Simulated Exam 2

When describing a federal covered security to a client, it would not be proper to state

"it would never have been exempted it if the government thought it was highly risky" (this question is referring to one specific case; Regulation D of the Securities Act of 1933, private placements are exempt transactions that are exempt from registration under federal law and are considered federal covered securities exempt from state registration as well.)

Which of the following would be prohibited practices under state securities law?

Failing to obtain prior written authority for orders from a third party (orders from a third party (someone other than the client) can only be accepted when the broker-dealer has received a written trading authorization form from the client.)

Which of the following are NOT included in the definition of an agent in the USA? I. A licensed broker-dealer II. An officer of an issuer who only represents the issuer in selling shares to a broker-dealer underwriting the company's securities III. An officer who represents an issuer of non-exempt securities in the sale of those securities to the public without receiving any compensation IV. An employee of a broker-dealer whose only transactions are with institutional clients

I and II (An agent is an individual - other than a broker-dealer - who represents a broker-dealer or issuer in securities transactions. An officer -or any other employee- of a company who represents her company in transactions with an underwriter is not included in the term "agent" because the transaction is exempt.)

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I. a charge when a client requests that a stock certificate be issued in his name II. a commission charge when a client buys a security on a listed exchange III. the interest charged by the firm on money owed by customers in their margin accounts IV. fees for providing advisory services to high net worth individuals

I and III (There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions, markups and markdowns, and advisory fees for those first that are also registered as investment advisers.)

Which of the following persons are included in the definition of an agent under the USA? I. An individual who represents First Securities Brokers, Inc., in selling shares of XYZ Corporation, a New York Stock Exchange listed company II. An individual who, as part of the job description, represents the City of Chicago in selling bonds to the public III. An individual who represents First Securities Brokers, Inc., whose sole activity consists of selling individual investors securities issued by the U.S. government IV. An individual who is employed by the Federal Reserve Board to sell Treasury Bills to retail investors

I and III (Under the USA, an agent is defined as an individual who represents a broker-dealer selling any type of security, whether that security is exempt or nonexempt. Individuals who represent issuers in trading certain exempt securities or any exempt transactions are not defined as agents.)

A client is interested in purchasing thinly traded equity security where, due to the extra effort involved in obtaining the issue, the commission charged will be somewhat higher than normal. The compensation to the broker-dealer must be disclosed I. before the order is placed II. at the time of trade execution III. in the prospectus IV. on the trade confirmation

I and IV (commissions are always disclosed on the trade confirmation; in this specific case, NASAA wants you to understand thinly traded issues will probably carry a higher than usual commission; in those cases disclosure must be made before the trade is made.)

Which of the following activities are unethical or fraudulent for agents? I. Stating that a specific stock always follows the performance of the Dow Jones Average II. Stating that the agent will always follow the client's account and recommend changes prior to a market shift III. Recommending speculative, low-priced stocks with no knowledge of client's financial condition IV. Stating that the client will always make money investing prior to quarterly reports

I, II, III, and IV

Under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, which of the following activities (if performed by an agent) are considered fraudulent, dishonest, or unethical? I. Executing a transaction in a margin account without securing an executed written margin agreement from the customer, promptly after the initial transaction in the account II. Executing a transaction either with or for a customer at a price not reasonably related to the current market price III. Guaranteeing a customer against loss on securities purchased IV. Personally providing safekeeping and custodial services for clients' cash and securities

I, II, III, and IV (An agent may not take personal possession of clients' cash and securities. The broker-dealer, however, can provide safekeeping and custodial services. Agents must execute trades at prices related to current market prices and may not guarantee the performance of a security. An agent may execute a trade in a margin account providing the agent receives a written margin agreement promptly after the initial trade.)

An investment adviser representative may perform which of the following functions ? I. solicit for advisory business II. manage advisory accounts III. earn commissions on sales of recommended securities IV. supervise those who render advice

I, II, and IV (An IAR may not earn commission on the sale of securities unless also registered as an agent.)

Which of the following investment adviser compensation arrangements is (are) permitted under the USA? I. The value of a client's account at the start of the year is subtracted from the value at the end of the year. The investment adviser's compensation is 5% of the difference. II. The investment adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. III. The investment adviser charges a fee of 1% of the average value of the account portfolio during the year. IV. The investment adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the clients assets increase to $200,000 or more.

III and IV (Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the investment adviser or $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.)

Which of the following are not specifically excluded from the definition of an investment adviser under the USA? I. An investment adviser representative of an advisory firm who makes securities recommendations on a regular basis for compensation. II. A temporary employee hired to assist in administrative responsibilities of an advisory firm III. Any person who is a federal covered investment adviser IV. A person, who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities

IV only

According to the USA, a person representing an issuer in the sale of which of the following securities would have to be registered as an agent?

Securities issued by a federal credit union (An individual is exempt from registering as an agent only when representing the issuer in one of the limited group of five exempt securities, or in any exempt transaction. Oddly enough, a federal credit union is not on that list.)

Under the USA, which of the following is TRUE regarding registration of agents?

To register, an agent must submit a completed application for registration, a filing fee, and a signed consent to service of process.

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is permissible for an agent to do all of the following EXCEPT

open a joint account with a customer with written consent of the employing broker-dealer (In order for an agent to open a joint account with a client, written consent of both the client and the employing broker-dealer is required.)

All of the following actions must be completed by the time customers enter their first option trade EXCEPT:

receipt of a completed options agreement. (While other option account requirements must be met no later than the time customers enter they initial options trade, under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.)

An Administrator may issue a stop order if it is in the public interest and the

registrant is subject to an administrative stop order of a neighboring state

Under the USA, all of the following could be cause for disciplinary review action by the state securities Administrator EXCEPT

the ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors (IA's may employ IAR as independent contractors.)

All of the following information would be found on a trade ticket EXCEPT

the price of the security at the time of the order (the price at the time of the order is of no significance; the execution price, of course, is)