Series 63 Greenlight Exam 1
According to the Uniform Securities Act, a broker-dealer employee who is not registered as an agent may do which of the following? A Take phone messages and post records B Accept unsolicited orders C Participate in an exempt transaction D Participate in the distribution of an exempt security
A A person need not be registered as an agent to take messages and post records. All of the other activities require a registered person. (89202)
A broker-dealer is conducting business on the premises of a retail bank. According to the NASAA Model Rules for Sales of Securities at Financial Institutions, all of the following statements are TRUE, EXCEPT: A The area where the broker-dealer provides its services should be physically integrated with the area where retail deposits are accepted, whenever possible B Customers who open securities accounts must receive written and oral disclosure that these products are not FDIC-insured, are not guaranteed by the bank, and may lose value C The Administrator's representatives must have access to the premises to inspect the books and records maintained by the broker-dealer to the extent allowed by state law D All confirmations and statements must indicate clearly that the broker-dealer is providing these services
A According to the NASAA Model Rules for Sales of Securities at Financial Institutions (e.g., banks, savings and loans, and credit unions), the activities of broker-dealers and their agents should be physically separated from the areas where retail banking business is handled, whenever possible. (89251)
An agent has a family member who sits on the board of directors of a publicly traded corporation. That family member has confided confidential information to the agent that will negatively impact the price of the company's stock once it becomes public. Out of the blue, one of the agent's clients calls to place a large unsolicited buy order for this stock. The agent must: A Execute the order without disclosing the confidential information B Hold the order until the information becomes public C Refuse the order without any additional explanation D Share the confidential information with the client since it is a material fact
A An agent who has material, insider information about a security may not trade that security either on her own behalf or on behalf of her firm. She is also forbidden from recommending the purchase or sale of that security, or soliciting clients about that security. The agent may, however, accept and execute unsolicited client orders regarding the security. An agent should never share insider information with anyone except her supervisor or compliance officer. (89244)
The Uniform Securities Act prohibits which of the following? A Soliciting orders for unregistered nonexempt securities B Maintaining discretionary accounts C Charging extraordinary commissions on certain transactions D All of the above
A Soliciting orders for unregistered nonexempt securities is prohibited by the Act. The Act allows discretionary accounts and charging for services provided by broker-dealers and their agents. (89214)
A publicly traded company is due to announce its quarterly earnings. The company's CEO contacts her agent about selling shares of the company's stock. The CEO may sell her shares: A Only after the company publicly announces its earnings B Only if the Administrator approves the sale C Under no circumstances D At any time
A The CEO will need to wait until after the company has publicly announced its earnings and the information has been disseminated to investors. Otherwise, she risks being charged with insider trading. Insider trading is selling or buying securities based on nonpublic, material information in violation of a fiduciary duty or relationship. The CEO has a duty to the company's shareholders. Earnings are material information, which the CEO is likely to be privy to before it is announced to the public. Once the company publicly announces its earnings, and the market has had some time to absorb the information, the CEO may sell her shares. Note that many companies have internal policies forbidding their executives from trading in their company's shares for period beginning a month or so before earnings are announced and ending a few days after the information is released. (89201)
An investment adviser representative advises a client in a low income tax bracket to purchase municipal securities. Which of the following statements best describes this action? A The advice by the representative is unethical B Advice concerning tax-free securities is excluded from the provisions of the Investment Advisers Act of 1940 C The action constitutes fraud D The Administrator has no jurisdiction over municipal securities unless the securities are out-of-state bonds
A The action taken by the representative is unethical rather than fraudulent. Municipal securities provide federally exempt interest income. This is advantageous to individuals in higher tax brackets. Recommending the security to an individual in a lower tax bracket is not suitable. There is no indication that an intent to deceive the client was employed, therefore, an assertion of fraud is inappropriate. (67201) (89250)
An agent of a broker-dealer is registered in State X. The agent wants to open an account for a new client, who currently lives in State Y, where neither the firm nor the agent are registered. The prospect suggests using his brother's address in State X to open the account. May the broker-dealer open the account? A No, the broker-dealer may not open the account B Yes, if the broker-dealer is federal covered C Only if the agent immediately applies for registration in State Y D Only if the broker-dealer sends duplicate confirmations and statements to the client's address in State Y
A The broker-dealer will be violating the registration provisions of the Uniform Securities Act if it opens the account. Both the firm and the agent will also be knowingly creating a false account record, which will violate both the state and federal securities laws. The term federal covered in choice (c) refers to larger investment advisers that register with the SEC instead of the states, not to broker-dealers. (89264)
An investment adviser representative has just opened an account for a 40-year-old client who has received an inheritance that the client wants to invest for retirement. The client says that his primary objective is capital appreciation, and that he has an aggressive risk tolerance. The client also states that he wants to keep his investments liquid. Which of the following products should the investment adviser representative recommend? A A diversified stock fund B A corporate bond fund C A variable annuity D A hedge fund
A Of the choices given, a diversified stock fund is the most suitable. A client who is 40 and saving for retirement probably has a time horizon of 15 to 25 years. Generally, investors with long-term financial goals should invest a greater portion of their portfolios in stocks. A stock fund will provide more capital appreciation than a corporate bond fund, choice (b), as well as more protection from inflation. As with all mutual funds, a diversified stock fund may be liquidated easily. A variable annuity, choice (c), might be a good choice, if the client did not want to keep his portfolio liquid. Variable annuities often require investors to lock up their money for a number of years or face early withdrawal penalties. In addition, variable annuity holders who are under the age of 59 1/2 may be subject to tax penalties. Most hedge funds, choice (d), also require investors to lock up their money for a specified period. They are usually not liquid investments. (89206)
A federal covered adviser must:Register with the SECRegister with one or more statesFile Form ADVBecome a member of NASAA AI and II only B I and III only C I, II, and III only D I, II, III, and IV
B A federal covered adviser is required to register with the SEC (I) by filing Form ADV (III). Broadly speaking, larger advisers with more than $100 million in assets register with the SEC while smaller advisers with less than $100 million register with the states. Firms that advise registered investment companies must also register with the SEC. There is currently no SRO that advisers are required to join. Most broker-dealers must become members of FINRA. NASAA (IV) is an organization for state securities Administrators. (89226)
A Canadian agent has many clients who visit the United States for extended periods. In order to continue to service these accounts while these clients are in the United States, the agent must: ARegister with the SEC under NAFTA BRegister with the relevant states CBecome associated with a U.S. registered broker-dealer DOpen an office in the states in which these clients are temporarily residing
B A Canadian agent, who wishes to continue to service the accounts of clients who are visiting the United States, must register with the states where these clients are staying. The agent's broker-dealer must also register. Both broker-dealers and agents who are registered properly in Canada may take advantage of the limited registration provisions available to Canadian broker-dealers and agents under the Uniform Securities Act.
A Canadian broker-dealer does not have a place of business in State A. Since many of its clients have vacation homes in State A, the broker-dealer has applied for, and received, limited registration status in State A. The broker-dealer may continue to effect transactions with customers as long as they are: A Qualified clients B In State A temporarily C In State A legally D Not U.S. citizens
B A Canadian broker-dealer that has limited registration status in a state may continue to do business with its existing clients who are in the United States temporarily. This means that they do not intend to remain in the United States permanently. The broker-dealer must have a bona fide preexisting relationship with these clients. It may not solicit new clients. (89236)
Which of the following forms must a broker-dealer file after an agent is terminated or resigns? A Form U4 B Form U5 C Form U6 D Form ADV
B A broker-dealer must file Form U5 after an agent is fired or resigns voluntarily. This form will state the reason the agent is leaving the firm. The agent must also receive a copy of Form U5. People applying for registration as agents or IARs must file Form U4 (and keep it updated). The regulators use Form U6 to report disciplinary actions and the final outcomes of arbitrations. Investment advisers use Form ADV to register with the SEC or the states. (89222)
An agent opens a new account. The client refuses to answer most of the financial and suitability questions in the New Account Document, checking only the boxes that indicate a conservative risk tolerance and an investment objective of capital appreciation. According to NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents, the agent may recommend which securities for the account? A A variable annuity B A conservative growth fund C A hedge fund D None
B According to the North American Securities Administrators Association (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may recommend only securities that are suitable for a client, given the client's investment objectives, financial situation and needs, plus any other relevant information of which the agent is aware. In this scenario the agent's job is complicated by the client's refusal to provide all of the requested suitability information. The agent may recommend investments that are suitable based on the information that the client did provide. Thus, a conservative growth fund, choice (b), would be an appropriate recommendation since it seems to meet the client's conservative risk tolerance and investment objective of capital appreciation. A variable annuity, choice (a), might also meet this client's risk tolerance and investment objective, depending on how the subaccounts are invested. However, we do not know if the client will need access to his funds in the next five to seven years. Variable annuities often impose surrender charges during these years that effectively limit investors' liquidity. A hedge fund, choice (c), would be too speculative and would also provide limited liquidity. (89205)
An agent of Broker-Dealer A is located in State A. He also intends to register as an agent in both States A and B for Broker-Dealer B, an unaffiliated broker-dealer. Which of the following statements is TRUE? A This is considered an unethical business practice. B Although dual agency is generally not allowed, it's permitted in certain states with permission of the Administrator. C The Uniform Securities Act prohibits the dual registration of agents. D The agent could register in both states without restriction.
B Agents are generally prohibited from registering with two different broker-dealers; however, certain states do allow this practice if the Administrator's permission is obtained. (18244)
Under the Uniform Securities Act, which of the following is NOT TRUE concerning the state registration of an agent? A An agent can only sell securities that have been properly registered in a state or qualify for an exemption from registration B An agent's registration to sell securities in a given state expires at the end of the broker-dealer's fiscal year C An agent can only solicit business in a state if both the agent and broker-dealer are registered in that state D If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change
B All agent, broker-dealer, investment adviser, and investment adviser representative licenses expire on December 31st each year and must be renewed in order to be effective. Renewal is accomplished by the payment of a filing fee. (89208)
A customer's investment objectives are capital preservation and current income. The agent recommends that the client purchase an S&P 500 Index fund. The agent then advises the client to sell shares in the fund every two weeks to generate income. According to NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents, the agent's recommendations represent: A Churning B Unsuitability C Unauthorized trading D Front-running
B An S&P 500 Index fund is not a suitable investment for someone whose investment objectives are capital preservation and current income. Arguably, the agent has also churned the account, choice (a), by advising the client to sell shares in the fund every two weeks, that should otherwise be a long-term investment. However, choice (b) is the best answer here since the fund was not a suitable recommendation in the first place. Choice (c), unauthorized trading, takes place when an agent places an order from a client without permission. Choice (d), 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. (89260)
An investment adviser representative and a client have similar financial resources, investment goals, and risk tolerance. However, although the IAR recommends penny stocks as a small part of her client's portfolio, she would never consider investing in such securities herself. Which of the following statements is TRUE? A As long as the recommendations to her clients are suitable for them, it does not matter what the IAR chooses to include in her portfolio B The IAR should tell her client that the recommendation is inconsistent with her own investment policy C An IAR is not allowed to reveal to a client what is in her personal portfolio D Penny stocks are never suitable investments
B An investment adviser whose personal investing is inconsistent with recommendations made to clients generally has an obligation to disclose this to them. (67252) (89209)
All of the following items should be included on a customer's order ticket, EXCEPT: A The terms and conditions of the order B The identity of the registered principal who preapproved the order C The identity of the registered representative assigned to the account D The time the order was entered
B An order ticket must include the terms and conditions under which the order is submitted—is it a limit order or a market order? It must also state the identity of the registered representative assigned to the account (if any) and the time the order was entered. An order does not need to be preapproved by a registered principal. A principal must review all orders after they are executed, usually by the end of the day. (89254)
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 Refrain from soliciting retail clients in State Y until the agent and the broker-dealer are registered in State Y C 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 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
B 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 exception 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. 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. (89249)
An agent inadvertently misrepresents the risks associated with U.S. Treasury bonds. Under the Uniform Securities Act, which of the following statements is TRUE? A The activity constitutes fraud. B The activity is unethical. C There's no violation since the action was inadvertent. D Since there are no risks associated with U.S. Treasury bonds, there's no violation of the USA.
B Misrepresenting the investment risks of a security is unethical and could lead to civil liabilities since clients have the right to sue and recover their losses. Because the agent inadvertently misrepresented the risks, the activity doesn't constitute fraud. Despite the fact that U.S. Treasury securities are safe, misrepresenting their characteristics is a violation of the USA.
Which of the following statements is NOT TRUE regarding an agent who misrepresents facts about a security? AThis is an unethical activity. BIf the securities are exempt, there are no consequences for misrepresenting a material fact about an investment. CThere are potential civil liabilities and a client can sue for damages. DThere will be no prison sentence if the agent can prove he had no knowledge of the rule he violated.
B Please notice that the question is asking for the choice that's NOT TRUE. Misrepresenting the investment risks of a security is unethical and could lead to civil liabilities, even if the securities are exempt. If a client loses money due to the misrepresentation of a material fact, she could sue and recover civil damages. If the agent can prove that he had no knowledge of the rule he violated, he can avoid a prison sentence, but could still be forced to pay criminal fines.
Which of the following choices is NOT a federal covered security? A A Nasdaq Global Market stock B A Section 504 private placement C Shares in a registered investment company D An exchange-listed ETF
B Regulation D is a group of SEC rules that provides safe harbors for private placements. Securities issued under Section 504 of Regulation D ARE NOT federal covered securities. Securities issued under Section 506, however, ARE federal covered. All securities listed on Nasdaq, choice (a), and the other exchanges, choice (d), are federal covered securities. Securities issued by an investment company that is registered under the Investment Act of 1940 are also federal covered, choice (c). (88511)
In order to register with a state, an investment adviser must take all of the following actions, EXCEPT: A File Form ADV through the IARD system B File the required disclosure documents with the SEC C File a Consent to Service of Process with the state D Pay the required fee
B State-registered advisers are not required to file any documents directly with the SEC. All advisers (state and federal registered) must file Form ADV through the IARD system in order to register with the relevant jurisdictions, choice (a). The states also require that advisers file a Consent to Service of Process, choice (c), and pay the required fees, choice (d). (89219)
An agent at Broker-Dealer A works in the firm's State A office. She uses the telephone to contact a client in State B. She recommends buying stock in a company located in State B. Which of the following statements is TRUE? A Since the company is located in the same state as the client this would be considered an exempt transaction B Both the State A and State B Administrator may have authority over the offer C She is not permitted to make this type of offering using the telephone D An offer exists only if a sale is made
B The Administrator has authority over any offer to buy or sell that is originated, accepted, or directed in the Administrator's state. A sale need not be made in order to meet the definition of an offer to sell. (89247)
Under the Uniform Securities Act, which of the following is NOT TRUE concerning an Administrator taking disciplinary action against a person?There must be written findings of fact and conclusions of lawThe Administrator can take action against a person with or without the opportunity for a hearingThe Administrator does not need to provide the person with prior written noticeThe Administrator's order can be appealed if the person files a petition in court within 60 days A I and IV only B II and III only C II, III and IV only D I, II, III, and IV
B The Administrator must provide a person with prior written notice, an opportunity for a hearing, and written findings of fact and conclusions of law when taking disciplinary action against a person. The Administrator's order can be appealed if the person files a petition in state court within 60 days. (89232)
The Administrator of State P requests that the Administrator of State Q issue a cease-and-desist order. May the Administrator of State Q grant this request? A Only if the person against whom the order is being issued is a resident of State Q B Only if the Administrator of State Q believes that the laws of that state are being violated, or will be violated C Only if there is a reciprocal agreement between to the states D Not under any circumstances
B The USA gives the Administrator the power to issue a cease-and-desist order anytime he believes that someone has violated one of the provisions of this Act or believes that someone is about to violate one of its provisions. (89241)
An agent is holding a sales seminar for a new variable annuity. Which of the following statements would violate NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents?Everyone should buy one of these annuities—they are absolutely the best way to save for retirementThe prospectus is available on the insurance company's Web site—let me know if you have questionsYou can get your money out anytime you need itThis is a great opportunity for long term investors A I only B I and III only C II and IV only D I, II, III, and IV
B The blanket statement that "Everyone should buy one of these annuities" would constitute an unsuitable recommendation, choice (I). There are very few securities that are suitable for all investors. Variable annuities tend to have significant surrender charges if investors withdraw their money during the early years of the contract. They are not usually liquid investments, which means choice (III) is a misrepresentation. Variable annuities are generally considered long-term investments, so choice (IV) is not a misrepresentation. (89231)
The members of the North American Securities Administrators Association (NASAA) include Administrators from all of the following jurisdictions, EXCEPT: A Puerto Rico B The British Virgin Islands C Mexico D All the Canadian Provinces
B The members of the North American Securities Administrators Association (NASAA) include Administrators from all 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, the Canadian Provinces (states), and Mexico. The Administrator of the British Virgin Islands is not a member. (89240)
Which of the following activities by an agent of a broker-dealer would be unethical according to the Uniform Securities Act? A Exercising discretion regarding price and time in a client's account after having been provided with verbal authorization B Executing orders to sell securities in your client's personal and joint account based on instructions from your client's spouse C Executing an unsolicited order to buy an issue of low-priced stock for an existing client D Sending a purchasing client a prospectus for a new issue when that client had not received the preliminary prospectus
B Unless the client's spouse has authorization to execute transactions in the account(s), executing orders on such authority is unethical. An agent may exercise discretion over price and time, based on verbal authorization. Agents may accept unsolicited orders to buy and sell securities. It is not necessary to send a client a preliminary prospectus, but it is required to send a final prospectus to a client purchasing a nonexempt security. (67257) (89216)
Which of the following fee structures is NOT permitted for broker-dealers that offer investment advisory services to retail customers? A Commissions for each trade and a separate fee for each research report sent to the customer B A fee based on a percentage of the profits of the account C An initial set-up fee, a fee based on the assets under management, and commissions for each trade D Commissions and service charges
B Fees based on the percentage of profits in the customer's account are generally not permitted. (67211) (89210)
Which of the following investors may be charged performance fees by investment advisers? A Accredited investors under Regulation D B Qualified clients C Exempt investors D None, since investment advisers are prohibited from charging performance fees
B 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, choice (a), is not the same as a qualified client. 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. (89218)
An issuer may amend its registration statement after it has been declared effective in order to: A Decrease the offering price B Increase the number of shares C Change the commission schedule D The registration statement may not be amended after it has been declared effective
B Under the Uniform Securities Act, an issuer may amend its registration statement after it becomes effective to change the number of shares in the offering. The issuer does not need to file a new registration statement. The issuer may not amend its registration statement to change the price of the securities, choice (a), or to change the compensation that the underwriters or the selling brokers will receive, choice (c). (89213)
Which of the following political units are defined as a state in the Uniform Securities Act?HawaiiBritish ColumbiaPuerto RicoWashington, D.C. A I and II only B I and III only C I, III, and IV only D I, II, III, and IV
C According to the Uniform Securities Act (USA), a state includes all 50 U.S. states, the District of Columbia, Puerto Rico, and all other U.S. territories or possessions. British Columbia is part of Canada. (89227)
All of the following include an offer or sale, EXCEPT: A The delivery of a warrant as a bonus for buying a bond B The sale of a right to buy common stock C A stock dividend D A gift of assessable stock
C A stock dividend is not considered to involve either an offer or a sale. (89255)
The owner of an electronics store wants to sell shares in his business to the public to raise additional capital. The owner will take an active role in selling the shares, but will not receive commissions for the sales. Under the Uniform Securities Act, the owner will be considered a(n): A Broker-dealer B Investment adviser representative C Agent D Market maker
C According to the Uniform Securities Act, there are two types of agents—agents of broker-dealers and agents of issuers. The owner would be considered an issuer, not a broker-dealer. The owner is not "in the business of effecting securities transactions." He is selling shares in his business directly to the public. So, choice (a) is not the correct answer. The question then becomes: Is the owner also an agent of the issuer? Is he an agent of his business? He is representing the store in selling securities to the public. However, there are several situations in which individuals who represent issuers are not agents. The securities that the individual is selling are exempt (U.S. government securities or municipal securities for example). The transactions are with underwriters. The transactions are with a trust company or a savings institution. Private placements Sales to qualified purchasers The sales are to people affiliated with the issuer (such as partners, directors, or employees) AND the salesperson does not receive direct compensation (commissions). Do any of these exceptions apply here? No, the shares in the store are not exempt and the owner is selling them to members of the public at large. The reason that the exception described in the last bullet point does not cover the owner is that he is selling the shares to people who are not affiliated with his business, and who are not his partners or employees. Both parts of this exception need to be satisfied for it to apply. The sales must involve people affiliated with the issuer and the individual arranging them must not receive direct compensation. (89207)
A broker-dealer is participating in the distribution of an IPO for a local company, which will not be listed on an exchange. It is making the prospectus available electronically to all purchasers. How long is the broker-dealer required to make the prospectus available? A 25 days B 40 days C 90 days D 120 days
C 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 or Nasdaq. For secondary offerings of securities that will trade over-the-counter (securities that are not eligible to be listed on Nasdaq), 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. THIS IS A CHART JUST LOOKS WIERD W COPY/PASTE: Listed on an Exchangeor Nasdaq?After the Offering,Dealers Must Providea Prospectus For:Will be listed25 daysWill NOT be listed and it isnot an IPO40 daysWill NOT be listed and it isan IPO90 days (89203)
Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, your firm closes one of its branch offices and, therefore, you must file an amendment. What would constitute a prompt filing with the IARD? A Filing the notice by December 31 of the current year B Filing the notice by October 31 of the current year C Filing the notice by September 30 of the current year D Filing the notice by the end of your firm's fiscal year
C Amendments to Form ADV are required to be filed promptly with the Investment Adviser Registration Depository, and will be considered filed promptly if filed within 30 days of the event that caused the filing requirement. (67234) (89221)
An order ticket does NOT need to include which of the following pieces of information when it is created? A The account number B The time of receipt C The time of execution D Whether the order was solicited or unsolicited
C An order ticket must include the number of the account for which the order was taken, choice (a). It must also include the time the order was received from the client, choice (b), and whether the order was solicited or unsolicited, choice (d). The ticket does not need to include the time of execution when it is first created. (That information will be added later unless the order is not executed for some reason.) (89256)
The term agent includes a person who represents an issuer in transactions involving: A Exchange-listed securities B Investment company shares C Foreign stock D Qualified purchasers
C In general, individuals who represent and issuer are only considered agents and required to register as such if the securities they're selling need to be registered. In other words, individuals who represent issuers of exempt securities or those distributing securities through exempt transactions are not considered agents. Exchange-listed securities and investment company shares are exempt as federal covered securities, while securities sold to qualified purchasers are exempt from registration under the Uniform Securities Act (USA) as an exempt transaction. However, there's no specific exemption for an issuer of foreign stock. An individual who represents the issuer of foreign stock is required to register as an agent in any state(s) in which the securities are being sold. (17253)
Individuals who represent issuers in which of the following transactions would NOT be excluded from the definition of an agent? A Sales of commercial paper B Sales of municipal securities C Sales of IPOs D Transactions between an issuer and an underwriter
C In general, persons who represent issuers of exempt securities are not agents. Exempt securities include commercial paper that matures in nine months or less, choice (a), and municipal securities, choice (b). Someone who represents an issuer in certain exempt transactions is also NOT an agent. Transactions between issuers and underwriters, choice (d), are exempt transactions. (89245)
Which of the following would be a violation of the Uniform Securities Act?Buying and selling the same stock on the same day on different exchangesOffering shares of an unregistered nonexempt security to exactly 14 clientsOffering a Canadian Government bond to a resident of a state in which the agent is not registered A II only B I and II only C II and III only D I, II, and III
C It is a violation of the Act to offer unregistered nonexempt securities to one client, let alone fourteen. Also, the sale of exempt securities in a state does not exempt the agent from being registered in that state. (89228)
An investment adviser has an office next door to a broker-dealer. The adviser directs client transactions to the broker-dealer for execution. In exchange, the broker-dealer rebates 10% of the commissions that it receives to the adviser. This practice is: A Prohibited under the Uniform Securities Act B An irreconcilable conflict of interest C A conflict of interest that must be disclosed to clients in writing D An acceptable practice, provided that the broker-dealer is registered as a solicitor
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 to clients in writing. These conflicts include the scenario described in this question where the investment adviser is receiving compensation (rebates) for the execution of client transactions. Note, however, that this arrangement would also need to comply with the federal securities laws and the FINRA rules pertaining to directed brokerage arrangement, which may require more than mere disclosure. As for choice (d), entities or individuals that solicit clients for investment advisers in exchange for compensation may need to register as IARs or solicitors. In this scenario, the IA is sending client transactions to the broker-dealer. The broker-dealer is not finding clients for the IA. (89204)
An issuer is going to sell a federal covered security in State A. The Administrator of State A may ask the issuer to do all of the following, EXCEPT: A File a Consent to Service of Process B Provide copies of all documents filed with the SEC C Furnish additional information that was not required by the SEC D Pay a filing fee
C The National Securities Markets Improvement Act (NSMIA) places limits on states' power to regulate federal covered securities. Generally, states may not require an issuer of a federal covered security to furnish more information than the SEC requires, choice (c). State securities Administrators may require certain issuers to Notice File, which includes filing a Consent to Service of Process and all the documents that have been filed with the SEC, choices (a) and (b). The states may also require the issuers of certain federal covered securities to pay filing fees, choice (d). Securities listed on a national exchange, such as the NYSE or Nasdaq, are exempt from Notice Filing, however, states retain the right to investigate all issuers that sell securities within their states and reserve the right to bring enforcement actions against any violators. (89852)
An agent may engage in all of the following activities, EXCEPT: A Call a client after 9:00 p.m. to service the account B Call prospects between 8:00 a.m. and 9:00 a.m. C Call a prospective client after 9:00 p.m. D Place a customer's name on the broker-dealer's internal Do Not Call list
C The Telephone Consumer Protection Act of 1991 bans all cold calls except during the hours of 8:00 a.m. to 9:00 p.m.—agents may not call prospective clients before 8:00 a.m. or after 9:00 p.m. They may, however, call prospective clients between 8:00 a.m. and 9:00 a.m., choice (b), and they may call existing clients after these hours to service their accounts. This Act also requires agents who are placing cold calls to state their names and companies and to give either the company's phone number or address. Agents may not call emergency numbers, or cell phones, or send out unsolicited faxes. Anyone who states that they do not want to be called again must be placed on the firm's Do Not Call list, which must be maintained indefinitely. (89212)
An agent overhears a colleague saying that the firm has just received a large block order to buy ABCD from an institution. The agent immediately buys ABCD for several client accounts. This is an example of: A Unauthorized trading B Insider trading C Front-running D Selling away
C The agent has committed front-running. Front-running occurs when an agent places trades based on the knowledge of a pending client order that will affect the price of the security. Front-running is similar to insider trading, choice (b). In both cases, the agent is acting on confidential information. However, front-running specifically relates to situations in which the agent has insider knowledge about a pending order. Insider trading may involve trading on many different types of confidential information, such as earnings releases, mergers and acquisitions, or other corporate events that will affect stock prices. (89223)
Under the Uniform Securities Act, certain advisers are exempt from registration. This exemption would apply if the adviser: A Does not hold itself as an investment adviser in the state and has fewer than 5 individual investors during a 12 month period B Directs communications to no more than 15 individual investors over the last 12 months C Has no place of business in the state and their only clients are institutional investors, and/or the adviser does not direct communications to more than 5 non-institutional investors within 12 consecutive months D Has a place of business in the state, but only advises institutional clients located outside the state
C The de minimis exemption for advisers under the Uniform Securities Act provides for an exemption from registration if the adviser (1) has no place of business in the state and only advices institutional clients, or (2) has no place of business in the state and directs communications to no more than 5 (not fewer than 5) non-institutional clients within 12 consecutive months. There is no longer a de minimis exemption under the Investment Adviser Act. (79409) (89224)
A customer's sole investment objective is income. The agent, who has discretionary authority over the account, buys large-cap stocks and sells some of the shares every two weeks, which generates income for the client and commissions for the agent. What is the main issue with the agent's actions? A Abuse of discretion B Churning C Making unsuitable recommendations D Front-running
C This is a difficult question, since at first glance there seems to be more than one correct answer. Choices (a), (b), and (c) all look plausible but you can choose only one answer. The agent has written discretionary authority over the account. This means that he has permission to buy and sell securities on the client's behalf without asking the client to approve these transactions. By purchasing and later selling stocks, the agent has not necessarily abused this authority, choice (a). If he had taken securities or money out of the account, this would be a clear abuse of discretion. Large-cap stocks are not a suitable investment for someone whose only investment objective is income. The agent should have purchased fixed-income securities (bonds) or perhaps preferred stocks for the account. Large-cap stocks would be an appropriate choice for an investor who was seeking capital growth. The agent has clearly violated his suitability obligations, making choice (c) the best answer. Arguably, the agent has also churned the account, choice (b), by selling a portion of these securities every two weeks and generating commissions for himself. However, choice (c) is the best answer since the purchase was unsuitable in the first place. Also, stocks are long-term investments. Buying them and selling some of them every two weeks is not a good strategy for this customer—there are better, more cost-effective ways to produce income for the client. (89239)
An accountant regularly refers clients to an investment adviser, who pays the accountant a referral fee for each client who opens an account with the investment adviser. The accountant: A Is acting unethically and could be disciplined by the Administrator B Would be considered an agent and required to register as such C May be required to register as an investment adviser representative or solicitor D Is exempt from registration under the Uniform Securities Act
C Under the Uniform Securities Act, an investment adviser representative includes anyone who "solicits, offers, or negotiates for the sale of or sells investment advisory services." Generally speaking, a solicitor is someone who receives compensation for referring prospective clients to an investment adviser, but is not directly employed by the investment adviser. Some states require investors to register as IARs. Other states, however, have special registration provisions for solicitors. The accountant is receiving fees for referring clients to the investment adviser. Thus, the accountant is acting as a solicitor for the investment adviser, and may be required to register as either an IAR or a solicitor (depending on the state). (89263)
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 Both accounts should be invested mainly in money-market and fixed income securities so that the principal is preserved 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 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 D Both accounts should be invested primarily in equity securities to provide capital appreciation
C 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 (c) is a better answer than choice (b). (89257)
Which of the following statements about the books and records that broker-dealers are required to make and retain is NOT TRUE? A Broker-dealers are required to keep original copies of all sales literature and advertising distributed to the public B Copies of all signed client account agreements must be retained C Only order tickets for solicited orders need to be kept by the broker-dealer D Broker-dealers are required to maintain all records required by the Administrator for at least three years
C Brokerage firms are required to originate and retain a large number of records. Records of all orders need to be produced and kept by the firm, even if the order is unsolicited. Brokerage firms must also keep original copies of client correspondence, sales literature, and advertising. (FINRA now uses the term retail communications to describe sales literature and advertising.) These records must be kept for at least three years unless the Administrator sets a shorter period (89242)
According to the Uniform Securities Act, the term sale means:Any attempt to dispose of a securityA solicitation of an offer to buyAny contract to dispose of a security for value A I only B II only C III only D I, II, and III
C The term sale means every contract to sell or disposition of a security or interest in a security for value. Included in the above would be a gift of assessable stock or any security given or delivered with, or as a bonus with, any purchase of securities. Attempting to dispose of a security for value or a solicitation to buy or sell a security would be considered an offer, not a sale. (89235)
Under the Uniform Securities Act, which of the following would NOT be considered an offer?Pledging securities to collateralize a loanA tombstone advertisementA sale of securities for value A I and II only B I and III only C II and III only D I, II, and III
D An offer is defined as an attempt to dispose of securities for consideration or value. Pledging stock is not a permanent disposition of shares. A tombstone does not constitute an offer, which can be made only by a prospectus. A sale is the culmination of the offer and completes the transaction. (89230)
A "sale" or "offer to sell" under the Uniform Securities Act would NOT include a(n): A Unsuccessful solicitation to sell a security of assessable value B Gift of assessable stock C Warrant attached to the purchase of a bond D Bona fide pledge or loan
D A bona fide pledge or loan does not involve an offer or sale. A gift of assessable stock is considered to involve an offer and a sale. An unsuccessful solicitation would constitute an offer. Any security given or delivered with a purchase is considered to have been offered and sold for value. (89261)
All the following activities by an investment adviser representative are considered unethical, EXCEPT: A Lending money to a client who has sustained an investment loss B Informing a client that the price of a stock will increase after the release of a positive research report on a company C Executing trades of frequency and size that exceed a client's risk tolerance, but result in a higher return than the client expected D Arranging a loan for a client conducted through an affiliated broker-dealer of the investment adviser for the purpose of paying for stock recommended by the investment adviser representative
D A broker-dealer is permitted to lend money. The situation described in choice (d), is a margin account. It is prohibited for an investment adviser representative to loan money to a client who sustained investment losses—choice (a). Telling a client that the price of a stock will increase is a promissory statement and is prohibited—choice (b). Trades of excessive size or frequency that disregard a client's objectives or risk tolerance are not permitted regardless of the returns—choice (c). (89449)
An agent for a broker-dealer fled the country after embezzling funds from a client. The client was able to initiate a civil suit against the agent by sending legal papers to the Administrator because the agent had signed a(n): A Indemnity agreement B Liability agreement C Show cause agreement D Consent to service of process
D A consent to service of process is an agreement whereby actions arising from violations of the Uniform Securities Act may be initiated against the individual executing the consent. The actions may be initiated by serving legal papers upon the Administrator. This is considered to be legally equivalent to serving them to the defendant. Individuals registering as agents under the USA must sign a consent to service of process as a registration requirement. (89248)
Under the Uniform Securities Act, an investment adviser must deliver a disclosure document to a client: A Five business days prior to signing the contract, with the client having two business days to rescind the contract without penalty B Within three business days of an existing client's request C With each statement, but at least on a quarterly basis D At least 48 hours prior to signing the contract, or at the time of the contract signing with the customer having five days to rescind the contract
D A disclosure document (ADV Part 2 or a document containing the same information) must be provided to new clients at least 48 hours prior to the signing of the contract, or at the time of the contract signing with the customer. If provided at the time of the signing of the contract, the client has five days to rescind the contract. The disclosure document must be sent to existing clients at least annually. If an existing client requests a current copy of the disclosure document, it must be sent to the client within seven days of the request. (75924) (89262)
Which of the following products are defined as securities according to the Uniform Securities Act?ADRsREITsEndowment PoliciesInterests in oil and gas drilling programs A I and II only B II and III only C I, II, and III only D I, II, and IV only
D ADRs, REITs (real estate investment trusts), and interests in oil and gas drilling programs (or other investment programs that involve the extraction of mineral resources) are all securities according to the Uniform Securities Act (USA). Endowment policies and traditional insurance policies are not defined as securities. (89225)
Which of the following choices describe accredited investors under SEC Regulation D? A Individuals with a net worth of $250,000, exclusive of their primary residence B Individuals with a net worth of $1 million, inclusive of their primary residence C Individuals with an annual income of at least $100,000 and net worth of at least $150,000 D Individuals with an annual income of $200,000, regardless of net worth
D Accredited investors fall into three categories.Institutions—banks, brokerage firms, insurance companies, investment companies, certain pension plans, businesses, and nonprofits with at least $5 million in assets, and venture capital firmsKey employees of the issuer—directors, executive officers, and general partnersWealthy individuals with at least $1 million in assets, excluding the value of their primary residence, or an annual income of $200,000 (or $300,000 together with a spouse). The investor's income must have been this high for at least the past two years and must be expected to continue at this level. Choices (a) and (c) describe the minimum financial standards for investing in viaticals. Choice (b) is not correct since the individual's net worth calculation includes a primary residence (home). The value of someone's house may not be included as an asset in order for someone to qualify as an accredited investor based on her net worth. (89237)
Under the Uniform Securities Act, which of the following constitutes grounds to warrant the issuance of an injunction restraining the sale of securities?The failure to make a required report regarding securitiesThe making of false, fraudulent, or misleading representationsThe failure to disclose the speculative nature of securities offered A I and II only B I and III only C II and III only D I, II, and III
D All of the activities listed would warrant the issuance of an injunction by the appropriate court restraining the sale of securities (89229)
Which of the following could occur if an agent of a broker-dealer is found to have engaged in insider trading?The agent could be finedThe agent could be imprisonedThe agent could be required to disgorge any profitsThe broker-dealer could be sanctioned for failure to supervise A I and II only B I and III only C III and IV only D I, II, III, and IV
D All of the choices listed are possible outcomes of an insider trading case. Disgorgement of profits means that the inside trader would have to forfeit any gains earned, since they were obtained illegally. (89234)
Which of the following would be considered a prohibited business practice? A Giving a quote for a security that is not the current market price B Soliciting orders for unregistered nonexempt securities C Creating transactions that give a misleading appearance of active trading in a security D All of the above
D All of the choices listed would be considered prohibited business practices (89215)
According to the Uniform Securities Act, the application process for an investment adviser may include: A Meeting a capital requirement equal to at least 2% of the assets managed B Filing contracts with the Administrator C Making a daily determination of the value of each account D Posting a notice in a newspaper that the adviser is an applicant for registration
D An applicant may be required to give public notice that it is seeking registration as an investment adviser. (62132) (89238)
You are an agent for a broker-dealer. You told a client that the price of a security in the client's portfolio is higher than it actually is. The client sells the security based on this information and incurs a loss. Which of the following is TRUE? A The loss is covered under your broker's fidelity bond insurance B Your firm will remedy the loss by making up the difference C You can remedy this by adjusting the price on the client's next transaction D You are subject to action taken by the Administrator, as well as civil and criminal action
D It is a fraudulent and prohibited practice to make inaccurate quotes. Persons doing so would be subject to action taken by the Administrator, as well as civil and criminal actions. (89265)
Which TWO of the following choices describe an unethical business practice?An agent tells clients that the broker-dealer will rebate their commissions if an IPO does not increase by 10% during its first month of tradingAn agent tells clients to purchase shares in a company based on the research report the broker-dealer just issuedAn agent who has insider information about a stock executes a client's unsolicited order for that stockAn agent highlights the important parts of a prospectus at the client's request A I and II B II and III C III and IV D I and IV
D The agent in choice (I) would be guaranteeing the client against losses, which is an unethical practice according to Statement of Policy Statement on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. The agent in choice (IV) should not have highlighted the prospectus even if his only intent was to help the client. An agent should never mark up or alter a prospectus for a client. (89233)
An individual is applying for registration as an agent. The applicant filed for bankruptcy nine years ago. Additionally, the applicant's home is currently in foreclosure and there's a tax lien on the property. Which of these issues is the applicant required to disclose? A Only the bankruptcy B Only the tax lien C None of the events need to be disclosed D The bankruptcy and tax lien, but not the foreclosure
D All applicants for registration must disclose on Form U4 any personal bankruptcies or bankruptcies of entities that they controlled if any of these bankruptcies occurred within the last 10 years. Applicants must also disclose all unsatisfied judgments and tax liens. The foreclosure proceedings are not required to be disclosed on Form U4. The applicant is not required to disclose the bankruptcy if it had occurred more than 10 years ago. The responsibility to disclose these financial events continues as long as a person is registered. A bankruptcy, tax lien, or unsatisfied judgment must be disclosed within 30 days after it occurs. (18243)
