Qbank Unit 1 Flashcards Preview

66 2.0 > Qbank Unit 1 > Flashcards

Flashcards in Qbank Unit 1 Deck (153):
1

If having discretion over $100 million or more in 13(f) securities, which of the following would be exempt from filing a Form 13F?

A)A trustee

B)An investment adviser that manages mutual fund assets

C)A natural person who exercises investment discretion over the account of any other natural person or entity

D)A natural person who exercises investment discretion over her own account

4; An institutional investment manager is also a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. For example, an investment adviser that manages private accounts, mutual fund assets, or pension plan assets is an institutional investment manager; so is the trust department of a bank. A trustee is an institutional investment manager, but a natural person who exercises investment discretion over her own account is not an institutional investment manager.

2

**** When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is

A)the ability of the customer to move funds out of the account on multiple occasions

B)the ability of the customer to make a one-time wire to a foreign bank account owned by a family member

C)if the customer owns the underlying security on which the call option is sold

D)that the account is in the name of an institutional customer

1; A covered account is an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions. Where the money goes is less of a factor than the frequency of transactions. The only time when a single transaction account might be covered is if there is reason to believe that the identity of the customer is at risk—not likely when wiring to a family member. Institutions are not included in the definition and owning the stock underlying the sale of a call option means the option is covered—totally different from the topic here.

3

true or false: The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by non-profit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.

true

4

true or false: The Administrator has jurisdiction from the state in which the offer was made, (ND), received, (WY), and accepted, (ID). Mailing of the certificate is of no consequence.

true

5

Transactions meeting certain conditions are exempt from the Uniform Securities Act’s registration and advertising filing requirements. Which of the following transactions does NOT meet those conditions to qualify as an exempt transaction?

A)A sale of securities by the executor of an estate.

B)A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid.

C)An offer of a security for which a registration statement has been filed but has not yet become effective.

D)The sale of U.S. government securities to a retail client's IRA by a registered government securities dealer.

4; In the sale of U.S. government securities to a retail client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.

6

An Administrator does not have jurisdiction over an offer to sell that is made in a:I. TV broadcast originating outside the state.
II. newspaper published outside the state.
III. newspaper published inside the state where more than two-thirds of its circulation is outside the state

all three; Under the broadcast and publishing exceptions, the Administrator does not have jurisdiction if the offer is made in a TV or radio broadcast originating outside the state or in a newspaper published outside the state. Furthermore, if a newspaper is published inside a state but more than two-thirds of its circulation is outside the state, the Administrator does not have jurisdiction.

7

Which of the following would NOT be considered an investment adviser under Release IA-1092?

A)A retired banker who solicits business and advises former clients on a monthly basis as to the specific investment merits of banking securities and receives compensation for his services.

B)A pension consultant who advises a defined contribution plan on alternative methods of funding the plan and the relative merits of a selected list of investment managers.

C)The president of an investment club who provides research and advice to the members of his club on a regular basis as an integral part of his duties.

D)An agent for an athlete who negotiates contracts for a baseball player, as well as advises the client on securities, but does not have discretionary authority over the athlete's securities account.

3; The president of the investment club does not meet all three of the required elements in the definition of an investment adviser as outlined in Release IA-1092. The investment club president is neither in the business of providing advice nor does he receive compensation for his services. Agents for athletes are considered investment advisers if they include investment recommendations as part of their services, whether or not they have discretion over the funds.

8

ABC Corporation, a newly formed company, has filed a registration statement with the SEC under the Securities Act of 1933. If they wish to use coordination to register in this state, which of the following statements is true?

A)A statement of the maximum and minimum proposed offering prices and maximum underwriting discounts and commissions must be on file with the Administrator for two full business days prior to the date the federal registration statement becomes effective.

B)If registered by coordination, the state registration may become effective before the federal registration.

C)If registered in state X by coordination, the state registration will become effective 30 days after the federal registration becomes effective.

D)The federal registration makes state registration unnecessary.

1; One of the requirements of coordination is that a statement of the maximum and minimum expected offering prices and maximum underwriting compensation must be on file with the Administrator for at least two full business days prior to the effective date.

9

Which of the following statements regarding issuers of securities listed on the NYSE is TRUE? Securities of NYSE issuers are:

A)exempt from registration with the SEC because they are required to meet listing requirements of SEC-registered exchanges.

B)federal covered securities that are exempt from registration with the states.

C)not federal covered securities because state securities regulators have the ability to prosecute the issuers for fraud as well as other violations of securities law.

D)securities sold in interstate commerce that must register with the SEC and by coordination only in those states in which their securities are sold.

2; Issuers of securities listed on the NYSE are federal covered securities that are exempt from registration, although some states may require a notice filing. Investment companies, however, are federal covered securities that generally submit notice filings to the state in which their securities are sold. Registration by coordination at the state level is available for securities that are sold interstate and registered with the SEC, but that don't meet the NSMIA definition of federal covered security by being listed on SEC-regulated exchanges, such as the NYSE.

10

Which of the following activities of an investment advisory firm would NOT require notification to and consent of the clients of the advisory firm?

A)The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm.

B)A minority partner resigning from the firm to start his own advisory firm.

C)An investment adviser wishing to merge with a larger national advisory firm.

D)The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser.

2;
Explanation



Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the investment adviser. The change in a minority interest is not considered to be an assignment so only notification, but not consent, is required.

11

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE?

A)The sale must be approved by the SEC.

B)The sale must be approved by each customer of the selling adviser.

C)No approvals are required.

D)The sale must be approved by the Administrator.

3; An investment adviser does not need the approval of clients to sell the business. However, technically, the sale means that the advisory contracts will be assigned and that cannot be done without client consent. In an event such as this, the clients would be given the choice of having the new firm manage their assets or taking their accounts elsewhere.

12

An investor files a suit against the agent handling his account. While the suit is in progress, the investor dies. In regard to the lawsuit, which of the following is TRUE?

A)If the account was registered in the client's name only, the executor of his estate continues the suit.

B)The death of the plaintiff cancels the legal action.

C)If the account was registered in the client's name only, the beneficiary continues the suit.

D)The death of the defendant cancels the legal action.

1; Death of either party to the suit does not cancel a civil suit. As the person responsible for the affairs of the estate, the executor will continue the legal action.

13

All of the following are exempt securities under the Uniform Securities Act EXCEPT:

A)securities issued by the Canadian government.

B)securities issued by a bank holding company.

C)securities issued by a federal savings and loan association.

D)securities issued by a Canadian province.

2; Securities issued by a bank are exempt. However, this answer refers to a bank holding company that is considered to be an ordinary company subject to state registration if not otherwise exempt.

14

An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans.

A)Registration as an IAR is required because the plan is qualified.

B)Registration as an IAR is not required because the plan is considered an institutional client.

C)Registration as an IAR is required because the individual is rendering investment advice.

D)Registration as an IAR is not required because the individual works for a federal covered investment adviser.

3; Regardless of who the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal), must register as IARs. It makes no difference if the plan is qualified or not.

15

A licensed agent with a registered broker-dealer in a state would be permitted to engage in which of the following transactions in unregistered nonexempt securities?

A)The sale of commercial paper with a 12-month maturity

B)The sale of a preorganization certificate on which the agent receives no commission on the amount paid by the investor

C)A private placement

D)A solicited transaction in a small Canadian mining company

3; Under the USA, it is unlawful for any person to offer or sell any security in this state unless (1) it is registered under the USA; or (2) the security or transaction is exempted under the USA; or (3) it is a federal covered security. In this case, a private placement is an exempt transaction so the agent is within the limits of the law. The sale of the preorganization certificate is not an exempt transaction because, although the agent received no commission, the investor paid for the subscription and, in order to be an exempt transaction, no payment is allowed.

16

Included among the powers of the Administrator is the ability to:

A)sentence an investment adviser representative who has been convicted of fraud to a prison sentence, not to exceed 3 years.

B)request the court to appoint a receiver to freeze the bank accounts of a broker-dealer who is the subject of an injunction.

C)arrest an agent who violates the USA.

D)deny the registration of a securities professional if doing so is in the public interest.

2; If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest, but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, etc. Although the maximum prison sentence under the USA is three years, it is the courts that do the sentencing, not the Administrator.

17

If convicted of a willful violation of the Uniform Securities Act, an agent is subject to:

A)a fine of $10,000.

B)imprisonment for five years.

C)disbarment.

D)a fine of $5,000, imprisonment for three years, or both.

4; Under the USA, the maximum criminal penalty is a fine of $5,000, three years in jail, or both

18

All of the following are exempt from state registration under the Uniform Securities Act EXCEPT:

A)bonds issued by a bank that is a member of the Federal Reserve System.

B)securities issued by a nonprofit organization.

C)debt securities issued by or guaranteed by an insurance company licensed to do business in this state.

D)variable annuities or other variable insurance products offered by an insurance company

4; A variable annuity (or other variable insurance product) offered by an insurance company is a nonexempt security under the Uniform Securities Act. Securities issued by or guaranteed by an insurance company are covered by extensive state insurance regulations and are exempt from state securities registration. Securities issued by banks are exempt because banks are covered by extensive state and federal banking regulations.

19

In 1933, Congress passed the Securities Act which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions including that for:

A)equipment trust certificates issued by a regulated common carrier.

B)stock issued by regulated insurance company.

C)corporate common stock listed on the NYSE.

D)obligations of the Canadian government.

1; Although each of these is considered an exempt security under the Uniform Securities Act, only the securities of a regulated common carrier carry an exemption from federal registration.

20


Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA?

A)Both the SEC and State X

B)The SEC only

C)Neither the SEC nor State X

D)State X only

4; Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions, such as insurance companies, are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to register in that state.

21

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if:I. results do not reflect the deduction of fees.
II. actual market conditions during the referenced period are not disclosed.
III. the advertisement did not reflect performance for a minimum period of three years.
IV. the advertisement did not disclose that it applied to only a specific group of clients.

1, 2 & 4; Advertising that reflects past performance must show a minimum period of one year, not three. All investment advisers advertising must reflect deduction of fees, disclose the specific group of clients to which it applies if applicable, and state actual market conditions during the referenced period.

22

Under the Uniform Securities Act, the definition of an investment adviser does NOT include: I.investment adviser representatives.
II.lawyers and accountants whose investment advisory services are solely incidental to their practices.
III.broker-dealers who offer investment advice on an incidental basis without special compensation for the advice provided.
IV.federal covered investment advisers.

all four; None of the above are included in the term "investment adviser" as used in the Uniform Securities Act. Federal covered advisers are regulated by the Securities Exchange Commission (SEC). The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual registration of investment advisers by federal and state authorities. If federal covered advisers were defined as investment advisers under the USA, then they would be subject to the same state registration procedures as local or state investment advisers.

23


Under the Uniform Securities Act, which of the following is NOT a requirement for a preorganization subscription to be an exempt transaction?

A)No payment may be made by any subscriber.

B)The offer of the security may not be advertised.

C)There may be no more than ten subscribers.

D)No commission may be paid to anyone for soliciting potential subscribers.

2; There are three requirements for a preorganization subscription to qualify as an exempt transaction. A preorganization subscription may be advertised.

24


Broker-dealers are not required to keep:

A)financial records.

B)copies of client's tax returns.

C)blotters.

D)customer account records.

2; There is no requirement for broker-dealers or their agents to maintain copies of client's tax returns. A firm's blotter is its record of original entry for all money and securities transactions.

25


When a security registers by using coordination, under normal circumstances, the effective date is determined by the:

A)issuer.

B)SEC.

C)Administrator.

D)underwriter.

2; A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in those states where the registration was coordinated.

26


Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration?

A)There is no need to prove eligibility for an exemption.

B)Issuer.

C)Underwriter.

D)State Administrator.

2; The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by someone other than the issuer, such as selling stockholders or a broker-dealer, that person must prove the claim

27

Based on the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? I.A lawyer who advertises financial planning services.
II.Persons whose advice relates solely to government securities.
III.An accountant who receives separate fees for providing investment advice.

2 only ;Lawyers and accountants may not claim the exclusion if they advertise their investment advisory or financial planning services, or if they charge a separate fee for such services. Broker-dealers may not claim the exception if they provide investment advice beyond the scope of the brokerage business or if they charge a separate fee for advice.

28

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.

all four; An agent may not take personal possession of clients' cash and securities. The agent's firm, 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.

29

Under the Investment Company Act of 1940, which of the following statements is (are) TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? I.This is prohibited under the act.
II.Investment companies may employ outside advisers if a written contract is executed.
III.The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares.

2 only ;One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open or closed-end) must be in writing. The initial contract must be approved by a majority vote of the outstanding shares and the "non-interested" members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties.

30

Under the USA, which of the following are exempt transactions? I.A transaction between an issuer and an underwriter.
II.An unsolicited customer order to buy an exempt security.
III.U.S. Treasury bonds.
IV.Municipal securities

1 & 2; Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction's exempt status generally depends on the trade's participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction.

31


In which of the following situations is an agent committing a prohibited practice?

A)Buying a security on behalf of a customer and then reselling it before the customer has paid for it.

B)Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority.

C)Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity.

D)Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account.

2; Written receipt of trading authority is required before conducting any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits the client from making his own trades.

32


Which of the following statements regarding state registration of securities is TRUE?

A)Registration by qualification is effective after 30 days.

B)Registration by coordination is effective on the 10th day after filing with the Administrator.

C)Notice filing is effective when ordered by the Administrator.

D)Registration by coordination is effective concurrent with federal registration.

4; Coordination is the method used to register a security simultaneously under the Securities Act of 1933 and under the USA in a state. If the security's federal registration is pending and the Administrator has received all of the required material, the two registrations can be declared effective at the same time.

33

******
In the Howey decision, the U.S. Supreme Court held that a security must represent:

A)an investment of money in a common enterprise with the expectation of profit from the efforts of the investor.

B)an investment of money in a common enterprise with the expectation of profit or tax deductible losses from the managerial efforts of others.

C)an interest in a publicly traded corporation whose managers are engaged in a regulated business enterprise.

D)an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.

4; The Howey decision defined a security as (1) an investment of money (2) in a common enterprise (3) where there is an expectation of a profit (4) through the efforts of a third party and not the investor.

34


Your friend is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent, and your friend wants you to sell the policy and split commissions with him. Splitting commissions:

A)is an unethical trade practice.

B)in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain their securities licenses at the same or affiliated broker-dealers.

C)would be allowable if the securities representative receives at least 60% of the commission and the insurance agent receives no more than 40%.

D)in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain securities licenses with broker-dealers registered with the Administrator.

2; You must be licensed in both insurance and securities to sell variable annuities or to split commissions. Commissions on securities transactions may only be split with registered agents of the same or affiliated broker-dealers.

35


Gibraltar Investment Advisers is organized as an investment advisory partnership. If Jack, a partner with a minority interest, retires, Gibraltar is required to:

A)notify its clients immediately that Jack is no longer with the firm.

B)notify its clients as soon as reasonably possible of Jack's retirement.

C)do nothing; notification is not required.

D)notify its clients within 30 days of Jack's retirement that he is no longer with the firm.

2; When a partner with a minority interest leaves an advisory firm for any reason, client notification must be made within a reasonable period. However, if Jack were a majority partner, the law would consider that the clients' accounts were assigned and client consent would then be required to maintain those contracts, as opposed to notification.

36

*****
Under the Securities Exchange Act of 1934, which of the following is a securities information processor?

A)TEFRA

B)The OTC Markets Group Inc, (formerly known as the Pink Sheets)

C)"The Wall Street Journal"

D)FINRA

2; Persons in the business of providing information on securities transactions or quotes of securities prices on a continuing basis through a computer network, wire service (ticker tape), or other publications, such as The OTC Markets Group Inc (Pink Sheets) are considered securities information processors. Excluded are newspapers, magazines, or other publications of a general and regular circulation, SROs, banks, broker-dealers, or others who provide such information as part of their normal activities.

37

*****
True or false: A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction.

True

38

Which of the following would meet the definition of investment adviser under the Uniform Securities Act? I.A broker-dealer charging a separate fee for investment advice.
II.The publisher of a weekly newsmagazine, sold on newsstands, that contains at least 5 stock recommendations per issue.
III.A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims.
IV.A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price.

1, 3 & 4; Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice as would appear to be the case here. On this examination, the term "comprehensive financial planning" always includes securities advice.

39

*****
NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. Because of this, when performing an examination of the IA, the Administrator will look for disclosure-related items not only in the disclosure document, but may also check the adviser's:I. advertising.
II. contracts.
III. seminar materials.
IV. websites.

all four; Improper disclosures in any form of communication with the client is a prohibited business practice.

40


Which of the following statements regarding an agent's registration is most accurate?

A)If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer.

B)Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration.

C)Registration of a broker-dealer in a specific state automatically registers all of the firm's agents in that state as well.

D)If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days.

2; The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act. Therefore, when the broker-dealer’s registration is revoked, the agent’s license is no longer in effect. The exam may refer to the agent's registration being placed into suspense which has the same meaning. The Administrator does not “hold” licenses. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers and partners when the firm first registers.

41

A customer placed an order with an agent to sell 100 shares of ABC and he instructed the agent to limit any losses. The agent did not have discretionary authority over the account and waited to sell the shares, hoping to get a better price for the customer. The price of the shares went down, so the agent sold 50 ABC shares to limit the customer's losses. According to the Uniform Securities Act, this is a

A)violation because the ​agent acted without discretionary authority

B)violation because the ​agent is required to execute sell transactions immediately after the order is placed

C)permissible activity because the ​agent is obligated to get the best price for the customer

D)permissible activity because the ​agent is not permitted to guarantee a price to a customer

1; An ​agent may determine the price and timing of a transaction without discretionary authority. As a result, the ​agent is not necessarily required to execute a transaction immediately after an order is placed. In this situation, the ​agent acted without authority when he changed the amount of the security sold

42

*****
An investment advisory firm is organized as a partnership and there are five equal partners. During the year, one of the partners passes away and two others leave to start their own firm. Which of the following is required by the Uniform Securities Act?

A)Permission of the clients to have their contracts assigned to the surviving entity.

B)The successor firm must pay the required fees.

C)Notification to all clients as to the change in the partnership's majority interest.

D)Cancellation of the registration of the firm.

1; Because three of the five partners are no longer with the firm, that represents a majority interest and the partnership must be re-formed as a new entity. The state does not require fees from successor firms, as they will be paid the fee at annual renewal time. Since this represents a new firm, the USA considers this as if the contracts are assigned so permission is required; not merely notification (as would be the case if only two of the partners had left or died).

43


States may require a surety bond as a prerequisite to registration under the Uniform Securities Act for each of the following EXCEPT a(n):

A)agent.

B)issuer.

C)broker-dealer.

D)state-registered investment adviser.

2; The common requirements are to pay filing fees, post a surety bond, and consent to service of process for all three of these designations. For broker-dealers and state-registered investment advisers, an additional net capital or net worth requirement has to be met.

44


*****
Once an investment adviser's registration has been granted by the state Administrator, he may advertise that he is:

A)able to give advice and execute securities transactions.

B)approved by state authorities to analyze securities.

C)eligible to engage in selling securities advice to the public.

D)an RIA.

3; Passing the Series 66 exam and obtaining registration by the Administrator makes an individual eligible to provide securities advice to the public. Only individuals registered as agents may execute transactions and the initials RIA may not be used, only the phrase" registered investment adviser."

45


*****
An investment adviser representative borrows $10,000 from his mother-in-law, who is also a client. He signs an agreement to pay back the loan in 5 years at below market interest. This arrangement is:

A)acceptable if any profits and losses in the customer's account are shared in proportion to each party's financial contribution and with the firm's prior permission.

B)acceptable because the client is considered an immediate family member.

C)unacceptable because the interest rate is too low.

D)unacceptable because it is considered an unethical business practice to borrow from a client not in the lending business.

4; The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permits borrowing from clients only when they are in the lending business or are affiliates of the firm.

46

An agent under the USA is a(n): I.individual who represents an issuer in nonexempt transactions.
II.registered broker-dealer that deals in registered securities.
III.individual who sells nonexempt securities as a representative of a registered broker-dealer.
IV.individual who has no place of business in the state and sells securities to an existing client who is not a resident of the state.

1 & 3; Agents generally work for and represent a broker-dealer in conducting securities sales or transactions but are excluded from the definition of an agent if they have no place of business in the state and sell securities to an existing client who is not a resident of the state. Individuals employed by issuers to sell in nonexempt transactions are also included in the definition of "agent".

47


The Uniform Securities Act provides for all of the following EXCEPT:

A)criminal penalties for violations of the act.

B)subpoena power for the state Administrator.

C)specific civil penalties for up to three times the amount of money invested for willful violation of the act.

D)exemption from registration for federal covered securities.

3; The Uniform Securities Act provides for criminal penalties of up to three years in prison and/or $5,000 in fines. The act describes civil liability, not specific civil penalties. Civil liability includes interest costs, rescission of trade, payment of attorney's fees, and return of principal invested. The act makes no reference to penalties of three times the amount of money invested. The Uniform Securities Act does provide the state Administrator with the power to issue subpoenas.

48

The Uniform Securities Act provides for both civil and criminal prosecution. In which of these cases might an agent face civil liability? I.A sale was made of an unregistered nonexempt security.
II.During a sales presentation, the agent misstated a material fact which resulted in the prospect deciding to make the purchase.
III.The agent was included in the judgment along with the broker-dealer for a civil infraction.

all three; These are all cases for civil, not criminal liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case.

49

According to the Uniform Securities Act, after an agent passes the Series 66 exam and the Series 7 exam, asset-based compensation is permitted:I. immediately.
II. after notification of investment adviser representative status by the appropriate supervisory person of the firm.
III. when registration has been granted by the state Administrator.
IV. when permission is received from the SEC.

2 & 3; Passing the Series 7 licensing exam qualifies an individual to solicit securities but not to receive asset-based compensation. Once the Series 66 has been passed, the state Administrator must actually issue a registration, and the individual must be associated with an investment adviser before engaging in asset-based compensation in a particular state.

50


Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses?

A)Registration fees for the seminar plus travel expenses

B)Registration fees for the seminar

C)Travel and transportation fees, but not the seminar fee

D)None; because ESA directs commission business to FSC, it would be an unethical business practice for FSC to pay any portion of the expenses

2; Payment for seminar fees is permitted under the safe harbor provisions in Section 28(e) of the Securities Exchange Act of 1934.

51

*****
If two agents of a broker-dealer agree to work together as a partnership in soliciting business and they agree to split commissions, this practice is:

A)in violation of the Uniform Securities Act's prohibition against sharing in the profits of an account.

B)permitted.

C)permitted only if a principal of the firm audits the partnership's financial performance.

D)permitted, but only with the prior written consent of the affected clients.

2; There is nothing in the USA that prohibits agents registered with the same broker-dealer from forming a partnership to conduct business or solicit clients. Under the USA, a principal of the firm need not audit the financial performance of such an arrangement. It is considered an unethical business practice for agents who are not licensed with the same or affiliated broker-dealers to share commissions.

52

*****
According to the Investment Advisers Act of 1940, which of the following is excluded from the definition of an investment adviser?

A)A lawyer who charges a separate fee for giving specific investment advice.

B)A person who receives a fee for advising others on Treasury securities.

C)A publisher of a newsletter that makes securities recommendations that are specific to the needs of individual subscribers.

D)A person paid to give advice on bank stocks.

2; The Investment Advisers Act of 1940 excludes from the definition of investment adviser anyone who advises only on U.S. government or agency securities. Normally, attorneys and publishers are excluded from the definition of investment adviser, but there are some exceptions. A lawyer who gives investment advice (if he offers the advice as part of his practice and receives compensation for it), a person who is paid to give advice on bank stocks, and a publisher of a newsletter that gives specific securities recommendations based on the needs of each subscriber, all fall within the definition of investment adviser under the act.

53

*****
If an agent solicits a client to purchase nonexempt, unregistered securities, and the solicitation results in a sale, which of the following statements is NOT true?

A)The broker-dealer may be sued if the client loses money, but if money is made the client may keep it.

B)The employing broker-dealer must offer the right of rescission within 30 days of discovery.

C)The broker-dealer who employs the agent may be sued.

D)The agent may be subject to civil penalties.

2; There is no specified time limit on when the right of rescission must be offered. The 30-day period is the length of time the client has, after receiving the notice, to accept or reject the offer. Agents are prohibited from soliciting sales for unregistered, nonexempt securities and any broker-dealer who employs an agent who does so may be sued. The agent may also be subject to civil penalties. Both agents and their broker-dealers may be sued when a sale results from an improper solicitation. If money is made, the client may keep it.

54

Which of the following activities would violate the Uniform Securities Act? I.An investment advisory partnership admits a renowned securities analyst to the partnership without informing its clients of this highly desirable addition.
II.An investment adviser incorporated in California fails to inform its clients of the departure of the chief financial officer who did not have an equity position in the firm.
III.An investment advisory firm incorporated in Illinois charges clients a share of the capital gains on the basis of a guaranteed performance level above a designated benchmark.
IV.An investment advisory firm assigns those accounts that fall to a low level to other firms willing to accept them with the consent of the account holder.

1 & 3; Investment advisers who are partnerships must inform their clients of any change in the membership of the partnership within a reasonable period. Unless the question refers to a specific exemption, it is a violation of the USA for an advisory firm to charge on the basis of performance. An investment advisory firm may assign accounts to another firm with the consent of the client.

55

*****
All of the following are examples of investment adviser fraud under the Investment Advisers Act of 1940 EXCEPT:

A)an adviser who has custody of client assets and deposits them into separate bank accounts.

B)an adviser who has been found in violation of the act and does not disclose this fact to clients.

C)an adviser who is exempt from registration under the act and fails to state a material fact.

D)an adviser exercising discretion over client accounts who has liabilities that exceed his assets and does not disclose this fact to clients.

1; The adviser who has custody of a client's assets must deposit them into separate accounts at the custodial bank as required by the Investment Advisers Act of 1940. An adviser exercising discretion or maintaining custody must disclose the fact that he has liabilities that exceed his assets. Advisers, whether or not they are exempt from the act, are subject to the antifraud provisions. Failing to disclose material facts to clients is considered fraud under the act.

56

*****
Mary, who is licensed as an agent in State A, got a promotion and will turn her clients over to Julie, who is licensed only in State B. Before Julie can take over the accounts, she must:

A)register with the NYSE.

B)register with State A.

C)receive permission from each of those clients.

D)register with FINRA.

2; For an individual to sell securities in a particular state, she must be licensed in that state unless an exemption applies. There is nothing in the USA that requires client consent when the agent of record on the account changes.

57


Under the USA, the term "security" refers to all of the following EXCEPT:

A)commodity futures contract.

B)bonds.

C)certificate of deposit for a security.

D)put, call, straddle, or option.

1; Commodities and futures contracts on commodities are not securities. Just remember the short list of items that are not securities.

58

*****
The Investment Advisers Act of 1940 requires an investment advisory contract to include which of the following terms?I. Performance guarantee.
II. Duration of contract.
III. Events that will lead to automatic assignment of the contract.
IV. Refunding of prepaid fees in the event of early termination.

2 & 4; Investment advisory contracts must disclose the duration of the contract and the terms by which prepaid fees are refunded to clients who cancel their contracts. Automatic assignment is never permitted.

59

*****
Which of the following must register as an investment adviser under the Investment Advisers Act of 1940?

A)A person who provides advice to insurance companies on their portfolios.

B)A person who provides advice to people who are investing in antique furniture.

C)A person who provides advice to people who are investing in coin collections.

D)A person who provides advice to people who are investing in companies registered under the Investment Company Act of 1940.

4; Investment advisers are defined by the Investment Advisers Act of 1940 as any person who, for compensation, engages in the business of advising others concerning the purchase or sale of securities. Investment companies are securities so this person would need to register. Since antiques and collectibles-such as coin collections-are not defined as securities, providing advice in this area does not require registration. A person who provides advice only to insurance companies is exempt from registration.

60


An investment advisory contract is considered assigned if an adviser formed as a:

A)partnership with 2 partners and adds 5 partners.

B)partnership with 5 partners and adds 2 partners.

C)corporation with 5 officers and adds 2 officers.

D)corporation with 2 officers and adds 5 officers.

1; If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required.

61

Which of the following securities are exempt from the registration provisions of the USA?I. Issue of a savings and loan association authorized to do business in this state.
II. General obligation municipal bond.
III. Bond issued by a company that has common stock listed on the American Stock Exchange.

all three; The USA exempts a number of different issues from registration, including securities issued by a bank, or anything that functions like a bank (e.g., a savings and loan or credit union). Securities issued by a governmental unit are always exempt. Securities listed on the American Stock Exchange are part of a group known as federal covered securities that also includes those listed on the New York Stock Exchange and Nasdaq Stock Market issues. If the common stock is listed, then any security of that issuer that is equal or senior in claim to the common is also considered exempt.

62

*****
Under the Uniform Securities Act, it is permissible for an agent to: I.solicit transactions in unregistered exempt securities.
II.share in the profits in an account with a customer with written permission of the customer and the broker-dealer.
III.split commissions with another agent at an affiliated broker-dealer.
IV.charge larger commissions because of a larger array of services the agent's firm offers.

all four; All of these are permissible actions. Exempt securities are unregistered because they are exempt and solicitations for trades are no problem. Sharing in the profits in an account with a customer is permitted under these conditions, and splitting commissions with agents of the same broker-dealer or different broker-dealers under common control is also permitted. However, two registered agents representing nonaffiliated broker-dealers may never share commissions. The Uniform Securities Act does permit commission charges to reflect the quality and quantity of services provided to the client.

63

*****
When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office:

A)the investment adviser representative and the employing adviser must notify the Administrator promptly.

B)only the investment adviser representative must notify the Administrator promptly.

C)only the terminating investment adviser must notify the Administrator.

D)the investment adviser representative and the federal covered advisers must notify the Administrator promptly.

2; If you are working for a registered investment adviser within a specific state, that state securities administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the State Securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the State Securities Administrator that you are working there as well as when you terminate.

64


An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if:

A)the customer fails to tell the adviser that he has custody.

B)there is a rule in the state barring such custody.

C)the customer has not received a wrap fee brochure.

D)the adviser is not a registered broker-dealer.

2; If there is a rule barring custody, under no circumstances may the adviser have custody of customer funds or securities. It is the adviser who must notify the customer that custody is being maintained, not the reverse.

65


Which of the following are issuers of securities?I. ABC Manufacturing Corporation borrows in the capital markets by selling bonds every few months.
II. Dot.Com, Inc., in an initial public offering, sells all its securities to the public within a few minutes after the shares go public.
III. XYZ Corp., in an initial public offering, fails to sell any shares to the public because it is not an attractive investment.
IV. YYY Corp., with 1 million shares outstanding, sells additional shares to the public in a primary offering.

all four; ABC Manufacturing Corp. is an issuer raising debt capital whereas Dot.Com, Inc., is an issuer raising equity capital. YYY Corp. is an issuer raising equity capital by selling additional new shares in a public primary offering. XYZ Corp. is an issuer despite its failure to sell any shares. The USA defines an issuer as a person that issues or proposes to issue a security. It is not necessary that an issuer actually issue the shares it proposes to issue.

66

Differences between static and interactive content on social media include I.Only static content can be reused by others
II.Only static content needs pre-approval
III.Only static content can be changed by the person who originated it
IV.Only interactive content can be commented on by others

2 & 4; Static content requires pre-approval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static can only be changed by its originator and interactive by the originator or others.

67

*****
The USA considers certain transactions to be exempt from the requirements to register and the filing of advertising material. Included in that group are all of the following EXCEPT:

A)any transaction by an executor, administrator, sheriff, marshal, or guardian.

B)any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000.

C)any transaction executed by a bona fide pledgee without any purpose of evading the act.

D)an isolated nonissuer transaction effected through a broker-dealer.

2; In general, the USA does not consider a transaction with an employee benefit plan to be exempt unless the plan has assets of at least $1 million.

68


Which of the following is NOT considered to be in the business of investment advising?

A)An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business

B)A person who prepares reports about securities in general

C)Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only

D)A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance

3; The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

69

*****
If a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE? I.The solicitor must be a registered investment adviser representative with the state.
II.The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940.
III.There must be a separate written agreement between the solicitor and the registered investment adviser.
IV.The agreement between the solicitor and the registered investment adviser is contained as part of the investment adviser's brochure.

2 & 3; Under federal regulations, if an investment adviser intends to pay a third party (non-employee) solicitor to solicit clients for investment advisory services, the adviser must be properly registered, there must be a written agreement between the adviser and the solicitor, and there can be no outstanding or pending orders or disciplinary actions against the solicitor involving finance or dishonesty. The solicitor does not have to be registered as a registered investment adviser representative because he is not representing the registered investment adviser in the giving of investment advice, in the management of accounts, or in the supervision of anyone else working for the registered investment adviser in these areas. The solicitor is being paid a fee for the solicitation of business for the registered investment adviser with a requirement of full disclosure to the client of the relationship with the adviser.

70

*****
One of the terms defined in the Uniform Securities Act is "broker-dealer". Which of the following is NOT included in that definition? I.An individual employed by a corporate entity to open new customer accounts for the purpose of trading securities.
II.A business entity seeking to raise additional capital using the regulated securities markets.
III.A person whose primary function is buying securities for his own account and for the accounts of others.
IV.A person whose primary function is providing advice on what assets belong in clients' investment portfolios.

1, 2 & 4; A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.

71

*****
Alice is a financial planner who is properly registered as an investment adviser and occasionally meets with clients with negative cash flow and substantial indebtedness. Alice refers such clients to Norman, a bankruptcy attorney. Likewise, when Norman encounters clients who need help managing their assets, he refers them to Alice. This activity is:

A)prohibited.

B)permissible if the referral arrangement is disclosed to clients.

C)permissible without restriction.

D)permissible without disclosure if it occurs on an incidental basis.

2; Referrals to other professionals may be made as long as the reciprocal nature of the arrangement is disclosed.

72


*****
An individual has filed an application for registration as an agent with a broker-dealer in this state. Which of the following would be ample cause for the Administrator to deny the registration? I.Bankruptcy filing by the individual 5 years and 4 months ago.
II.Conviction for a felony committed less than 10 years ago.
III.Conviction for a misdemeanor involving the securities industry less than 8 years ago.
IV.The applicant is not a legal resident of this state.

2 & 3; The Administrator will deny an application for registration if the applicant has been convicted of a securities-related misdemeanor or any felony within the past 10 years. Bankruptcy is not a cause for denial, and one does not have to be a resident of a state in order to become licensed in that state.

73

Life insurance companies offer many different products. Which of the following would NOT be considered a security? I.Index annuity
II.Modified endowment
III.Variable annuity
IV.Variable life

1 & 2; Any insurance product that includes the word variable is a security. Otherwise, it is not.

74


Although certain common stocks, known as federal covered securities, are exempt from state registration, the Administrator has the power to request from the issuer all of the following EXCEPT:

A)a copy of the issuer's articles of incorporation.

B)a consent to service of process.

C)copies of the registration statement filed with the SEC.

D)a contact person located within the state for purposes of legal service.

4; The consent to service of process eliminates the need for any local representation for legal purposes.

75


The term exempt reporting adviser refers to

A)advisers who are registered on the state level, but who file their Form ADVs through the IARD

B)advisers that rely on either the venture capital fund adviser exemption or the private fund adviser exemption

C)advisers whose only clients are insurance companies

D)broker-dealers who are considered investment advisers solely because they offer wrap fee accounts

2; Exempt reporting advisers (ERAs) are defined as investment advisers, but, because they either are private fund advisers or advise venture capital funds, they are exempt from registration on either the state or federal level. However, even though they are exempt from registration, they must file certain portions of Form ADV—hence the name exempt reporting advisers.

76

true or false: precious metals are a security

false

77

Securities exempt under the Uniform Securities Act are exempt from:I. registration requirements.
II. antifraud provisions of state securities laws.
III. sales and advertising literature filing.

1 & 3; An exempt security is exempt from the registration requirements and the provisions that require the filing of advertising and sales literature. Exempt securities are never exempt from the antifraud provisions of the act.

78

The Investment Advisers Act of 1940 addresses the issue of investment advisers (IA) maintaining custody of client funds and/or securities. In which of the following cases would that Act consider the IA to have custody?I. Possession of client funds or securities.
II. Any arrangement under which the IA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the IA's instruction to the custodian.
III. Any capacity that gives the IA or a supervised person legal ownership of or access to client funds or securities.
IV. Receipt of a check made out to a third party.

1, 2 & 3; One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a 3rd party other than the IA is not considered to be custody.

79

*****
Alvin Hill is an IAR with Kapco Advisers, Inc., a covered investment adviser with offices in New York City, Chicago, and Los Angeles. Alvin is registered in the states of New York, New Jersey, and Connecticut. Alvin has clients who move to San Diego and officially become California residents. Once settled there, they decide to open an advisory account for each of their children. What are Alvin's options?

A)Have a Kapco IAR who is licensed in California take over the existing account and open the new accounts for the children.

B)Continue to do business as usual with the existing clients but have the children's new accounts serviced by a Kapco IAR registered in California.

C)Obtain a California registration and handle all of the accounts.

D)Continue to do business as usual with the existing clients as well as open the children's account because Alvin does not have a place of business in California.

4; Under Section 203A of the Investment Advisers Act of 1940, an investment adviser representative of a covered investment adviser is required to register only in those states in which that IAR maintains a place of business. Even though the firm has a California office, nothing here indicates that Alvin plans to establish one there. If Alvin had been associated with a state-registered IA, then, once the clients had been residents of California for 30 days, Alvin would have to begin counting them towards the 5 in any 12 months de minimis limit which, once exceeded, would require registration as an IAR in CA.

80

*****
Which of the following securities offerings most likely would register by coordination?

A)Shares offered by an open-end investment company registered under the Investment Company Act of 1940.

B)An IPO for a company offered under the terms of a Rule 147 exemption.

C)An IPO whose shares will be traded on the OTC Bulletin Board.

D)A company whose stock is traded on Nasdaq Stock Market.

3; Coordination is used when an issue will be registered at both the federal and state levels. Stocks on the OTCBB require registration with SEC and any states in which they will be offered. All Nasdaq stocks and mutual funds are federal covered securities, so they are exempt from state registration. Rule 147 is the intrastate exemption requiring state, but not federal, registration.

81

*****
Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI’s portfolio managers notices an article on asset allocation that harmonizes with WSI’s investment philosophy. If WSI should post a link to this article on its website, it would probably be considered

A)estrangement

B)adoption

C)entanglement

D)fulfillment

2; A firm will be responsible for the content of a linked third-party site if the firm “adopts” its content on any of the firm’s sites. Adoption is defined as a firm’s endorsement of the content of a third-party site. This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm’s policies. Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it.

82


A bond's duration is:

A)identical to its maturity for an interest-bearing bond.

B)an indication of a bond's yield that ignores its price volatility.

C)longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon.

D)expressed as a percentage.

3; Duration measures a bond's price volatility by weighting the length of time it takes for a bond's cash flow to pay for itself. If two bonds with differing coupon rates have identical maturities, the one with the lower coupon has the longer duration. The cash flow from an interest-bearing bond makes its duration shorter than its maturity. Bonds with longer duration carry greater price volatility. Duration is expressed in years (time) rather than in percentage.

83


Under the Uniform Securities Act, which of the following is an investment adviser?

A)A broker-dealer who receives no compensation for investment recommendations.

B)A firm with no office in the state that provides specific investment advice to 10 noninstitutional clients within the state.

C)An investment adviser representative.

D)An individual who provides financial advice over the Internet with no recommendations based on specific investment situations of individual clients.

2; A firm with no office in the state that provides investment advice is not an investment adviser if its clients are investment companies or other institutions, or if business communications or advice are directed to no more than five noninstitutional clients within the state in the past 12 months. A broker-dealer is not required to register as an investment adviser unless it receives special compensation for providing investment advice. Individuals who publish general advice (no specific recommendations to individual clients) in hard copy form, electronic communications, or otherwise are not required to register as investment advisers.

84

Which of the following regarding corporate debentures are TRUE?I. They are certificates of indebtedness.
II. They give the bondholder ownership in the corporation.
III. They are unsecured bonds issued to finance capital expenditures or to raise working capital.
IV. They are the most senior security a corporation can issue.

1 & 3; Debentures are debt securities that represent unsecured loans of the issuer. They are senior to common and preferred stock in claims against an issuer. They are issued to finance capital expenditures or raise working capital.

85

*****
Under the Investment Advisers Act of 1940, for how many years must records be kept after the end of the fiscal year in which an entry was made?

A)2 years.

B)5 years.

C)1 year.

D)10 years.

2; Records must be kept for a full 5 years-the first two years in a readily accessible place- and are subject to SEC examination at any time. The 5-year requirement governs records of business activities. Additional rules require the articles of incorporation or partnership documents of the advisory firm and other business organizational documents to be kept for three years after termination of the enterprise.

86


The Securities and Exchange Commission does NOT have any regulatory jurisdiction over which of the following?

A)Municipal Securities Rulemaking Board.

B)National securities exchanges.

C)FINRA.

D)Federal Reserve Board.

4; The Federal Reserve Board is not regulated by the SEC.

87

*****
Which of the following statements is NOT true? I.A broker-dealer must be a firm or corporation (legal person) as opposed to a natural person (human being).
II.An investment adviser must be a firm or a corporation as opposed to a natural person.
III.An investment adviser representative (IAR) cannot, under any circumstances, be employed by a registered broker-dealer.

all three; A broker-dealer or investment adviser can be either a natural person (i.e., organized as a sole proprietorship) or a legal person (i.e., a corporation or partnership). There is no prohibition against an investment adviser representative also being licensed as an agent with a broker-dealer.

88


The agreement between an investment adviser and client is the advisory contract. In order to be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they:

A)generally do not provide for discretion.

B)must be in writing.

C)typically are renewed on an annual basis.

D)must disclose the amount or method of calculation of the adviser's fee.

2; While not the general practice, the federal law does permit oral contracts while the USA requires that all initial and renewal contracts be in writing.

89


Which of the following is not included in the list of alternatives enabling an issue to meet the residency requirement necessary to qualify for the exemption provided under Rule 147 of the Securities Act of 1933?

A)80% of the assets of the issuer must be within the state of issuance

B)80% of the purchasers of the offering must be residents of the state of issuance

C)A majority of the employees must be residents of the state

D)80% of the proceeds of the offering will be used within the state of issuance

2; 100% of the purchasers must be residents of the state in which the securities are being issued to qualify for the intrastate exemption under SEC Rule 147. As long as any one of the other choices, as well as having 80% of the revenue of the issuer derived from operations in the state of issuance, is met, it will meet the residency requirements.

90

******
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows I.16 clients in State A
II.12 clients in State B
III.6 clients in State C
IV.4 clients in State D
Fred would have to register as an IAR in

States A & D; In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state-registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).

91

true or false: When fees are automatically withdrawn from the client's account, custody of client funds can be presumed.

true

92


Senior Wealth Advisers (SWA) is registered as an investment adviser in North and South Carolina with offices in Charlotte and Charleston. On occasion, one of their investment adviser representatives meets with clients who reside in North Augusta, South Carolina in a hotel room in Augusta, Georgia. The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would

A)require that both SWA and the IAR register with the Georgia Administrator

B)require that SWA register with the Georgia Administrator

C)not require registration of either person with the Georgia Administrator

D)require that the IAR register with the Georgia Administrator

3; The hotel room located in Georgia is being used only to meet with existing clients, so no registration in Georgia is necessary. If prospects were invited, registration of both persons would be required. What if only 1 or 2 prospects were invited? Wouldn't the de minimis exemption apply? No, because the moment a person who is not an existing client is involved, the hotel room becomes a place of business in the state and that eliminates use of the de minimis rule.

93

******Which of the following are exempt from registration under the Uniform Securities Act?I. Preferred stock issued by ZXZ Corporation, whose common stock is traded on the New York Stock Exchange.
II. Common stock issued by a national bank.
III. Equipment trust certificates issued by a railroad company regulated by a state or federal agency.
IV. A debenture traded in the over-the-counter market issued by a corporation whose common stock trades on the NYSE.

all four; All the securities listed are exempt from registration under the Uniform Securities Act. Preferred stock issued by corporations whose common stock trades on the NYSE is a federal covered security and is exempt from registration with the states. The same is true for a debenture of a company registered on the NYSE even though the debenture is traded over the counter. The issuers of equipment trust certificates (railroads) are regulated by other agencies, and issuers of bank securities (commercial banks) are regulated by the Federal Reserve and Office of the Comptroller of Currency (OCC); their securities are exempt from registration by the states. The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual regulation of securities.

94


Which of the following must register as an investment adviser under the Investment Advisers Act of 1940?

A)A person who provides advice to people who are investing in antique furniture.

B)A person who provides advice to people who are investing in companies registered under the Investment Company Act of 1940.

C)A person who provides advice to people who are investing in coin collections.

D)A person who provides advice to insurance companies on their portfolios.

2; Investment advisers are defined by the Investment Advisers Act of 1940 as any person who, for compensation, engages in the business of advising others concerning the purchase or sale of securities. Investment companies are securities so this person would need to register. Since antiques and collectibles-such as coin collections-are not defined as securities, providing advice in this area does not require registration. A person who provides advice only to insurance companies is exempt from registration.

95

******
Which of the following transactions would be included in the USA's definition of exempt transaction? I.A banker liquidates stock pledged as collateral for a loan that has gone into default.
II.An offer to purchase a new stock made to 5 individuals and 15 institutional investors in this state during the past 12 months.
III.An isolated nonissuer transaction.
IV.The sale of preorganization certificates to 10 individuals with no commission being paid.

all ;All of these are included in the USA's definition of an exempt transaction. Sales made by a bona fide pledgee are exempt. Even though the number of offerees in the private placement exceeds 10, that limitation does not apply to institutional investors. A preorganization certificate may be sold to as many as 10 persons, while a private placement may not be offered to more than 10 (not counting institutional investors).

96

******
Which of the following would not be an issuer?

A)A partnership selling partnership interests.

B)An investment company.

C)A corporation selling certificates of interest in a mining lease.

D)A governmental agency borrowing money for short-term needs.

3; Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.

97


For which of the following is there no active secondary market?

A)Options.

B)Futures contracts.

C)ETFs.

D)Forward contracts.

4; One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.

98

******
Flexible premium payments are a feature of:

A)term life.

B)whole life.

C)universal variable life.

D)variable life.

3; Only universal and universal variable life policies have flexible premium payments.

99

******
Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA?

A)The SEC only

B)Neither the SEC nor State X

C)Both the SEC and State X

D)State X only

4; Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions, such as insurance companies, are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to re``gister in that state.

100

what security is most affected by credit risk?

zero coupon bond since no interest payments are made

101

******
In 1933, Congress passed the Securities Act which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions including that for:

A)obligations of the Canadian government.

B)stock issued by regulated insurance company.

C)equipment trust certificates issued by a regulated common carrier.

D)corporate common stock listed on the NYSE.

3; Although each of these is considered an exempt security under the Uniform Securities Act, only the securities of a regulated common carrier carry an exemption from federal registration.

102

******
One method of securities registration under the Uniform Securities Act is Qualification. The effective date of a security registered using this method is:

A)by Noon of the 30th day following the filing of the application.

B)when the offering is made effective by the SEC.

C)within 2 business days of the filing of maximum and minimum proposed offering prices.

D)when so ordered by the Administrator.

4; Registration by Qualification becomes effective on the date set by the Administrator

103


An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns?

A)8% Treasury bond maturing in 2036.

B)6% Treasury bond maturing in 2035.

C)Treasury STRIPS, maturing in 2036.

D)5% Treasury bond, maturing in 2037.

1; Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile since they have the longest duration. The actual calculation of the duration of each of the other bonds given is beyond the scope of this exam.

104

Which of the following are characteristics of commercial paper? I.Backed by money market deposits.
II.Negotiated maturities and yields.
III.Issued by insurance companies.
IV.Not registered with the SEC.

2 & 4; Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of less than 270 days, it is exempt from registration under the Securities Act of 1933.

105


An investment adviser is servicing a group of physicians and will offer a discounted fee to the doctors in that particular partnership. In what way would this be considered ethical?

A)This would be permitted as long as a disclosure is made in the IA's brochure that fees are negotiable.

B)This would be permitted if all of the physicians had a minimum net worth of at least $1.5 million.

C)This would be permitted as long as the adviser is not a patient of any of the physicians in that group.

D)This would be permitted as long as each physician has a unique contract.

1; Item #5 on the Form ADV Part 2A asks about the adviser's fee schedule. The adviser can indicate what types of fees are charged and whether or not they are negotiable. In a manner similar to a mutual fund breakpoint, when a group, not formed for the purpose of investing, contracts with an investment adviser, the adviser may choose to consider it one very large client rather than several smaller ones. This will generally result in a reduction in the percentage charged.

106


Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT:

A)publishers of financial publications that are not addressed to clients' specific individual investment situations.

B)investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million.

C)investment adviser representatives.

D)financial planners who provide fee-based investment advisory services to clients.

4; Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator as long as their total assets under management are less than $100 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration.

107

******
omitting prospectus

An omitting prospectus is a mutual fund tombstone advertisement. It must include information on obtaining a prospectus and may include the fund's past performance. It will never include an application to purchase shares and may or may not make mention of the fund's expense ratio.

108

******
true or false: Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security’s exemption, the only two where the Administrator has to power to do so are those issued by non-profit organizations and in connection with an employee benefit plan.

true

109

******
John Thompson, an investment adviser representative who has not obtained written discretionary authority from a client, receives oral instruction from the client to buy 100 shares of common stock of XYZ at whatever price he thinks is best. The investment adviser representative may:

A)not accept the order.

B)accept the order.

C)not accept the order unless the client is physically present when giving the order.

D)not accept the order until written discretionary authority is received.

2; An investment adviser representative may accept an order without written discretionary authority if the order is confined to time and/or price because the law does not consider that to be discretion. In this case, the client picked the name of the security, the amount to be purchased, and the action to be taken. The client only asked the investment adviser representative to use his discretion as to the best price and that does not require written authority.

110

******
Asset-based sales charges will generally be lowest when holding

A)Class D shares

B)Class C shares

C)Class B shares

D)Class A shares

4; Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don’t have a front-end load, but do have a higher asset-based sales charge.

111

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? I.Broker-dealers must maintain customer ledgers for three years.
II.Investment advisers must keep partnership records for three years after the partnership is terminated.
III.Agents must keep customer records for three years.
IV.Investment adviser representatives must maintain records for five years

1 & 2; Recordkeeping requirements for broker-dealers are three years and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs.

112

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may loan money to a client if: I.the investment adviser is a financial institution in the business of loaning money.
II.the investment adviser is also a broker-dealer.
III.the client is an affiliate of the investment adviser.

all three; Loaning money to a client is unethical conduct, unless the investment adviser is a financial institution in the business of loaning money, or the client is an affiliated person of the adviser. The broker-dealer is included because broker-dealers lend money to clients in the form of margin loans. Therefore, they are considered to be in the business of loaning money. Margin loans are considered an integral component of the broker-dealer's business of effecting securities transactions.

113

******
An individual has been employed by a broker-dealer to make cold calls to solicit prospects for the firm's new wrap fee program. Under the USA, this individual I.must obtain registration as an investment adviser representative
II.must obtain registration as an agent of the broker-dealer
III.is not required to obtain any registration because he is only making cold calls
IV.must be adequately supervised

1 & 4; Broker-dealers offering wrap fee programs must also have registration as an investment adviser. Under the USA, those individuals who solicit on behalf of an IA must register as IARs. If there was an indication in the question that the individual would be receiving compensation from the sale or purchase of securities, then registration as an agent would also be required. Of course, the activities of any employee of any type, must always be under proper supervision.

114

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

A)agent.

B)issuer.

C)international bank.

D)investment adviser.

4; The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.

115


An investment adviser is a member of a country club and provides substantial fee reductions to those members who become clients. The adviser justifies this because these club members are known for great referrals. The IA charges regular clients a fee that was larger for the same services because they were not members of the country club. Is this permissible?

A)It is not permissible because all clients must be charged at the same rate.

B)It is not permissible because the firm is charging other clients fees that are excessive in nature compared to the country club members.

C)It is permissible as long as the offer is not published as an inducement to join the country club.

D)This is permissible as long as proper disclosure is made in the adviser's brochure.

4; Item #5 on the Form ADV Part 2A asks about the adviser’s fee schedule. The adviser is asked if fees are negotiable. If so, it is necessary to describe the nature of the fee structure and what type of variations there might be. As long as the adviser discloses that there are some affinity groups that will qualify for a lower fee, there should be no problem. This is not considered to be a referral fee.

116

The Administrator may deny an application for registration as an agent if:I. the applicant has been convicted of a misdemeanor involving securities fraud within the past 120 months.
II. the applicant is insolvent.
III. the applicant has been convicted of a felony within ten years of the date of application.
IV. the applicant has filed an incomplete application.

all four; A record of any felony conviction or misdemeanors involving securities fraud during the last 10 years is sufficient grounds for the Administrator to deny an application for registration in the securities industry. Insolvency and failure to file a complete application are also grounds for denial.

117

******
While an application for registration as an agent of a broker-dealer is still pending, that person would be permitted to:

A)engage in no activity at the office other than studying for the exam.

B)accept unsolicited orders only.

C)assist registered employees of the firm by doing research on securities they are following.

D)limit her acceptance of orders to those from the broker-dealer's existing clients.

3; While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, performing research on an internal basis does not involve contact with the public in a sales effort and would be permitted.

118

******
Under the Investment Advisers Act of 1940, which of the following statements regarding the receipt of excessive compensation by an investment adviser is TRUE?

A)Receipt of excessive compensation is only prohibited for mutual funds having a front-end sales charge.

B)Compensation of 8.5% is the maximum permitted.

C)Receipt of excessive compensation is a breach of the adviser's fiduciary duty to the client.

D)No amount of compensation is excessive since it is disclosed in the advisory contract.

3; Receipt of excessive compensation is considered a breach of the adviser's fiduciary duty. However, this term is not specifically defined in the act.

119

******
Which of the following must register as an agent when representing a broker-dealer?

A)An employee who accepts unsolicited orders from institutional clients.

B)An individual who represents an underwriter only in transactions between an issuer and the underwriter.

C)A partner of a broker-dealer who has no securities sales functions.

D)The telephone switchboard operator who directs orders to the appropriate extension.

1; An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.

120

******
KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Jones has ten clients who reside in Ohio; IAR Cohen has six clients who live in Kentucky; and IAR Brown has three clients who are Georgia residents. In addition, Brown conducts a quarterly presentation at the Augusta National Golf Club where he discusses current market developments. The seminar is restricted to Club members only. Which of the following is CORRECT? I.Jones must register in OH.
II.Cohen must register in KY.
III.Brown must register in GA.
IV.Because all three are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs.

3 only; Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state, even when the number of clients the adviser has in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to Club members only – they are still members of the general public).

121

All of the following must be sold with prospectus EXCEPT:

A)a primary offering of a closed-end fund.

B)a closed-end fund in the secondary market.

C)an open-end common stock fund.

D)an open-end U.S. government bond fund.

2; Closed-end company shares trading in the secondary market are not new securities, so they are not required to be sold with a prospectus. However, a prospectus must be used in an initial offering of closed-end company shares. All open-end company shares must be sold with a prospectus because they are considered continuous primary offerings.

122

******
The Uniform Securities Act requires that an administrative order appeal must be requested within how many days after the order has been entered?

A)30 days.

B)45 days.

C)60 days.

D)15 days.

3; Any person who receives an order from the Administrator can petition the court to change or set aside the order, but an appeal must be filed within 60 days after the order was entered.

123

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?

A)Agents working in the branch office that are licensed only in Minnesota may take unsolicited orders from New Jersey residents.

B)Agents working in the principal office that are licensed only in New Jersey may take unsolicited orders from Minnesota residents.

C)Each agent must be registered in the appropriate state before soliciting or taking orders.

D)Each agent is automatically registered in both states.

3; 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.

124

******
An agency cross transaction can be described as:

A)a transaction between an issuer and a broker-dealer.

B)a sale of securities between different agencies of the federal government.

C)a sale of a security owned by a broker-dealer to the general public.

D)a transaction where a person acts as both an investment adviser and broker-dealer in the same transaction.

4; An agency cross transaction occurs when an investment adviser acts as both adviser and broker-dealer and requires prior written approval from the client and special reporting requirements. The adviser cannot recommend the transaction to both parties, only one side or the other.

125

******
Under SEC Release 1A-1092, which of the following has(have) met the test of providing advice or analysis concerning securities?I. A stockbroker calls a client and recommends the purchase of a certain stock.
II. A lawyer recommends against purchasing shares of a mutual fund in favor of another investment.
III. A publisher of an investment newsletter provides general information and recommendations concerning securities.

all three; Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect.

126

******
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT

A)charges for wiring funds

B)account maintenance fees

C)commissions on unsolicited trades

D)account transfer fees

3; There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1.commissions;
2.markups and markdowns; and
3.advisory fees for those firms that are also registered as investment advisers.

127

******true or false: While some states do require solicitors to be registered as adviser representatives, that is not a requirement of the federal law.

true

128

******
Which of the following statements regarding agent registration under the Uniform Securities Act are TRUE?I. In the absence of any action by the Administrator, the effective date of a registration is noon of the 30th day.
II. The Administrator may initiate a disciplinary action within 2 years of an agent's withdrawal of registration.
III. The administrator may request the agent furnish a statement of assets and liabilities.
IV. If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed upon filing of those amendments.

1 & 4; Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements and the Administrator has a maximum of one year after termination to initiate any actions.

129

An agent registered in one state may solicit business in another state provided:

A)the agent applies for registration in the other state.

B)the agent was previously registered with a different firm in the other state.

C)both the agent and the firm are properly registered in the other state.

D
the agent's firm is properly registered in the other state.

3; An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available.

130

******true or false: The maximum penalty for criminal violations is $5,000 and/or 3 years imprisonment. However, no prison sentence can be imposed if the person can prove he had no knowledge of the rule being violated.

true

131

******Which of the following securities are exempt from the registration requirements of the Uniform Securities Act?I. An investment contract issued in connection with an employee pension plan.
II. Securities issued by St. Paul's Catholic Church in Tempe, Arizona.
III. Securities issued by a public utility.
IV. Securities issued by the Canadian government.

all four; All of the securities listed are exempt from registration under the USA.

132

******true or false: A performance-based fee must be based on capital gains minus capital losses, include both realized and unrealized gains and losses and must reflect a time period of no less than 12 months. This client is well above the minimum net worth requirements of $2.1 million. The rule requires that the performance be measured against a recognized benchmark but does not specify one.

true

133

******Which of the following are exempt securities under the Uniform Securities Act?I. Common stock, not listed on any regulated exchange, purchased by an open-end investment company.
II. Preferred stock issued by an insurance company authorized to do business in this state.
III. Municipal bonds issued by Toronto, ON.
IV. Private placements.

2 & 3; Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Private placements are exempt transactions, not exempt securities

134

true or false: Agents have no minimum net worth requirements.

true

135

******
A notice filing would be most appropriate for which of the following new issues?

A)Intrastate offering.

B)Railroad equipment trust certificate.

C)Federal credit union shares.

D)Open-end investment company shares.

4; Investment companies registered under the Investment Company Act of 1940 are exempt from registration with the states under the NSMIA. However, most states require notice filing and the payment of fees. Federal credit union shares and railroad equipment trust certificates are exempt securities and intrastate issues would have to register using qualification.

136

******how do intrastate issues have to register?

intrastate issues would have to register using qualification.

137


The Investment Advisers Act of 1940 addresses all of the following EXCEPT the:

A)registration of individuals who are in the business of giving investment advice.

B)establishment of procedures for registration of investment advisers.

C)registration of new issues of securities sold by investment advisers.

D)the establishment of standards of ethical conduct for investment advisers.

3; The Investment Advisers Act of 1940 does not establish registration procedures for the sale or issuance of securities, but it does establish requirements for the registration of persons who are in the business of giving investment advice. The Securities Act of 1933 regulates the issuance of new corporate securities.

138

******true or false: a new investment adviser that reasonably expects to reach the $100 million minimum threshold within 120 days of the initial filing of the Form ADV invariably registers with the SEC as a federal covered investment adviser and, therefore, does not register in any state.

true

139


An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans.

A)Registration as an IAR is required because the plan is qualified.

B)Registration as an IAR is not required because the plan is considered an institutional client.

C)Registration as an IAR is not required because the individual works for a federal covered investment adviser.

D)Registration as an IAR is required because the individual is rendering investment advice.

4; Regardless of who the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal), must register as IARs. It makes no difference if the plan is qualified or not.

140


Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of:

A)the majority vote of the noninterested directors.

B)the majority vote of the board of directors.

C)the majority vote of the outstanding shares.

D)the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members.

4; The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members.

141

******SYZ Corporation is having a rights offering that will enable existing shareholders to acquire 1 share of SYZ common stock for each 10 shares they currently own. Under the Uniform Securities Act, this would be considered: I.an offer of SYZ rights.
II.a sale of SYZ rights.
III.an offer of SYZ common stock.
IV.a sale of SYZ common stock.

1 & 3; This is obviously an “offer” of the rights (that’s what the question says). In addition, the USA states than any offer of a right or warrant that gives the holder the ability to subscribe to another security is also an offer of that security.`

142

true or false: For a specific order, oral authority is sufficient. An adviser may not place any order for a client's account without proper authority.

true

143


Recent rule changes to the Investment Advisers Act of 1940 require all of the following EXCEPT:

A)independent review of an advisory firm's compliance procedures.

B)appointment of a chief compliance officer (CCO).

C)written compliance policies and procedures.

D)annual compliance review.

1; Although new rules require annual compliance reviews, such reviews may be conducted internally by the firm's appointed chief compliance officer. The new rules require written policies and procedures, an annual compliance review, and the appointment of a chief compliance officer (CCO).

144

******
USATrade Securities, a FINRA member broker-dealer, is registered in 10 midwestern states. Regarding financial requirements, USATrade must meet those of

A)the state in which the principal office of the member is located

B)the SEC

C)FINRA

D)the state with the most stringent financial requirements

2; It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

145

******
Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction?

A)The sale of an unregistered nonexempt security to an individual client at that client's request.

B)A bank liquidates the securities pledged as collateral for a loan that has gone into default.

C)An agent sells Canadian treasury bonds to an individual client.

D)The sale of LMNO common stock, listed in the Pink Sheets, to an insurance company.

3; Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.

146


Transactions meeting certain conditions are exempt from the Uniform Securities Act’s registration and advertising filing requirements. Which of the following transactions does NOT meet those conditions to qualify as an exempt transaction?

A)The sale of U.S. government securities to a retail client's IRA by a registered government securities dealer.

B)An offer of a security for which a registration statement has been filed but has not yet become effective.

C)A sale of securities by the executor of an estate.

D)A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid.

1; In the sale of U.S. government securities to a retail client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.

147

true or false: An offer is not a transaction.

true

148

******According to the Uniform Securities Act, a person who sells securities in violation of state securities laws is civilly liable for which of the following?I. Principal.
II. Interest.
III. Court costs.
IV. Attorney's fees.

all four; The person illegally selling the securities is liable for the purchase price of the securities plus interest from the date of purchase, court costs, and reasonable attorney's fees. Punitive damages will not be assessed.

149

******
All of the following statements about an agent's need to be registered in a state are correct EXCEPT:

A)registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state.

B)registration is required when they limit their activity to the sale of exempt securities.

C)registration is required in each state in which the employing broker-dealer has a place of business.

D)registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state.

3; The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer and there is no de minimis exemption available. Finally, registration is not required when making use of the "snowbird" exemption.

150

A client with a margin account notifies an agent of his vacation next week. The day after the client departs, there is a substantial market sell off, and the drop in the value of the client's portfolio requires additional margin in the client's account immediately. Which of the following actions of the agent would be prohibited? I.Transferring funds from the client's spouse's account to meet the margin maintenance call.
II.Lending the client sufficient funds to meet the margin maintenance call.
III.Contacting the client's banker and arranging a loan on behalf of the client to meet the margin maintenance call.
IV.Doing his best to reach the client, and, if unsuccessful, notifying his principal, in order that sufficient securities in the account be liquidated to meet the margin maintenance call.

1, 2 & 3; If the client cannot be reached, or otherwise does not come up with funds, the only way to satisfy the margin maintenance call is through the liquidation of shares in the account. The broker-dealer determines which securities are to be liquidated. None of the other actions described here would be permitted. An agent can never lend money to a client, nor may loans be arranged through banks. To transfer funds from another account, permission of all owners of that account must be obtained.

151

******
The Administrator may require which of the following from a federal covered adviser? I.copy of the IA's Form ADV.
II.filing of the IA's advertising in the state.
III.a listing of the IA's fee schedule.
IV.a filing fee.

1 & 4; Even though the Administrator has limited jurisdiction over federal covered advisers, they can require filing of a copy of the information filed by that IA with the SEC (the Form ADV) as well as a filing fee.

152


A broker-dealer is registered in state A and state B. A client in state B files a complaint with the Administrator and, upon further investigation, the Administrator decides to take action against the broker-dealer. In order to complete the case, the Administrator feels that certain information must be subpoenaed from persons in state A and asks that state's Administrator for assistance. Under the Uniform Securities Act, state A's Administrator is required to cooperate only if:

A)the broker-dealer had filed a consent to service of process in state A.

B)the activities constituting an alleged violation for which the information is sought would be a violation if the activities had occurred in state A.

C)state A's Administrator has taken action against this broker-dealer prior to state B's getting involved.

D)state A's Administrator is also pursuing action against the broker-dealer.

2; Although state Administrators tend to cooperate well with each other, the USA only requires it when the action that is the subject of the complaint would also be a violation of the law in this state.

153

******
One common characteristic that face-amount certificate companies, unit investment trusts, and management investment companies that are registered with the SEC under the Investment Company Act of 1940 have is that:

A)distributions are required to be reinvested at net asset value.

B)state registration is accomplished by notice filing.

C)there is no active secondary market for their ownership interests.

D)ownership interests are redeemable upon request.

2; These are the three types of investment companies described in the Investment Company Act of 1940. All are federal covered securities, but unlike the others, they are generally required to do a notice filing with the Administrator of each state in which their interests are sold.