Series 63
A state Administrator may require an applicant for registration to do which of the following? I. Furnish information about any SEC adjudications within the past 10 years II. Pay a registration fee III. Pass a qualification examination IV. Place an advertisement in one or more newspapers circulated in the state
All In general, the application for registration will request information about any disciplinary actions, such as an adjudication by the SEC within the past 10 years and require an applicant to pay a fee, pass an examination, or place an advertisement in a local newspaper before granting registration.
Under the Uniform Securities Act, an offer is made in a state when it originates in that state it is broadcast by radio or TV from outside the state it is contained in a newspaper published outside the state but delivered to an address in that state
I An offer is made when it originates in a state. An offer is also considered to be made in a state when it is directed by the offerer to that state and is received at the place to which it is directed. However, offers received via a TV or radio broadcast that originated out of state or offers contained in a newspaper published out of state are specifically excluded.
Which of the following are NOT agents as defined in the USA? A broker-dealer acting on behalf of a properly registered issuer An individual representing the U.S. government in the sale of its securities An individual who, acting on behalf of a broker-dealer, sells exempt securities or engages in an exempt transaction An individual who represents an issuer selling a nonexempt security in a nonexempt transaction
I and II A broker-dealer by definition is not an agent. An individual who, while acting on behalf of the issuer, sells certain exempt securities, such as those issued by the U.S. government, is not an agent. The exclusion from the definition of an agent only applies to those individuals who are selling on behalf of the issuer (never a broker-dealer) and only when the transaction is exempt or the issuer is one of a specified list of exempt issuers.
A customer with liquid net worth of $25,000 tells an agent that she has $1,000 to invest. Explaining how diversification can reduce risk, the agent recommends that the customer purchase 8 different over-the-counter stocks, each trading at approximately $1 per share. With regard to the above situation I. the recommendation is suitable for the customer because the agent recommends a diversified stock portfolio II. high-risk penny stocks are not suitable recommendations for this low net worth customer III. the agent may be exhibiting a pattern of excessive commissions (churning) in his customer's account IV. once the customer agrees to the agent's recommendation, it is no longer considered an unsolicited transaction
II Regardless of diversification, low-priced stocks are not suitable for a low net worth customer. Risk is not necessarily diversified away by simply increasing the number of risky securities. Risk is only reduced by diversifying many securities whose patterns of returns are not correlated. Churning is not indicated here because there is no trading shown other than the initial purchases.
Which of the following intentional acts by an agent are fraudulent? I. Excessive activity in a client's account II. Representing that a bond yields 7% when it actually yields .7% III. Representing that bonds are general obligation tax bonds when they are second-lien revenue bonds IV. Failing to deliver customer securities within a reasonable time period
II and III Deliberately misstating a bond's yield or its characteristics is a lie and that is fraudulent behavior. Excessive trading and failing to deliver customer securities (by broker-dealers—agents don't make delivery) are prohibited actions, but are not fraudulent. There are only a few times when you will have to discern what is fraudulent and what is prohibited.
The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? I. Agents II. Broker-dealers III. Investment Advisers
II and III Only broker-dealers and investment advisers are required to maintain financial records. Agents must maintain sales records and but there are no financial inspections of agents or investment adviser representatives as there are with broker-dealers and advisers.
Which of the following statements regarding broker-dealer registration under the Uniform Securities Act are TRUE? I. In the absence of any action by the Administrator, the effective date of a registration is noon of the 45th day. II. The Administrator may initiate a disciplinary action within two years of a broker-dealer's withdrawal of registration. III. The Administrator may request that the broker-dealer furnish a statement of assets and liabilities. IV. If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed upon filing of those amendments.
III and IV Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Broker-dealers have financial requirements, and the Administrator has a maximum of one year after termination to initiate any actions.
In general, a broker-dealer will disclose any changes to its fee schedule A) by notifying clients of the change in advance B) when requested by the client C) to the Administrator and then to the clients D) within 30 days following the change
a. Most broker-dealers disclose fee changes at least 30 days in advance and there is no requirement whatsoever to notify the Administrator.
In an effort to combat money-laundering, financial institutions are required to file reports with FinCEN for each cash transaction A) that exceeds $10,000 B) that exceeds $5,000 C) of $10,000 or more D) made by a new customer
a. The currency transaction report (CTR) must be filed with the Financial Crimes Enforcement Network (FinCEN) whenever a cash transaction in excess of $10,000 is made at a financial institution (including broker-dealers).
Under the Uniform Securities Act, the definition of an investment adviser does NOT include I. investment adviser representatives II. lawyers and accountants whose investment advisory services are solely incidental to their practices III. broker-dealers who offer investment advice on an incidental basis without special compensation for the advice provided IV. federal covered investment advisers
All None of the above are included in the term "investment adviser" as used in the Uniform Securities Act. Federal covered advisers are regulated by the Securities Exchange Commission (SEC). The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual registration of investment advisers by federal and state authorities. If federal covered advisers were defined as investment advisers under the USA, then they would be subject to the same state registration procedures as local or state investment advisers.
You inform a customer that you are not allowed to solicit an order for a stock but will accept that customer's buy order if placed. This is A) an offer to purchase B) an unsolicited trade C) an offer to sell D) an offer to sell only if it is accepted
c. Under the Uniform Securities Act, the term "offer" is the solicitation of an offer. In this example, the agent is soliciting an offer from the customer to buy a security. A solicitation is considered to have occurred even if the customer fails to act on the solicitation.
Under the Uniform Securities Act, which of the following statements are TRUE? I. A broker-dealer may not also be registered as an investment adviser. II. A broker-dealer may be structured as a corporation, a partnership, or a sole proprietorship. III. A broker-dealer's primary business is effecting securities transactions for clients or for the broker-dealer's own account. IV. A broker-dealer need not register in a state in which it has non-institutional clients unless it has an office in that state.
II and III A broker-dealer may be structured as a business entity or a sole proprietorship. Its primary business is effecting securities transactions for clients or for its own account. A person may be registered as both a broker-dealer and an investment adviser at the same time. Although a person is not a broker-dealer in this state if there is no office in this state and transactions within this state are limited to issuers, other broker-dealers and institutions if the broker-dealer wishes to offer securities to individuals, it must register in the state.
Disclosure to the client is required when I. an investment adviser representative, in preparing a recommendation, uses research provided by the broker-dealer with whom the IAR is affiliated II. an investment adviser representative intends to sell the client the insurance policy he recommended for his financial plan and receive a commission for doing so III. transactions recommended to the client are not the same as those for other clients with similar objectives IV. recommending a new issue where the major stockholder is the investment adviser's brother
II and IV An investment adviser representative must provide full disclosure to his client if there would be even a hint of conflict of interest. This will include the case where a recommended product will generate a commission or other source of income to the IAR, as well as full disclosure if a recommendation of security where a family member is involved. The IAR can use any source of information to create his own analysis, and disclosure of that source is required only if the IAR uses the product of a third party as the presentation to the client. Even though 2 clients may have similar objectives, there are many factors that would dictate different investment styles, such as age, risk tolerance, and current financial situation.
An issuer employs its officers and directors to sell newly issued shares of the company to the public. To comply with the USA, the officers and directors would have to be registered as agents of A) neither a broker-dealer nor the issuer because the transactions are exempt B) the broker-dealer and the issuer C) the issuer D) the broker-dealer
c. Unless something in the question indicates that the securities being issued are exempt, employees, including officers and directors, who sell shares of their companies to the public fall under the definition of agent under the USA.
Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser EXCEPT A) a federal covered adviser B) a person in the business of providing advice on municipal bonds for compensation C) banks D) broker-dealers and their agents
b. Although municipal bonds are exempt securities, that only refers to their exemption from registration with the state or SEC. Any person who is in the business of giving advice on securities would be defined as an investment adviser and, therefore, would require registration.
The First Fidelity Building and Loan association, organized in State A and authorized to do business in State B, has an offering of common stock being made in State B. In order for an individual selling the offering to be excluded from the definition of agent in State B, the individual A) would have to be employed by a broker-dealer registered in State B B) could not sell without being registered as an agent in State B C) would have to be employed by First Fidelity D) would have to be employed by a broker-dealer registered in State A
b. Although securities issued by a building and loan association are included in the Uniform Securities Act's list of exempt securities, they are not included in the group of exempt securities where employees selling on behalf of the issuer are excluded from the definition of agent. Please see your LEM for the 5 categories of exempt securities that qualify for that exclusion.
Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he A) is registered as a broker-dealer B) had no more than 5 retail clients in that state within the past 12 months C) had no more than 15 retail clients in that state within the past 12 months D) had no more than 10 retail clients in that state within the past 12 months
b. An adviser who had no more than 5 retail clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business.
If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) not committed a prohibited business practice B) committed a prohibited business practice by selling an unsuitable investment C) not violated the Uniform Securities Act because no untrue statements were made D) failed to disclose material information
d. The agent has violated the Uniform Securities Act by fraudulently omitting material information in the sale of a security.
Under the Uniform Securities Act, the term "agent" refers to individuals who act on behalf of a broker-dealer or issuer in effecting securities transactions. Which of the following individuals are NOT included in the definition of an agent? A lawyer acting on behalf of an issuer in preparing documents describing the issuance of nonexempt securities A lawyer acting on behalf of a broker-dealer who prepares documents describing the sales or purchase of securities to the general public A partner or officer of a broker-dealer whose only securities activity is the purchase of shares of an issuer for his personal investment account An officer of an issuer who sells shares of the issuer's stock to employees without receiving any special compensation
An agent is described in the Uniform Securities Act as an individual, other than a broker-dealer or issuer, who represents a broker-dealer or issuer in effecting transactions in securities. The lawyer is not engaged in effecting securities transactions on behalf of the issuer or broker-dealer. Therefore, the lawyer is not considered an agent subject to regulation by the Uniform Securities Act. A partner (or anyone else) of a securities firm making a personal investment does not make him an agent. An officer of an issuer not receiving any compensation for sales of the issuer's stock to employees is not an agent under the USA.
Which of the following are NOT included in the definition of an agent in the Uniform Securities Act? I. A licensed broker-dealer II. An officer of an issuer who only represents the issuer in selling shares to a broker-dealer underwriting the company's securities III. An officer who represents an issuer of non-exempt securities in the sale of those securities to the public without receiving any compensation IV. An employee of a broker-dealer who only deals with institutional clients
I and II An agent is an individual other than a broker-dealer who represents a broker-dealer or issuer in securities transactions. In the case of those individuals who represent the issuer, compensated or not, unless the transaction is exempt or the security is one of a specified group of exempt securities (see your LEM for the 5 that are), registration as an agent is required. An officer of a company who represents his company in transactions with an underwriter is not included in the term "agent" because the transaction is exempt. An employee of a broker-dealer who sells securities to any clients, institutional or not, is an agent under the act.
According to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following conditions must be met for an agent to share in the profits or losses of the customer's account? I. The agent has the employer's written consent II. The agent has the customer's written consent III. The agent has a capital stake invested in the account IV. The percentage of the profits/losses shared is proportionate to the agent's personal investment in the account
I and II In order for an agent to share in an account with a client, prior written consent of the client and the employer broker-dealer must be obtained. Unlike FINRA rules, there is no requirement that gains/losses be shared on a proportionate basis. Please do not confuse this point with a similar looking question asked about investment advisers. There are no circumstances under which an investment adviser may share with a customer in an account.
An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be I. unsuitable and unethical II. a securities felony III. grounds, in extreme cases, for suspension or revocation of the agent's license IV. outside regulatory jurisdiction
I and III Municipal bonds provide a fixed income, but they are generally suitable only for high tax-bracket individuals. In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent's license.
Which of the following activities are allowable activities of an agent? I. Borrowing money from a colleague at the agent's broker-dealer II. Borrowing money from a client at the broker-dealer III. Splitting commissions with another agent at the broker-dealer IV. Establishing a joint account with a customer without consent of the broker-dealer
I and III Splitting commissions with another agent at the same broker-dealer is an allowable activity, as is borrowing money from colleagues and lending institutions. It is a prohibited practice to borrow money from a client not in the lending business or establish a joint account with a client without written permission from the broker-dealer and the client.
Which of the following situations would require registration as an investment adviser? I. A broker-dealer provided investment research services to a customer and charged a fee for the service. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. An agent of a broker-dealer prepares a complete financial plan for a customer with a one-time charge of $950. The plan recommends specific securities transactions, which the customer orders. The agent earns commissions on the securities transactions. IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed.
I and III Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. A charge for creating a comprehensive financial plan is considered to be a charge for investment advice, even if it is only a one-time expense. It could also be considered that the commissions earned from the recommendations are indirect compensation (which is still looked at as advisory compensation). Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.
A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Your free subscription will start once we have received your name and mailing or email address. B) Your free subscription will start upon receipt of your completed financial profile. C) Your free subscription will start once you have furnished us with the names and addresses of three of your friends. D) Your free subscription will start after your 3rd trade with our affiliated broker-dealer.
a. A free offer must not only be free of financial cost, it must be free of any other burden or commitment.
Which of the following is required to register as a broker-dealer? A) A person who is in the business of effecting securities transactions for the accounts of others B) A savings and loan association C) A trust company D) A bank
a. A person buying and selling securities for customers' accounts is deemed a broker-dealer under the Uniform Securities Act and must be registered as such. Specifically excluded from the definition of a broker-dealer are banks, trust companies, and savings and loan associations.
For larger accounts, a broker-dealer is least likely to waive its normal fee for A) transferring the account to another broker-dealer B) wiring funds to the client's bank C) the annual account maintenance charge D) safekeeping of funds or securities in the account
a. Although there is no official standard, larger accounts tend to have many of the smaller fees waived. However, if the client is moving the account to another firm, it is likely that the transfer fee will be charged.
Under the Uniform Securities Act, all of the following are specifically excluded from the definition of a broker-dealer EXCEPT A) investment advisers B) issuers C) agents D) banks
a. Banks, issuers, agents, and certain out-of-state broker-dealers are excluded from the definition of broker-dealer. However, investment advisers frequently also carry registration as a broker-dealer.
All of the following activities could result in being charged with a fraudulent or prohibited practice EXCEPT A) failing to state all known facts about an investment when presenting it to a client B) making recommendations based on material nonpublic inside information C) borrowing from retail customers D) excessively trading for the purpose of generating commissions
a. Failure to state all known facts about an investment is not a violation of the Uniform Securities Act; omitting material facts, however, would be a violation of the act. Excessive trading, making recommendations on material nonpublic information, and borrowing from retail customers are prohibited business practices that could result in revocation of a registration.
When may an individual sell securities as a registered agent for more than one broker-dealer? A) If the broker-dealers are under common control B) If the agent sells only exempt securities C) If the agent sells only nonexempt securities D) If the agent sells different securities for each broker-dealer
a. The Uniform Securities Act provides for multiple registrations when the broker-dealers are under common control or otherwise affiliated. The Administrator has the authority to make an exception and allow dual registration even when there is no relationship between the firms.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be prohibited for an agent A) to borrow money or securities from a client who is a member of his immediate family B) accept an unsolicited order from his client who lives in a neighboring state C) indicate to a client that a specific transaction will incur higher than normal commissions D) sell an unregistered nonexempt security to an employee benefit plan with assets in excess of $10 billion
a. The only circumstances under which an agent may borrow from a client is if the client is in the lending business, and something to that effect would have to be stated in the choice. This means you can't borrow from clients who are family or friends. Although the unsolicited order from the client who lives in a neighboring state is an exempt transaction, the agent could not accept it if he was not licensed in that neighboring state. How do we know he is? If he was not, then he could not have a client there.
An agent implies to his customers that he has inside information that will have a dramatic effect upon the price of the company's stock. In truth, he does not have this kind of information and no trades result. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this would A) be prohibited because he is giving misleading information to his clients B) be prohibited because he is acting on inside information C) not be prohibited because no sale based on inside information actually took place D) not be prohibited because the policy does not deal with braggarts
a. This is not an insider trading situation; it is a case of an agent lying to clients. That is a prohibited practice.
The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's Website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an agent, you would A) be permitted to contact your clients with this recommendation tomorrow B) be permitted to contact your clients with this recommendation right now C) not be permitted to contact your clients until it was determined that the report was general public knowledge D) be required to send your clients to the firm's Website before making any comments regarding this security
b. A firm's internal research is not considered inside information. Clients may be contacted as soon as the agent has access to the report. What is prohibited would be for the agent to purchase this stock personally before release of the report and then contact clients.
An investment adviser with no place of business in the state has 10 clients in the state. For which one of the clients would registration be required? A) An investment adviser B) An individual with net worth in excess of $1 million C) A governmental agency D) An insurance company
b. An investment adviser need not register in a state if there is no place of business in this state and his only clients in this state are investment companies as defined in the Investment Company Act of 1940, other investment advisers, broker-dealers, banks, trust companies, savings and loan associations, insurance companies, employee benefit plans with assets of not less than one million dollars ($1,000,000), and governmental agencies or instrumentalities. The wealth of an individual client is of no consideration - if it is an individual, the IA must be registered. Now, you might ask, "what about the de minimis rule?" And, you would be correct. If there were a bunch of institutional clients and 5 or fewer individuals, regardless of wealth, the IA would not have to register. But, this is the way it is on the exam so you have to take the best shot.
An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require A) disclosure of the length of time the charting system has been employed B) a statement as to the limitations of and difficulties involved in using this system C) if the system is indeed foolproof, verification of that fact D) past performance since inception of the system must be shown
b. Anytime an investment adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.
Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action? A) A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive. B) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade. C) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction. D) Gibraltar Securities is not required to disclose the amount of commission in advance to Watson. However, it must receive clearance from the Administrator before charging commission in amounts exceeding 10% of the value of the securities traded under the transaction.
b. It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson proceeded with the trade. However, charging larger than normal commissions without informing the customer of such intent in advance is a prohibited practice under the Uniform Securities Act. There is no requirement for administrative clearance prior to charging larger than normal commissions.
A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities. The purpose of doing this is A) margin increases investors' purchasing power, while, at the same time, mitigating the investors' exposure to losses B) margin increases investors' purchasing power, but also exposes investors to the potential for larger losses C) margin loans are unsecured so that the investors' loss is limited to the original investment D) margin loans are non-recourse, so the investor personal exposure is limited to the original investment
b. Margin enables an investor to increase buying power, but that comes with the risk of potentially larger losses. In fact, in a margin account, the investor can lose more than his original investment. The margin loan is secured by the securities purchased and, under the terms of the credit agreement, the firm has recourse against the assets of the investor.
Peter Smith, a prominent securities lawyer living in Connecticut, conducts his securities law practice full time in New York state. He must register as an investment adviser in New York state if: a. the clients of Smith's law firm are all residents of Connecticut but conduct their business with Smith in New York b. Smith's clients, none of whom are residents of New York, receive investment advice as an integral part of Smith's legal services c. he advises his wife, who also has an office in New York, that her investment in 15 technology stocks is too high d. the clients of Smith's law firm are New York residents and seek advice on the construction of trust documents that may be helpful in reducing taxes on the securities in their estates
b. Smith must register as an investment adviser in New York when or if he is offering investment advice as an integral part of his practice. Since his place of business is in New York, he must register in New York as an investment adviser, even though his clients are not themselves residents of the state. If Mr. Smith advises his wife, who also has an office in New York, that her investment in 15 technology stocks is too high, he need not register in New York because he is not charging his wife a fee for investment advice. Mr. Smith, as a securities lawyer, need not register in New York as an investment adviser when he advises clients on the construction of trust documents.
Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an A) issuer B) investment adviser C) international bank D) agent
b. The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.
If a broker-dealer offers or recommends products for which the firm receives greater fees or compensation than other products, it would be considered A) arbitrage B) a potential conflict of interest C) churning D) misrepresenting the registration status of a security
b. There are certain products that carry higher compensation rewards to the broker-dealer than do others of a similar nature. This presents a potential conflict of interest should the firm recommend these over others. There is nothing illegal about doing so as long as disclosure of the conflict is made to the client.
In 1998, NASAA promulgated a Model Rule covering the sales of securities at financial institutions. Under that rule, an advertisement by a broker-dealer would be exempt from meeting the requirements of that rule if A) the broker-dealer and the bank were affiliated B) it were a radio ad not exceeding 30 seconds as long as the omission of the required disclosures would not cause the advertisement to be misleading in light of the context in which the material is presented C) the advertisement only related to federal covered securities D) it was distributed to a limited demographic group
b. Under this Model rule, certain disclosures must be made. They include statements that even though the investments are being sold on the premises of a financial institution (typically a bank), they are not FDIC insured, may lose money, and are not an obligation of the bank. However, an exception from those required disclosures is made in the case of a short (no longer than 30 seconds) radio advertisement as long as there is nothing in that ad that could be construed as misleading without those disclaimers.
Under the Uniform Securities Act, which of the following is a broker-dealer? A) Credit union that sells its own stock B) Issuer C) Corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer D) Agent
c. A broker-dealer is any person that buys or sells for the accounts of others or for his own account. In this case, an entity structured as a corporation is selling a security in the form of limited partnership units and is therefore a broker-dealer. A broker-dealer is not an issuer or an agent.
All of the following must register as an agent when representing a broker-dealer EXCEPT A) An individual who represents an underwriter only in transactions between an issuer and the underwriter B) An employee who accepts solicited orders C) A partner in a broker-dealer who has no securities sales functions D) An individual selling shares of a trust company chartered in this state
c. A partner, (or any employee), of a broker-dealer with no securities sales functions (and that includes supervising sales), need not register as an agent. An employee of a BD who accepts solicited (or unsolicited) orders must register as an agent. An individual who represents an underwriter (one of the roles of a BD) in transactions between an issuer and the underwriter is an agent for the broker-dealer (it is the individual representing the issuer who is NOT). Trust companies are exempt securities and their employees selling shares are not defined as agents, BUT this individual is working for the broker-dealer selling the shares and, as such, must register as an agent.
Under industry rules, customers who wish to trade options must receive a copy of the Options Disclosure Document (ODD): A) at or before the mailing of the next monthly statement. B) within 15 days of account approval. C) at or before account approval. D) at or before the mailing of the confirmation representing the first options trade.
c. All prospective options customers must receive a copy of the ODD at or before the time the account is approved to trade options. It is the options account agreement that must be signed and returned to the broker-dealer within 15 days of account approval.
Under all of the following circumstances, the USA requires investment advisers with no place of business in the state to register EXCEPT A) when an adviser has maintained assets of $100 million or more for 7 out of the last 10 years B) when an adviser with numerous retail clients in the state has not been subject to disciplinary action within any state within the last 10 years C) when an adviser only provides advice to registered investment companies D) when an adviser only provides investment advice to 401(k) plans with assets of $250,000 or more
c. An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered and does not have to register in a state, regardless of whether or not it has a place of business there. An adviser that provides advice only to 401(k) plans or other tax qualified employee benefit plans with $1 million in assets (not $250,000) is not required to register in a state in which it does not have a place of business. The assets of the adviser is not what determines becoming a federal covered adviser; it is assets under management and the determining factor is the AUM now, not the range over the previous 10 years.
As fiduciaries, investment adviser representatives owe their clients an affirmative duty of utmost good faith and full disclosure of all material facts. This affirmative duty of disclosure is required by the investment adviser representative in all of the following situations EXCEPT A) when a family member has a beneficial interest in a private medical equipment firm that the IAR recommends to a client B) when compensation is received from the affiliated broker-dealer for transactions that are executed through the brokerage house C) when donating funds to a nonprofit medical research institute that owns securities the IAR has recommended D) when the advice being provided is outside the scope of the services provided by the investment adviser and is not under supervision or control of a supervisory person
c. An investment adviser representative need not disclose donations to nonprofit organizations, even those with whom the IAR has a client relationship. In all of the other cases, even when outside of the scope of the investment adviser's business, an IAR must always make full disclosure to clients.
Over which of the following would an agent have discretionary authority? A) An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the agent B) An account in which a trustee has power of attorney over another individual's account C) An account in which the agent chooses portfolio securities on behalf of the client D) An account in which a customer has power of attorney over another individual's account
c. An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.
With regard to the Uniform Securities Act, which of the following statements regarding the omission of a material fact by an agent is NOT true? A) It is a violation because it is a unethical or fraudulent practice. B) It is a violation even if the client failed to make a transaction. C) It is not a violation if the security is exempt from registration under the Uniform Securities Act. D) It is a violation even if material facts were unknowingly omitted.
c. Deliberate omission of material facts is a fraudulent practice under the Uniform Securities Act, whether securities are exempt or nonexempt or even if the transaction was exempt. If done unknowingly, then it is a unethical business practice (fraud requires deliberate action) and is still a violation.
While having lunch at his club, an agent overhears a conversation that Technotalk (a publicly traded company) has just lost its biggest account to a competitor. Upon returning to the office, the only person the agent informs of the conversation is his supervisor. In the above situation, the agent has acted A) lawfully, because he did not profit from selling Technotalk, Inc. common stock short in his own account B) unlawfully, because he failed to inform his customers of the negative news immediately C) lawfully because he did not make use of material, nonpublic information D) unlawfully, because he failed to report nonpublic information to the SEC
c. Having material, nonpublic information puts the agent (sales representative) in a difficult position. If the information is used so that a trade takes place, a criminal violation has occurred. If the information is passed on to others, even if not used, NASAA would consider that unethical conduct. The only proper action is to pass the information on to your supervisor or the firm's compliance officer.
An agent sells her customer $10,000 of 15-year U.S. Treasury bonds. If the agent tells the customer this is the best investment due to the absolute safety of Treasury securities, the agent has acted A) lawfully, because Treasury securities are the safest among all domestically available debt instruments B) lawfully, because Treasury securities carry no default risk C) unlawfully, because the term "absolute safety" implies that the customer cannot lose money D) unlawfully, because allocating the customer's entire $10,000 into bonds ignores the customer's need for diversification
c. Implying or stating to customers that they cannot lose money when investing in a marketable security is prohibited. Although Treasury securities carry no default risk, the customer faces potential interest rate risk, particularly in light of the bonds' 15- year maturity.
Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser? A) Retire in Luxury Pension Plan Consultants advising several corporate retirement plans with combined total assets of $145 million B) GHI Consultants, a sole proprietorship, managing $89 million belonging to high net worth individuals C) ABC Money Managers, a partnership with $385 million under management D) DEF Fund managers, a corporation managing an unregistered hedge fund with $10 million in assets
c. It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered regardless of size. The Hedge Fund is an unregistered fund so the rule does not apply to it. Under the Dodd-Frank Act, the pension consultant must have $200 million under management to be eligible to be federal covered.
As appropriate to the scale and complexity of a firm's business, elements of an effective practice framework for managing conflicts of interest include all of the following EXCEPT A) training staff to identify and manage conflicts in accordance with firm policies and procedures B) establishing mechanisms to identify conflicts in a firm's business as it evolves C) ensuring that the firm remains solvent for protection of customers and employees alike D) avoiding severe conflicts, even if that avoidance means foregoing an otherwise attractive business opportunity
c. Managing conflicts of interest does not take into consideration making enough money to remain solvent.
If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the Uniform Securities Act, this omission constitutes A) a criminal violation punishable by up to 3 years in prison B) a civil violation punishable by a fine up to $5,000 C) no violation D) a misdemeanor
c. No violation occurs because the Uniform Securities Act requires the disclosure of only material facts. Material facts are those that could influence the price of a security. Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision.
Sarah has not yet passed the Series 63 exam. As Jack's assistant, Sarah has frequent telephone contact with Jack's customers to whom she provides account information and current stock quotes. In this situation Sarah is A) in violation of the Securities Act of 1933 B) in violation of the Securities Exchange Act of 1934 C) not in violation of any applicable statutes D) in violation of the Uniform Securities Act
c. Provided Sarah does not solicit business, offer advice to customers, or accept orders, she has not committed a violation of any act.
This morning's financial section of your newspaper has an article discussing several significant material facts relating to a stock held in the portfolio of several of your clients. You would be able to share these facts with your clients A) only if the statement without this fact would make your previous statements misleading B) only if the customer did not work for the issuer and did not know this information C) with or without the issuer's permission D) under no circumstances until the clients have had a chance to read the article themselves
c. Public information may be disseminated with or without the permission of the issuer, even if it is material information that casts the issuer in an unfavorable light.
A consent to service of process allows the Administrator to A) verify the accuracy and completeness of registration without obtaining the registrant's prior approval B) terminate a registrant's application C) exercise the power of attorney on behalf of the registrant D) ensure that the legal appeal process is expedited as a result of the Administrator's access to information
c. The consent to service of process provides the Administrator with power of attorney for registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process.
The Uniform Securities Act defines a guaranteed security as one A) where a party other than the issuer offers a guarantee that investors are assured of never receiving less than their original investment B) involving a guarantee of a minimum profit by a party other than the issuer C) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer D) that may only be sold to institutional investors
c. This is simply the definition of a guaranteed security. The one thing not guaranteed is a profit (capital gain).
In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under current regulations, this activity requires written A) consent of and the disclosure to the client before the execution of the transaction B) disclosure to the client C) disclosure to the client and consent prior to completion of the transaction D) consent of the client
c. Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.
Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction? A) An accountant located in the state who offers general securities advice as an incidental part of his business B) A commercial bank with a place of business in the state that advises clients on investment matters C) A federal covered adviser with clients in the state D) An investment subsidiary of a bank holding company located in the state that manages $70 million in assets
d. A bank holding company's investment subsidiary that manages less than $100 million in assets is an investment adviser subject to the Uniform Securities Act (USA). Under the language of the USA, a commercial bank is excluded from the definition of investment adviser whereas a bank holding company subsidiary is not. While a federal covered adviser is an investment adviser in practice (that is, it performs the functions of an investment adviser), it is excluded from the definition of an investment adviser under the USA to avoid duplicate regulation. An accountant located in the state that offers general securities advice as an incidental part of his business is not an investment adviser.
A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A) is a member of FINRA B) is licensed/registered in its state of residence C) is a member of the New York Stock Exchange D) does no business in that state other than with institutional clients
d. A broker-dealer must be registered in every state it sells or offers to sell securities, unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required.
With regard to a broker-dealer's use of social media, static content would be considered as I. a planned communication to a target audience that is generally not altered II. communication that does not provide for interaction with the author once published III. content used to engage in real-time interactive communications with a target audience IV. a blog that gives readers the opportunity to post comments
d. A key to recognizing static social media content is that it is usually not changed once published and does not provide a method for interaction (commenting) once published.
A broker-dealer with no place of business in the state would not be required to register with the Administrator unless one of its clients was A) a savings institution B) a unit investment trust registered under the Investment Company Act of 1940 C) another broker-dealer D) an employee benefit plan with assets of less than $1 million
d. As defined in the Uniform Securities Act, "Broker-dealer" does not include a person who has no place of business in this state if he effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions, other broker-dealers, or banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, employee benefit plans with assets of at least $1 million, or other financial institutions or institutional buyers.
All of the following are prohibited actions EXCEPT A) failing to record exempt transactions on the broker-dealer's books and records B) sharing in profits of an account as a reward for the agent's recommendations exceeding the S&P 500 C) trading in the account of a conservative client exclusively in speculative public offerings with proper trading authorization from the client D) executing a transaction in a nonexempt security in a discretionary account
d. Discretionary (and nondiscretionary) accounts may contain nonexempt securities. All transactions, whether exempt or non-exempt, must be recorded on the books of the broker-dealer. Trading the account of a conservative client only in speculative public offerings is unsuitable and, therefore, a prohibited business practice. Sharing in the profits of an account is considered performance-based compensation and is prohibited for agents under any circumstance. This is not the same as sharing in the profits of an account that is jointly owned, as this is based on the performance of the agent's recommendations.
Which of the following would be least likely to meet the cyber security definition of a covered account? A) A customer with a margin account at a broker-dealer B) A customer with an automobile loan at a bank C) An account with a registered investment company that permits the owner to wire funds to a third party D) An account held by a company listed on the NYSE
d. In general, business accounts are not included in the term covered account. There could be an exception for a sole proprietorship or other small business where there is a reasonably foreseeable risk to customers due to the inability of the customer to provide adequate internal safeguards. That is unlikely to be the case with a listed company.
Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X B) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X C) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them D) Sharon must be registered in State X in order to accept the order
d. Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state which is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside.
The term "agent", as defined in the Uniform Securities Act, would not include which of the following individuals? A) One who represents a registered broker-dealer selling securities listed on the NYSE to individual clients B) One who represents a registered broker-dealer selling unregistered exempt securities C) One who represents an issuer of any exempt security D) One who represents an issuer in effecting exempt transactions
d. The USA defines an agent as an individual representing a broker-dealer or an issuer in the sale of securities. This exam will never have a case of an individual selling on behalf of a broker-dealer excluded from that definition. The securities listed on the NYSE are exempt from state registration because, under the NSMIA, they are federal covered securities. But anyone selling securities, exempt or not, while representing a registered broker-dealer must be licensed as an agent of that broker-dealer. The only case in which an individual selling securities as a representative of an issuer is always excluded from the definition of agent is when the transactions are exempt. There are 5 different categories of exempt securities where this exclusion applies as well, but it doesn't apply to all exempt securities.
State securities law generally limits agents to employment with a single broker-dealer unless A) permission has been granted by the SEC B) permission is received from both broker-dealers regardless of Administrator approval C) multiple employment is widespread and does not require specific Administrator approval D) the Administrator, by rule or order, authorizes employment with more than one broker-dealer
d. The USA generally limits agents to single employment unless the Administrator, by rule or order, authorizes multiple affiliations.
A third-party post has been made on a broker-dealer's Facebook page. If the firm has involved itself in the preparation of the content, this would be known as A) disgorgement B) replacement C) misrepresentation D) entanglement
d. The entanglement theory means the firm or its personnel is entangled with the preparation of the third-party post. A similar concept is that of adoption. This is when the broker-dealer explicitly or implicitly endorsed or approved the content posted by the third party.
An agent with a broker-dealer is suddenly called out of town on a personal family matter. While away, the agent's unregistered sales assistant receives a phone call from an existing client wishing to purchase 200 shares of a listed stock. What would be the most appropriate action for the sales assistant to take? A) Accept and place the order because it is unsolicited B) Accept the order because it is from an existing customer C) Explain that the agent is out of town and request the client to call back with the order next week D) Route the call to a licensed agent in the office
d. The fact that the order is unsolicited does not preclude the rule that under no circumstances shall an unregistered individual accept and place orders.
An investment advisory firm provides each of their clients with a written contract detailing, among other things, the services to be provided, the fees to be charged and the procedure for handling early terminations. In addition, the contract provides that the clients waive their right to sue in the event that the IA violates any provision of the USA. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) the contract is only enforceable if signed by the client B) the contract is misleading and could lead to action by the Administrator C) the firm has met the requirements of providing a written contract D) waivers of this type are never permitted
d. There is no way, NEVER, NEVER, that a waiver of legal rights is ever enforceable.
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers B) fee schedules should only be delivered by hand or postal mail to reduce cyber security threats C) the schedule should be made available on the broker-dealer's public website and should be password protected D) the schedule should be made available on the broker-dealer's public website without requiring any login or password
d. Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.
