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Question

A person registering as a broker-dealer with the Administrator must disclose its form of business organization. Which of the following are permitted forms? I. Sole proprietorship II. Corporation III. Partnership IV. Limited liability company (LLC)

Answer 1

I, II, III, and IV

Answer 2

C Rule 15c3-3, the Customer Protection Rule, is found in the Securities Exchange Act of 1934. It certainly would not be in the USA—that is state law only.

Answer 3

A The initial delivery requirement is no later than the date of entry into the advisory contract. The 48-hour rule deals with an advance delivery to avoid having to honor a five-day penalty-free withdrawal. The annual delivery date is within 120 days of the end of the adviser's year. The 90-day requirement is for the annual updating amendment to the Administrator. LO 6.a

Answer 4

C Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question. LO 4.e

Answer 5

B The terms offer and offer to sell include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. A sale is when the offer has been accepted. LO 1.a

Answer 6

D Administrators have jurisdiction if they are from the state in which the offer was made, directed, or accepted. The offer was made in New York and, because it was directed to the cell phone of a New York customer, the USA considers that the offer was directed to New York. The offer was accepted in Indiana. The mailing of the certificate is of no consequence and calling a local number and having it answered in another state is viewed the same way as mail sent to a customer's residence that is forwarded to another state: the offer was not directed to that other state . LO 4.f

Answer 7

A An agent is described in the Uniform Securities Act as an individual, other than a broker-dealer or issuer, who represents a BD or issuer in effecting transactions in securities. The lawyer is not engaged in effecting securities transactions on behalf of the issuer or BD. Therefore, the lawyer is not considered an agent subject to regulation by the Uniform Securities Act. A partner (or anyone else) of a securities firm making a personal investment is not an agent. An officer of an issuer not receiving any compensation for sales of the issuer's stock to employees is not an agent under the USA. LO 2.f

Answer 8

B Among the cases where an individual representing the issuer of an exempt security is excluded from the definition of an agent is commercial paper in the three highest rating grades (AAA is the highest) with no more than a 270-day maturity and a minimum denomination of $50,000. Although railroad equipment trust certificates and membership-only sales of securities issued by cooperatives are exempt securities, they are not included in the list of those eligible for the agent's exclusion. Please check you LEM for that list. LO 2.f

Answer 9

B To share in a customer's account, written authorization of both the client and the broker-dealer need to be obtained. Unlike FINRA rules, there are no requirements for proportionate sharing. LO 7.a

Answer 10

D None of these 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 IAs by federal and state authorities. If federal covered advisers were defined as IAs under the USA, then they would be subject to the same state registration procedures as local or state IAs. LO 3.a

Answer 11

C The IAR is living in Georgia and has local clients, so he must be registered there. With only one client in Arkansas, the de minimis exemption would apply to the IAR. There is no need to register in New Jersey because the IAR has no clients there. LO 3.d

Answer 12

D Unlike securities professionals in the United States, where the annual renewal date is December 31, for those using the limited Canadian registration, it is December 1. LO 8.b

Answer 13

C Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions (e.g., isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions. LO 4.e

Answer 14

D The National Securities Markets Improvement Act preempts state registration of covered securities. On the exam, the word federal is sometimes omitted, but covered still means federal covered securities. State Administrators may not impose registration requirements on securities that are subject to federal regulation. This has had the effect of reducing their power, not increasing it. Unlike the NSMIA's effect on investment advisers where there is no longer dual registration, the requirement to register as a securities offering on both the state and federal levels still exists for those securities that are not federal covered. Registration for intrastate securities goes back to the earliest of the blue-sky laws, well before the NSMIA. LO 4.b

Answer 15

B 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. LO 3.a

Answer 16

D Although the person has no office in the state, transactions are effected with individual residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for BDs. A person is exempt from the definition of broker-dealer if there is no office in the state and securities trades are confined to institutional clients, without a numerical limit, or existing individual clients not residents of that state. The agents are merely selling their own stock as would any other individual; that does not make one a BD. LO 2.b

Answer 17

B An agent can always execute an unsolicited market order but may never accept third-party orders without written authority or borrow money or securities from a customer, regardless of the family relationship. Loans from clients who are lending institutions are permitted, but not from the individuals who work for them. LO 7.a

Answer 18

B The hypothecation agreement gives permission to the broker-dealer (BD) to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the BD on the basis of the loan value of these securities. LO 6.d

Answer 19

C 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. LO 4.d

Answer 20

D A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the accounts 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. LO 2.a

Answer 21

D In all cases, 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. LO 2.c

Answer 22

A Isolated nonissuer transactions, unsolicited transactions effected through a broker-dealer, and transactions between issuers and underwriters are all exempt transactions under the provisions of the USA. As long as there are no more than 10 subscribers to pre-organization certificates, the transaction is exempt. LO 4.e

Answer 23

C Individuals performing the duties of an IAR for a federal covered IA are only required to register in states in which they maintain a place of business. Although pension plans (as long as the total assets of the plan are at least $1 million) are considered institutional investors for exemption purposes, that exemption only applies when the individual has no place of business in the state. LO 3.d

Answer 24

A A sale is defined as every contract to sell a security or an interest in a security, including a security given as a bonus with the purchase of another security or a gift of assessable stock when something of value is given. A sale is not an attempt to transfer ownership of a security, a solicitation of an offer to buy, or an offer of an equivalent contract (i.e., an offer or offer to sell). LO 4.f

Answer 25

C 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. LO 7.a

Answer 26

A A free offer must not only be free of financial cost, it must be free of any other burden or commitment. LO 6.e

Answer 27

C An investment adviser representative (IAR) need not disclose donations to nonprofit organizations, even to those with whom the IAR has a client relationship. In all of the other cases, even when outside of the scope of the investment adviser's business, an IAR must always make full disclosure to clients. LO 7.b

Answer 28

A The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. In this question, the fee is $600 ($150 per quarter times four quarters). The other is when the advisory contract is with a registered investment company such as a mutual fund. LO 6.a

Answer 29

C Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sales are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required. LO 2.f

Answer 30

B Higher than average markups or commissions are not prohibited if they are justifiable and disclosed. However, in this case, there would appear to be no justification because the customer bought a round lot, the normal trading unit of stock. The firm is a market maker, so the security is being sold from their inventory and the stock is on the company's recommended list. LO 7.a

Answer 31

C Under the NASAA Model Rule, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded). The check would not be payable to the investment adviser (RSA) because it is for a securities transaction and that would be through the broker-dealer (SRS). IARs would never take custody, and there is no bonding requirement for IARs. LO 7.f

Answer 32

D Unlike agents of broker-dealers, IAs and their representatives can never share in the profits and losses of an account with a customer. LO 7.b

Answer 33

C Conflicts of interest must always be disclosed. Underwriting a new issue and then issuing a favorable research report about the stock is one of the many different potential conflicts of interest that broker-dealers encounter. Permission of the Administrator or the issuer is not required for a BD to publish a research report (although it might have to be filed as advertising or sales literature). LO 7.d

Answer 34

B Any trade involving a commission, regardless of the type of security, must have that commission disclosed. An unregistered nonexempt security can be sold in an exempt transaction, such as an unsolicited order. LO 5.d

Answer 35

B When your research department is world renowned, the likelihood of a report influencing the market price of any securities in the report is high enough so that the regulators would be able to suggest that any use of the information prior to public release could be considered material non-public information (MNPI). LO 6.f

Answer 36

B When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website). In a discretionary account, agents are authorized to exercise their discretion—that is the point of the account. LO 6.c

Answer 37

D The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes. LO 7.f

Answer 38

C The Administrator may require that, as a condition of registration, the agent post a surety bond (if given discretion by clients over their accounts) pay filing fees, and pass an examination that may be written, oral, or both. Minimum net capital orders apply to broker-dealers, not their agents. LO 8.b

Answer 39

B 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 New York Stock Exchange are part of a group known as federal covered securities that also includes those listed on the NYSE American LLC (formerly known as the American 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. LO 4.d

Answer 40

D Rule 15c3-3, the Customer Protection Rule, is found in the Securities Exchange Act of 1934. It certainly would not be in the USA—that is state law only. LO 7.f

Answer 41

B Unlike investment advisers who will register with either the state or the SEC, all investment adviser representatives register with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration. LO 3.e

Answer 42

C Municipal bonds provide a fixed income, but they are generally suitable only for high tax bracket individuals. In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent's license. LO 7.a

Answer 43

A As a state-registered investment adviser (IA), all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV Part 2A. Every IA, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included. However, an amended Form ADV needs to be filed promptly with the Administrator only if there are material changes. LO 6.a

Answer 44

D A denial of registration must be based on the concept of law. There are stated reasons for denial, such as felony convictions, outstanding injunctions, and insolvency. Where in the USA does it say an adviser can't use palm readers, a Ouija board, or a Magic 8 Ball? Although disclosure of methods of analysis is required, the Administrator is not empowered to pass judgment on the merits of those methods. The USA does state that the Administrator is empowered to "condition a particular applicant's registration as a broker-dealer upon his not transacting business as an investment adviser if the Administrator finds that he is not qualified as an investment adviser." But nowhere in this question does it indicate that the applicant is, or is applying for, registration as a broker-dealer. LO 5.a

Answer 45

D One of the exclusions from the definition of a broker-dealer in the state is when the BD has no place of business in the state and its only clients in the state are issuers of the securities the BD is buying. When BCA resells the GOP debentures, it will be selling them to its customers in States A, B, and C, where the BD is registered. LO 2.b

Answer 46

C If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers. LO 5.d

Answer 47

A It is always important to remember the name of this exam: the Uniform Securities State Law Examination. Because this is an exam about the laws, the wording has to be very precise. Do all three of these meet the definition of accredited investor? Yes, but that is a term used in the federal law, not state law. Are they all sophisticated investors? Yes, but that term has no legal meaning in the law. There is no such thing as an exempt investor, although transactions with these institutions are exempt transactions (covered in depth in Unit 4). What is critical is that these are all included in the specific definition of an institution. LO 1.a

Answer 48

A The use of furniture or office facilities is not included in the list of safe harbor items, regardless of what role the employees of the fund play. LO 7.c

Answer 49

A The securities issued by all of these entities are exempt from registration under the provisions of the Uniform Securities Act. However, the only one included in the list of those where individuals representing the issuer are not agents is the savings institution. Please check your LEM for the complete list. LO 2.f

Answer 50

A Once a broker-dealer has a retail (individual) client in a state, registration as a BD in that state is required. The fact that the BD does not have a place of business in the state is irrelevant. Although many accredited investors are institutions, it is only individuals who qualify under the income standard. The exemption applies when the firm's clientele is limited to other BDs or institutional clients in the state. Those would include banks, whether state or federal chartered, and employee benefit plans, such as a pension trust, with assets of at least $1 million. Every BD on the exam will be SEC-registered (unless the question states something to the contrary). That SEC registration does not remove the need for state registration. LO 2.b

Answer 51

D The key to this question is that it deals with professionals qualifying for an exclusion. Lawyers, accountants, teachers, and engineers (LATE) are excluded from the definition when the advice provided is incidental to the practice of their profession. Financial institutions, such as banks, savings and loans, and trust companies, are excluded without any requirement that advice be rendered on an incidental basis. Broker-dealers are not included in the list of professionals qualifying for this exclusion; however, if they do not receive special compensation when advising their clients, they too are excluded. LO 3.a

Answer 52

C Sale, used interchangeably with sell, is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. The sale of a corporate bond is a sale with or without a warrant attached and involves the disposition of an interest in a security of the issuer. Because the distribution of the warrant is conditional upon the purchase of a bond, the acquisition of the warrant is considered to be a sale. Something else to be aware of is that the granting of the warrant (or a stock right) is also considered to be an offer of the security underlying the warrant (or right). LO 4.f

Answer 53

D In issuing a cease and desist order, the Administrator may provide prior notice and a hearing or may issue the order without prior notice or a hearing (summarily). There is no time period associated with the order. Cease and desist orders are directed against persons; it is stop orders that are directed against securities. LO 5.a

Answer 54

A The form filed with the Financial Crimes Enforcement Network (FinCEN) is Form 112. It replaced Form 104 years ago, and there is no IRS Form 1040ML. FBI Form FD-772 is a foreign-travel request form for FBI agents. LO 7.e

Answer 55

C Any felony must be disclosed. Any misdemeanor that involves investments and many other financial issues, such as those in the correct answer, require disclosure. Note that it is not only convictions, but charges as well. There is no time limit on the disclosures; the question is "have you ever . . . ?" The 10-year limit applies to statutory (automatic) disqualification. LO 2.c

Answer 56

B As found in the Uniform Securities Act, and therefore relevant to this exam, solicitors are persons who refer business to investment advisers. There is no comparable term for those referring business to broker-dealers and their agents. LO 1.a

Answer 57

A Any individual selling securities on behalf of an issuer of certain exempt securities (bank securities are in that list) is not an agent under the USA. LO 2.f

Answer 58

A Don't ask why, but in both cases, trading can commence before the agreements are signed and returned. In the case of the margin account, promptly after the initial trade is the time and for the options account, within 15 days of account approval to engage in options trading. LO 6.d

Answer 59

A 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 federal 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 covered 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). LO 3.d

Answer 60

C This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of investment adviser a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser. LO 3.a

Answer 61

B Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale. LO 4.f

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