Simulated Exam 1

A retail customer of a broker-dealer A is on vacation in State N. Broker-dealer A, who is registered and maintains an office in State F, wishes to make the customer aware of an investment opportunity that has just become available. Which of the following is TRUE?

Broker-dealer A may solicit this customer in State N (This is an example of the USA's position that, in certain situations, a broker-dealer is not a broker-dealer. If a broker-dealer registered in one state contacts an existing customer in another state and that customer is not a resident of the other state, the bd is not defined as a bd in the state in which the contact is made and is therefore not subject to the laws of that state.)

All of the following are included in the definition of federal covered security EXCEPT

City of Portland, Maine, GO bond sold to a resident of Augusta, Maine (Municipal bonds, exempt securities under the Securities Act of 1933, are also federal covered securities with one significant exception: if the issuer is a political entity in this state and it is sold to a resident of this state, it is not consider a federal covered security in this state. Any security listed on the NYSE, regardless of the corporation's or the customer's state of domicile, is a federal covered security.)

If Somerville Discount Securities has its principal office in New Jersey and recently registered a branch office in Minnesota, which of the following statements is TRUE?

Each agent must be registered in the appropriate state before soliciting or taking orders. (Agents must be registered in every state in which they do business. An agent is not automatically registered in a state just because his employer is registered in that state.)

Which of the following practices violates the USA?

Failing to follow a customer's instructions (deliberate disregard for a customer's instructions is a violation under the USA.)

Which of the following practices does NOT violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents?

Hypothecating customer securities held in margin accounts. (The normal method of financing customer margin accounts is by hypothecating.)

An agent is registered in Illinois and Ohio. One of her substantial clients has just moved from Ohio to Arizona, and the agent would like to continue to do business with her. Under the USA, which of the following statements is TRUE? I. The agent's bd must already be registered in Arizona or complete the Arizona registration process within a time period specified by the act. II. The agent must complete the Arizona registration process within a time period specified by the act. III. The agent must ask the Ohio Administrator to request reciprocal registration from the Arizona Administrator. IV. The agent must suggest that the client maintain a mailing address, such as post office box, in Ohio.

I and II (USA permits bd's and their agents to continue to do business with existing customers who change their state of residence, as long as registration in the new state takes place within a reasonable time period. This time period varies from state to state but is generally 30 days.)

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, a broker-dealer may charge a reasonable fee for I. appraisals II. transfers III. collection of dividends IV. safekeeping

I, II, III, and IV

Under the USA, the term "agent" refers to individuals who act on behalf of a broker-dealer or issuer in effecting securities transactions. Which of the following individuals are NOT included in the definition of agent? I. A lawyer acting on behalf of an issuer in preparing documents describing the issuance of nonexempt securities II. A lawyer acting on behalf of a broker-dealer who prepares documents describing the sales or purchase of securities to the general public III. A partner or office of a broker-dealer whose only securities activity is the purchase of shares of an issuer for his personal investment account IV. An officer of an issuer who sells shares of the issuer's stock to employees without receiving any special compensation

I, II, III, and IV (An agent is described in the USA as an individual, other than a broker-dealer or issuer, who represents a broker-dealer or issuer in effecting transactions in securities. The lawyer is not engaged in effecting securities transactions on behalf of the issuer or bd. The lawyer is not considered an agent subject to regulation by USA. A partner (or anyone else) of a securities firm making a personal investment does not make him an agent. An officer of an issuer not receiving any compensation for sales of the issuer's stock to employees is not an agent under the USA.)

A Canadian broker-dealer with no office in this state has a Canadian client who is on a temporary work assignment in this state. To accept orders from his client, the broker-dealer must I. file an application for limited registration with the Administrator in the form required by the jurisdiction in which it has its head office II. file a consent to service of process III. provide the Administrator with evidence that is currently in good standing as a broker-dealer in the jurisdiction from which it is effecting securities transactions IV. be a member of a recognized self-regulatory association or stock exchange in Canada

I, II, III, and IV (for a Canadian broker-dealer with no offices in this state to do business with Canadian residents who are temporarily in this state, it must apply for a special limited registration. Filing involves all of the choices listed. In essence, Canadian broker-dealers and agents have a limited form of the snowbird exemption.)

An Administrator may summarily suspend a registration pending final determination of proceedings under the USA. However, the Administrator may NOT enter a final order without I. appropriate prior notice to the registrant II. an opportunity for a hearing III. findings of fact and conclusions of law IV. prior written acknowledgment of the registrant

I, II, and III

Which of the following is (are) prohibited by the antifraud provisions of the USA? I. A misstatement of a material fact II. An omission of a fact important to understanding other statements that are made III. A deceptive sales presentation which does not result in a sale

I, II, and III (The antifraud provisions prohibit material misstatements, material omissions, and any deceptive or unethical business practice. Whether a sale was made or whether money was lost by a client as a result of the fraudulent act is irrelevant to the prohibition.)

Under the USA, which of the following is considered a place of business of a registered investment adviser representative? I. An office from which the representative regularly provides advisory services to clients II. A location published in a professional directory, indicated on business cards, or telephone book listing that identifies it as a place where the representative will be available to meet or communicate with clients III. A hotel or auditorium at which the representative has advertised to the public that he will be available to conduct advisory business at that site IV. A hotel meeting room identified only to current clients as a place the representative will be available to conduct advisory business

I, II, and III (USA defines a place of business as one where the IAR regularly provides investment advisory services, solicits, meets with, or otherwise communicates with clients, or any other location held out to the public as a location where the representative will do any of these activities. A hotel room is not included when it is not advertised and only used with existing customers, presumably when the adviser is traveling through their state.)

According to the USA, once an individual passes the appropriate exam, asset-based compensation is permitted I. immediately II. when registration has been granted by the state Administrator III. after notification of investment adviser representative status by the appropriate supervisory person of the firm IV. when permission is received from the SEC

II and III (In order for an individual to receive asset-based compensation, registration as an investment adviser representative is required. Once all the requirements are met, the Administrator will notify the employing investment adviser and then a supervisor will inform the indivdual that the registration is effective.)

Under current law, who of the following would be required as an investment adviser in a state? I. A person who effects transactions exclusively with issuers of securities in that state while maintaining no office therein II. A person who has directed advice relating to securities to 6 individuals in that state within the past 12 months, even though he has no place of business within the state III. A person with an office in the state who manages less than $25 million in assets IV. A person who deals exclusively with broker-deals in that state, but maintains no place of business within the boundaries of the state

II and III (Investment advisers (or IARs) having no place of business in a state are generally limited to contracting with fewer than 6 retail (individual) residents of that state within any 12 month period (de minimis exemption) before being required to register.)

As used in the USA, included in the term institutional investor would be I. accredited investors II. banks III. employee benefit plans with assets of not less than $750,000 IV. investment companies

II and IV (Institutional investors include banks, insurance and investment companies, and, as long as they have assets not less than $1 million, employee benefit plans. Although each of these is included in the term accredited investor, that term, as used in federal law (not found in USA), also includes certain individuals, and they would never be considered institutional investors under the USA.)

State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the USA?

Investment adviser representatives (USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap free program, they lose their exclusion. Economists are not included in the list of exclusions.)

An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working one day per week out of the firm's office in State B. Which of the following actions must the person take to practice within that particular state?

Pay state registration fees if required by the Administrator (Individuals with a place of business in a state, managing client assets while employed by federal covered investment advisers, must register as investment adviser representatives in that state. It is the investment adviser who may be required to notice file with the Administrator.)

Under the USA, it is legal for an agent to tell a customer that

a registered security may lawfully be sold

Under the USA, an individual is subject to registration as an agent if he engages in transactions between an issuer of a non-exempt security and

an individual investor with assets in excess of $1 million (A person representing an issuer in an exempt transaction does not have to register as an agent. Transactions between an issuer and an underwriter, an insurance company or a banking institution are exempt. Transactions with investors, not meeting the definition of institutional investor, even a wealthy investor, are not exempt and require registration as an agent.)

If an incorporated entity sells nonexempt securities to public customers, receives a commission on the sale of the securities, and pays commissions to the employees who sell them, according to the USA, the corporation is a

broker-dealer engaging in exempt transactions

The First Fidelity Building and Loan association, organized in State A and authorized to do business in State B, has an offering of common stock being made in State B. In order for an individual selling the offering to be excluded from the definition of agent in State B, the individual

could not sell without being registered as an agent in State B (Although securities issued by a building and loan association are included in the USA list of exempt securities, they are not included in the group of exempt securities where employees selling on behalf of the issuer are excluded from the definition of agent.)

Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an

investment adviser (the USA specifically excludes agents/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.)

A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities. The purpose of doing this is

margin increases investors' purchasing power, but also exposes investors to the potential for larger losses (Margin enables an investor to increase buying power, but that comes with the risk of potentially larger losses. In fact, in a margin account, the investor can lose more than his original investment. The margin loan is secured by the securities purchased and, under the terms of the credit agreement, the firm has recourse against the assets of the investor.)

Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is

margin interest on the debit balance (in a cash account, you can't have margin activity, so there can't be a margin interest charge.)

Under the USA, all of the following are included in the definition of the term exempt transaction EXCEPT a sale of

securities to an individual investor with a net worth of more than $5 million (unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated non-issuer, fiduciary, unsolicited, bd), sales to individuals, regardless of their wealth, are not exempt transactions.)

In a effort to combat money-laundering, financial institutions are required to file reports with FinCEN for each cash transaction

that exceeds $10,000 (the currency transaction report (CTR) must be filed with the Financial Crimes Enforcement Network (FinCEN) whenever a cash transaction in excess of $10,000 is made at a financial institution (including broker-dealers.)

An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the USA,

the agent is describing a guaranteed security (A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee.)

When recommending a corporate security, an agent indicates that the top officers of the company were responsible for the rapid growth of LBJ Corporation, a well-known, successful firm in the same industry. Under the USA, all of the following statements by the agent are permitted EXCEPT

there is no doubt that the officers will repeat the success they enjoyed with LBJ Corporation (statement implies guaranteed performance and is not permitted.)