Series 66 Uniform and Securities Act (3 and 4)

A Federal Covered Adviser can be audited by the State Administrator: A. any time the Administrator believes it is in the public interest B. in the event the Administrator suspects fraud C. no more than once per year after the updated Form ADV is filed D. only if a complaint is lodged against the Adviser by a customer in the State

The best answer is B. While NSMIA (National Securities Markets Improvements Act of 1996) partitioned responsibility for investment adviser supervision between the Federal government (Federal Covered Advisers) and the States (State-registered advisers), it retained State jurisdiction to investigate and enforce any violation of State law with respect to fraud or deceit, covering all advisers, whether State-registered or Federal Covered.

The statute of limitations on civil suits arising from alleged violations of the Uniform Securities Act is: A. 1 year of discovery B. 2 years of discovery C. 3 years of discovery D. 5 years of discovery

The best answer is B. Civil suits alleging violation of the Act must be brought within 2 years of discovery of the alleged violation, but no later than 3 years after the actual violation occurred.

When can an agent represent that a mutual fund is "no load"? A. When the fund does not impose an up-front sales load B. When the fund does not impose a contingent deferred sales charge C. When the fund does not impose annual 12b-1 fees in excess of .25% D. When the fund does not impose an up-front sales load, a contingent deferred sales charge or annual 12b-1 fees in excess of .25%

The best answer is D. Under both FINRA and NASAA rules, a mutual fund can be called "no load" only if it has no up-front sales charge; no contingent deferred sales charge; and annual 12b-1 fees of no more than .25%. (Note, in contrast, that a "pure" no load fund cannot impose any annual 12b-1 fees.)

A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offering II 20 days following the effective date for an initial public offering III 3 days following the effective date for a secondary offering IV 5 days following the effective date for a secondary offering AI and III BI and IV CII and III DII and IV

The best answer is A. A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.

In order for an agent based in State A to qualify for an exclusion from registration when contacting an individual vacationing in State B: I the agent must be registered in State A II the agent must be registered in State B III the individual must be an existing client IV the individual can be a new client AI and III BI and IV CII and III DII and IV

The best answer is A. An exclusion from registration is given to broker-dealers and their agents that have a place of business in a State (thus they must be registered in that State) that are dealing with pre-existing customers who are temporarily visiting other States. This addresses the fact that people travel widely throughout the United States and if that citizen who is on vacation in another State effects a securities transaction with his or her existing broker-dealer, then the State where the customer is vacationing will not require the broker-dealer and its agents to register. Note that the exclusion does not apply to new customers; only to pre-existing customers.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged an advisory fee II The account may not be charged an advisory fee III The account may be charged a commission on each trade execution IV The account may not be charged a commission on each trade execution AI and III BI and IV CII and III DII and IV

The best answer is A. An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

A broker-dealer located in State A makes an offer of securities to a customer whose principal residence is in State B. The customer has temporarily moved to State C and has asked the post office in State B to forward the mail to the customer's address in State C. Which State Administrator(s) has (have) jurisdiction over the offer? I State A II State B III State C AI only BI and II only CI and III only DII and III only

The best answer is A. Because the broker-dealer is located in State A, that State Administrator has jurisdiction. Normally, if an offer is received in a State (B in this case), then State B's Administrator would have jurisdiction. But the offer was never received in State B because it was forwarded by the post office on to State C. Thus, an offer was never made in State B and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in State C, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to State C and should not be subject to the law of State C on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

Broker-dealers may charge: A. commissions on recommended transactions B. advisory fees on recommended transactions C. both commissions and advisory fees on recommended transactions D. commissions, advisory fees and performance fees on recommended transactions

The best answer is A. Broker-dealers charge commissions. Investment advisers charge advisory fees. Each is a legally separate entity. Brokers do not charge advisory fees - to do so they would have to establish a separate investment adviser subsidiary that is registered with the State. Investment advisers do not charge commissions - to do so, they would have to establish a separate broker-dealer that is registered with the State.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, all of the following are considered manipulative and prohibited practices EXCEPT: A. Arbitrage B. Churning C. Wash trades D. Painting the tape

The best answer is A. Buying a security on one exchange and simultaneously selling it on another exchange for profit is a common trading technique known as "arbitrage" and is perfectly legal. Trading a customer account for the purpose of generating commissions to the agent is commonly known as "churning" and is a prohibited practice. Buying a security on one exchange and simultaneously selling it to create the appearance of trading activity is a manipulative and prohibited practice known as "wash trading" (also known as "painting the tape").

A market maker in ABCD stock is currently quoting the stock at:$42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to buy 800 shares of ABCD at $42.50, the market maker: A. must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B. must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C. must send the order to a stock exchange floor for execution D. is not required to take any action

The best answer is A. Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently bidding the stock at $42.00 - this is the price at which he is willing to buy up to 500 shares. Since this customer is willing to pay more to buy - $42.50 for up to 800 shares, the customer's bid must be displayed in the market. Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed OTC.

A registered representative with a broker-dealer sets up a financial planning practice at home to create financial plans for a fee for individuals who are not customers at the broker-dealer. Which statement is TRUE? A. The registered representative has become a "statutory" investment adviser and must register with the State as such B. The registered representative has violated the Investment Advisers Act of 1940, since registered representatives cannot give separate investment advice C. The registered representative must give prior notice to his customers at the broker-dealer of his outside investment advisory practice D. The registered representative may do so without restriction

The best answer is A. If a registered representative sets up an advisory practice outside his or her "scope of employment" with the broker-dealer, then this person just went into business as an "investment adviser" and must register with the State (or the SEC if the adviser has $100,000,000 or more of assets under management). This person is now a "statutory investment adviser" (that is, legally, by statute, he or she is now considered to be an investment adviser) and must register with the State.

Which of the following statements is TRUE regarding a sales representative who intentionally embezzles monies from a customer's account? A. The sales representative has committed a felony and is subject to fines and/or imprisonment B. The sales representative has committed a felony and is subject to fines and/or imprisonment only if the customer's monies are not replaced within a specific time frame C. The sales representative has committed a fraudulent and misleading act only if the customer's monies are not replaced within a specific time frame D. None of the above

The best answer is A. If a sales representative intentionally embezzles monies from a customer, that is considered to be a felony, since the action was willful (theft is theft!). In this case, the individual is subject to possible fines and/or imprisonment.

If an investment adviser creates a website and offers individualized investment services based on client input, then: I this is considered to be an offer of advisory services in the State where the client who gave input resides II this is not considered to be an offer of advisory services in the State where the client who gave input resides III the investment adviser and its agents must be registered in each State where the client who gave input resides IV the investment adviser and its agents are not required to be registered in each State where the client who gave input resides AI and III BI and IV CII and III DII and IV

The best answer is A. If a website offers securities recommendations or investment advisory services using client input, then this "personalized" service is considered to be an offer of securities or advisory services in each State where a client gives information - and to do so requires registration of both the adviser and its agents in each State where a customer inputs information. However, note that "general" information Web sites that do not give personalized recommendations are NOT considered to be offers of advisory services and registration would not be required.

Which of the following statements are TRUE about an offer of rescission? I The offer can only be made prior to the institution of a lawsuit alleging a securities violation II The offer can only be made after the institution of a lawsuit alleging a securities violation III An offer must be made to buy back the security at the original purchase price and the customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security IV An offer must be made to buy back the security at the current market price and the customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security AI and III BI and IV CII and III DII and IV

The best answer is A. If an offer of rescission is made on the inadvertent sale of a non-exempt security that should have been registered under the Act, the offer can only be made prior to the institution of a lawsuit alleging a securities violation. An offer must be made to buy back the security at the original purchase price, plus the customer must be paid interest at the legal rate in the State (6%), less any dividend or interest income received from that security. Any offer of rescission must be accepted within 30 days of the offer.

A willful and fraudulent violation of the Uniform Securities Act occurs if a(n): A. deceptive sales presentation is made to a client, but no sale results B. omission of fact is made that is not important to understanding the risks and merits of the investment C. security that is not properly registered is recommended to a customer and the agent was unaware of this D. investment recommendation is made to a customer of the stock of a company that is in a precarious financial condition

The best answer is A. If one is being "deceptive," that implies that the person knew about a fact that he or she distorted or omitted in order to attempt to get the customer to do a securities trade - and willful intent to deceive is fraudulent. It makes no difference if the trade actually occurred for there to be a violation of the Act. If the agent did not know about important information that was not presented to the customer, then there is no "willful intent." A recommendation of a company that is in a precarious financial position is OK, as long as the investment is suitable. Omitting a fact in a presentation that is not important to understanding an investment's risks and merits is OK as well.

In order for the State Administrator to enter an order revoking or suspending a registration, which requirement MUST be present? A. The order must be in the public interest B. The registration must be misleading C. A complaint must have been received by the Administrator D. A willful violation of the Act must have occurred

The best answer is A. If the Administrator wishes to enter an order suspending or revoking a registration, this action must be in the public interest and the Administrator must believe that a violation of the Act has occurred; or is about to occur.

Which statement is TRUE regarding the sharing of commissions between a state licensed individual and another person? The sharing of commissions is: A. allowed between individuals as long as both are licensed at the same broker-dealer B. allowed between a state licensed broker and an unlicensed bank teller C. allowed between a state licensed broker and a state licensed insurance agent D. prohibited in all instances

The best answer is A. It is prohibited to share in any commission or other remuneration from the purchase or sale of a security with any person who is not licensed to sell securities. There is no prohibition on sharing commissions between two licensed individuals - as long as these individuals work for the same brokerage firm. If two licensed individuals work at different broker-dealers, commissions cannot be shared.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that is based on the: A. investment adviser's business model including the size of the firm, types of services provided, and number of business locations B. itemized list provided by NASAA in the Model Rule C. requirements of the PATRIOT (Providing Appropriate Tools to Restrict, Interdict and Obstruct Terrorism) Act D. demographics of the Investment Adviser Representatives employed by the Investment Adviser

The best answer is A. NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for:The protection, backup, and recovery of books and records;Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel;Office relocation in the event of temporary or permanent loss of a principal place of business;Assignment of duties to qualified persons in the event of death or unavailability of key personnel; andMinimizing service disruptions and client harm that could result from a significant business disruption.Notice that the NASAA list is only a recommended minimum - it is up to the RIA to decide how much more extensive the list of covered items should be.

An Investment Adviser has adopted an internal Business Succession Plan. Who is responsible for servicing the IA's client accounts if the managing director of the Investment Adviser suddenly dies? A. Another Investment Adviser Representative currently in the firm B. Another Investment Advisory Firm to which investment management has been transferred C. The custodian bank that holds client funds and securities positions D. An immediate family member of the deceased managing director

The best answer is A. NASAA has a model rule on "Business Continuity and Succession Planning" for Investment Advisors. The rule requires IAs to draft a plan for the actions to be taken in the event of an unexpected major negative event occurring at the IA firm. One of the issues that must be addressed in the plan is the death or disability of key personnel. To continue servicing client accounts in such an instance, the IA can adopt either an "internal" or "external" Succession Plan. In an "internal plan," the Adviser transfers the advisory responsibilities to another IAR currently in the firm. With an "external" Succession Plan, the Adviser transfers client management to another firm.

The Uniform Securities Act is administered by: A. NASAA B. CFTC C. FINRA D. SEC

The best answer is A. NASAA is the North American Securities Administrators Association. Each State Administrator enforces the Uniform Securities Act - the State "Blue Sky Laws" that require registration of broker-dealers, their agents, non-federal covered advisers, and investment adviser representatives, in each State where they deal with the public. The Investment Advisers Act of 1940 is administered by the SEC. FINRA only regulates broker-dealers, not investment advisers. The CFTC is the Commodities Futures Trading Commission - the federal regulator for the commodities and futures markets.

Under the Uniform Securities Act, all of the following statements about penalties are true EXCEPT: A. Criminal liability may be offset by rescission B. Civil liability may be offset by rescission C. the statute of limitations on criminal actions is 5 years D. the statute of limitations on civil actions is 3 years

The best answer is A. Only civil liability can be offset by rescission. Criminal liability cannot be offset by rescission. The statute of limitations on civil cases is 3 years (but no later than 2 years after discovery); for criminal cases it is 5 years.

A written customer complaint is received by mail that the firm resolves to the customer's satisfaction. Which statement is TRUE regarding keeping this record? A. A copy of the original complaint along with its resolution must be retained in the file of the agent by the broker-dealer B. A copy of the original complaint along with its resolution must be retained at the firm's supervisory office C. A copy of the original complaint along with its resolution must be retained by the State Administrator D. There is no requirement to retain a copy of the complaint because it was resolved to the customer's satisfaction

The best answer is A. SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways:The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; orInstead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original."

An agent accepts an unsolicited telephone order from a new customer to buy 200 shares of a listed common stock. The salesman has the order executed and then forwards the new account form, with the executed order ticket, to the manager. Under the Uniform Securities Act, which statement is TRUE? A. The agent's actions are prohibited since the account must be approved by the manager prior to opening B. The agent's actions are prohibited since the customer must open a new account in person C. The agent's actions are allowed as long as the manager approves of the first trade D. The agent acted properly

The best answer is A. The procedure to open a new account is to have the manager approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

A written customer complaint is received by mail about an error made by the firm that the firm resolves to the customer's satisfaction. The customer asks the member firm for a copy of the complaint letter along with a written apology letter. The member firm should: I retain the original complaint along with its resolution in the agent's file and send the customer a photocopy of the complaint II retain a photocopy of the original complaint along with its resolution in the agent's file and send the customer the original complaint copy III send the customer a written apology letter and retain a copy in the agent's file IV not send the customer a written apology letter and retain a note to this effect in the agent's account file AI and III BI and IV CII and III DII and IV

The best answer is A. SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways:The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; orInstead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original." And in this example, since it was the firm's error that was corrected, send the customer the apology letter!

Making an intentional omission of material fact when recommending a security to a customer would be considered fraudulent if: A. a reasonable man would attach decision making importance to the omitted information B. the information was not available to the general public at the time that the recommendation was made C. the maker of the recommendation did not perform due diligence to determine the relevancy of the omitted information D. under the circumstances, the maker of the recommendation did not, and could not, have known of the importance of the omitted information to the buyer of the securities

The best answer is A. The "reasonable man" test is used by courts in determining if an offer of a security was made fraudulently. Since a fraud is deemed to occur if there was an omission or misstatement of material fact when the offer of the securities was made, the court looks to see if a "reasonable man" would attach decision making importance to the omitted or misstated information. If the answer is yes, then a securities fraud has occurred.

Information received by the Administrator in a private investigation: A. can be provided to the officers and employees of the Administrator B. can be provided to the general public on request C. cannot be used by the Administrator as the basis for issuing a cease and desist order D. are made available to the public upon the conclusion of the investigation

The best answer is A. The Administrator can conduct both public and private investigations. When conducting a private investigation the Administrator will not disclose any information about the investigation to anyone, other than the employees of officers of the Administrator (which makes sense, since they are conducting the investigation). Information received during the investigation can be used as the basis for issuing an order against the person that is the subject of the investigation. Private investigations are just that, private - the information is not disclosed to the public, before, during, or after, the investigation.

Under the provisions of the Uniform Securities Act, any rule may be modified or rescinded: A. by the Administrator in order to carry out the provisions of the Act B. only with the approval of that State's legislature C. only with the approval of the North American Securities Administrators Association D. with the approval of the Securities and Exchange Commission

The best answer is A. The Administrator will issue interpretative rules to carry out the provisions of the Uniform Securities Act; and the Administrator is free to modify or rescind these rules as he or she deems fit to carry out the Act's provisions. On the other hand, the actual provisions of the Act were enacted into law by the State legislature; and can only be modified or changed by a majority vote of that State's legislature.

A plan trustee is considering making an investment in XYZ stock for a trust that has multiple beneficiaries. Under the provisions of the Uniform Prudent Investor Act, this investment decision must give consideration to the role that this investment plays: A. to the overall portfolio strategy B. to the investment strategy desired by each beneficiary C. on its own merits, regardless of its impact on the overall portfolio D. in meeting the financial needs of the trustee

The best answer is A. The Uniform Prudent investor Act says that the fiduciary or trustee must manage plan assets by applying the principles of risk-return analysis and portfolio diversification. Thus, each investment decision must take into account its effect on the overall portfolio return and risk level (this makes Choice A correct and Choice C incorrect). The trustee must manage the trust assets to meet the needs of all of the beneficiaries - not the needs of the trustee (thus Choice D is incorrect). Each beneficiary can certainly voice an opinion as to how well the trustee is managing the portfolio, but the trustee does not set investment strategy based on the desires of the beneficiary (thus Choice B is incorrect). Rather, the overall strategy is set by the grantor (settlor) of the trust

Under the Uniform Securities Act, in a civil suit brought by a purchaser against a seller that is alleged to have violated the Uniform Securities Act, the burden of proof rests with the: A. Buyer of the securities B. Seller of the securities C. State securities administrator D. Judge presiding over the state court hearing the case

The best answer is A. The burden of proof in any lawsuit is placed on the plaintiff - not the defendant. The buyer of the securities is the plaintiff in the suit and must prove to the satisfaction of the court, that the seller (the defendant) violated the Uniform Securities Act.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is an example of an activity that manipulates the market? A. Effecting trades to give the appearance of trading activity B. Simultaneously buying a security on one exchange and selling it on another exchange C. Performing trades of excessive frequency in a customer's account D. Performing trades of excessive size in a customer's account

The best answer is A. The only choice that is an example of market manipulation is trading a security solely to give the appearance of active trading on the tape. This is known as "painting the tape." Simultaneously buying a security on one exchange and selling it on another exchange is a legitimate trading technique called "arbitrage" and is performed to exploit small price differences that may arise between exchanges. Performing trades of excessive size or frequency in customer accounts are not examples of market manipulation, but they are prohibited practices.

An agent recommends that a customer purchase an unregistered non-exempt security. This is a violation of which section of the Uniform Securities Act? A. Part I - Fraudulent and Other Prohibited Practices B. Part II - Registration and Notice Filing Procedures For Broker-Dealers, Agents, Investment Advisers and Investment Adviser Representatives C. Part III - Registration and Notice Filing Procedures Of Securities D. Part IV - General Provisions

The best answer is A. The recommendation of an unregistered non-exempt security is a prohibited practice. For example, common stock of an issuer (a non-exempt security) cannot be recommended to a client unless it is either registered in the State; or if it is unregistered but qualifies for an exemption. Part I of the Act contains the Act's anti-fraud provisions and prohibited practices in general terms. Part II covers all the registration rules for BDs, their agents, IAs and IARs. Part III contains the rules for securities registration in a State. Part IV contains the Act's definitions, including the defined exempt securities and exempt transactions. It also details the Administrator's powers, civil liability and criminal liability provisions.

An investment adviser representative has worked with a client and his spouse for 10 years and has an excellent relationship with the couple. The representative has been notified that the husband is unconscious and is in the hospital. The account has several open orders that have not yet been executed. What can the representative do regarding the disposition of these orders? A. Instructions can be taken from the customer's spouse B. Instructions can be taken from the customer's attorney C. Instructions can be taken from any relative of the customer that has knowledge of the customer's financial dealings D. Instructions regarding these open orders can be accepted from the customer's tax accountant

The best answer is A. This one is a little vague, but here goes! In a customer account, instructions can only be taken from the customer (or customers in a joint account); or from any person to whom a written power of attorney has been granted by the customer. Just because an individual is that person's attorney does not mean that he or she has a power of attorney over that customer's account - such a power of attorney must be granted in writing by the customer. The question states that the adviser has "worked with the client and his spouse for 10 years" without mentioning whether the account is a joint account; an individual account; or an individual account where the wife has a power of attorney. But, because the representative has been working "with the client and his spouse" we can infer that is either a joint account or an individual account where the wife has a power of attorney. Thus the best choice offered is to accept orders from the wife. The other 3 choices have no plausible validity unless a written power of attorney has been granted by the customer.

A hedge fund offers to provide a minimum level of trades to a broker-dealer in return for receiving below-market office space from the broker-dealer. Which statement is TRUE? A. This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator B. This is an illegal usage of soft dollar compensation C. This is a legal usage of soft dollar compensation D. This is an unethical practice unless the broker-dealer is also licensed as a real estate agency in the State

The best answer is A. This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized rents if the hedge fund agrees to direct its portfolio trades to that broker-dealer. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific. Because most hedge fund advisers are set up as partnerships, hedge funds are not subject to the mutual fund soft dollar rule which requires that the soft dollar benefit accrue to the shareholders. All of the "partners" in a hedge fund may get a benefit from the reduced expenses that the hedge fund will enjoy from the subsidized rent. However, the SEC (and also NASAA, because each State uses the same ADV Form) requires that the hedge fund disclose the practice of accepting soft dollars as a line item in the Form ADV and that it disclose that, in return for getting the rent subsidy, it may be paying a higher commission rate to that executing broker-dealer.

An investment adviser representative (IAR) has an oral agreement with a customer to provide advisory services and has given the new customer a glossy brochure describing the adviser's services, but has forgotten to give the customer Part 2 of Form ADV. Which statement is TRUE? A. The customer must receive the Form ADV Part 2 and then has 2 days to sign the agreement B. The customer must be given the Form ADV Part 2 at the time of signing the agreement C. The oral agreement is binding because the customer received the glossy brochure D. The customer must receive the Form ADV Part 2 and then has 5 days to sign the agreement

The best answer is A. Under NASAA rules, customers must receive Part 2 of Form ADV (the "Brochure" and "Brochure Supplement") at least 2 business days prior to the completion of an oral or written contract to provide advisory services. As an alternate to this "2 day free look," the customer can be given the brochure at the time the contract is signed; but must have the right to rescind the contract within the next 5 days after examining the brochure. Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!

Unintentional violations of the Uniform Securities Act are considered to be a: A. misdemeanor subjecting that person to civil liability only B. misdemeanor subjecting that person to civil liability and civil penalties C. felony subjecting that person to criminal liability only D. felony subjecting that person to criminal liability and criminal penalties

The best answer is A. Unintentional violations when offering or selling a security result in Civil Liability under the Act. There are no Civil Penalties. Willful violations of the Uniform Securities Act can be a felony and can result in Criminal Liability and Criminal Penalties.

A willful violation of the Uniform Securities Act would occur if an agent of a broker-dealer recommends the purchase of a(n): A. non-exempt security to a customer that the agent knows is not registered, however the customer does not buy that security B. security to a customer that the agent believes to be exempt and is not registered, however the agent later discovers that the Administrator has denied the issue's exemption C. exempt security to a customer that the agent knows is not registered and the customer makes a purchase of the recommended security D. non-exempt security to a customer that the agent believes to be registered and the customer does not buy that security

The best answer is A. Willful violations are intentional acts that violate that Uniform Securities Act (as opposed to an unintentional violation). If an agent knows that a non-exempt security is not registered and recommends it to a customer, there is a "willful" violation of the Act. Whether or not a sale actually resulted from the recommendation is irrelevant. Making a recommendation of an exempt security that is not registered is perfectly legal and is not a violation. Recommending a non-exempt security to a customer that the agent believes to be registered is an "unknowing" violation of the Act - there is no willful intent.

Which of the following is prohibited in an advisory contract under NASAA rules? A. Custody Provision B. Liquidated Damages Provision C. Non-Assignment Provision D. Discretionary Authority Provision

The best answer is B. A "liquidated damages provision" in an advisory contract would state that if the customer suffers a loss, the adviser is responsible. This is no different than a prohibited guarantee against loss and thus is not permitted. Advisory contracts can permit the adviser to take custody (unless that State prohibits this); must have a non-assignment provision, which means that the contract cannot be assigned to another investment adviser without customer consent; and can give the adviser discretion over the customer's account.

Under the Uniform Securities Act, a purchaser may void a securities transaction: A. within 5 business days of the trade B. if the trade is contrary to the provisions of the Act C. if the security involved is exempt D. if the broker-dealer also is registered as an investment adviser and has charged a commission on the trade

The best answer is B. A purchaser may void a securities transaction if the trade is contrary to the provisions of the Act. Civil liabilities apply and the purchaser must be paid the original cost of the security plus 6% interest and any attorney's costs by the seller.

John Jones has an individual account at a broker-dealer. John calls his agent at the broker-dealer and states that he wishes to open an account for his brother Jake in his brother's name and buy 1,000 shares of DEF stock. Which statement is TRUE? A. The agent can open the account B. The agent can open the account only if the brother Jake gives authorization in writing C. The agent can open the account only if the manager approves in writing D. The account cannot be opened unless the brother Jake orally approves

The best answer is B. A third party is prohibited from opening an account in someone else's name. The customer must open the account personally. John cannot open an individual account in his brother's name. Jake (the customer in this case) must either sign the new account form to open the account; or can give his brother John a full power of attorney, signed by Jake, that names John as a person allowed to act of Jake's behalf.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged both the advisory fee and a commission on each trade II The account may not be charged an advisory fee and a commission on each trade III This is an unethical practice IV This is not an unethical practice AI and III BI and IV CII and III DII and IV

The best answer is B. An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

An Investment Adviser Representative who lives and works in a northern suburb of Chicago, Illinois is registered in the State of Illinois. The IAR moves to Kenosha, Wisconsin. The IAR will now commute to work in the office in Illinois. Which statement is TRUE? A. The IAR is required to register in the State of Wisconsin B. The IAR is not required to register in the State of Wisconsin C. The IAR must de-register in the State of Illinois D. The IAR must both register in the State of Wisconsin and de-register in the State of Illinois

The best answer is B. Because the IAR works in the State of Illinois, he or she must register in Illinois. If the IAR worked or did business in the State of Wisconsin, he or she would have to register there as well. However, just "living" in Wisconsin is NOT working there, so there is no registration in the State of Wisconsin required.

An agent of a broker-dealer in State A makes a phone call to an existing client who lives in State C while that client is in State B and the transaction is completed in State C. The agent must be registered in: A. State A only B. States A and C only C. States B and C only D. States A, B and C

The best answer is B. Because the agent (and broker-dealer) is in State A, he or she must be registered in State A. Because the client lives in State C and the transaction is completed in State C, the agent (and broker-dealer) must be registered in State C. There is no requirement to be registered in State B because an exemption from registration in the State of contact is provided for contacting existing clients that are temporarily in other States. For example, if the customer of a broker-dealer based in New York City is contacted on the New Jersey Turnpike on his cell phone while he is driving to his home in Philadelphia, there is no requirement for the agent to be registered in New Jersey. The agent must be registered in New York (where he is physically located) and in Pennsylvania (where the customer is physically located).

A broker-dealer located in New York makes an offer of securities to a customer whose principal residence is in New Jersey. The customer has temporarily moved to Ohio and has asked the post office in New Jersey to forward the mail to the customer's address in Ohio. Which State Administrator(s) has (have) jurisdiction over the offer? A. Ohio only B. New York only C. New York and Ohio D. New York, New Jersey and Ohio

The best answer is B. Because the broker-dealer is located in New York, that State Administrator has jurisdiction. Normally, if an offer is received in a State (New Jersey in this case), then New Jersey's Administrator would have jurisdiction. But the offer was never received in New Jersey because it was forwarded by the post office on to Ohio. Thus, an offer was never made in New Jersey and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in Ohio, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to Ohio and should not be subject to the law of Ohio on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

The State Administrator would revoke an investment adviser's registration if the adviser: A. loses a case in civil court B. was convicted of a securities misdemeanor 5 years ago C. loses an arbitration hearing initiated by a client D. is the subject of a customer complaint alleging recommendations of unsuitable securities

The best answer is B. Convictions during the past 10 years for securities or money related misdemeanors, or any felony, will cause the State to deny registration.

A customer has brought a civil suit against an agent for violating the Uniform Securities Act. Two weeks before the court date, the agent dies. Which statement is TRUE? A. The civil suit is terminated upon the death of the defendant B. The civil suit survives the death of the defendant C. The civil suit must be settled within 60 days of the defendant's death D. The Administrator decides whether the suit is terminated or survives upon the defendant's death

The best answer is B. If a customer files suit against an agent alleging a violation of the Uniform Securities Act and the agent (the defendant in this case) dies, the suit lives on! (Hey, we need to keep the lawyers working!)

If a person disagrees with a final order of the Administrator, which statement is TRUE? A. The person may petition the court within 30 days of the order B. The person may petition the court within 60 days of the order C. The person may petition the court within 90 days of the order D. No petitioning is allowed as the Administrator's ruling is final

The best answer is B. If a person disagrees with a final order of the Administrator, he or she must petition the appropriate court within 60 days of the order.

Under the Uniform Securities Act, an advertisement for advisory services published in a local newspaper is: A. not considered to be an offer B. an offer only in the State where the newspaper is published C. an offer in any State where the newspaper is distributed D. an offer in the State where the advertiser is headquartered

The best answer is B. If an offer is made in a newspaper with a general, regular and paid circulation, it is not considered to be made in the State if the newspaper is not published in the State; or if the newspaper is published in the State, but has more than 2/3 of its circulation outside the State during the last 12 months. Since this is a "local" newspaper, the offer is only made in the State where the newspaper is published.

Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customer B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year

The best answer is B. If the adviser is prohibited from taking custody of client funds or securities by the State Administrator, the adviser can trade the customer account under a limited power of attorney - this is normal practice. So Choice B is the correct answer. The adviser cannot buy securities for a customer and then delay delivery of the securities to the client - this is an unethical practice. If an adviser is prohibited from taking custody, it cannot hold customer funds and securities, making Choice C incorrect. There is nothing precluding an adviser from taking a prepaid advisory fee, but if the adviser accepts $500 or more of prepaid fees, 6 months or more in advance of rendering services, this is defined as "taking custody" under NASAA rules.

An investment adviser charges a 1% annual management fee to all clients. The adviser also says that if he does not produce a 20% annual return on the client's investment, he will refund the management fee. This action is: A. permitted because it has been offered to all clients B. permitted because the clients are not being charged an incentive fee C. prohibited because the adviser cannot make fee charges contingent on performance D. prohibited because the adviser cannot share in portfolio gains and losses

The best answer is C. Investment advisers cannot make their fees contingent upon earning a minimum investment return. They can only charge a fee based on a flat annual dollar amount or a percentage of annual net assets. Advisers cannot be compensated based on gains (Choice D), unless the clients are all wealthy (at least $1,100,000 invested or $2,200,000 net worth).

All of the following events would result in an advisory contract being considered to have been transferred EXCEPT: A. a majority partner in the advisory firm dies B. a minority partner in an advisory firm sells his interest to another individual C. a controlling block of stock in the investment adviser is sold to another individual D. the contract is pledged as collateral for a loan

The best answer is B. If there is an assignment of an advisory contract, then the customer must approve. A "so-called" involuntary assignment occurs if the adviser is a partnership and a majority of the partners are changed. Such an event would require the customer to sign a new contract. A minority of the partners being changed is not considered to be an "involuntary assignment." If the adviser is a corporation, a change in the majority ownership of the corporation would be an "involuntary assignment." Finally, if the contract is pledged as collateral for a loan - then legally, title is now being held by the person to whom the contract is pledged. This is another version of an "involuntary assignment" of the contract.

Which statements are TRUE about an adviser offering discounted rates? I An investment adviser is permitted to offer a discount from standard rates to selected categories of customers II An investment adviser is permitted to offer a discount from standard rates only if all customers are given the discount III The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable IV The investment adviser can offer the discount as long as the fact that discounts are offered is disclosed in the Form ADV Part 2A AI and III BI and IV CII and III DII and IV

The best answer is B. Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue additional business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount - for example, the discounted fee might apply only to members of a local Rotary Club; or the discount might only apply to customers that invest at least $200,000 with the adviser. The adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the Brochure") that is given to clients.

Investment advisory contracts must include a: A. power of attorney B. no assignment clause C. consent to service of process D. duplicate copy for the client

The best answer is B. Investment advisory contracts must include a "no assignment clause" - that is, the contract cannot be assigned to another investment adviser unless the customer consents in writing.

he person named as the executor over an estate would be found in the: A. affidavit of domicile B. letters testamentary C. proof of domicile D. certificate of incumbency

The best answer is B. Letters testamentary is the legal term for the will (as in "last will and testament"). The name of the executor chosen by the person who is now deceased would be found in the will.

All of the following are examples of market manipulation EXCEPT: A. disseminating rumors B. churning C. painting the tape D. wash trades

The best answer is B. Market manipulation means that the price of a security is being manipulated in the market away from the true market value. Disseminating rumors to get people to buy or sell that stock, especially if it is thinly traded, will certainly get the price moving! "Painting the tape" is a term for doing rapid-fire buy/sell trades in that security to show action on the tape, without an actual ownership change. This activity will attract other market participants to trade, again moving the stock's price. Wash trading is another term for "painting the tape." Churning a customer's account is illegal, but it is not market manipulation. Churning is executing trades in a customer account that are excessive in frequency or size, just to generate commission income for that agent.

An Investment Adviser has adopted an external Business Succession Plan. Who is responsible for servicing the IA's client accounts if the managing director of the Investment Adviser suddenly dies? A. Another Investment Adviser Representative currently in the firm B. Another Investment Advisory Firm to which investment management has been transferred C. The custodian bank that holds client funds and securities positions D. An immediate family member of the deceased managing director

The best answer is B. NASAA has a model rule on "Business Continuity and Succession Planning" for Investment Advisors. The rule requires IAs to draft a plan for the actions to be taken in the event of an unexpected major negative event occurring at the IA firm. One of the issues that must be addressed in the plan is the death or disability of key personnel. To continue servicing client accounts in such an instance, the IA can adopt either an "internal" or "external" Succession Plan. In an "internal plan," the Adviser transfers the advisory responsibilities to another IAR currently in the firm. With an "external" Succession Plan, the Adviser transfers client management to another firm.

Suits alleging criminal violations of the Uniform Securities Act must be brought within: A3 years B5 years C10 years D15 years

The best answer is B. Suits alleging criminal violations of the Uniform Securities Act must be brought within 5 years of the occurrence of the alleged violation.

The Administrator can subpoena the records of a broker-dealer or agent: A. only after a violation has occurred B. if he suspects that a violation has occurred C. only if written customer complaints are received by the Administrator D. only if criminal charges are being filed against that person

The best answer is B. The Administrator can subpoena the records of a broker-dealer if he suspects that a violation has occurred or after it is known that a violation has occurred. There is no requirement that records can be subpoenaed only if written customer complaints are received by the Administrator or if criminal charges are filed.

A registered investment adviser lives in State X. The adviser does business with 1 client in State A and 1 client in State B. The adviser gives seminars about investing to groups of potential customers in State C. The adviser is required to register in: A. State X only B. States X and C only C. States X, A, and C D. States, X, A, B, and C

The best answer is B. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer:originates in the Administrator's State;is directed into the Administrator's State; oris accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction.This adviser is physically located in State X, so the adviser must register in State X. Because the adviser has no location in States A and B, and only has 1 client in each of these States, the adviser qualifies for a "de minimis" exemption and does not have to register in those States. The adviser is giving investment seminars to "groups" of potential customers in State C. This activity requires the adviser to be registered in State C.

An investment adviser agrees to direct its portfolio trades to a specific broker-dealer at full commission rates in return for the broker-dealer providing the adviser with a leased new car paid by the broker-dealer. This is: I a soft dollar arrangement II a quid pro quo arrangement III permitted under the Uniform Securities Act IV prohibited under the Uniform Securities Act AI and III BI and IV CII and III DII and IV

The best answer is B. The SEC and State Administrators permit so called "soft dollar" arrangements. An adviser may direct its portfolio trades to a brokerage firm that charges a higher commission (as opposed to the lowest-cost broker) in return for the adviser getting something of value from the broker-dealer, such as research reports, asset allocation software, stock screening software, etc. The "idea" is that the value of the broker-dealer "give-back" is much higher than the "extra commission" amount paid to the broker-dealer by the adviser and will enhance the adviser's investment returns, which will benefit the adviser's clients. The problem here is that the "give back" does not benefit the adviser's clients - rather, it benefits the adviser personally at the expense of his or her clients (since the lease is really being paid by the higher commission charges that are being imposed on all of the adviser's trades for his or her clients).

The Uniform Securities Act subjects agents and broker-dealers who violate the Act's provisions to all of the following EXCEPT: A. Civil Liability B. Civil Penalties C. Criminal Liability D. Criminal Penalties

The best answer is B. The Uniform Securities Act provides for civil liability for unintentional violations of the Act (refund of customer's money plus 6% interest and attorney's fees). For intentional (and serious) violations, the Act provides for criminal liability (jail!) and criminal penalties ($5,000 fine per offense). The Act does not provide for civil penalties (that is, civil fines). These could only be imposed if an action were taken in civil court and the judge imposed punitive damages.

A Federal Covered Adviser (FCA) located in State A advertises in State B. The Administrator of State B can: A. require the FCA to submit its advertising to the State B Administrator before use B. do nothing C. only require the adviser to meet Federal guidelines for advertising D. require the FCA to submit its advertising to the State B Administrator 10 days prior to use

The best answer is B. The basic idea behind the partitioning of investment adviser regulation between the SEC and the States was to eliminate duplicate regulation of investment advisers at both the Federal and State level. A Federal Covered Adviser is only subject to SEC regulation and cannot be required to register in a State and is not subject to State regulation. All the State can require is a "notice filing." Supervision of advertising for a Federal Covered Adviser is the responsibility of the SEC - not the State. The only jurisdiction retained by the State over a Federal Covered Adviser is if a fraud is committed. Note, however, that if the Administrator suspected that a deceit or fraud was being committed, it could investigate the Federal Covered Adviser in the State, and as part of the investigation, it could require the production of books and records, including advertising. However, the question makes no mention of a suspected fraud or deceit.

What is the maximum dollar fine that can be imposed for criminal liability and criminal violations of the Uniform Securities Act? A$2,500 B$5,000 C$7,500 D$10,000

The best answer is B. The fine that can be imposed for criminal violations of the Uniform Securities Act is $5,000 per offense.

All of the following are relevant considerations when determining if a customer account has been churned EXCEPT the: A. customer's investment objective B. length of time that the customer had the account with that broker-dealer C. character of the customer's account D. financial condition of the agent responsible for the account

The best answer is B. The length of time that a customer had an account has no relevance when attempting to determine if churning has occurred. What is relevant is:whether the active trading is in line with the customer's investment objective;the character of the customer's account - that is, the types of investments that have been made in the account and frequency of trading of each investment type; andthe financial condition of the agent (e.g., is the agent not making enough money to pay his bills, so he or she has an incentive to churn?).

All of the following statements are true regarding rules and orders of the Administrator under the Uniform Securities Act EXCEPT: A. rules are general in applicability; orders apply to specific cases B. different penalties apply for violations of rules and orders than for violations of the Act's provisions C. the Administrator may enter an order prior to conducting a hearing D. the Administrator may make any rule or order relating to the Act

The best answer is B. The penalties for violations of the Uniform Securities Act's provisions are the same as for violating a rule or order of an Administrator that is applying the Act. The Administrator may make a rule or order applying to the Act (e.g., the Administrator can modify the Act's provisions by making its own rules; and can enter suspension or revocation orders against registrants). The Administrator can enter an order suspending or revoking a registration, prior to providing a hearing. The only requirement is that an opportunity for a hearing be provided to the person who is the subject of the rule or order.

The intentional omission of material facts when offering or selling a security can result in: I Civil liability II Civil penalties III Criminal liability IV Criminal penalties AI and II only BIII and IV only CI and IV only DII and III only

The best answer is B. This is a subtle question. The willful omission of material facts can result in Criminal Liability and Criminal Penalties. The unintentional omission of material facts when offering or selling a security results in Civil Liability under the Act. There are no Civil Penalties.

What is the best way to ensure that customer account information held at a broker-dealer is not stolen due to cyber theft? A. Require that the customer send a text message to the firm from a registered device before allowing access B. Maintain customer information in a secure website in encrypted form C. Purchase an adequate level of insurance to cover the full range of cyber risks D. Retain third party vendor to evaluate the firm's cyber risks

The best answer is B. To stop individual customer information from being stolen, the firm must have in place procedures to verify who is accessing the customer account information and must verify that it is the actual customer doing so, typically by having the customer use a strong password and having the customer answer questions before allowing access. To stop broad based cyber theft, all customer data must be maintained in a secure website, with the data encrypted.

In order for an agent to share in the gains and losses of a customer's account, all of the following statements are true EXCEPT the: A. client must approve in writing B. agent must approve in writing C. broker-dealer must approve in writing D. agent cannot invest any of his own funds into the account

The best answer is D. Agents are prohibited from sharing in the gains and losses of a customer's account unless there is a written agreement between the customer and the agent which has been approved by the broker-dealer; and the agreement specifies that sharing in gain and loss is proportionate to the capital contribution of each participant in the account.

A broker-dealer that is offering a new issue in a State has obtained a legal opinion from its counsel that the issue is exempt from registration in that State. After the offering is completed, the State Administrator determines that the issue should have been registered. Which statement is TRUE regarding the broker-dealer's liability in this situation? A. The broker-dealer has no liability because it can rely on the legal opinion as its defense B. The broker-dealer has no liability because it acted in good faith in the transaction C. The broker-dealer has civil liability since it offered the securities in contravention of State law D. The broker-dealer has criminal liability because it has shown scienter in this transaction

The best answer is C. A broker-dealer cannot rely on a legal opinion to avoid civil liability. A legal opinion is just that - an opinion - it is not the law, as interpreted by a court. In this situation, both the broker-dealer (and the attorney that gave the erroneous legal opinion) can be held civilly liable. There would be no criminal liability here because the illegal action was not intentional (that is, it was not thought out in advance - "scienter" in Latin).

A customer has previously signed a durable power of attorney giving his spouse power of attorney over his individual brokerage account. Which statements are TRUE? I The power of attorney continues upon the customer's death II The power of attorney ceases upon the customer's death III The power of attorney continues upon the customer's incapacitation IV The power of attorney ceases upon the customer's incapacitation AI and III BI and IV CII and III DII and IV

The best answer is C. A durable power of attorney continues in effect if the grantor is incapacitated. A non-durable power of attorney ceases if the grantor becomes incapacitated. Note, however, that any power of attorney ceases if the grantor dies (the power of attorney dies with the customer!)

An agent may be denied registration for which of the following reasons? I The agent was convicted of embezzling customer funds 5 years ago II The agent is not qualified due to lack of experience III The agent has omitted material facts in his or her registration application IV The agent is financially insolvent AI and IV only BII and III only CI, III, IV DI, II, III, IV

The best answer is C. An agent may be denied registration if he has been convicted of a misdemeanor involving securities or monies, or any felony, within the past 10 years; if he has omitted material facts in his registration application; or if he is financially insolvent, defined as not being able to pay bills as they come due. Registration cannot be denied solely on the basis of lack of experience. In addition to lack of experience, the agent must be unqualified due to lack of training or knowledge.

Under the NASAA Statement of Policy on unethical practices, which of the following investment advisers would be able to loan monies where securities are collateral for the loan? I An investment adviser that has a registered broker-dealer that lends money to a customer through the broker-dealer affiliate II An investment adviser that is a subsidiary of a parent bank that lends money to a customer through the bank affiliate III An investment adviser that is a partnership lends money to a customer under the provisions of Regulation T of the Federal Reserve Board IV An investment adviser that is a corporation lends money to its officers AI and II only BIII and IV only CI, II and IV DI, II, III, IV

The best answer is C. An investment adviser is not permitted to lend money to a customer, unless the investment adviser does so through an affiliated "regulated lender." An affiliated broker-dealer is regulated under Regulation T and can lend money to a customer; as can an affiliated bank. An adviser can lend monies to its officers or employees because they are not customers.

The anti-fraud provisions of the Uniform Securities Act would apply to the sale in the State of: I fixed annuities II variable annuities III whole life insurance IV variable life insurance AI and II only BIII and IV only CII and IV only DI, II, III, IV

The best answer is C. Anti-fraud questions are simple - the anti-fraud rules apply to everyone and everything! However, the Uniform Securities Act only applies to fraud involved in the sale of securities. It does not apply to fraud involved in the sale of a pure insurance product - then that State's insurance laws apply. Both a fixed annuity and a whole life insurance policy are insurance products and are not securities. In contrast, any variable product, either a variable annuity or variable life insurance, is defined as a security, since the underlying separate account funding the contract is invested in mutual funds.

An Investment Adviser located in State A has 3 clients - 1 each in States X, Y and Z. The Investment Adviser places an advertisement offering its services in a local newspaper and gives a seminar about its services in State Z. The Investment Adviser must be registered in: A. State A only B. State Z only C. States A and Z D. States A, X, Y and Z

The best answer is C. Because the Investment Adviser is physically located in State A, it must be registered in State A. Additionally, advertising in the newspaper in State A requires it to be registered in State A. The Investment Adviser must be registered in State Z because it is offering a seminar there. The Investment Adviser is exempted from registering in States X and Y because it only has 1 client in each State and does not have an office in those States. An adviser with no office in a State, that deals with 5 or fewer clients in a State, is exempted from registration.

For an investment advisory contract, which of the following is true or possible? A. Guaranteeing a client specific investment results B. Assigning a contract without client consent C. Sharing in the investment gains in a client account D. Signing a waiver that the client is not required to be notified of any future investment adviser conflicts of interest

The best answer is C. Guaranteeing specific investment results is prohibited, as is assigning an advisory contract to another adviser without client consent. Sharing in the gains and losses of a customer account is prohibited, unless the client is wealthy (either a client with $1,100,000 of assets or $2,200,000 of net worth) - so this is "possible." Finally, a client cannot sign a waiver to any rights that are given under the law - such a waiver is a violation. The model rules under the Uniform Securities Act (and the Investment Advisers Act of 1940, as well) requires that customers be notified in writing of conflicts of interest. This requirement cannot be waived by having the customer sign a document permitting this.

A broker-dealer and agent located and registered in State A have a client that resides in State A. State B is just across the river from State A, and the agent and customer meet at a restaurant in State B to discuss the customer's portfolio. The agent frequently recommends this restaurant to his clients because it has excellent food and reasonably priced drinks. Neither the broker-dealer nor the agent are registered in State B. At the meeting, the agent recommends that the customer buy XYZ stock. The client is not interested in the recommendation, but he has heard about DEF stock from a wealthy friend and tells his agent to buy 1,000 shares of DEF. The agent telephones the order to his assistant in the office in State A. The order is immediately executed and confirmed verbally over the telephone by the assistant to the agent, who informs the client while at the table in the restaurant in State B that the trade is don

The best answer is C. Because the broker-dealer and agent are physically located and registered in State A, the Administrator of State A has jurisdiction. Regarding State B, because the transaction between the agent and the customer was completed there, State B also has jurisdiction. You could attempt to argue that the "vacationing customer" exemption should apply or that the de minimis exemption should apply. However, the issue here is that State B is "just across the river" from State A and the agent "frequently recommends" meeting clients there. So the agent is routinely in State B in this restaurant doing securities transactions, so this is deemed to be a "place of business" in State B. Thus, the broker-dealer and agent must be registered in State B as well. (As with so many test questions, this is a bit subjective and the answer hinges on the regularity of the agent's presence in State B.)

A 75-year old investor calls his securities agent, wanting to buy 1,000 shares of a high risk stock. To fund the investment, the customer is going to liquidate some certificates of deposit that he uses for current income. The registered representative should: A. execute the trade as instructed B. refuse to execute the trade since it is not suitable C. explain to the customer that the trade is not suitable and get a signed non-solicitation letter from the customer before accepting the order D. refer the customer to the manager

The best answer is C. Clearly the trade is unsuitable for the customer, and he must be told this. If the customer still insists that the trade be performed, follow the customer's instructions but get a signed "non-solicitation" letter from the customer for this trade. If the investment turns sour, the agent is protected from customer complaints since he has a written statement from the customer that the agent did not solicit this trade.

An investment adviser representative has joined the local golf club, where there are many wealthy club members. At the club, the IAR has met many individuals who are interested in having her investment advisory firm manage their money. As an inducement only available to club members, the IAR offers to reduce the annual management fee to .25% of annual average net assets from the usual fee of .35%, conditioned upon a minimum of $500,000 being invested by that club member. Which statement is TRUE about this offer? A. This is a prohibited discriminatory fee arrangement under both NASAA and SEC rules B. This is a permitted fee arrangement because it is conditioned upon a minimum investment of $500,000 C. This is a permitted fee arrangement as long as the existence of the negotiated discount is disclosed in the Form ADV Part 2A D. This is a permitted fee arrangement only if the State Administrator approves of the arrangem

The best answer is C. Discounted investment adviser fee arrangements are permitted only if they are disclosed in the Form ADV Part 2A (the IA brochure). The Form ADV is filed electronically with either the SEC (Federal Covered Advisers) or the State using IARD - Investment Adviser Registration Depository within 90 days of year-end. It must be given to advisory clients when an account is opened and an updated Form ADV Part 2A or a Summary of Material Changes to the form must be delivered to customers annually thereafter.

A representative is making a presentation to a married couple, ages 77 and 81, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statements made by the representative would be misleading and fraudulent? I "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" II "I do not earn any commissions when I sell you an EIA" III "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" IV "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company" AI and III BI and II CI, II, III DI, II, III, IV

The best answer is C. Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice I is a misleading statement. Technically the salesperson does not earn a commission, but he or she does earn a very steep sales charge, so Choice II is misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice III a misleading statement. Choice IV is true - the contracts have a minimum guaranteed rate of return (like around 4%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.

Which of the following, if it contains an offer of securities, is considered to be an offer made within a State, subject to jurisdiction of that State's Administrator? A. Television broadcast from another State received in that State B. Radio broadcast from another State received in that State C. Newspaper published in the State and read in that State D. Newspaper published out of that State, read in that St

The best answer is C. For a television or radio broadcast to come under the jurisdiction of the State Administrator, it must originate in that State. For a newspaper offering to come under the jurisdiction of the State Administrator, it must be published in the State, and have at least 1/3 of its circulation in that State. Choices A and B are clearly incorrect. Choice C is the best choice since this newspaper is published in the State and read in the State. Choice D must be incorrect because that newspaper is published outside of the State.

The Administrator of a State determines that a broker-dealer has violated State law by selling unregistered non-exempt securities and issues a cease and desist order. If the broker-dealer continues to offer these securities in the State, then the Administrator may: A. refer the case to the SEC who can issue an injunction B. bring action in Federal Court to request an injunction C. bring action in a court of competent jurisdiction to request an injunction D. refer the case to the local police for arrest and arraignment of the officers and agents of the broker-dealer

The best answer is C. If a cease and desist order is not obeyed, the Administrator has the power to bring action in State court (not Federal court) seeking an injunction. If the court issues an injunction, then if the broker-dealer were to continue selling the unregistered non-exempt securities, the Administrator could petition the court to issue an arrest warrant for the officers and agents of the broker-dealer involved.

A sales representative who fails to register as an agent of a broker-dealer: I has committed a felony II has committed a misleading Act III is subject to civil liability IV is subject to criminal liability AI and III only BI and IV only CII and III only DII and IV only

The best answer is C. If a sales representative fails to register in a state, this is not deemed to be a serious enough offense for criminal action. This person is subject to civil liability.

Which of the following orders would be performed in a discretionary account? A. A customer places an order to buy 100 shares of IBM at the best price available B. A customer places an order to sell 100 shares of KO at the market C. A customer places an order to buy 100 shares of any computer stock priced at under $40 D. A customer places an order to sell 100 shares of GE when it gets to a certain level or lower

The best answer is C. If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." If the agent chooses any more than price or time - that is, the size of the trade or the security to be traded - a power of attorney is required.

The Administrator will revoke the registration of an investment adviser if: A. a representative of the adviser becomes insolvent, meaning that he cannot pay his bills as they come due B. an officer of the adviser becomes insolvent, meaning that he cannot pay his bills as they come due C. the adviser becomes insolvent, meaning that the firm cannot pay its bills as they come due D. any of the above

The best answer is C. If an employee or officer of an advisory firm goes broke, this has no effect on the firm's registration in that State. However, if the firm goes broke (cannot pay its bills as they come due), then the adviser's registration will be revoked in that State.

Which of the following statements are TRUE about an offer of rescission? I The offer can only be made prior to the institution of a lawsuit alleging a securities violation II An offer must be made to buy back the security at the original purchase price III The customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security IV The customer must sign a waiver of non-compliance to accept the offer AI and II only BIII and IV only CI, II, III DI, II, III, IV

The best answer is C. If an offer of rescission is made on the inadvertent sale of a non-exempt security that should have been registered under the Act, the offer can only be made prior to the institution of a lawsuit alleging a securities violation. An offer must be made to buy back the security at the original purchase price, plus the customer must be paid interest at the legal rate in the State (6%), less any dividend or interest income received from that security. There is no requirement for the customer to sign a waiver of non-compliance to accept the offer. Any offer of rescission must be accepted within 30 days of the offer.

If an unregistered agent effects transactions for a registered broker-dealer, all of the following statements are true under the Uniform Securities Act EXCEPT: A. the broker-dealer may be subject to disciplinary action B. the purchaser may recover the full purchase price plus interest on unprofitable investments, while retaining those investments that are profitable C. the agent is only subject to disciplinary action if a customer complains D. the Administrator may deny a future registration application of that agent

The best answer is C. If an unregistered agent effects securities transactions for a registered broker-dealer, both the dealer and agent are subject to disciplinary action (making Choice A true). Anyone who purchased securities from the unregistered agent, under the Act's civil liability provisions, can force the seller to buy back the securities at original cost plus interest (net of any income received from the securities). Also note that the purchaser can choose to keep any investments that he or she likes; forcing the seller to take back only the "bad" ones. Thus, Choice B is true. It is incorrect to state that the unregistered agent is subject to disciplinary action only if a customer complains (Choice C). A customer complaint has no bearing on this - the violation occurred, customer complaint or not, when the unregistered agent sold the security. Finally, of course the Administrator can deny a future registration application from this individual - since he already broke the law.

The Administrator has determined that a registered broker-dealer has been selling unregistered non-exempt securities to customers in the State and has issued a cease and desist order against the firm. Which statement is TRUE? A. The firm may not solicit securities transactions from customers but can accept unsolicited transactions B. The firm can participate in initial public offerings sold with a prospectus but cannot effect secondary market transactions for customers C. The firm can petition a court of law in the State to review the order D. The firm may continue to sell unregistered non-exempt securities in the State until a stop order is issued by a court of law

The best answer is C. If the Administrator issues a cease and desist order against a broker-dealer, the broker-dealer is compelled to stop the activity that is violating the Act. So, in this case, the broker-dealer must stop selling unregistered non-exempt securities. The Administrator must provide the broker-dealer with an opportunity for a hearing. If, after the hearing, the order still stands, the broker-dealer can request a judicial review of the order - no later than 60 days after the entry of the final order.

Which of the following is NOT a "Red Flag" for securities fraud operated through social media? A. An e-mail received promoting a stock from an unknown sender B. A claim made on Twitter that a stock's price is about to "go through the roof" C. A website promoting an investment with no risk offering 30% monthly returns D. A banner advertisement placed by a broker-dealer on a "stock pick" chat room

The best answer is D. E-mails received promoting stocks from unknown senders are a red flag for social media investment fraud, as are unfounded or exaggerated claims about investments made on websites and apps such as Facebook or Twitter. Banner advertisements placed by broker-dealers are not a red-flag (since they are regulated by FINRA).

Under the Uniform Securities Act, all of the following are requirements for advisory contracts EXCEPT: A. the investment adviser cannot assign the contract to another adviser without the written consent of the customer B. the investment adviser must notify the customer of any changes in the composition of the partnership, if the adviser is so structured C. the investment adviser must notify the customer of its current standing as either a federal covered adviser or state registered adviser D. the investment adviser cannot be compensated based on the performance of the securities held in the managed portfolio

The best answer is C. Investment advisory contracts, under State law, cannot base the fee on the performance in the account (unless the customer is wealthy). The fee can either be based on a percentage of assets under management; or can be a flat fee arrangement. Advisory contracts cannot be assigned to another adviser without prior customer consent. If an adviser is a partnership, any customer must be notified of changes in the composition of the partnership within a reasonable time after the change. There is no requirement for an adviser to disclose whether it is a federal covered or state registered adviser.

Jack Jones has been an IAR with a registered investment adviser for 10 years. He is leaving to start his own state-registered advisory business as a sole proprietor. He has hired an advertising firm to create a radio spot for his new firm. The account manager recommends that they use one of his largest clients - the managing partner of a prominent law firm in town - to give a testimonial about Jack. The lawyer agrees and records the following: "I have been a client of Jack Jones for the past 10 years. My investments with Jack have reliably produced superior returns and he has always acted ethically and with integrity." The use of this testimonial in a radio advertisement is: A. permitted since it is being made by a person that is unaffiliated with Jack Jones B. permitted because it is true and not misleading C. prohibited under NASAA rules for state-registered advisers D. prohibited because the lawyer cannot express

The best answer is C. NASAA prohibits the use of testimonials in advertising by state-registered advisers. Note, in contrast, that federal law permits the use of testimonials in advertising for broker-dealers and federal covered advisers, as long as any payment is disclosed.

An individual that has not yet passed the appropriate State licensing examination for agent registration in a State would be permitted to: I call existing customers of the firm to solicit orders II call existing customers of the firm to invite them to seminars III make cold calls to potential customers and respond to their questions IV call other agents of the firm and offer them recommendations made by the firm AI and II only BI and III only CII and IV only DI, II, III, IV

The best answer is C. Prior to being licensed as an agent, an individual can only perform clerical functions. The individual cannot solicit existing or potential customers ("make cold calls"), cannot make recommendations, cannot perform a suitability determination and cannot write order tickets. These are promotional activities. Unregistered individuals can basically only perform clerical functions. They can call existing customers to invite them to seminars; and they can call other agents of the firm, since the agents should know what they are doing!

A registration application filed by a new investment adviser with the State Administrator details that the adviser "will solely employ contrarian indicators and other non-traditional factors, including market psychology and investor sentiment measures to select investments." Under the Uniform Securities Act: A. registration must be denied since the applicant has not demonstrated a track record using this investment methodology B. registration must be denied because the use of non-traditional indicators is not in the public interest C. registration cannot be denied unless such an order is in the public interest and the applicant is subject to statutory disqualification D. registration cannot be denied unless the Administrator makes a determination that the business of the adviser is fraudulent

The best answer is C. The Administrator cannot deny a registration application of a broker-dealer, investment adviser or their agents unless it is in the public interest and the applicant is subject to "statutory disqualification" as detailed in the Uniform Securities Act. The Administrator will deny registration if the applicant has:filed a misleading application, which is interpreted as a materially incomplete application or one that is misleading with respect to any material fact.willfully violated the provisions of the Act.been convicted of a misdemeanor involving any aspect of the securities business; or any felony; within the past 10 years.been enjoined by any court from engaging in or continuing to conduct any aspect of the securities business.been suspended or had its registration revoked by any State or the Securities and Exchange Commission within the past 10 years.engaged in dishonest or unethical business practices.been found to be insolvent, defined as not being able to meet obligations as they mature.been found to be unqualified due to lack of training, experience, or knowledge of the securities business. However, lack of experience alone is not sufficient to deny registration.failed to reasonably supervise subordinates. This provision applies to broker-dealers and investment advisers. This does not apply to agents.The fact that this adviser will use "non-traditional" methods to select investments has no bearing. As long as the adviser discloses the methodology used to clients, all is OK! Also note that Choice D would be one of the listed reasons to deny registration, but Choice C covers all of the possible reasons to deny registration and thus is the better choice.

The Administrator can take which of the following actions? I Coordinate inspections with those conducted by the Securities and Exchange Commission II Inspect a broker-dealer located in another State that does business in the Administrator's State III Require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness IV Suspend the constitutional privilege against self-incrimination available to an individual AI and III BII and IV CI, II, III DI, II, III, IV

The best answer is C. The Administrator may coordinate inspections with those conducted by the Securities and Exchange Commission; may inspect a broker-dealer located in another State that does business in the Administrator's State; and may require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness. However, the Administrator cannot suspend the constitutional privilege against self-incrimination available to an individual, since this Federal law (5th Amendment to the Constitution) supersedes any State law.

The determinant of whether that State's Administrator would initiate a proceeding against an investment adviser for violations of the Uniform Securities Act is if the: A. adviser has an office located in that State B. violation involved securities registered in that State C. illegal conduct occurred in that State D. customer of the adviser filed a complaint in that State

The best answer is C. The Administrator will take action in that State if the illegal conduct occurred in that State.

Under the provisions of the Prudent Investor Act, a Registered Investment Adviser should consider all of the following when investing and managing trust assets EXCEPT: A. General economic conditions B. Possible effect of inflation C. Trading patterns of plan beneficiaries D. Investment tax consequences

The best answer is C. The Prudent Investor Act states that the trustee should consider the following when making investment decisions relevant to the trust or its beneficiaries:General economic conditions;Possible effects of inflation or deflation;Expected tax consequences of investment decisions or strategies;The role that each investment plays within the overall trust portfolio;The expected total return;Other resources of the beneficiaries;Needs for liquidity, regularity of income, and preservation or appreciation of capital; andAn asset's special value to one or more of the beneficiaries.

The Prudent Investor Act requires that fiduciaries manage the assets of their beneficiaries based upon: A. legal list requirements B. efficient market theory C. modern portfolio theory D. value investing theory

The best answer is C. The Prudent Investor Act, adopted in most States, is a modernization of the "prudent investor rule" restricting the investment authority of fiduciaries. Instead of setting forth a list of "approved" securities (a "legal list") for investment, the Prudent Investor Act allows fiduciaries to use modern portfolio theory for investment decision making. Thus, instead of just investing in securities that have minimal risk, the fiduciary can apply risk-return analysis to choose the "best" investments for the level of risk assumed. Investment performance is not measured on each individual investment, but rather by looking at the overall portfolio return.

If an investment adviser is found to be insolvent, powers of the Administrator include the ability to: I petition the court to issue a permanent injunction against a person from engaging in the investment advisory business II make the showing required to appoint a receiver to protect the assets of customers held in custody of the investment adviser III imprison individuals for a period of up to 10 years for willful violations AI only BII only CI and II DI, II, III

The best answer is C. The State Administrator is empowered to, upon discovering a violation of the Uniform Securities Act, seek a permanent injunction (from the appropriate court) against a person from engaging in the investment advisory business; and can make a showing (to a court) so that a receiver is appointed to protect the assets of customers held in custody by the investment adviser. When taking such action, an opportunity for a hearing must be provided to the investment adviser. The Administrator cannot imprison individuals for violations - this action can only be taken in a court of law. (Note that the Administrator may petition a court to take such action.)

he Uniform Securities Act subjects agents and broker-dealers who violate the Act's provisions to which of the following? I Civil Liability II Civil Penalties III Criminal Liability IV Criminal Penalties AI and II only BIII and IV only CI, III, and IV DI, II, III, IV

The best answer is C. The Uniform Securities Act provides for civil liability for unintentional violations of the Act (refund of customer's money plus 6% interest and attorney's fees). For intentional (and serious) violations, the Act provides for criminal liability (jail!) and criminal penalties ($5,000 fine per offense). The Act does not provide for civil penalties (that is, civil fines). These could only be imposed if an action were taken in civil court and the judge imposed punitive damages.

Which of the following is NOT required to be in an investment advisory contract under NASAA rules? A. The formula for computing the advisory fee B. A clause prohibiting the adviser from assigning the contract without customer consent C. A list of the states in which the adviser is registered D. Disclosure of whether the contract gives the adviser discretionary authority

The best answer is C. The advisory contract, under NASAA rules, must include:Description of services provided;Term of contract;Formula for computing fees;Amount of prepaid fees to be returned if contract is terminated early;Assignment of the contract is not permitted unless the customer approves;Whether the contract grants discretionary authority to the adviser; andDisclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.

During the past year, an agent of a registered broker-dealer has offered partnership units to wealthy investors in a private placement. The agent finds that he has been named in a civil lawsuit filed by one of the buyers of the private placement units, claiming that untrue statements were made by the agent in connection with the sale of the issue. Which of the following is a defense against the buyer's claim that is most likely to be upheld by a court of law? A. The agent can claim that the buyer was informed of all material facts and is filing a frivolous lawsuit to extract a large settlement from the agent B. The agent can claim that because the investor was wealthy, he or she is "sophisticated" and understood the merits of the transaction prior to entering into a contract to buy the partnership unit C. The agent can claim that he took reasonable care to ensure that no untrue statements were made at, or before, the

The best answer is C. The agent is being accused of making untrue statements when selling a security to a customer. Making untrue statements of material fact or omitting statements of material fact when selling securities is fraudulent. However, if the agent can show that he took reasonable care to ensure that no untrue statements were made in connection with the sale of the security and that the agent did not, and could not, know of the untrue statement, then the court will reject the claim of the customer. This is the only defense of the 4 choices offered that addresses the customer's claim. The other defenses offered do not address the customer's claim (e.g., the suit is frivolous; the customer is wealthy and knew what he was doing, etc.)

An agent of a broker-dealer may: A. charge a fee for investment advice in addition to any commission charged if a recommendation performs well B. increase the commission charged retroactively if a recommendation performs well C. charge for clerical services where the charge is not based on performance D. charge for clerical services if a recommendation performs well

The best answer is C. The only fee that can be accepted for executing a transaction is the original commission charged. A broker-dealer cannot charge separately for investment advice; any charge for investment advice is included in the broker's commission charge. Charges for clerical services are permitted as long as the charges are fair and reasonable and do not discriminate among customers. A broker-dealer cannot increase commission charges or clerical fees if the account performs well.

Which of the following statements are TRUE regarding rules and orders of the Administrator under the Uniform Securities Act? I Rules are general in applicability; orders apply to specific cases II Different penalties apply for violations of rules and orders than for violations of the Act's provisions III The Administrator may enter an order prior to conducting a hearing IV The Administrator may make any rule or order relating to the Act AI and II only BIII and IV only CI, III and IV DI, II, III, IV

The best answer is C. The penalties for violations of the Uniform Securities Act's provisions are the same as for violating a rule or order of an Administrator that is applying the Act. The Administrator may make a rule or order applying to the Act (e.g., the Administrator can modify the Act's provisions by making its own rules; and can enter suspension or revocation orders against registrants). The Administrator can enter an order suspending or revoking a registration, prior to providing a hearing. The only requirement is that an opportunity for a hearing be provided to the person who is the subject of the rule or order.

he statute of limitations for criminal violations of the Uniform Securities Act is: A1 year B3 years C5 years D6 years

The best answer is C. The statute of limitations for criminal violations of the Uniform Securities Act is 5 years.

The amount of commission charged to a customer to effect a securities transaction: A. is not required to be disclosed B. must be disclosed prior to executing the transaction C. must be disclosed on the trade confirmation D. must be disclosed on the account statement

The best answer is C. There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade.

he President of an investment advisory firm is also a registered representative of a broker-dealer. This fact is disclosed in the adviser's disclosure document. The President buys 50 partnership units for his clients who are suitable. The President does not disclose to the clients that he receives a commission on each partnership unit purchased by his clients. Under NASAA Rules on Unethical Business Practices for Investment Advisers and Federal Covered Advisers, is this permitted? A. Yes, because the President is properly registered as an agent of a broker-dealer and this fact is disclosed in the adviser's disclosure document B. Yes, because the adviser determined the suitability of the investment for each of his clients C. No, because the adviser should have specifically informed each client that he would earn a commission on each limited partnership unit sold D. No, because officers of investment advisers are not p

The best answer is C. There is no suitability issue here, but there is a conflict of interest issue. The adviser is earning a commission on each partnership unit recommended and sold to his customers. This is a conflict of interest that must be disclosed to customers.

If a complaint is received by a State Administrator alleging that a Federal covered adviser stole funds from a customer, the State Administrator can do all of the following EXCEPT: A. conduct an investigation B. issue a cease and desist order C. revoke the registration of the adviser D. refer the matter to the SEC

The best answer is C. This is a federal covered adviser, so it is not registered with any State; rather, it is registered with the SEC and only the SEC can revoke its registration. Regarding each State, the adviser must notify the State if it is doing business in the State. If a complaint is filed with the Administrator of a State for a federal covered adviser, the State can still investigate and issue an order; and the State can coordinate an investigation with other State Administrators and the SEC.

A customer submits a written complaint to your broker-dealer. Later, he changes his mind and asks that the complaint be returned. You should: A. do nothing unless the customer makes a written request B. return the original written complaint to the client C. return a copy of the complaint to the client and retain the original complaint in the firm's files D. return the original complaint to the client and retain a copy of the complaint in the firm's files

The best answer is C. This is very judgmental. SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways:The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; orInstead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original." Thus, Choice C is the best answer.

The Administrator of State Z receives a complaint about an advertisement placed by an investment adviser. The complaint claims the advertisement stated that: "Any investment made with IZZI Advisers would double in 5 years." IZZI Advisers is located in State X and the advertisement was created in State X and distributed in States X and Z. Which statement is TRUE? A. The Administrator of State Z has no jurisdiction because the adviser is located in State X B. The Administrator of State Z will refer the complaint to the Administrator of State X C. The Administrator of State Z will investigate the complaint D. The Administrator of State Z will enjoin IZZI Advisers from the publication of future advertisements in the State Z

The best answer is C. This one is pretty simple. If a State Administrator receives a complaint about a BD or IA, it will first investigate to see if the complaint has validity. The Administrator of State Z has jurisdiction because the advertisement was distributed in State Z. If the Administrator of State Z finds that the complaint has validity, then the Administrator may issue a cease and desist order against IZZI Advisers and can also refer the matter to the Administrator of State X, where IZZI Advisers is based. The Administrator cannot enjoin IZZI Advisers from publishing future advertisements in State Z; this can only happen if the Administrator petitions a court of law to take this action and the court does so.

Under Regulation SP, customers must be given a privacy notice: A. prior to each recommendation B. prior to each trade execution C. prior to the first transaction D. with each statement of account

The best answer is C. Under Regulation SP ("Statement of Privacy"), customers must be given a privacy notice at, or prior to, account opening. An account is considered to be opened with the first transaction. Once the account is opened, the privacy notice must be presented to the customer at least annually thereafter.

A broker-dealer headquartered in State X has an agent that is located in State Y. The agent accompanies a customer to State Z on a golf outing, where the agent makes an offer of securities to the customer. Which State(s) has (have) jurisdiction over the offer? A. State X only B. State Y only C. State Z only D. States X, Y and Z

The best answer is C. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer:originates in the Administrator's State;is directed into the Administrator's State; oris accepted in the Administrator's State.Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. In this scenario, the "vacationing" exclusion does not apply because it ONLY applies when an agent registered in another State makes an offer into a State where the customer is vacationing. It does NOT apply if both the agent and the customer are both in another State, where the offer is made. Both the agent and the customer are vacationing in State Z, where the offer of securities is made. Therefore, State Z has jurisdiction. The agent did not make an offer of securities from State Y and the offer was not accepted in State Y, so State Y does not have jurisdiction in this instance. The fact that the agent's broker-dealer is headquartered in State X has no bearing on the Administrator's jurisdiction.

An Investment Adviser registered in the State has a limited number of IARs to cover various industry sectors. In order to increase its coverage of companies that are not in sectors assigned to its in-house analysts, it buys third party research reports, which it sends to its advisory clients on request. Which statement is TRUE? A. Because the third party research reports are only provided on customer request, these are given an "unsolicited customer" exemption under NASAA rules B. Investment advisers are prohibited from using third party research reports C. The fact that the investment adviser did not produce the research report must be disclosed to any person that receives the report D. The report can be distributed to sophisticated institutional clients who understand the limitations of third party research reports and not to retail clients

The best answer is C. Under the NASAA Statement of Policy on unethical practices, if a third party research report is given to customers, it must be disclosed that the adviser did not prepare the report.

A customer enters a bank branch where he has a savings account and is approached by the branch manager who asks: "Are you interested in earning a higher rate of return than we offer on our savings accounts? Let me introduce you to our securities representative." If the customer opens a securities account, which disclosures are required to be made? I Securities products are not insured by the Federal Deposit Insurance Corporation II Securities products are not deposits or other obligations of financial institution III Securities products are subject to investment risks, including possible loss of principal IV Securities products are subject to taxation of income and capital gains AI and II only BIII and IV only CI, II, III DI, II, III, IV

The best answer is C. When a customer enters a bank that has a securities "kiosk," this is called a securities branch in a bank setting. Any salesperson selling the securities in the branch must be properly registered and licensed. Note that this person can be both a bank employee and an employee of a broker-dealer, usually owned by the bank, at the same time. When a customer wishes to buy securities in that location, the sales representative must comply with the "Not-Not-May" Rule. The salesperson must inform the customer verbally and in writing (this is done by giving the customer a written brochure) that:Securities are NOT FDIC insured;Securities are NOT bank deposits; andSecurities are subject to investment risk and MAY lose value. In addition, the representative must attempt to get the customer to sign a statement that he or she understands this. There is no requirement to disclose the tax consequences of the investment.

A customer contacts an agent of a broker-dealer, asking for an investment that has no risk. The agent recommends the purchase of Treasury notes or bonds, stating that these are "riskless" securities. Which statement is CORRECT regarding this recommendation? A. The agent has not violated the Uniform Securities Act because Treasury securities are free from risk of default of either payment of interest or principal B. The agent has not violated the Uniform Securities Act because Treasury securities are free from interest rate or market risk C. The agent has acted unethically because Treasury securities that are not a short term maturity have interest rate risk D. The agent has acted unethically because there are no securities that are completely free of risk

The best answer is C. While Treasury securities are considered to be "risk free" when it comes to risk of default (since the U.S. Government has the power to "print" the money to pay off its debt, if worse comes to worse), any fixed interest rate security with a long term expiration is subject to market or interest rate risk. This is the risk that as market interest rates rise, the price of fixed income securities must fall to bring their yield up to a level that is competitive with current market rates. It would be unethical not to disclose this risk to a customer.

A sales representative who sells unregistered securities to customers in non-exempt transactions: I has committed a felony II has committed a misleading Act III is subject to fines and imprisonment IV is subject to buying back the security at the purchase price plus interest at the legal rate in that State, less any dividend or interest income received on that security AI and III only BI and IV only CII and III only DII and IV only

The best answer is D. If a sales representative sells unregistered securities in a non-exempt transaction (these securities should have been registered in the State), he or she is subject to civil liability (this is not serious enough for criminal penalties). In this case, the individual is subject to buying back the security at the original price, plus interest and attorney's costs; less any income received from the security during the period it was held.

An investment adviser representative who is both located and registered in New York State has clients in New Jersey and Connecticut. The State Administrator of Connecticut, located in Hartford, has subpoenaed the representative to testify in Hartford. The representative: A. is only obligated to testify if he or she is registered in the State of Connecticut B. is only obligated to testify if the adviser has an office in the State of Connecticut C. is exempt from the requirement to testify in any State except New York D. must comply with the subpoena or be held in contempt of court

The best answer is D. A State Administrator has jurisdiction over transactions that occur in his State. Even though this representative is located in New York, because the firm has clients in Connecticut, the Connecticut State Administrator has jurisdiction over transactions that take place in Connecticut. The representative must comply with the subpoena to testify, otherwise he or she will be found in contempt of court.

A customer has previously signed a non-durable power of attorney giving his spouse power of attorney over his individual brokerage account. Which statements are TRUE? I The power of attorney continues upon the customer's death II The power of attorney ceases upon the customer's death III The power of attorney continues upon the customer's incapacitation IV The power of attorney ceases upon the customer's incapacitation AI and III BI and IV CII and III DII and IV

The best answer is D. A durable power of attorney continues in effect if the grantor is incapacitated. A non-durable power of attorney ceases if the grantor becomes incapacitated. Note, however, that any power of attorney ceases if the grantor dies (the power of attorney dies with the customer!)

All of the following orders must be retained as a record by broker-dealers EXCEPT: A. executed orders B. unexecuted orders C. canceled orders D. subscription orders

The best answer is D. A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

Internet communications by agents of broker-dealers will NOT be considered to be offers of securities transactions in a State as long as the: I communication is limited to "general" information II agent's affiliation with the broker-dealer is prominently displayed III broker-dealer retains responsibility for the review and approval of the content IV agent does not exceed the scope of authority granted by the broker-dealer AI and II BIII and IV CI, II, III DI, II, III, IV

The best answer is D. All of the choices are true in order for an Internet Communication by an agent not to be considered to be an offer of securities transactions in a State. The communication must be general in nature; the agent's affiliation with the broker-dealer must be prominently displayed; the broker-dealer must review and approve of the communication; and the agent cannot exceed the scope of authority granted by the broker-dealer in the communication. If these requirements are not met, then both the broker-dealer and the agent must be registered in each State where a customer receives the communication.

The anti-fraud provisions of the Uniform Securities Act would apply to the sale in the State of: A. both fixed and variable annuities B. both whole life and variable life insurance policies C. variable annuities only D. both variable annuities and variable life insurance

The best answer is D. Anti-fraud questions are simple - the anti-fraud rules apply to everyone and everything! However, the Uniform Securities Act only applies to fraud involved in the sale of securities. It does not apply to fraud involved in the sale of a pure insurance product - then that State's insurance laws apply. Both a fixed annuity and a whole life insurance policy are insurance products and are not securities. In contrast, any variable product, either a variable annuity or variable life insurance, is defined as a security, since the underlying separate account funding the contract is invested in mutual funds.

The anti-fraud provisions of the Uniform Securities Act apply to: I exempt securities II non-exempt securities III exempt transactions IV non-exempt transactions AI only BI and II CIII and IV DI, II, III, IV

The best answer is D. Anti-fraud questions are simple - the anti-fraud rules apply to everyone and everything, as long as a security is involved!

A Web site created by a broker-dealer will NOT be considered to be an offer of securities in a State as long as all of the following conditions are met EXCEPT the communication: A. is limited to "general" information B. does not attempt to effect securities transactions C. contains a legend that the broker-dealer can only effect business in that state if it is registered in the state D. is filed in advance of use with the state Administrator

The best answer is D. As long as a web site is limited to "general" information and does not attempt to induce customers to effect securities transactions, then an "offer" is not being made in the State. In addition, the Web site must show a legend that the broker-dealer can only transact business in the State if it is first registered in that State. Finally, any follow-up "individualized" responses to customers involving securities transactions require that the broker-dealer and its agents be registered in the State. There is no requirement to file the Web site with the state Administrator in advance of use.

A registered investment adviser located in State A only sells its services to registered investment companies. The RIA has a client with its home office in State B. The client also has an office in State C. State C can: A. require the investment adviser to register as an RIA in the State B. require the client to register as an RIA in the State C. require the RIA to have an office in the State D. do nothing

The best answer is D. Because the adviser is located in State A, it must file notice there (since it is a federal covered adviser.) There is no mention of the adviser having a location in State C. Since the adviser's only client in the State is an investment company (an institutional investor), and the adviser has no location in the State, State C has no jurisdiction over the adviser. Note that if the adviser either had an office in State C, or if the adviser had more than 5 retail clients in State C, then it would have to file notice in State C as well.

A sales representative who lives in Florida has a customer who lives in Georgia. The customer spends his summers visiting relatives in New York, where the representative also effects securities transactions with the customer. Which statement is TRUE? A. Only the New York Administrator has jurisdiction over the transactions B. Only the Florida Administrator has jurisdiction over the transactions C. Only the Florida and Georgia Administrators have jurisdiction over the transactions D. The New York, Florida, and Georgia Administrators all have jurisdiction over the transactions

The best answer is D. Because the representative is located in Florida and is making offers from Florida, the agent must be registered in Florida and Florida has jurisdiction over the agent. Because the customer lives in Georgia, the agent must be registered in Georgia to do business with that client and the Georgia Administrator has jurisdiction over transactions that occur in Georgia. Finally, because the customer spends "summers" in New York, this is more than a "vacation." The agent must be registered in New York unless the agent can qualify for a "de minimis" exemption. So the best answer is that all 3 Administrators have jurisdiction.

A person who offers or sells securities that result in a violation of Uniform State Law has civil liability to: I buy back the security at the original purchase price II pay any reasonable court and attorney's costs III pay interest at the legal rate in the State for the period the security was held; reduced by any income derived from that security AI only BI and II only CII and III only DI, II, III

The best answer is D. Civil liability under the Uniform Securities Act requires the violator to:buy back the security at the original purchase pricepay any reasonable court and attorney's costs, andpay interest at the legal rate (6%) in the State for the period the security was held; reduced by any income derived from that security.

Under the Uniform Securities Act, during an investigation, the Administrator may: A. require an affidavit from an agent of a broker-dealer B. subpoena books, records and witnesses C. require testimony that might tend to incriminate the giver D. all of the above

The best answer is D. During an investigation, the Administrator may require affidavits from agents and their broker-dealers; can subpoena books, records, and witnesses; and can require testimony that may tend to incriminate the giver. Please note that the giver of such testimony may use his constitutional Fifth Amendment rights (Federal Law) against self-incrimination to withhold such testimony. The point here is that we are dealing with State law, not Federal law!

A sales representative who unintentionally gives a fictitious quote to a customer: I has committed a felony II has committed a misleading Act III is liable to execute a trade for the customer at that price IV is subject to buying back the security at the purchase price plus interest at the legal rate in that State, less any dividend or interest income received on that security AI and III only BI and IV only CII and III only DII and IV only

The best answer is D. If a sales representative unintentionally gives a fictitious quote, that is considered to be a misleading action, which is subject to civil liability, since the misrepresentation was not willful. In this case, the individual is subject to buying back the security at the original price, plus interest and attorney's costs; less any income received from the security during the period it was held.

If a customer exercises the right of rescission allowed under the Uniform Securities Act, the offer must be accepted within: A. 10 days of written notice from the seller B. 15 days of written notice from the seller C. 20 days of written notice from the seller D. 30 days of written notice from the seller

The best answer is D. If an offerer offers in writing to buy back a securities issue that was inadvertently sold in the State at original cost plus interest paid at the legal rate in the State (6%), plus any attorney's or court costs (net of any dividends or interest received by the holder), buyers of the issue have 30 days to accept the offer. Otherwise, the offer is null and void, and the offerer is relieved of any further obligation to buy back the issue. Thus, buyers must exercise their right of rescission within 30 days' written notice by the offerer.

Which of the following is (are) prohibited in a margin account? I A customer buying a security without the intention to pay on settlement II A customer selling a security without the intention to deliver on settlement III A customer selling short a security that cannot be borrowed and delivered on settlement AI only BI and II CII and III DI, II, III

The best answer is D. In any account, whether it be a cash or margin account, a customer cannot buy a security without intending to pay on settlement, and cannot sell a security without intending to deliver on settlement. Short sales can only be effected in a margin account. Selling short a security means that the security to be sold is borrowed from another customer of the broker-dealer. A short sale is not permitted unless it is first determined that the security to be sold can be borrowed and delivered by settlement.

A customer buys shares of a stock that had its initial public offering 5 years ago. Which statement is TRUE regarding prospectus delivery? A. The prospectus must be delivered to the customer within 24 hours of confirmation B. The prospectus must be delivered to the customer within 3 business days of the transaction C. The prospectus must be delivered to the customer no later than settlement of the transaction D. A prospectus is not required because the initial public offering happened 5 years ago

The best answer is D. Prospectus delivery is only required for new issues being sold in the primary market. Once a company is trading in the secondary market, it is reporting its results to the SEC and this information is publicly available. Thus, an investment decision can be made from this information and there is no longer a prospectus delivery requirement.

The State Administrator would NOT deny the registration application of an Investment Adviser because the IA was the subject of a(n): A. adjudication 4 years ago by the Securities and Exchange Commission that the adviser willfully violated the Investment Company Act of 1940 B. conviction in a court of law for a misdemeanor involving the securities business 4 years ago C. determination by the Commodities Futures Trading Commission 4 years ago that the IA willfully violated CFTC rules under the Commodities Exchange Act D. personal bankruptcy proceeding 4 years ago that relieved the individual from the claims of all unsecured creditors as of the date of the bankruptcy filing

The best answer is D. Registration as a broker-dealer, agent, investment adviser or investment adviser representative will be denied if that person was convicted of any misdemeanor involving securities or money within the past 10 years; or if that person was convicted of any felony within the past 10 years. Thus Choice B will result in denial of registration. If that person was found to have violated the securities or commodities laws within the past 10 years, then registration will be denied. Thus, Choices A and C will result in denial of registration. If that person is insolvent, then registration will be denied. However, just because an individual filed for bankruptcy 4 years ago, this does not mean that registration will be denied. Any bankruptcy that occurred within the past 10 years must be disclosed, but it is not an automatic disqualifier from registration. After all, the individual might have emerged from bankruptcy a reformed person and is now solvent. (Of course, if that individual were still in the bankruptcy proceeding, then he or she would be "insolvent" and registration would be denied, but this happened 4 years ago.)

Which statement is FALSE about rules created by the Administrator? A. Rules are not written as part of the Uniform Securities Act but carry the weight of law B. Rules are issued by the Administrator to provide interpretation of the Uniform Securities Act C. Rules issued by the Administrator cannot contravene the provisions of the Uniform Securities Act D. Rules issued by the Administrator are not required to be published as a matter of public record

The best answer is D. Rules are written by the Administrator to interpret the provisions of the Uniform Securities Act. The basis for the issuance of the rule is to protect investors. The rules cannot contravene the Act's provisions. Administrative rules are a matter of public record - otherwise, how would anyone know what the rules are?

An Investment Adviser is registered in both State A and State B, and has its principal office in State B. State A would be allowed to do all of the following EXCEPT: A. review the Investment Adviser's books and records in State A B. review the Investment Adviser's books and records in State B C. require advertising and sales literature to be filed in State A D. require advertising and sales literature to be filed in State B

The best answer is D. State A has the authority to inspect the IA's books and records, no matter where they are located, so State A can inspect the IA's books and records in both State A and State B. State A can require the filing of advertising and sales literature used in State A. It cannot require the filing of advertising and sales literature used in State B - only State B can do this.

Suits alleging criminal violations of the Uniform Securities Act must be brought within how many years of the occurrence of the alleged violation? A1 year B2 years C3 years D5 years

The best answer is D. Suits alleging criminal violations of the Uniform Securities Act must be brought within 5 years of the occurrence of the alleged violation.

All of the following State-registered advisers must file an annual audited financial statement with the Administrator within 120 days of completion of a surprise audit EXCEPT an adviser that: A. accepts $500 or more of prepaid advisory fees, 6 months or more in advance of rendering services B. uses a qualified custodian to hold customer assets C. maintains custody of customer assets D. exercises discretion in customer accounts under a limited power of attorney

The best answer is D. Taking custody means that the adviser is holding customer funds or securities. For purposes of this rule, accepting prepaid advisory fees of $500 or more, 6 months or more in advance of rendering services, is taking custody of customer funds for State-registered advisers under NASAA rules (note, in contrast, that the SEC rule for Federal-covered advisers is $1,200). Any adviser that takes custody must keep customer assets with a qualified custodian, and a CPA must conduct a surprise audit verifying the assets annually. The auditor's report must be filed by the investment adviser with the State Administrator within 120 days of completion. Being given investment discretion is only "custody" if the adviser has a full power of attorney over the account, which gives the adviser the ability to withdraw customer funds or securities. If the adviser is given a limited power of attorney, the adviser can trade, but cannot withdraw funds or securities, so the adviser does not take custody.

The vice president of a publicly traded company casually tells a close friend over dinner that the company's results are looking very weak this quarter. The friend offers some comforting words to the vice president and does not tell anyone else about the news. Which statement is TRUE? A. The vice president has violated the insider trading laws B. The friend has violated the insider trading laws C. Both the vice president and the friend have violated the insider trading laws D. Neither the vice president nor the friend have violated the insider trading laws

The best answer is D. The "tipper-tippee" doctrine applies only to cases where the tipper "intentionally" gives the information to the "tippee," who then trades on it. In this case, the "tippee" never traded, so there is no violation.

The Administrator can issue all of the following orders EXCEPT: A. an order suspending registration B. an order denying registration C. a cease and desist order D. a court order of incarceration

The best answer is D. The Administrator can issue orders without giving prior notice. These orders can deny registration to an applicant; suspend registration; revoke registration; and the Administrator can issue a "cease and desist" order against any person for a violation of the Uniform Securities Act that has occurred; or that is about to occur. If an order is issued, the person that is the subject of the order must be given an opportunity for a hearing in State Court if he or she wants to get the order reversed. Note that the Administrator does not have the power to incarcerate anyone; a court order is needed for this. Note that the Administrator does not have the power to enjoin an individual from being in the securities business - again, only a court can order this.

The Administrator can do all of the following EXCEPT: A. subpoena witnesses within that State B. subpoena witnesses in other States C. issue a cease and desist order to a person in the securities business D. enjoin a person from engaging in the securities business

The best answer is D. The Administrator has the power to subpoena witnesses (both in and out of that State); can issue a cease and desist order; and can revoke a registration. The Administrator cannot enjoin a person from engaging in the securities business - such an action can only be taken in a court of law.

The Administrator can take all of the following actions EXCEPT: A. coordinate inspections with those conducted by the Securities and Exchange Commission B. inspect a broker-dealer located in another State that does business in the Administrator's State C. require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness D. suspend the constitutional privilege against self-incrimination available to an individual

The best answer is D. The Administrator may coordinate inspections with those conducted by the Securities and Exchange Commission; may inspect a broker-dealer located in another State that does business in the Administrator's State; and may require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness. However, the Administrator cannot suspend the constitutional privilege against self-incrimination available to an individual, since this Federal law (5th Amendment to the Constitution) supersedes any State law.

If the Administrator designates an officer to conduct a hearing, the officer may: I administer oaths to witnesses and take evidence II subpoena witnesses and compel their attendance III require the production of books and records AI and II only BII and III only CIII only DI, II, III

The best answer is D. The State Administrator is empowered, at a hearing, to administer oaths to witnesses ("Do you promise to speak the truth, so help you God" etc.); can subpoena witnesses to attend hearings; and can require the production of books and records at such hearings.

Under the provisions of the Uniform Securities Act, for willful violations, the State Administrator can: A. institute criminal proceedings B. impose a monetary fine C. file suit under civil liability provisions D. revoke registration of persons

The best answer is D. The State Administrator may, by order, deny, suspend or revoke any registration in the State. The Administrator does not have the power to institute criminal or civil proceedings, or to impose a monetary fine. The Administrator may refer a case to the State Attorney General for criminal prosecution, and if a conviction results, a court of law can impose a fine and a jail sentence.

An established customer has an individual account. The customer discusses a specific NASDAQ stock with a sales representative and wants to buy shares of that stock when it declines to $60 a share lower. The customer leaves for a 3-week vacation traveling to a third world country where he cannot be contacted. During this time, the stock declines to the level at which the customer wanted to buy the shares. What is an appropriate action to take? A. Buy the stock in the customer's account since he wanted to buy the shares at that price B. Buy the stock in the customer's account as long as the branch manager or compliance officer approves of the transaction C. Attempt to contact one of the customer's immediate relatives, and if this is possible, obtain authorization from the relative to buy the shares D. Do nothing until the customer can be contacted

The best answer is D. The customer did not give specific enough information to warrant the entry of an order. If he had mentioned the exact amount of shares that he wanted to buy, you could execute the order. If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." Prior to opening a discretionary account, a written power of attorney must be obtained from the customer.

An agent is conducting securities activities on the premises of a bank. Which statement is TRUE? A. This is an unethical practice B. This is permitted if the agent discloses orally to the customer that the products offered are not bank products; are not FDIC insured; and may lose value C. This is permitted if the agent discloses in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value D. This is permitted if the agent discloses both orally and in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value

The best answer is D. This is the "NOT-NOT-MAY" Rule. When a broker-dealer offers securities in a bank setting, it must be disclosed both verbally and in writing that securities are NOT bank products; that securities are NOT FDIC insured: and that they MAY lose value. In addition, the agent must attempt to get the customer to sign a statement that he or she understands this.

An agent that is employed by Merrill Lynch believes that the stock of the parent company (Bank of America), which has been trading at new lows on the NYSE, is ready for a rebound. She wants to recommend it to her customers. Which statement is TRUE about doing so? A. This is an unethical business practice and is prohibited B. This is permitted only if the agent discloses the existence of the relationship verbally when making the recommendation C. This is permitted only if existence of the relationship is disclosed in writing on the confirmation D. Both Choices B and C above

The best answer is D. This question does not address reality! As an internal policy, most broker-dealers prohibit their agents from recommending the stock of their publicly traded parent company - because of the inherent conflict of interest. For example, an agent for Merrill Lynch cannot recommend the purchase of Bank of America stock. However, let's move to the theoretical and, evidently, the test world. This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the transaction (this is done by disclosing it in writing on the trade confirmation).

An agent is registered in State Y. The agent accompanies a customer to State Z on a golf outing, where the agent makes an offer of securities to the customer. Which statements are TRUE? I State Y has jurisdiction over the offer of securities II State Z has jurisdiction over the offer of securities III The agent may qualify for a de minimis exemption in State Y IV The agent may qualify for a de minimis exemption in State Z AI and III BI and IV CII and III DII and IV

The best answer is D. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer:originates in the Administrator's State;is directed into the Administrator's State; oris accepted in the Administrator's State.Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. In this scenario, the "vacationing" exclusion does not apply because it ONLY applies when an agent registered in another State makes an offer into a State where the customer is vacationing. It does NOT apply if both the agent and the customer are both in another State, where the offer is made. Both the agent and the customer are vacationing in State Z, where the offer of securities is made. Therefore, State Z has jurisdiction. The agent did not make an offer of securities from State Y and the offer was not accepted in State Y, so State Y does not have jurisdiction in this instance. If the agent makes a "few" offers to customers in State Z, the agent may qualify for a de minimis exemption in the State (but this is only available to broker-dealers and their agents in a minority of States). The agent gets no such exemption in State Y because the agent is physically located there.

Under the NASAA Statement of Policy on unethical practices, the release of customer information to which of the following would be "unethical"? A. Securities and Exchange Commission B. Internal Revenue Service C. Self-Regulatory Organizations D. Registered broker-dealers

The best answer is D. Under the NASAA Statement of Policy, information about a customer account cannot be divulged to anyone other than that customer, unless the customer gives authorization. The only exception is if the information request comes from a governmental authority such as the SEC, IRS or a self-regulatory organization like FINRA

Which of the following is NOT considered to be unethical under the Uniform Securities Act? A. Taking an order from the spouse of a customer who has an individual account, only when the customer is traveling and is out of the country B. Telling a customer that wishes to invest in a speculative stock that the agent believes to be unsuitable, that the prospects for the company are considerably more bearish than the agent believes C. Telling a customer to sell a security based on material negative non-public information that an agent has obtained, as long as the agent does not sell the stock for his or her personal account D. Executing a customer's order to buy at the market at the current ask price when the bid price is lower

The best answer is D. Unless the customer has given spouse "discretion" to trade the account in writing, a verbal order cannot be taken from the spouse. An agent cannot misrepresent the prospects for a company - it makes no difference that the agent is trying to "discourage" the customer from making an "unsuitable" investment. Under the "tipper-tippee" insider trading doctrine, not only is a person that trades on material non-public information liable (the "tippee"); but the person who gave the tip (the "tipper" is the agent in this case) is also liable as well. Customer orders to buy are executed at the current ask price (the customer must buy from the dealer at the dealer's ask). Customer orders to sell are executed at the current bid (the customer must sell to the dealer at the dealer's bid). The bid price will always be lower than the ask price - this is the dealer's trading profit, known as the spread.

Intentional or willful violations of the Uniform Securities Act that are considered to be a felony subject that person to: A. civil liability only B. civil liability and civil penalties C. criminal liability only D. criminal liability and criminal penalties

The best answer is D. Willful violations of the Uniform Securities Act can be a felony and can result in Criminal Liability and Criminal Penalties. Unintentional violations when offering or selling a security result in Civil Liability under the Act. There are no Civil Penalties.

NASAA Model Rule 502 (c) applies to: A. State registered advisers only to the extent that the conduct is fraudulent or deceptive B. Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive C. State registered advisers and Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive D. Federal covered advisers and State registered advisers only to the extent that the conduct is fraudulent or deceptive

he best answer is C. NASAA Rule 502 (c) sets the rules for investment advisory contracts. As a NASAA rule, it only covers State-registered advisers. Federal covered advisers are subject the rules of the Investment Advisers Act of 1940, however the rule says that it applies to Federal covered advisers to the extent that the alleged conduct is fraudulent or deceptive. The rule requires that advisory contracts provide in writing: The services to be provided, the term of the contract, the fee formula, the amount of prepaid fee to be returned for early termination and any grant of discretionary power; That no direct or indirect assignment or transfer of the contract is permitted without consent of the client; That the investment adviser shall not be compensated based on capital gains (unless the client is wealthy, with either $1MM of assets under management or $2.1MM of net worth - this is set under the Investment Advisers Act of 1940); and That if the investment adviser is a partnership, the adviser will notify the client within a reasonable time of any change in the membership of the partnership. The rule also prohibits any provision that waives compliance with the rule or with the Investment Advisers Act of 1940; and prohibits an advisory contract that is contrary to Section 205 of the Investment Advisers Act of 1940 (Section 205 prohibits compensation based on gain or loss).