Series 66: Uniform Securities Act Quiz 3

A block trade is a trade of at least:

10,000 shares A trade of 10,000 shares or more is a block trade (as in a large block of stock). Such a trade is large enough to strongly influence the market price of a stock, so these are often handled outside of computerized execution systems to avoid a market price distortion.

In order for a money market fund to be called "no load" it cannot charge any of the following EXCEPT:

12b-1 fees A fund cannot be called "no load" if it charges any type of sales charge, whether it be a front-end load, back-end load, or a contingent deferred sales charge. A mutual fund (money market funds are mutual funds) can advertise itself as a "no-load" fund if it charges 12b-1 fees of no more than .25% (25 basis points) annually. 12b-1 fees are charges against net asset value that pay for the cost of soliciting new investment to the fund, and they can be used to compensate salespersons that sell the fund's shares.

Under the NASAA Model Rule covering Investment Adviser records, the adviser's articles of incorporation must be retained for how long after the adviser ceases business operations?

3 years NASAA's recordkeeping rule for investment advisers requires that "partnership articles and any amendments, articles of incorporation, charters, minute books and stock certificate books of any investment adviser be preserved for at least 3 years after termination of the enterprise."

Which statement is TRUE about the delivery of a final prospectus to the purchaser of a non-exempt new issue security?

A final prospectus must be delivered, at, or prior to, confirmation of sale, to any person who purchases the issue In connection with the sale of any non-exempt new issue to a customer, the final prospectus must be delivered to the customer, at, or prior to, confirmation of sale. There are no exceptions!

Which of the following persons MUST register as an investment adviser in a state?

A firm with no place of business in the state that has 10 advisory clients in the state within the preceding 12 months The Uniform Securities Act exempts from registration as an "investment adviser," any firm that has no place of business in the State that does not have advisory clients in the State; or a firm with no place of business in the state that deals solely with other investment advisers, broker-dealers, investment companies, insurance companies or financial institutions. Note that if an adviser is physically located in a State, then it still must register. In addition, a firm with no place of business in a State that has no more than 5 clients in the state in the preceding 12 months is exempt from registration.

Which individual would most likely be required to be registered as a representative of a broker-dealer?

A sales assistant taking an order for a limited partnership unit Administrative personnel are not registered making Choices A and D incorrect. In Choice B, the secretary is taking a "message" while in Choice C, the sales assistant is taking an "order." Taking an order to buy or sell a security requires that individual to be registered. An argument could be made that in Choice B, since the "message" was about buying or selling a security, these also are orders. However, Choice C is clearly the better answer.

The wife of a customer who maintains an individual account with your firm telephones, and states that they are short of money, and that they will not be able to pay for the most recent securities purchase in the account. The securities have appreciated substantially since trade date, and the trade settles in 3 business days. The wife tells the agent to liquidate the position. Which actions by the agent are NOT allowed? I The agent may arrange for a loan to the customer of the money needed to purchase the securities II The trade may be canceled III The agent may sell the securities in the account; and may send the customer a check for the profit when that trade settles IV The agent may sell the securities in the account; but cannot send the customer a check for the profit until the original purchase is paid

All of the above The wife has no authority over the husband's individual account. The wife would only be permitted to effect transactions in the account; or draw checks from the account; if the husband had given the wife authorization to do so in writing. This is not the case, so the agent cannot follow the wife's instructions to liquidate the transaction. The agent cannot arrange for a loan to the customer - lending money to customers is prohibited under State law, making choice I prohibited. The trade cannot be canceled. All trades are binding on the customer, making choice II prohibited. The agent cannot sell the securities in the account at a profit. To do so would require that instructions be given directly by the husband to this effect; or the instructions would have to be given by someone with written trading authorization. Thus, choices III and IV are also prohibited.

Securities traded on the Midwest (Chicago) Stock Exchange are NOT exempt from which requirement of the Uniform Securities Act?

Anti-fraud If a security is exempt (exchange listed issues are exempt from under the State law "blue chip" exemption), then the issue is exempt from the registration requirement in that State. Furthermore, if a security or transaction is exempt, then it is also exempt from any rules that the Administrator may impose regarding the filing of advertising in that State. However, the anti-fraud provisions of the Act cover all offerings, whether exempt or non-exempt.

An investment adviser that claims that it is a "fee only" adviser could be compensated based on: I a percentage of assets under management II a flat annual or hourly fee for all work performed III 12b-1 fees paid by mutual funds IV commissions paid by broker-dealers

I and II Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,100,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it sells. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.

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?

Do nothing until the customer can be contacted 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.

All of the following may be required by the Administrator to maintain registration EXCEPT:

Filing of a renewal consent to service of process with the Administrator Consent to service of process is only filed with initial registration applications; it is not required for renewals. The Administrator can require the filing of financial reports, sales literature, and the payment of renewal fees.

For initial registration as an agent in a State, all of the following are required EXCEPT:

Government Issued Photo I.D. In an initial registration with the State, a consent to service of process must be filed, in addition to the registration application (which can include fingerprints) and any filing fees designated by the Administrator. There is no requirement for a Government issued photo ID to be registered.

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

I and III 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.

A "consent to service of process" must accompany which of the following? I Agent's initial registration application II Agent's renewal registration application III Investment Adviser's initial registration application IV Civil complaint filed against a broker-dealer

I and III only "Consent to service of process," which appoints the Administrator as attorney for that person to receive legal documents, is required on each initial registration application. This is true for registration of agents, broker-dealers, investment advisers and investment adviser representatives. For example, if a civil complaint is filed against a broker-dealer, the court papers will be served to the Administrator, who will forward them to the broker-dealer - since that firm must have filed a "consent to service of process" with the Administrator. Therefore, no "consent" is filed with the civil complaint. Once a consent to service of process is filed with the initial application, there is no requirement to file another consent with each renewal application.

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

I and IV 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).

Which of the following are defined as a "State" under the Uniform Securities Act? I Hawaii II Puerto Rico III Virgin Islands IV Key West

I, II, III "State" is defined under the Act to be any state, territory, possession of the United States, the District of Columbia, and Puerto Rico. Key West is part of the State of Florida; it is not a territory or possession.

Which of the following conditions must be met in order for an agent to share in the gains and losses of a customer's account? I The agent and customer must enter into a written agreement to share in the account II The agent can only share to the extent of capital contributed by the agent, and must share in both gain and loss III The agreement must be approved by the broker-dealer before it takes effect

I, II, III 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.

Which of the following are violations under the Uniform Securities Act? I Failure to make reasonable inquiry as to the financial objectives and needs of a customer II Recommending a security without having a reasonable basis for making the recommendation III Failure to sufficiently describe the material facts and risks about a transaction

I, II, III All of the choices given are violations of the Act - failing to inquire as to the financial objectives and needs of a customer; recommending a security without having a basis in fact for making the recommendation; and failing to describe the material facts and risks of a transaction.

In connection with the sale of an issue to a customer, the agent of a broker-dealer must disclose any material public facts about the issuer if: I by not disclosing the information, the presentation to the customer would be misleading in any material respect II the customer is not an employee or officer of the issuer and therefore is not in a position to have knowledge of these material public facts III the information was disclosed to the agent by the broker-dealer, regardless of the broker-dealer's policies and procedures covering disclosure of information to customers

I, II, III Omissions or misstatements of material fact, when making a sales presentation to a customer, are prohibited. If the customer is not an officer or employee of the company that is the subject of the sales presentation, then that customer is not in a position to know that much about the company and must be told the material public facts that are relevant to the sales presentation. Finally, regardless of the broker-dealer's internal policies and procedures on disclosure of information, all material information about that issuer necessary for the customer to form an opinion as to whether to trade that security, must be disclosed.

State "blue sky" laws provide for: I Registration of broker-dealers II Registration of agents III Registration of investment advisers IV Registration of issuers

I, II, III State blue sky laws provide for registration of broker-dealers and agents; registration of investment advisers and investment adviser representatives; and registration of securities issues. Note that the issuer itself is not registered in the state under the Uniform Securities Act - only the securities that it issues are registered.

Which of the following are generally required to be included in the State registration application of a broker-dealer or investment adviser? I Consent to service of process II Business history of applicant III Fingerprints of the officers IV Books and records of the broker-dealer used by the applicant

I, II, III State registration applications for a broker-dealer or investment adviser must include: The applicant's form and place of organization; The applicant's proposed method of business; The qualifications and business history of the applicant and each of its officers or partners; Any injunction, administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business and any conviction of a felony; The applicant's financial condition and history; and Any information to be furnished to a client (the "brochure") if the applicant is an investment adviser. Also note that the initial application must be accompanied by a consent to service of process, which appoints the Administrator as attorney for the applicant. Any lawsuits filed in court against a broker-dealer or investment adviser will result in a subpoena sent to the Administrator; who will then forward it to the registrant (broker-dealer or investment adviser) that is being sued. As part of the registration application, fingerprints are required by most states (Choice III). However, if the applicant already has fingerprints on file with FINRA as part of a U-4 filing, then the State will not require an additional fingerprint filing. Note that there is no requirement for filing of the books and records of the broker-dealer as part of the application, making Choice IV incorrect. (Note, however, that the Administrator has the power to inspect books and records of a BD or IA at will.)

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

I, II, III 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 Administrator may, by order, cancel the registration of a broker-dealer, agent, investment adviser, or investment adviser representative, if: I it is found that the registrant is no longer in existence or has ceased to do business II the registrant cannot be located after a reasonable search III the registrant is the subject of an adjudication of mental incompetence

I, II, III The State Administrator has the power to enter an order canceling the registration of any broker-dealer, agent, investment adviser or investment adviser representative if the Administrator finds that the registrant has gone out of business (they were supposed to notify the Administrator of this, anyway!); if the registrant has disappeared; or if the registrant is found to be insane (this would only apply to agents and IARs)! These are all pretty logical reasons for canceling that person's registration.

Actions that are violations of the Uniform Securities Act could cause that individual to be subject to: I State government anti-fraud provisions II Federal Government anti-fraud provisions III Common law deceit provisions

I, II, III The action that gives rise to a violation of Uniform State law can also cause one to be subject to Federal charges as well. For example, insider trading is a violation of both State and Federal law. Everyone is subject to common law provisions, which govern such things as contracts and liability.

Which of the following are unlawful activities for an investment adviser? I To enter into an advisory contract that does not detail compensation arrangements II To enter into an advisory contract that provides for compensation based solely on capital appreciation III To fail to notify the Administrator that the adviser has custody of the client's funds

I, II, III Under the Uniform Securities Act, investment advisers must enter into a written contract with clients that spells out compensation arrangements. Compensation cannot be based solely on capital gains achieved - it is typically based on an annual percentage of all assets under management. The Act requires the investment adviser to notify the Administrator if he has custody of customer funds or if he can have custody of customer funds.

Under the Uniform Securities Act, a person who sells securities in violation of the Act has civil liability for: I principal amount of the security II commission costs to acquire the security III interest on the amount invested IV attorney's fees related to the recovery of assets

I, II, III, IV If a security is sold in violation of the Uniform Securities Act, the broker-dealer and/or agent has civil liability for all funds paid by the customer including attorney's fees, plus a reasonable rate of interest on those funds.

Which statement(s) is (are) TRUE? I An agent may guarantee a customer account against loss II A broker-dealer may guarantee a customer account against loss III A customer may guarantee another customer account against loss IV An investment adviser may guarantee a customer account against loss

III only One customer may guarantee another customer's account - this is not prohibited. For example, a parent may guarantee the account of a child in college who is of legal age to open the account; but who has no credit history. It is prohibited for broker-dealers, investment advisers and their agents, to guarantee an account against loss.

A customer has a joint account with her husband. She discusses with you a specific NYSE stock in which she wants to invest. She wants to wait for it to move lower before making a purchase. One week later, the stock begins to rise in price and you try, unsuccessfully, to contact the customer. You are concerned that the stock may keep increasing in value, thereby losing an opportunity for your customer. Which action is appropriate?

Purchase the stock upon verbal authorization from the customer's husband Since this is a joint account, both the wife and the husband can trade in the account. Thus, after obtaining authorization from the husband, you would be able to buy the shares of stock.

Which one of the following items would be included in the computation of an investment adviser's net capital?

Sofa and chair owned by the adviser Net capital is really a firm's "liquid net worth." It is liquid assets minus all liabilities. Excluded from assets that count in net capital are any intangible assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, and marketing rights. Also excluded are advances or loans to officers or owners of the adviser, since it is unlikely that these would be repaid if the adviser were liquidated. Believe it or not, an automobile used in the business or office buildings or furnishings used in the business ARE included in the computation if the adviser is NOT an individual. The question does not state whether the adviser is an individual, so we cannot assume this. All intangibles are automatically excluded, so goodwill, marketing rights and copyrights are all deducted, However, conference room furniture is included for an adviser that is a corporation or a partnership, so this is the best choice. Finally, note that if the adviser were an individual, any "personal" assets that are not readily marketable such as home, home furnishings and automobiles, ARE excluded.

A Registered Investment Adviser is a general partner in a real estate limited partnership, and receives a management fee for this. The RIA is recommending partnership units to those clients for which the investment is suitable. Which statement is TRUE?

The RIA must disclose to his clients that he will be receiving the partnership management fees when presenting the partnership investment to his clients All fees taken by an investment adviser relating to investments sold or recommended to customers must be disclosed. Since this adviser is the general partner in the partnership investment that he is recommending to his clients, he must disclose the fact that he is the general partner and that he will be receiving partnership management fees in addition to any overall management fees assessed for managing the customer's portfolio.

A customer wishes to open a margin account at a broker-dealer. The customer provides all of the necessary information to open the account, but refuses to sign the margin agreement when the agent gives it to the customer. Which statement is the correct course of action to be taken?

The account cannot be opened because the customer did not sign the margin agreement If a customer refuses to sign a margin agreement, then a margin account cannot be opened. When the agreement is signed, the customer is legally pledging the securities in the account to the broker-dealer as collateral for the margin loan made from the broker-dealer to the customer. Unless this agreement is signed, the broker-dealer cannot make the loan!

Bonds issued by a church located in Sullivan County, in the State of Indiana, are being offered to congregants of affiliated churches in the State of Illinois. Which statement is TRUE?

The bonds are only exempt securities in either Indiana or Illinois, as long as a notice filing specifying the material terms of the offer is made in the State Bonds issued by not-for-profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator: can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offering can provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days) can disallow the exemption, providing the grounds for denial or suspension can require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering)

An Investment Adviser Representative uses a graph/chart to illustrate investment results for a client. Which of the following MUST be disclosed by the IAR to the customer?

The fact that a chart, by itself, can be misleading and may not represent true performance If an investment adviser uses a performance chart to promote itself, it must disclose that a chart, in and of itself, should not be used by a customer to measure performance, or to decide whether to invest to with the adviser. The chart must be accompanied with the disclosure that there are limitations and difficulties in using performance charts alone to judge results. When prior performance is shown, the disclaimer that past performance does not predict future results must be made. There is no minimum 5 year time period for showing prior performance. A comparison may be made to an index that is comparable to the investment style of the adviser, but there is no requirement to do so.

An individual that is registered as an IAR in a State is also registered as an agent of an affiliated broker-dealer in that State. This individual would be allowed to perform which services for a fee for a customer?

The individual can provide both advisory services and earn commissions on recommended transactions as long as this fact is disclosed in writing to customers If an investment adviser will effect its recommended portfolio transactions though an affiliated broker-dealer that will charge commissions for each trade, this is a conflict of interest that must be disclosed, in writing, to the client at the time that the advisory contract is signed.

A salesperson is offering promissory notes for a company selling coffee at drive-through kiosks. The notes pay a 13% interest rate and mature within 9 months. The salesperson tells a potential investor that the notes are "risk-free" and that the kiosks are collateral that secure the note. The salesperson is not registered in the State and the notes are not registered in the State. Which statement is TRUE?

The offer is a violation of State law because the salesperson must be registered or licensed in the State and the promissory notes must be registered in the State Legitimate promissory notes are marketed to sophisticated, corporate investors that have the ability to thoroughly research the company issuing the notes and determine whether the issuer will be able to repay principal and interest. However, there have been many instances of "promissory note fraud" where unlicensed individuals push bogus promissory notes that are sold as investments that offer above-market fixed interest rates and safeguarding of principal - and most of these are frauds. This is a major concern to State regulators. To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000 are exempt from State registration. Thus, smaller note offerings (under $50,000 amount) to smaller investors are non-exempt and must be registered; and unrated note offerings or non-investment grade rated note offerings must also be registered in the State. Finally, the tell-tale signs of fraud in promissory note offerings are: Statements that the notes are "guaranteed" or "insured" - especially by bogus foreign entities Promises of above-market rates of return (an above-market rate of return is not offered by a "low-risk" investment, but rather by a high-risk investment) Statements that the notes are "risk-free" (these are corporate issues that have risk of default) The labeling of a start-up company's notes as "prime" (since only established companies with a history of operations and earnings can be called "prime") Offers of promissory notes from a stranger who does not know the customer's financial situation

An Investment Adviser prepares a 4-color glossy brochure to be given to potential customers instead of the Form ADV Form Part 2A. The brochure includes all of the information found in the ADV Part 2A, but is much livelier in its presentation. An Investment Adviser Representative uses the brochure to solicit a new client, who signs a contract with the firm that includes a clause giving the customer 2 business days to back out of the contract without incurring any penalty. Which statement is TRUE under NASAA rules?

This procedure violates NASAA rules because the customer must be given 5 business days to back out of the contract without penalty NASAA requires that new customers be delivered the investment adviser brochure. It is OK to prepare a customer brochure that includes all of the ADV Part 2A information. The rule on delivery of the brochure is that either: the brochure must be delivered 48 hours prior to entering into either a verbal or written contract with the customer to provide advisory services; or if the brochure is delivered at the time that the contract is signed, the customer has 5 business days to terminate the agreement without penalty. In this case, the customer signs a contract that gives him 2 business days to rescind the deal. The rule requires that the customer be given 5 business days to rescind the deal when the customer is receiving the brochure at the time that the contract is signed. (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!)

Which action is a prohibited practice under the Uniform Securities Act?

Verbally communicating material inside information to a customer Communicating material "inside information" is a prohibited practice under the Uniform Securities Act, as well as a violation of the Securities Exchange Act of 1934. Of course, it would be permitted to verbally communicate to a customer, facts included in sales material, facts included in prospectuses, or recommendations of non-exempt securities (assuming that the security is properly registered in the State).

Under the NASAA Statement of Policy on unethical practices, an investment adviser may:

accept a verbal order from a customer to sell a security position where the customer has not given the adviser trading authority An investment adviser may accept a verbal order from the customer - after all, the account belongs to the customer and the adviser must follow the customer's instructions! Instructions about a customer's account cannot be accepted from anyone other than the customer, unless there is a trading authorization signed by the customer. Thus, a spouse cannot effect trades in a customer's individual account unless the customer gives the spouse trading authorization. Only the customer can open an account for him or herself - another person cannot open an account for that customer.

Under the Uniform Securities Act, an agent's registration can be denied, suspended or revoked for all of the following reasons EXCEPT the:

applicant was convicted of a securities misdemeanor 15 years ago An agent's registration will be denied if the agent was convicted of a misdemeanor involving securities or monies; or any felony; within the past 10 years. Since this conviction occurred 15 years ago, the agent is beyond the time limitation and can re-register in that State. If the application is incomplete; includes misleading statements; or the applicant lacks experience and has not demonstrated either knowledge or taken required training, then registration can be denied by the Administrator.

An elderly client of a Registered Investment Adviser has gifted securities to his adult son at the end of each year, in an amount equal to the annual gift tax exclusion. The client has a stroke that has affected his ability to communicate and the RIA is approached by the adult son about continuing the annual giving of the gift. The RIA should:

ask the son if he has a durable power of attorney granted by the father and obtain this prior to giving the annual gift This client is incapacitated. If the client gave his son a durable power of attorney prior to the stroke, then the son is authorized to act on the father's behalf. (Remember that a durable power of attorney continues on the giver's mental incapacitation; while a non-durable power of attorney ceases upon the giver's mental incapacitation.) Otherwise, the RIA can do nothing. Choice C is wrong because the client is not dead! Choice D is simply amusing.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, all of the following are unethical business practices EXCEPT:

charging a customer for clerical services performed Firms are allowed to charge customers for clerical services such as safekeeping of securities. They are prohibited from lending money to customers in excess of legal limits; from charging excessive mark-ups to customers; and from commingling customer securities with an agent's securities.

The type of state securities registration for an initial public offering that relies on the prospectus information filed with the SEC under Federal law is registration by:

coordination Registration by coordination "coordinates" State registration with a Federal registration. The same information that is filed with the SEC is filed with the State. When the SEC registration becomes effective, the State registration becomes effective.

If the issuer of a federal covered security has filed notice in a State for an initial public offering, then:

filing notice is required for each subsequent secondary offering of that issuer in that State Notice filings in the State for federal covered securities are required for both initial offerings in the State and each secondary offering in the State (and a filing fee must be paid to the State with each "notice"!).

When an agent changes employment from one broker-dealer to another, the agent's registration must be transferred:

immediately When an agent changes his employer, the registration must be transferred promptly. (Please note, in contrast, that notification to the Administrator when an investment adviser representative is terminated is only given by the investment adviser; or if the representative is associated with a federal covered adviser, the notice is only given by the representative.)

The State Administrator is empowered to do all of the following EXCEPT:

incarcerate violators The Administrator cannot imprison anyone - this can only be imposed by a court of law. The Administrator can conduct investigations, subpoena witnesses; administer oaths at hearings so that if the person lies, they can be held liable; and can order a suspension or revocation of an adviser's registration based upon the findings of fact from such investigations. The Administrator can also issue a cease and desist order against the adviser or its representatives.

Federal securities laws supersede the provisions of the Uniform Securities in all of the following areas EXCEPT:

investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct The National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."

An individual is employed by a broker-dealer on a salary basis, solely to give information relating to trades of securities, such as last sale price and size. This individual:

is not required to be registered in the State An agent is defined as an individual who represents a broker-dealer or issuer in effecting, or attempting to effect purchases or sales of securities. It excludes employees that do not solicit trades or who solely perform clerical functions. Thus, a person who solely gives out quotes to customers does not have to be registered as an agent in the State, since this is a clerical function.

An agent registered in State A has a customer who lives in his parent's home in State A. The customer will be going to college in State B, where the agent is not registered. The agent would like to continue to do business with the customer while he is in college in State B. In order to do so, the agent:

is not required to take any further action College students are considered to be residents of the State where their home is; not the State where they are going to college. Furthermore, this is an existing customer of the agent - the agent is not soliciting new business in State B. The agent does not have to register in State B to do business with the student who is at college in State B because this is an existing customer who resides in State A, a State where the agent is registered.

The Administrator may issue a stop order for a securities issue "in registration" for all of the following reasons EXCEPT the:

issuer's business is unproven in that State The Administrator may issue a stop order for an issue "in registration" if it is in the public interest and the sale works a fraud on investors; or the underwriter's compensation (spread) is excessive; or the issuer's business is illegal in the State. The issuer's business being unproven in the State has no bearing on halting registration.

An Investment Adviser has just submitted a U-4 registration application for a newly hired salesperson to be registered as an Investment Adviser Representative of the firm. This individual can start soliciting potential clients:

once the State Administrator approves the application Registration applications filed with the Administrator become effective in 30 days, or sooner, if the Administrator approves the application more quickly. This is the best choice given. Of course, to be registered, a licensing fee must be paid and a licensing test must be passed in most States, but Choice C is the best one offered.

Amendments to filings made with the Administrator to make changes, or to correct misstatements or omissions, must be made:

promptly If a filing with the Administrator is found to have material misstatements or omissions, a correcting amendment must be filed promptly.

If the Administrator summarily suspends a registration of an agent, all of the following statements are true EXCEPT:

the Administrator must obtain a court order prior to issuing its own order The Administrator is permitted to summarily suspend a registration, which means that he or she can take this action without obtaining a court order. If the administrator does this, the agent must be notified promptly of the action and the reasons for the action; and the agent must be given the opportunity for a hearing within 15 days of the agent making a written request.

An institutional buyer is defined under the Uniform Securities Act as any person:

so designated by the Administrator by rule or order

John is a registered agent with ABC Brokerage, a registered securities broker-dealer in the State. Mike is a registered agent of XYZ Insurance Brokerage, a registered insurance agency in the State. John is not registered with the State to sell insurance and Mike is not registered with the State to sell securities. Mike verbally agrees with John that Mike will tell his insurance clients to do their securities trades with John, for which John will pay Mike 25% of the commission charged to the customer. This is a violation known as:

splitting commissions Commissions are only permitted to be split or shared with other registered persons at the same firm.

Which of the following would likely be required to register as an investment adviser representative? A person who:

supervises other investment adviser representatives NASAA states that an "investment adviser representative" that must be registered is a person who: makes recommendations or otherwise renders advice regarding securities; manages accounts or portfolios of clients; determines which recommendation or advice regarding securities should be given; solicits, offers or negotiates for the sale of, or sells, investment advisory services; or supervises employees who perform any of the foregoing

Under the Uniform Securities Act, the financial records of a broker-dealer must be retained for:

the time period specified by the Securities Exchange Act of 1934 and if the record is not specified in the 1934 Act, then the time period specified by the Administrator Financial records of a broker-dealer must be kept for the time period specified by the Administrator. In the absence of a rule by the Administrator, the retention period is the same as that required under the Securities Exchange Act of 1934. If there is a retention period for the same record set by both regulators, then federal supremacy dictates that the record be maintained under the 1934 Act requirements, even if this is longer than the Administrator's rule.

As a condition of registration as an agent or principal of a broker-dealer, all of the following statements are true EXCEPT:

there is no requirement for either a written or oral examination to be taken As a condition of registration as an agent or principal of a broker-dealer or investment adviser, an examination may be required. The examination may be written or oral, or both (oral exams are sometimes given to people with vision problems). Higher passing grades can be required for principals than for agents on these examinations - for example, some States have a passing grade of 80% on the Series 63 or 66 for principals of broker-dealers; while agents pass with a 72% for Series 63 and 73% for Series 66.

An agent would be denied registration for all of the following reasons EXCEPT the agent:

was convicted of a securities misdemeanor 11 years ago Registration can be denied to those convicted of a misdemeanor involving the securities business or any felony within the past 10 years. After 10 years have elapsed, that person can re-enter the business. If the agent is insolvent; does not pay filing fees; or is not affiliated with a broker-dealer; registration will be denied.

Under the Uniform Securities Act, an agent that sells securities to a customer in a transaction that is not recorded on the books and records of his or her broker-dealer:

will cause the agent to become a statutory broker-dealer Agents are prohibited from effecting securities transactions for customers unless the trades are known to the broker-dealer; are supervised by the broker-dealer; and are recorded on the books and records of the broker-dealer. This agent is "selling away" from his firm and is executing trades for customers that are not being recorded by the broker-dealer. He or she becomes a "statutory broker-dealer" under the Uniform Securities Act and is required to register in the State as such.

A broker-dealer that is registered in New York and that is not registered in any other State may effect transactions in securities:

with any existing customer that is a New York resident that is vacationing anywhere in the United States An exemption from registration is given to broker-dealers 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 exemption does not apply to new customers; only to pre-existing customers.