generally considered an unethical business practice for an agent to effect securities transactions and not record them on the broker-dealer's books and records. (89569)

All of the following practices are prohibited, EXCEPT: a. A broker-dealer enters a discretionary order to buy shares of a security for which a client gave verbal authorization 10 days earlier b. Accepting verbal instructions from a client granting power-of-attorney to a spouse c. Recommending securities based on assumptions about the client's financial resources d. A sales assistant relays a message that a customer wishes to buy securities

D Explanation: Correct. A sales assistant is assumed to be unregistered, unless otherwise specifically stated. Unregistered persons may not accept orders to buy or sell securities. However, they may relay messages from clients to registered persons. For example, a client is seeking to buy securities, but the agent who normally works with that client is unavailable. The sales assistant could take a message stating this and make sure the agent calls the client back as soon as possible. Clients may grant power-of-attorney in writing only. An agent or adviser representative must make recommendations about securities based on reasonable inquiry into a client's financial situation, not assumptions. For example, the clothing choices of a client, or the car the client drives, is not grounds for a suitable recommendation.

An agent located in State W is employed by a broker-dealer that is owned by a bank. The bank is headquartered in State I. If the agent sells securities issued by the bank to clients in State I, the agent: a. Does not need to disclose the affiliation since the clients are located in the state where the bank is headquartered b. Does not need to disclose the affiliation since the bank issues exempt securities c. Would need to disclose the affiliation only if the clients have nondiscretionary accounts d. Would need to disclose the affiliation to the customer under any circumstances

D Explanation: Correct. Failing to disclose that a broker-dealer is affiliated with or controlled by an issuer of securities is considered a dishonest and/or unethical business practice. The agent would need to disclose the affiliation before entering into any contract with a customer to buy or sell securities. The disclosure may be made verbally prior to the trade if written disclosure is made at or before the completion of the transaction (usually the settlement date). The disclosure would need to be made to all accounts of a broker-dealer.

Which of the following investment advisory practices are permitted? a. A client's portfolio increases in value from $100,000 to $150,000 over a one-year period and the adviser charges the client a fee of only 1% of the $50,000 increase b. An investment advisory firm is purchased by a large broker-dealer and all client contracts will remain in force as long as the terms of the contracts are not altered c. An investment advisory firm appoints three new senior partners and, for competitive reasons, it does not disclose this to anyone d. A client terminates an advisory relationship with an investment adviser halfway through the contract and the advisory firm refunds 50% of all prepaid fees, as called for in the contract

D Explanation: Correct. Investment advisory contracts must provide that: • The adviser will not be compensated on the basis of a share of the capital appreciation of the account. • The adviser may not assign client contracts without the consent of the client. • If the adviser is a partnership, clients will be notified of changes in the partnership within a reasonable period of time.

The LEAST suitable investment for Mrs. McCarthy, a 70-year-old investor, would be a: a. Treasury note b. Utility stock mutual fund c. Fixed annuity d. Zero-coupon bond

D Explanation: Correct. Periodically, you may encounter a suitability question that may not give you the amount of information you would normally require to make an informed recommendation to the client. When encountering these types of questions, you may need to make assumptions based on a client's age or other factors that are given. An assumption that you must make with this question is that since the client is 70, she is most likely retired and dependent on her portfolio for income. Zero-coupon bonds do not provide current income that the majority of elderly investors are seeking. In addition, zero-coupon bonds traditionally are the most volatile securities in periods of fluctuating interest rates. The combination of the volatility and lack of current income make zeroes zero-coupon bonds the most unsuitable vehicle of the choices given.

LMRT is a broker-dealer registered in State J. An existing client of the firm who is a resident of State J is on a ski vacation in State C. Under the Uniform Securities Act, if a securities transaction is effected with the client in State C, LMRT would: a. Need to register as a broker-dealer in State C b. Not need to register as a broker-dealer in State C if the agent selling the securities was registered in State C c. Not be required to register as a broker-dealer in State C if the client signed an agreement d. Not be required to register as a broker-dealer in State C if it has no office there

D Explanation: Correct. Since the client's permanent residence is in State J, the trade is valid. LMRT does not need to register in State C because it does not have an office there and the transaction is with an existing client who is in the state temporarily.

Included in the definition of agent under the Uniform Securities Act is a salesperson of a broker-dealer selling a: a. Private placement b. Stock to a qualified investment buyer c. New York State GO bonds to the public d. All of the above

D Explanation: Correct. **Salespersons of broker-dealers effecting securities transactions are considered agents. This designation holds true even if the securities being sold are exempt or the purchaser involved in the transaction is a qualified institution.**

Which of the following activities is NOT considered an unethical business practice for a broker-dealer? a. Reducing the sales commission on a mutual fund for a longtime customer of the firm b. Failing to properly segregate the proprietary securities of the broker-dealer c. Basing the markup on a security trade based on the broker-dealer's acquisition d. Charging fees for transferring, safekeeping, and custody of securities

D Explanation: Incorrect. It is permissible to charge clients reasonable and equitable fees for miscellaneous services performed by a broker-dealer. Some of these services include appraisals, safekeeping, transferring, and custody of a client's securities. They also include collection of dividends, interest, and principal payments. Sales commissions (loads) on mutual funds may only be reduced based on the breakpoints stated in a the fund's prospectus. Reducing the load simply based on the client's longevity with a firm is not acceptable. A broker-dealer must segregate it's proprietary securities from those of it's customers. Markups for securities trades must be based on the prevailing price for the securities, sometimes called the inside market. Basing markups on the dealer's cost is not acceptable.

The maximum civil penalty for insider trading violations is: a.$5,000,000 and/or 20 years in prison b.$25,000,000 c.$10,000 and/or five years in prison d.Treble damages

D Explanation: This question is one that requires you to memorize some facts, specifically the differences between civil and criminal penalties. A person who engages in insider trading will be subject to both. This question specifically asks you for the civil penalties. The maximum civil penalty for insider trading violations is three times the amount gained or loss avoided (treble damages). The maximum criminal penalties per violation for individuals are a fine of $5,000,000, 20 years in prison, or both. Only corporations are subject to a criminal penalty of $25,000,000 per violation.

Under the Uniform Securities Act, which TWO of the following practices are prohibited? I.Accepting orders from a client's brother with written, third-party authorization II.Recommending securities without regard for the client's financial resources III. Quoting a price that is marked up from the current offering price IV. Crediting a portion of mutual fund's sales load back to a client's account a.I and III b.I and IV c.II and III d.II and IV

D Explanation: Under the Uniform Securities Act, recommending securities without considering a client's resources or rebating commissions (loads) are considered prohibited practices. It is acceptable to take an order from someone with written, third-party authorization. Quoting a price that includes a markup is an acceptable practice.

If the Administrator has summarily suspended an agent's registration, within how many days of the agent's written request must a hearing be scheduled? a. Immediately b. Three days c. Ten days d. Fifteen days

D = 15 days Explanation: Incorrect. The Administrator may suspend or postpone an agent's registration. Upon entering the order, the Administrator will notify the registrant as well as that person's employer (or potential employer) of the order. The Administrator will also send notification that the person has a right to a hearing within fifteen days of a written request.

Which of the following choices is considered a stock offering under the Uniform Securities Act? a. Creditors receive stock as part of a bankruptcy proceeding b. Shareholders receive a stock dividend c. Shareholders receive the right to purchase additional shares in a subsidiary at a prearranged price d. An issuer pledges its securities as collateral for a loan

Explanation: C Choice (c) describes an offering of stock rights, which is defined as an offer, or offer to sell, under the USA (sometimes called a rights offering). Choice (a) refers to a situation in which the issuer is bankrupt and the creditors receive stock as part of the reorganization plan. Any securities received as a result of a reorganization plan approved by the bankruptcy courts are not an offer or an offer to sell (and neither is stock that is received as a result of a merger or acquisition, or other corporate reorganization). Stock dividends, choice (b), are not defined as sales or as offers to sell. Choice (d) describes a situation where securities are being pledged as collateral for a loan, which also is not a sale or an offer to sell.

KiddieLand is a company that operates several theme parks around the United States. Bertha would like to purchase one share of KiddieLand stock for her newborn niece. Her broker-dealer charges a specified minimum ticket charge for small orders. What information should be disclosed to Bertha? a. Common stock is not a suitable gift for children since there is no guarantee it will pay a dividend b. It is not possible to purchase one share of stock and the minimum amount is 100 shares c. The commission charged for this transaction could be unusually large as a percentage of the offering price d. Bertha will need to obtain KiddieLand's permission to purchase the stock for a minor

Explanation: Correct. It is considered fraudulent for a broker-dealer to fail to notify a client of larger-than-ordinary commissions or costs. Purchases or sales of a small amount of securities can often lead to larger-than-ordinary costs because of minimum charges assessed for transactions. This can lead to commissions that are large as a percentage of the purchase price. It is not illegal to assess such charges, but it is illegal not to inform the client about them.

The Administrator of State X has reason to believe that a broker-dealer registered in State Y is violating the law in that state. The Administrator of State X will: a. Issue a temporary restraining order (TRO) b. Issue a cease-and-desist order c. Coordinate an investigation with the Administrator of State Y d. Suspend the firm's registration

Explanation: Correct. The Administrator may not suspend the registration of a broker-dealer that is not registered in her state, choice (d). She also does not have the authority to issue a cease-and-desist order, choice (b). She could issue this order if she believed that the broker was violating the laws of State X. A temporary restraining order (TRO) must be issued by the courts, not the Administrator, choice (a). The Administrator's only option is to coordinate an investigation with the Administrator of State Y.

Which of the following statements is NOT TRUE concerning the limited registration status of Canadian broker-dealers? a. They are exempt from the antifraud provisions of the Uniform Securities Act b. They are exempt from net capital requirements c. They are required to pay a filing fee d. They are required to file a Consent to Service of Process

Explanation: Correct. The Uniform Securities Act has a section concerning rules governing the limited registration of Canadian broker-dealers and their agents. It allows broker-dealers and agents properly registered in Canada with no place of business in a state to be exempt from certain provisions of the Uniform Securities Act. No person engaging in a securities or advisory business is exempt from the antifraud provisions of the Act. (75446)

An agent for a broker-dealer is registered in State A. The agent has a prospective client who lives in State B and wants to open an account, but neither the agent nor the broker-dealer is registered in State B. The agent suggests that the client use her parents' address to open the account since they reside in State A and she is currently visiting them. May the broker-dealer open the account? a. Only if the client has given her parents written discretionary authority over the account b. Yes, since the client has previously lived in State A c. Only if the client signs a waiver d. Under no circumstances

Explanation: Correct. The agent will be violating the registration provisions of the Uniform Securities Act if she opens the account. She will also knowingly create a false account record, which will violate both state and federal securities laws. Although the client is currently visiting in State A, she resides in State B. **Both the broker-dealer and the agent must be registered in the state where the client resides**