SERIES 63 MASTERY EXAM
Which of the following criteria would most likely be used to determine if an agent is engaged in churning or excessive trading in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Transactions in a customer's account were excessive in frequency based on the customer's objectives. B) The agent's firm acted in a principal capacity in the transaction. C) The agent received commissions on each transaction conducted on behalf of clients. D) The customer has not provided the agent written trading authority.
A) Transactions in a customer's account were excessive in frequency based on the customer's objectives. Explanation An agent may be suspected of churning an account if the account's transactions would be considered at an abnormal level on the basis of the client's financial resources and objectives and the character of the account.
In which of the following situations is an agent most likely to be in violation of the Uniform Securities Act? A) A customer instructs an agent to purchase shares in ABC Company, a company the agent knows is experiencing financial difficulty. Looking out for the best interest of the customer, the agent purchases XYZ stock, a financially sound company instead. B) The agent registers in several states in which she has no clients. C) An agent, acting on behalf of his customers, purchases shares in an oversubscribed initial public offering. D) An agent suggests that a client with a short-term financial need borrows from his margin account held at the broker-dealer.
A) A customer instructs an agent to purchase shares in ABC Company, a company the agent knows is experiencing financial difficulty. Looking out for the best interest of the customer, the agent purchases XYZ stock, a financially sound company instead.
Which of the following is an issuer transaction? A) Adam's uncle, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation 10 years after its founding. B) Adam sold the securities he had inherited from his uncle to his neighbor at the market price. No commissions were charged. C) Adam inherited securities of the XYZ Corporation from his uncle who, as a founder of the company, had received the shares directly from the company. D) Adam purchased shares in XYZ Corporation in an over-the-counter transaction.
A) Adam's uncle, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation 10 years after its founding. Purchasing shares directly from the corporation that issued them is an issuer transaction.
First Securities of New Jersey, Inc., is a broker-dealer that has its only offices in New Jersey, where most of its clients reside. First Securities also has more than 30 customers living in New York state. Many of its New York state customers vacation for three or four months during the winter in Florida. First Securities is a broker-dealer required to be registered in A) New York and New Jersey. B) New Jersey and Florida. C) New York, New Jersey, and Florida. D) New York.
A) New York and New Jersey. Because First Securities of New Jersey's clients vacation or maintain a temporary presence only in Florida, the firm is excluded from the definition of a broker-dealer and is not required to register in Florida.
Under the Uniform Securities Act, an individual is not an agent if he is employed by a broker-dealer and only A) represents the broker-dealer in effecting transactions between the issuer and underwriter. B) serves as a partner, officer, or director of the firm with exclusive responsibility for information technology. C) accepts unsolicited orders. D) trades for the firm's market-making account.
B) serves as a partner, officer, or director of the firm with exclusive responsibility for information technology. The definition of an agent under the USA excludes any employee, partner, officer, or director of a broker-dealer who is not involved directly in the trade or sale of securities or the supervision of those who are. The automatic registration of partners, officers, or directors applies only to those who are functioning as agents. All the others function as agents representing the broker-dealer.
Which of the following activities regarding the use of material facts is prohibited? A) A full discussion of a material fact may be omitted in a sales discussion if the agent clearly references a discussion of the fact in the prospectus. B) A material fact is deliberately omitted in a sales presentation because it was publicly disclosed four years ago. C) An agent declines to reveal material, nonpublic information provided to him in confidence by a senior officer of the firm. D) In the absence of specific guidance from her supervisor, an agent is responsible for determining what is and what is not a material fact.
B) A material fact is deliberately omitted in a sales presentation because it was publicly disclosed four years ago. The fact that material information was publicly disclosed in the past does not release the agent from ensuring that it is disclosed to the client. The ultimate responsibility of disclosure belongs to the agent making a recommendation. She must make a determination regarding what information is material in order for an investor to make an informed decision. An agent may not reveal material, nonpublic information provided to him in confidence.
The Uniform Securities Act permits the Administrator to do all of the following except A) have subpoenas issued to individuals outside the state. B) suspend an agent's registration without an opportunity for a hearing. C) conduct investigations involving dealers doing business in his state but domiciled in another state. D) conduct an investigation until proof of wrongdoing is established.
B) suspend an agent's registration without an opportunity for a hearing.
In order to be in compliance with the Uniform Securities Act, an investment advisory contract must comply with all of the following except A) specify the method of fee computation. B) provide for annual renewal. C) describe what, if any, are the provisions for a refund in the event of early contract termination. D) be in writing.
B.provide for annual writing There is no specified term for advisory contracts in the USA. It is important to remember that both initial and renewal of advisory contracts must be in writing.
Which of the following transactions would not be exempt from the sales literature and advertising filing requirements of the Uniform Securities Act? A) A broker-dealer sells bonds to an investment company. B) A broker-dealer conducts a seminar at which sales are made of fixed annuities. C) An individual employed by a broker-dealer calls a client to encourage her to purchase U.S. Treasury bonds. D) On an unsolicited basis, a client calls his agent to purchase municipal bonds.
C) An individual employed by a broker-dealer calls a client to encourage her to purchase U.S. Treasury bonds. When an individual calls noninstitutional clients to purchase shares in publicly traded securities, the transaction does not qualify as exempt under the USA, even if the securities themselves are exempt. Sales to investment companies and unsolicited orders are exempt transactions, while fixed annuities are not securities.
Information required on an application for registration as an agent would include I.the form of business (corporation, partnership, LLC, etc.). II.felony convictions, whether securities related or not. III.a statement of financial condition. IV.citizenship information. A) I and III B) I and II C) III and IV D) II and IV
D) II and IV Applicants for registration as agents must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship. Agents can only be individuals, not business entities, and it is only broker-dealers and investment advisers that must submit financial information.
Which of the following persons, natural or corporate, fall under the definition of broker-dealer under the Uniform Securities Act? A) A properly registered agent who regularly sells securities in his own account and for the account of his employer B) A credit union that offers shares to its public customers C) An industrial corporation registered with the SEC that proposes to issue shares to the public D) A corporation in the business of selling interests in various oil and gas limited partnerships to qualified investors
D) A corporation in the business of selling interests in various oil and gas limited partnerships to qualified investors Explanation The USA's definition of broker-dealer includes any person engaged in the business of effecting transactions in securities for the account of others or for his own account. Oil and gas limited partnership offerings are securities, regardless of the nature of the investors. Issuers of securities, credit unions, and agents are all excluded from the definition of broker-dealer
The First National Bank Corporation is a holding company owning, among other properties, FNBC Securities, a full-service broker-dealer, and FNBC Capital, a broker-dealer offering online discount brokerage services. An agent who is registered with FNBC Securities would not be permitted to split commissions with which of the following? A) Her principal at FNBC Securities B) Another individual registered as an agent with FNBC Securities C) An individual registered as an agent with FNBC Capital D) An individual registered as an agent with FNB Securities
D) An individual registered as an agent with FNB Securities The USA permits the splitting of commissions among agents of the same broker-dealer or with an agent employed by an affiliate company controlled by the same parent company, such as First National Bank Corporation. Her principal is also registered as an agent. FNB Securities is not the same company as FNBC Securities. Students need to remember to read the questions very, very carefully.
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? A) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers B) Rent-free use of unused space in the broker-dealer's office C) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements D) Clearance and settlement services provided by the broker-dealer
D) Clearance and settlement services provided by the broker-dealer
If an individual files his first application for registration as an agent in the state in late October, the Uniform Securities Act provides that the agent's license will expire A) on December 31 of the same year. B) on December 31 of the following year. C) on every anniversary date of the initial registration. D) automatically within 30 days after the withdrawal of registration if the state securities Administrator has initiated proceedings against the registrant.
A) on December 31 of the same year.
Long Range Planning (LRP) is a federal covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fergus has retail clients as follows: 16 clients in State A. 12 clients in State B. 6 clients in State C. 4 clients in State D. Fergus would have to register as an IAR in A) States A and D. B) States A and C. C) States A, B, and C. D) States B and C.
A) States A and D. In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under Section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a federal covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state covered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).
When conducting an investigation, the Administrator has the power to do all of the following except A) arrest suspected violators of the Uniform Securities Act. B) make a public announcement about the pending investigation without the consent of the accused. C) require the production of any records relevant to the investigation at hand. D) subpoena witnesses and compel them to provide testimony relevant to the investigation.
A) arrest suspected violators of the Uniform Securities Act. One power the Administrator does not have is the ability to arrest. The Administrator can refer the case to the appropriate person (usually the state's attorney general) for prosecution.
A customer of Prodigious Investment Returns (PIR), a state-registered investment adviser, has decided that adding investment discretion to the current advisory account is worthwhile. After speaking with the investment adviser representative handling the account, A) discretionary activity may take place without any written documentation for up to 10 business days after the initial trade. B) discretionary activity may not take place until the written authorization is accepted. C) discretionary activity may take place without any written documentation for up to 10 business days prior to the initial conversation. D) any discretionary activity needs the prior approval of a designated supervisor.
A) discretionary activity may take place without any written documentation for up to 10 business days after the initial trade. A rule unique to state-registered investment advisers is that oral discretionary authorization is allowable. However, once 10 business days have elapsed since the first discretionary trade, the written authorization must be received for any further discretionary activity to take place. All discretionary trading must be approved by a designated supervisor after the trade, not before.
The Uniform Securities Act prohibits the state securities Administrators from A) using for personal benefit any information that is filed with the Administrator and that has not been made public. B) publishing information obtained in private investigations about individuals who have violated the Uniform Securities Act. C) subpoenaing witnesses in order to compel the production of books, papers, correspondence, or other material relevant to an investigation. D) conducting investigations outside of their state of jurisdiction.
A) using for personal benefit any information that is filed with the Administrator and that has not been made public
An individual meets the Uniform Securities Act's definition of an agent in all of the following cases except A) when acting on behalf of an issuer of a security in transactions with an underwriter. B) when receiving commissions for selling shares of his employer's stock to employees. C) when acting for a broker-dealer on behalf of a large institutional customer to find a buyer for a large block of stock to be sold on the NYSE. D) when buying shares of a security listed on the Nasdaq Stock Market system for the portfolio of a client of the broker-dealer.
A) when acting on behalf of an issuer of a security in transactions with an underwriter
A broker-dealer has its principal office in State A and branches in States B, C, and D. State A requires all broker-dealers registered in that state to maintain records for two years while State B and State C have a three-year retention requirement, and State D's is four years. If the SEC requires that records be kept for three years, this broker-dealer must maintain records for A) three years. B) two years. C) two years in State A, three years in States B and C, and four years in State D. D) four years.
A) Three years A broker-dealer registered in several states must also be registered with the SEC. Under the NSMIA of 1996, federal laws take precedence over those of any state. However, if the broker-dealer were registered on the state level only, then the obligation, just as it is for state-registered advisers, is met by complying with the requirements of the state in which the principal office is located. LO 2.c
Your client has been saving for the purchase of a home. He calls to tell you that his bank CD matured. The client plans to purchase the home within the next 9-12 months but may need extra money for the down payment. Which of the following would be the most suitable recommendation? A) U.S. Treasury bills B) Growth stock C) Public utility stock paying liberal dividends D) Large-cap stock
A) US treasury bills
Flashpoint Securities, Inc., (FSI) is a registered broker-dealer with the state. If a violation of the Uniform Securities Act occurred, FSI would most likely notbe held liable for failure to supervise which of the following? A) A clerk in FSI's back office who was recently caught stealing customer's stock certificates by a staff member of the Administrator B) A senior officer of FSI whose brother-in-law was just convicted of securities fraud C) An agent registered with FSI D) A financial planner, registered with the state as an investment adviser, who receives commissions on transactions of advisory clients that are directed to FSI
B) A senior officer of FSI whose brother-in-law was just convicted of securities fraud Broker-dealers are responsible for supervising the activities of all personnel, both registered and non-registered. In order for the financial planner to receive commissions on those securities trades, registration as an agent with FSI would be required. However, FSI cannot be held liable for the actions of a family member of one of its employees unless we are told that the employee was somehow involved.
Which of the following persons falls under the Uniform Securities Act's definition of agent? A) A sales assistant of an agent who is responsible for mailing trade confirmations to the agent's clients B) An analyst for a broker-dealer who, while devoting most of her time to research, maintains a limited retail customer base C) A broker-dealer selling nonexempt securities to its customers D) An individual employed by an issuer
B) An analyst for a broker-dealer who, while devoting most of her time to research, maintains a limited retail customer base Explanation Regardless of the primary function of a broker-dealer employee, if the employee engages in sales activity, that employee must be registered as an agent. Specifically excluded from the definition are clerical and ministerial employees. Broker-dealers are the business entities that hire agents and are not included in the definition of an agent.
Which of the following statements regarding an investment adviser is not correct? A) If, during a 12-month period, an investment adviser directed communications to no more than five individuals in this state and did not maintain an office in this state, no registration is required. B) An investment adviser whose only clients in this state are insurance companies located in the same city as her office is not an investment adviser under the Uniform Securities Act. C) An investment adviser with $70 million in assets under management who would be required to register in 17 states has the option of registering with the SEC. D) The Administrator of this state can require a federal covered adviser doing business in this state to file a copy of all of the documents submitted to the SEC.
B) An investment adviser whose only clients in this state are insurance companies located in the same city as her office is not an investment adviser under the Uniform Securities Act.
ruenwald Securities has a summer internship program that allows college interns to see what it is like to work for a broker-dealer. This is an unpaid position, and the interns will gain work experience only. Which of the following tasks may the interns perform while interning at Gruenwald Securities? A) Qualifying prospective clients as to suitability for opening a brokerage account B) Calling prospective clients to make appointments with the agents working at the firm C) Receiving unsolicited orders to enter into the brokerage order entry system D) Making sales pitches to clients while supervised by a senior registered representative
B) Calling prospective clients to make appointments with the agents working at the firm
Which of the following practices are prohibited by NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Frequent trading in an account consistent with the client's objectives and investment experience B) Indicating that your graduation from an elite business school will result in better investment performance than that of agents who graduated from nonelite schools C) Describing a mutual fund as no load when it has a 12b-1 charge not in excess of .25% D) Entering into a transaction with a customer at a price that is reasonably related to the current market price of the security
B) Indicating that your graduation from an elite business school will result in better investment performance than that of agents who graduated from nonelite schools An agent is prohibited from representing that her education, registration, or experience in any way guarantees better investment results. Transactions should always be reasonably related to the current market price of the security. That is, if the broker-dealer has the stock in inventory at a cost well above the market, the BD cannot sell that stock to a customer at a price above market to lower its loss. Trading frequently to meet a customer's objective is an allowable practice and does not necessarily indicate churning; look for the word excessive to indicate churning. As long as the 12b-1 charge is no higher than .25%, the fund can be called no load.
Bemused Investment Brokers (BIB) is registered as a broker-dealer in States A, B, C, and D. BIB's principal office is in State B with a small branch office in State C. Registration would be required in State E if BIB opened an account for A) the Second National Bank of Queegston. B) Marjorie Eveningstar, an accredited investor. C) the Kaine Life Insurance Company. D) the VPH Corporation $4 million pension fund.
B) Marjorie Eveningstar, an accredited investor. Explanation When a broker-dealer does not maintain a place of business in a state and deals solely with institutions and other broker-dealers in that state, registration is not required. Banks, insurance companies, and large employee benefit plans (at least $1 million in assets) are included in the definition of institutions. Individual accredited investors do not qualify the broker-dealer for the exemption. LO 2.b
Which of the following statements regarding withdrawal of registration by broker-dealers is not true? A) Withdrawals of registration must be in writing. B) Once a broker-dealer withdraws its registration, it may not re-register in the future. C) Broker-dealers may not withdraw their registrations if the state securities Administrator has a revocation proceeding in process. D) Withdrawal of registration is generally effective 30 days after written notification. Explanation
B) Once a broker-dealer withdraws its registration, it may not re-register in the future. broker-dealer may not withdraw its registration if it is in a registration revocation process. Broker-dealers must give a withdrawal notice in writing, which becomes effective 30 days after receipt of a completed notice. A broker-dealer in good standing is not prohibited from re-registering with a state at any point in the future if all the appropriate requirements are met, including the payment of a registration fee. LO 2.c
Which of the following statements does not describe registration requirements under the Uniform Securities Act? A) An agent may lawfully sell securities that have been registered in a state or that are exempt from registration in the state. B) The revocation of a broker-dealer's registration in a state has no effect on the registration of agents employed by that broker-dealer. C) If an agent resigns from his employing broker-dealer and affiliates with another broker-dealer, both firms and the agent must notify the state Administrator of the change in employment. D) An agent that does not live in the state can solicit business in that state if the agent and the broker-dealer are registered in that state.
B) The revocation of a broker-dealer's registration in a state has no effect on the registration of agents employed by that broker-dealer. The USA registration of an agent is contingent upon his affiliation with a registered broker-dealer. Therefore, the revocation of a broker-dealer's license will also suspend an agent's registration until the agent reaffiliates with a different registered broker-dealer. LO 2.g
State securities Administrators can require A) broker-dealers that have had regulatory problems to post bonds in amounts greater than those required by the Securities and Exchange Commission. B) agents to post a surety bond if they have discretion over client funds and securities. C) agents to maintain minimum net worth requirements based upon the number of clients they serve. D) both broker-dealers and agents to post bonds and maintain minimum capital and net worth requirements.
B) agents to post a surety bond if they have discretion over client funds and securities. Explanation The state securities Administrators can require agents to post a surety bond if they have discretion over client funds and securities; however, they cannot require surety bonds that exceed the amounts required under federal law. In addition, agents are not subject to minimum net worth or capital requirements. Broker-dealers are subject to net capital requirements.
All of the following actions are unethical or prohibited business practices under the Uniform Securities Act except A) an agent implying to a prospect that the Administrator has approved of a security registered in the state. B) an agent offering an unregistered exempt security for sale. C) a broker-dealer recommending an unregistered nonexempt security to retail customers. D) an agent offering unregistered promissory notes to customers explaining that registration is not necessary for a nonsecurity offering.
B) an agent offering an unregistered exempt security for sale. The solicitation of unregistered exempt securities (e.g., municipal bonds) is a common and permissible practice. An agent who implies that a security has received approval from the Administrator, or any other regulatory agency, would be in violation of the USA and other securities regulations. The only way a broker-dealer can sell an unregistered security that is not exempt from registration is in an exempt transaction. The most common exempt transaction with retail customers is the unsolicited order, and that can't be the case when the security has been recommended by the BD. On the exam, a promissory note will always be a security. The most common example is commercial paper.
Protecting the interest of your client is of primary concern to the regulators. Therefore, industry rules require agents to disclose to their clients A) their home address if in a state other than that of the client. B) any relationship between the broker-dealer and the issuer of a security on the firm's recommended list. C) all securities licensing exams taken and number of years in the business. D) their highest education level reached.
B) any relationship between the broker-dealer and the issuer of a security on the firm's recommended list. Explanation Potential conflicts of interest must always be disclosed. One of the most common is when a broker-dealer has participated in the underwriting of an issuer's securities and shortly after publishes a recommendation for that security. There is nothing wrong with doing so, but disclosure of the relationship must be made. An agent could share the other information with clients but is under no obligation to do so.
The filing of a Currency Transaction Report (CTR) would be required when an individual A) purchases more than $10,000 of securities and makes payment with a personal check. B) deposits $10,500 in cash into her existing account at a registered broker-dealer. C) rolls over the proceeds of a maturing CD of $15,000. D) deposits a personal check in the amount of $11,000.
B) deposits $10,500 in cash into her existing account at a registered broker-dealer. A CTR must be filed whenever there is a cash transaction of more than $10,000. Cash includes traveler's checks and postal money orders.
A registration statement for new issues of securities under the Uniform Securities Act is effective for more than one year after its effective date A) if an offering subscription is oversubscribed, thereby requiring registration of additional shares. B) if the issuer or broker-dealer offering the securities has an unsold allotment. C) under no circumstances because the Uniform Securities Act provides that registration statements are effective for up to one year from the effective date. D) if the SEC delays the Administrator's acceptance of the registration.
B) if the issuer or broker-dealer offering the securities has an unsold allotment. Explanation A new issue's registration statement may remain valid for more than one year beyond its effective date if there are unsold securities remaining in the issue that must be sold with a prospectus.
After careful analysis of a client's needs and objectives, an agent has determined that the KAPCO Growth Fund is a suitable investment. However, the fund's prospectus is extremely long and has many complicated details explaining the investment style used by the portfolio manager. In an effort to help the client better understand the nature of this investment, the agent highlights the most important items in the document and suggests to the client that reading those is all that is necessary. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this action would be A) permitted because this will help make the client better informed about the investment decision. B) prohibited because no marks may be placed on a prospectus. C) permitted because the entire prospectus has been delivered. D) prohibited because an agent may never omit material information.
B) prohibited because no marks may be placed on a prospectus.
The Uniform Securities Act imposes certain recordkeeping requirements upon registered broker-dealers. Among the records that must be retained are all of these except A) order tickets. B) unsolicited testimonials from customers. C) blotters. D) emails sent to customers.
B) unsolicited testimonials from customers. A client who sends in a testimonial praising the firm on his own has not created a record that is necessary for the firm to maintain, unless the firm decides to use that letter.
When a broker-dealer operates on the premises of a financial institution, certain disclosures must be prominently made in communications with the public. As long as omission of the disclosures would not cause the message to be misleading, these disclosures need not be made as part of A) TV broadcasts of 60 seconds or less. B) radio broadcasts of 30 seconds or less. C) TV broadcasts of 30 seconds or less. D) radio broadcasts of 60 seconds or less.
B) Radio broadcasts of 30 seconds or less
A broker-dealer has flexibility in terms of the capacity in which it can act in a securities transaction. When buying a security from a client, the trade confirmation would A) disclose that the firm acted as the client's agent in the transaction. B) indicate the amount of markup charged. C) disclose that the firm acted as a principal in the transaction. D) include the amount of the commission charged.
C) disclose that the firm acted as a principal in the transaction.
Which of the following activities could result in an Administrator taking action against a broker-dealer registered in her state? A) Maintaining custody of customer's funds and securities without notifying the Administrator B) Charging reasonable fees or commissions for brokerage execution services C) Hypothecating a customer's securities in a margin account without written consent from the customer promptly after the initial transaction D) Executing transactions in a customer's margin account before receiving the written margin account agreement
C) Hypothecating a customer's securities in a margin account without written consent from the customer promptly after the initial transaction Explanation The signed hypothecation agreement must be received by the broker-dealer promptly after the initial transaction in a margin account. Because the requirement is after, transactions can be made without having the margin agreements in hand. Charging reasonable fees is proper and, unlike investment advisers, broker-dealers do not have to notify the Administrator of their plan to maintain custody of customer assets. LO 6.e
Under the Uniform Securities Act or the North American Securities Administrators Association (NASAA) Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following would not be an unethical or prohibited action by an investment adviser? A) Implying to clients that federal covered securities are exempt from state registration because of SEC approval B) Failing to obtain a client's written verification of an advisory contract renewal C) Not providing the Administrator with a surety bond because the adviser does not maintain custody or exercise discretion over client assets D) Charging a fee that is unreasonable
C) Not providing the Administrator with a surety bond because the adviser does not maintain custody or exercise discretion over client assets Explanation Bonding is generally required only when an investment adviser has discretion over client accounts or maintains custody of customer funds or securities. We never accept an answer implying SEC approval. Furthermore, many federal covered securities are not even registered with the SEC, such as U.S. government securities and municipal securities. NASAA's Model Rule requires that initial and renewal advisory contracts be in writing.
For purposes of state regulation, broker-dealers are defined in the Uniform Securities Act to include A) an agent of an issuer who receives commissions for the sale of the issuer's securities. B) an agent conducting principal-only transactions with major financial institutions. C) a person in the business of conducting securities transactions for its own account or for the account of others. D) a trust company servicing accounts in a fiduciary capacity. Explanation
C) a person in the business of conducting securities transactions for its own account or for the account of others.
A broker-dealer is a member of the underwriting syndicate for a new issue of common stock. From all indications, it appears that the offering will be oversubscribed. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the broker-dealer should A) allocate the shares in such manner that both employees and clients have a reasonable division of the issue. B) withhold shares for the firm's own account rather than make the distribution available to the public. C) allocate the shares of the issue to clients in a manner that is based on their indications of willingness to purchase the shares. D) allocate the shares fairly among the firm's largest clients.
C) allocate the shares of the issue to clients in a manner that is based on their indications of willingness to purchase the shares. In any new issue, particularly one that might be "hot," the obligation of the member of the underwriting group is to make a bona fide public distribution. This can be done based on the indications of interest received prior to the effective date of the offering.
Capital Asset Planning (CAP) is an investment adviser registered in States A, B, and C. CAP has no place of business in State D. The registration provisions of the Uniform Securities Act would not apply to CAP in State D if it confined its advisory business in State D to all of these except A) other investment advisers. B) savings and loan associations. C) individuals qualifying as accredited investors. D) broker-dealers
C) individuals qualifying as accredited investors. Investment advisers without a place of business in the state are not required to register in the state if their only clients are other investment advisers, broker-dealers, and institutional clients. Although it is true that the term accredited investor includes institutions where the exemption would apply, unless the choice limited itself to those, it also includes retail (individual) investors meeting certain financial standards. As is mentioned in the case of this question, the exemption does not apply.
Under the Uniform Securities Act, a person who owns a business providing advice on commodity futures contracts as well as limiting its securities advice to those issued or guaranteed by the U.S. government is A) required to be a registered investment adviser representative in the state. B) required to be a registered agent in the state. C) not required to register as an investment adviser in the state. D) required to be a registered investment adviser in the state.
C) not required to register as an investment adviser in the state. Explanation This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of investment adviser a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser. LO 3.b
If a broker-dealer sells a security to a customer and discovers that the sale was made in violation of the Uniform Securities Act, the broker-dealer may offer to repurchase the securities from the customer. The term describing this procedure is A) retraction. B) refunding. C) rescission. D) restitution.
C) rescission. If a broker-dealer of securities discovers that it has made a sale of securities in violation of the USA, the seller may offer to repurchase the securities from the buyer. In this case, the seller is offering the buyer the right of rescission.
The Administrator has charged an investment adviser with allowing transactions in customer accounts that are excessive in size or frequency in relation to the client's financial resources, objectives, or the character of the account. The alleged violation involved is A) frequent trading. B) discretionary trading. C) churning. D) unsuitable recommendations.
C) Churning As is often mentioned, this is a law exam and the law is very particular in its use of words. This is the definition of churning as you will see it on the exam.
An agent is registered with XYZ Discount Brokers, a wholly owned subsidiary of the XYZ Bank Holding Company. The holding company also owns XYZ Capital Markets, a full-service broker-dealer. Under the provisions of the Uniform Securities Act, this agent would be permitted to split commissions A) with a client in a joint account as long as written authorization has been received from the client and the employing broker-dealer. B) with any agent properly registered with the Administrator of the state. C) with an agent employed by XYZ Capital Markets. D) solely with other agents registered with XYZ Discount Brokers.
C) with an agent properly registered with the administrator of the state Explanation Agents are permitted to split commissions only with other agents registered with their broker-dealer or affiliated broker-dealers under common control. Because XYZ Capital Markets is an affiliated firm, sharing commissions with their agents would be permitted.
An Administrator may issue a stop order suspending the effectiveness of a registration statement if it is in the public interest and which of the following occurs? It is determined that the Administrator of another state has issued a stop order relating to this issue. The issuer has accidentally neglected to pay the appropriate fees. The issuer reports a loss for the previous quarter. A) I, II, and III B) II and III C) I and II D) I and III
C. I and II I. It is determined that the Administrator of another state has issued a stop order relating to this issue. II. The issuer has accidentally neglected to pay the appropriate fees. Failure to pay fees or being subject to a stop order from another regulatory agency would constitute reason for an Administrator to suspend the registration of an issue. Reporting losses would not result in a securities registration suspension. LO 5.b
All of the following are included in the definition of person under the Uniform Securities Act except A) a political subdivision. B) an unincorporated association. C) the custodian for a minor. D) a deceased individual.
D) a deceased individual. Explanation A minor but not the custodian, a deceased individual, or an individual whom the court has deemed incompetent are not persons under the USA. Natural persons and legal entities are persons under the USA. LO 2.a
Kapco Advisers is a federal covered investment adviser with its principal office in New York City and several offices in New Jersey. Joe Segal, who lives in Manhattan, is an investment adviser representative with the firm and has the responsibility for serving those clients of Kapco who winter in Florida. In order to do so, Segal takes a hotel suite in Miami Beach for one week in December, in Boca Raton for one week in January, and in West Palm Beach for one week in February. While Segal is using these facilities to meet with existing clients, he does let them know that if they have any friends who might be interested in the firm's advisory services, they are welcome to make an appointment with him. Which of the following statements is correct regarding Segal's registration status under the Uniform Securities Act? A) Because Segal is meeting with existing clients who are not permanent Florida residents, he does not have to register as an IAR in the state of Florida. B) Because Segal is employed by a covered adviser, no registration is necessary in the state of Florida. C) Because Segal is employed by a covered adviser, he is required to register only with the SEC. D) Because Segal may be meeting with individuals who are not existing clients and may be Florida residents, he must be registered in the state of Florida as an IAR.
D) Because Segal may be meeting with individuals who are not existing clients and may be Florida residents, he must be registered in the state of Florida as an IAR. Once an IAR is using a temporary facility to meet with prospective clients, it is considered that there is a place of business in the state. Therefore, the IAR must be registered. The de minimis rule does not apply here because he is holding himself out as offering advisory services in the state and the hotel room becomes a place of business. Because KAPCO is a federal covered IA, it does not register in the state; although, notice filing may be required.
Which two of the following statements regarding customer accounts are correct? I.Margin account agreements must be signed before the first trade in the account. II.Margin account agreements must be signed promptly after the first trade in the account. II.The option account agreement must be returned by the client before the first trade in the account. IV.The option account agreement must be returned by the client within 15 days of the account being approved. A) I and IV B) II and III C) I and III D) II and IV
D) II and IV Explanation Don't ask why, but in both cases, trading can commence before the agreements are signed and returned. In the case of the margin account, promptly after the initial trade is the time and for the options account, within 15 days of account approval to engage in options trading. LO 6.e
An agent representing a broker-dealer in State P has a retail customer who moves to State S from State P. The agent and the broker-dealer now have one customer in State S. To continue to do business with this customer, which of the following is true? A) Neither the broker-dealer nor the agent needs to register in State S. B) Only the broker-dealer must register in State S. C) Only the agent must register in State S. D) The agent and broker-dealer must register in State S.
D) The agent and broker-dealer must register in State S. The agent and broker-dealer must register in State S. Unlike investment advisers, there is no de minimis exemption for broker-dealers. LO 2.g
All of the following actions are dishonest or unethical business practices under the Uniform Securities Act or the North American Securities Administrators Association (NASAA) statements of policy except A) buying a stock in one market and selling it in another to create the appearance of increasing market interest. B) implying to a prospect that the Administrator has approved of an agent's qualifications. C) an agent suggesting to clients that they purchase a stock after learning from his father, the company's CEO, that the next earnings report would show a dramatic increase. D) an agent offering an unregistered exempt security for sale.
D) an agent offering an unregistered exempt security for sale. The solicitation of unregistered exempt securities (e.g., municipal bonds) is a common and permissible practice. An agent who implies that he has received approval from the Administrator, or any other regulatory agency, executes trades to create fictitious volume, or recommends trades based on nonpublic inside information would be in violation of the USA and other securities regulations.
Among the benefits of using electronic communications with clients are all of the following except A) the ability to reach clients wherever they are. B) the lower delivery cost when compared to traditional mail. C) the speed of delivery when compared to traditional mail. D) electronic communications do not have the same recordkeeping requirements as traditional methods of communicating with clients.
D) electronic communications do not have the same recordkeeping requirements as traditional methods of communicating with clients.
Broker-dealers have a great deal of information about their clients that would be highly valuable to persons with evil intentions. In the cybersecurity realm, one specific concern related to protecting customers is that of A) churning. B) currency transactions in excess of $10,000. C) embezzlement. D) identity theft.
D) identity theft. Broker-dealers must have cybersecurity procedures designed to recognize red flags that could indicate identity theft. Embezzlement is a concern but is not specifically a cybersecurity threat. Churning is an unethical practice but does not involve cybersecurity. Currency transactions do not deal with customer personal information.
An investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms. When advertising this system, the investment adviser must A) provide customer testimonials evidencing their satisfaction with the system. B) indicate the length of time the system has been in play. C) show performance for at least the past 12 months. D) indicate that there are limitations and difficulties to using the system.
D) indicate that there are limitations and difficulties to using the system. Explanation When advertising any type of charting or formula system, the ad must always mention the limitations and difficulties of using the system.
According to the NASAA Statement of Policy on Dishonest or Unethical Practices of Broker-Dealers and Agents, agents may A) split commissions from the purchase or sale of securities with any other agent who is registered with any broker-dealer registered in the state. B) share in the profits and losses of an account with written authorization of the client and the agent's supervisor. C) imply that a conservative investment strategy will guarantee a specific investment result will be achieved. D) select the specific security to be purchased in a discretionary account without contacting the client in advance.
D) select the specific security to be purchased in a discretionary account without contacting the client in advance.
Unlike broker-dealers, investment advisers have a legal obligation to place their client's interests ahead of their own. This is due to A) the requirements of the Dodd-Frank Act of 2010. B) the charging of fees rather than commissions. C) the fact that most investment advisers manage larger accounts than broker-dealers. D) the fiduciary relationship existing between the investment adviser and client.
D) the fiduciary relationship existing between the investment adviser and client. Explanation Investment advisers are considered fiduciaries; broker-dealers and their agents are not. Fiduciaries are legally required to place their client's interests ahead of their own while broker-dealers and their agents are required to only meet a suitability standard.
A person applying for an initial registration as an agent might be asked to provide all of the following except A) citizenship information. B) employment history. C) a consent to service of process. D) fingerprints.
D. Fingerprints Unlike FINRA, the USA does not require fingerprints for new registrants. Form U4 lists employment history and many other personal details. LO 2.g
Registered agents employed with a broker-dealer registered in State A regularly mail sales material to four clients in State B. The State A broker-dealer I.does not need to register in State B until it has five or more clients in State B. II. must be registered in State A. III. must be registered in State B. IV. must register in all states in which it receives any mail from clients. A) I and III B) II and III C) I and II D) II and IV
II&III The firm is required to be registered in both State A and State B. The firm is required to be registered in the state only to which it directs mail and not states from which mail is received. No de minimis exemption similar to the one for investment advisers is available for broker-dealers.
Company A, a blue chip with a AAA rating, has a wholly owned subsidiary, Company B. Because Company B is a relatively new operation, it has not yet developed a strong credit history. Needing to borrow additional funds for long-term capital investment, but wanting to keep interest costs to a minimum, what steps might Company B take? A) Invest in U.S. Treasury bills B) Borrow from the bank that Company A uses C) Issue common stock D) Issue a bond guaranteed by Company A
Issue a bond guaranteed by Company A Explanation This would be an example of a guaranteed security. That is, the payment of principal and interest is guaranteed by an entity other than the issuer. Because the question says the need is long-term, issuing a bond is preferable to borrowing from a bank. Because the question refers to borrowing, the only correct answer would be something involving a debt, and common stock is equity, not debt. LO 6.d
It would be considered an unethical business practice for a broker-dealer to A) fail to disclose the amount of commission that was charged on an exempt transaction involving an exempt security. B) offer registered nonexempt securities to retail clients. C) accept unsolicited orders from individual clients for unregistered nonexempt securities. D) sell unregistered exempt securities to unsophisticated retail clients.
a) fail to disclose the amount of commission that was charged on exempt transaction Explanation Any trade involving a commission, regardless of the type of security, must have that commission disclosed. An unsolicited order makes the transaction exempt. That is why it is permitted for the BD to accept this order for an unregistered security that is not exempt from registration. When the BD offers nonexempt securities to retail clients, as long as they are registered, things are fine. What would be wrong with selling U.S. Treasury securities to unsophisticated clients? LO 6.a
Under the NASAA Model Rule on financial requirements for investment advisers, state-registered investment advisers who have custody of customer funds and exercise discretion in customer accounts are usually required to have a net worth totaling A) $10,000. B) $5,000. C) $35,000. D) $45,000.
c) $35,000 The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. However, if the IA does both, the $35,000 is sufficient (the $10,000 is not added to the $35,000). Alternatively, a surety bond in an amount determined by the Administrator may be posted, but that amount is unlikely to be testable.
Ángel is an agent with Basking Ridge Securities (BRS), a broker-dealer registered with the SEC and a number of states. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, Ángel may borrow money from A) a mortgage broker who is one of Ángel's clients. B) any client of BRS who has a credit balance at the firm and has signed the margin account loan consent agreement. C) a family member who is not a BRS client. D) a family member who is a BRS client with written consent of the family member and BRS.
c) a family member who is not a client Explanation When it comes to an agent (or IAR) borrowing money from clients, the NASAA policy limits it to those persons in the money-lending business. That would be banks or broker-dealers. Please note the restriction applies to clients only. If the person is not a client, there are no limitations on who an agent can borrow from (or lend to). Mortgage brokers are not technically in the money-lending business. As brokers, they put together borrowers and lenders, but do not do the actual lending themselves. The loan consent agreement in a margin account gives consent for the BD to lend the customer's securities, not money.
Under the Uniform Securities Act, the definition of sale includes bona fide gifts of securities. giving a security as a bonus with any purchase. exercising a right to convert one security into another. preliminary agreements between issuers and underwriters. A) II, III, and IV B) II and III C) I and II D) III and IV
giving a security as a bonus with any purchase. exercising a right to convert one security into another. Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale.
