Unit 5

Question 1

Which of the following involves an offer or sale?

A) A stock dividend
B) A pledge of stock
C) A gift of an assessable security
D) An exchange of securities due to a reorganization

Answer 1

C) A gift of an assessable security

The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale.

Question 2

Under the Uniform Securities Act, an offer and sale does NOT exist if it is

I. the result of a class vote by stockholders regarding a merger or consolidation
II. a bona fide pledge or loan
III. an act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares
IV. a gift of nonassessable securities

A) I and II
B) I, II, III, and IV
C) II and IV
D) I, II, and III

Answer 2

B) I, II, III, and IV

The Uniform Securities Act specifically excludes all 4 choices from the definition of an offer and a sale.

Question 3

Under the Uniform Securities Act, as a result of a hearing, the disciplinary actions that may be taken by the Administrator include which of the following?

I. Permanent revocation of a registration
II. Bar from employment with any registrant
III. Restriction on a registrant’s performance of any activity in the advisory or brokerage business

A) I and III
B) II and III
C) I and II
D) I, II, and III

Answer 3

D) I, II, and III

Once the registrant is found guilty at a hearing, the Administrator is authorized to take any or all of the above actions against a person’s registration.

Question 4

Under the Uniform Securities Act, which of the following concerning the withdrawal of an agent’s registration is NOT true?

A) Absent any disciplinary proceedings, withdrawal is effective 30 days after application.
B) Absent any disciplinary proceedings, withdrawal is effective 60 days after application.
C) Disciplinary proceedings may be taken against an agent after the agent’s withdrawal is effective.
D) At the Administrator’s discretion, disciplinary proceedings may delay effectiveness of a withdrawal application indefinitely.

Answer 4

B) Absent any disciplinary proceedings, withdrawal is effective 60 days after application.

Under the USA, withdrawals of registration are generally effective on the 30th day after filing, unless a disciplinary action is instituted. The Administrator may institute a revocation or suspension proceeding within 1 year after an agent’s withdrawal has become effective.

Question 5

Under the Uniform Securities Act, an Administrator investigating violations

A) may appoint an officer who has the power to subpoena records, administer oaths, or require production of documents and books
B) must maintain the confidentiality of all records
C) may subpoena records but may not compel individuals to testify
D) may subpoena records only with court approval

Answer 5

A) may appoint an officer who has the power to subpoena records, administer oaths, or require

Public or private investigations may be conducted by the Administrator to determine whether violations of the act are about to take place or have already occurred. These investigations may take place inside or outside the state. In conducting the investigation, the Administrator, or any officer designated by him, may subpoena records or compel testimony from individuals.

Question 6

Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if

I. more than 2 years ago, the client realized the advice rendered was improper
II. the adviser has died
III. the client willingly signed a statement waiving the IV. adviser’s compliance with the provision of the act on which the suit is based

A) I and II
B) II and III
C) I only
D) I, II, and III

Answer 6

C) I only

The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser’s compliance with the rules.

Question 7

An applicant for registration as an investment adviser discloses on Form ADV that it plans to use palm readers to help determine investments most suitable for their clients. Under the Uniform Securities Act, the Administrator

A) may deny applications only on the basis of the limitations of the law
B) is empowered to deny this application
C) will probably turn to the SEC for guidance
D) will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit

Answer 7

A) may deny applications only on the basis of the limitations of the law

A denial of registration must be based on the concept of law. There are stated reasons, such as felony convictions, outstanding injunctions, and insolvency. Although it is required to disclose methods of analysis used, the Administrator is not empowered to pass judgment on them.

Question 8

Under the Uniform Securities Act, the Administrator has the power to do all of the following EXCEPT

A) administer oaths
B) subpoena witnesses
C) take evidence
D) indict offenders

Answer 8

D) indict offenders

While the Administrator is authorized to refer violations for possible criminal prosecution, the actual powers of criminal prosecution belong to others. For example, indicting offenders is the function of a grand jury. The Administrator has the power to administer oaths, subpoena witnesses, and take evidence. The Administrator also has the power to compel testimony and require the production of books and records.

Question 9

The Administrator may

I. deny a registration if the registrant does not have sufficient experience to function as an agent
II. limit a registrant’s functions to that of a broker-dealer if, in the initial application for registration as an investment adviser, the registrant is not qualified to act as an adviser
III. take into consideration that the registrant will work under the supervision of a registered investment adviser or broker-dealer in approving a registration
IV. deny a registration, if it is prudent in view of a change in the state’s political composition

A) I and II
B) I and IV
C) II and III
D) III and IV

Answer 9

C) II and III

The Administrator may deny, suspend, or revoke a registration for many reasons, but those reasons must be in the interest of the public. The Administrator may determine that an applicant, in his initial application for registration for an investment adviser, is not qualified to act as an adviser and thus limit the registration to that of a broker-dealer. The Administrator can also take into consideration whether the registrant will work under the supervision of a registered investment adviser or broker-dealer when approving an application. Lack of experience is insufficient reason for denial.

Question 10

Violations of the Investment Advisers Act of 1940 are punishable by

I. a fine of up to $10,000
II. a prison term of up to 20 years
III. suspension of registration

A) I and II
B) I, II, and III
C) I and III
D) II and III

Answer 10

C) I and III

Criminal penalties for violations of the Advisers Act include a $10,000 fine and 5 (not 20) years in prison. Administrative penalties, such as revocation or suspension of registration, may also be imposed.

Question 11

A fraudulent transaction was initiated by an agent in Indiana by contacting a client residing in Iowa. After evaluating the offer, the client agreed to purchase the recommended security while vacationing in Florida. Which Administrator(s) has (have) jurisdiction?

I. The Indiana Administrator
II. The Iowa Administrator
III. The Florida Administrator

A) II only
B) I, II, and III
C) I only
D) I and II

Answer 11

B) I, II, and III

Activities that originate in a state, are directed into a state, or are accepted in a state fall under the jurisdiction of the Administrator of each of those states.

Question 12

An agent based in Alabama directs a solicitation to a customer who lives in Connecticut while the customer is temporarily in Indiana. The customer does not accept the offer until he arrives back in Connecticut. According to the Uniform Securities Act, the Administrators of which of the following states have jurisdiction?

A) Alabama and Connecticut
B) Alabama and Indiana
C) Alabama, Connecticut, and Indiana
D) Indiana and Connecticut

Answer 12

C) Alabama, Connecticut, and Indiana

The Administrator from any state from which an offer is made, directed, or accepted has jurisdiction over the offer.

Question 13

Which of the following statements regarding the Administrator’s authority to examine the books and records of registrants is TRUE?

A) Broker-dealer records may be examined at any time during normal business hours, but the same is not so in the case of investment advisers.
B) The records may be examined at any time during normal business hours for any reason within or outside the state if it is in the public interest to do so.
C) If a broker-dealer’s or investment adviser’s records are located outside the Administrator’s state, they only may be examined to collect evidence for a hearing.
D) Such examinations are not necessary or appropriate for the protection of investors or in the public interest.

Answer 13

B) The records may be examined at any time during normal business hours for any reason within or outside the state if it is in the public interest to do so.

All required records must be made available for examination by a state Administrator during normal business hours, within or outside the state, as is appropriate or necessary in the public interest.

Question 14

A customer determines that he has been sold unregistered, nonexempt securities in a prohibited transaction. In accordance with the USA, he can exercise the right to file a civil suit within

A) 1 year from discovery or 2 years from occurrence, whichever is later.
B) 1 year from discovery or 2 years from occurrence, whichever is sooner.
C) 2 years from discovery or 3 years from occurrence, whichever is later.
D) 2 years from discovery or 3 years from occurrence, whichever is sooner.

Answer 14

D) 2 years from discovery or 3 years from occurrence, whichever is sooner.

The civil liabilities provisions of the Uniform Securities Act provide for a statute of limitations equal to the sooner of 2 years from the date of discovery or 3 years from the date of the violation.

Question 15

Which of the following statements describes the powers of the Administrator over the issuance of orders?

I. A final order may be appealed in the appropriate court within 60 days of the order being issued.
II. Appeal of a final order will act as a stay of the order, unless a court of competent jurisdiction rules to the contrary.
III. No final order may be issued without the opportunity for a hearing.
IV. Final orders must receive approval from the state legislature.

A) II and III
B) I and IV
C) II and IV
D) I and III

Answer 15

D) I and III

Any final order of the Administrator may be appealed within 60 days of the order. The appeal does not act as a stay of the order. Only a court of competent jurisdiction may issue a stay of the order. Because the final order is similar to passing sentence, an opportunity for a hearing must be granted. The Administrator’s orders are not related to the state legislature.

Question 16

In conducting investigations, the Administrator may

I. require a person to file a statement in writing and under oath
II. publish information of any violation over the vigorous objections of a violator
III. make investigations both inside the state and in other states to determine whether violations of the USA have occurred in his state
IV. make investigations outside the state to determine whether violations of the USA have occurred in that other state

A) I, II, III, and IV
B) I and II
C) I, II, and III
D) II and III

Answer 16

C) I, II, and III

The Administrator may require written statements under oath, publicize violations, and investigate anywhere necessary to determine whether or not a violation of the act took place in his state. However, he is not authorized to conduct investigations in other states to determine whether a violation of the USA has occurred in those states.

Question 17

Under the Uniform Securities Act, which of the following constitutes an offer of a security?

A) The delivery of a prospectus to a prospective purchaser
B) Agreement between an issuer and an underwriter
C) Tombstone advertisement
D) Stock dividend distributed to current shareholders

Answer 17

A) The delivery of a prospectus to a prospective purchaser

A prospectus is the document that offers a security for sale. A tombstone advertisement always states that in and of itself, it is not an offer to sell, that such an offer may only be made by prospectus, and where a prospectus may be obtained. The key to this question is that the delivery is being made to a prospective purchaser; that is what makes it an offer.

Question 18

According to the USA, under which of the following circumstances may an Administrator cancel an investment adviser representative’s registration?

A) The investment adviser representative is the subject of an insider trading lawsuit.
B) The Administrator determines it would be in the public interest.
C) The investment adviser representative is judged to be mentally incompetent.
D) The investment adviser representative has admitted to selling unregistered exempt securities to individual clients.

Answer 18

C) The investment adviser representative is judged to be mentally incompetent.

Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.

Question 19

The Uniform Securities Act contains a number of actions potentially leading to revocation of an agent’s registration. Not included in that list would be when the individual is

A) convicted of a non-securities-related felony
B) convicted of a securities-related misdemeanor
C) accused of murder in the first degree
D) declared insolvent

Answer 19

C) accused of murder in the first degree

Once registered, an agent’s license can be revoked if the agent is convicted of a securities-related misdemeanor or any felony. Insolvency is a cause for revocation of the registration of any securities professional. However, merely being accused of a crime, no matter how serious it is, does not lead to action until there is a conviction.

Question 20

Under the USA, which of the following statements regarding the withdrawal of an IAR’s registration is TRUE?

I. The withdrawal automatically becomes effective 90 days after filing.
II. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed.
III. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal.

A) II and III
B) I and III
C) I, II, and III
D) I and II

Answer 20

A) II and III

A registered person may apply to withdraw the registration. The withdrawal is effective in 30 days, unless the person is under investigation in connection with pending disciplinary action or an investigation is instigated during the 30 days after filing the application to withdraw. If there is an investigation underway, the Administrator will determine when the withdrawal will become effective. The Administrator has one year from the effective date of withdrawal to begin disciplinary actions for violations of the act.

Question 21

The Administrator may deny registration of an agent because the agent

A) is being investigated by the SEC for possible insider trading violations
B) was convicted of a drug-related misdemeanor
C) is under investigation by the Administrator of another state
D) was convicted of a felony within the past 10 years

Answer 21

D) was convicted of a felony within the past 10 years

The Administrator may deny a registration for any felony conviction, not just those involving securities. If the misdemeanor conviction were securities related, that would be sufficient grounds for denial. However, denial would not be appropriate when a case is only in the investigation stage.

Question 22

The Uniform Securities Act provides for all of the following EXCEPT

A) exemption from registration for federal covered securities
B) subpoena power for the state Administrator
C) criminal penalties for violations of the act
D) specific civil penalties for up to 3 times the amount of money invested for willful violation of the act

Answer 22

D) specific civil penalties for up to 3 times the amount of money invested for willful violation of the act

The Uniform Securities Act provides for criminal penalties of up to 3 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 3 times the amount of money invested. The Uniform Securities Act does provide the state Administrator with the power to issue subpoenas.

Question 23

If a person not registered in a state knowingly makes a misleading filing with the Administrator, that person may be

A) imprisoned for 5 years
B) fined $5,000
C) fined $10,000
D) excused from liability, because the person is not registered

Answer 23

B) fined $5,000

Willful violation is punishable by a fine of up to $5,000, imprisonment of up to 3 years, or both. A state Administrator has jurisdiction over any transaction conducted in that state and over all applications filed in the state.

Question 24

Jack, who is proficient in both fundamental and technical analysis, would like to become an investment adviser. Although Jack is fairly new to the securities business, he worked in the commodities business for many years. Five years ago, Jack’s Commodity Pool Operator’s license was suspended by the Commodity Futures Trading Commission for having willfully violated or willfully failing to comply with any provision of the Commodity Exchange Act. Which of the following best describes how Jack’s application to open an investment advisory business will be handled under the Investment Advisers Act of 1940?

A) Jack’s application will likely be accepted because he has not violated any securities law.
B) Jack’s application will likely be accepted because his violation of investment-oriented regulations occurred 5 years prior to his application.
C) Jack’s application will likely be denied because he has little experience in the securities industry.
D) Jack’s application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application.

Answer 24

D) Jack’s application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application.

Jack’s application will probably be denied because he was found guilty of violating the Commodity Exchange Act within the 10-year period prior to his application. Registration as an investment adviser will be denied to any party that has been convicted, within the 10-year period prior to application, of a violation of federal securities acts or the Commodity Exchange Act. Such statutory denial will also impact those enjoined under domestic or foreign court orders from engaging in the business of investing, presuming such orders were made in the 10-year period prior to the application date.

Question 25

The Uniform Securities Act grants state securities Administrators all of the following powers EXCEPT

I. the power to conduct investigations involving a broker-dealer registered in the Administrator’s state, but with all its offices located in states other than his state
II. the power to issue subpoenas to agents and broker-dealers registered in the Administrator’s state, but not residing in his state
III. the power to revoke or suspend a registration without an opportunity for a hearing because of the confidential nature of the offense
IV. the power to limit the length of an investigation to 1 year from the alleged offense, rather than place a registrant in continuous jeopardy

A) I, II, and IV
B) III and IV
C) I and II
D) II and III

Answer 25

B) III and IV

State securities Administrators may conduct investigations involving BDs in other states and issue subpoenas to agents and BDs not residing in the Administrator’s state as long as they are registered in the Administrator’s state. Administrators may not revoke or suspend a registration without an opportunity for a hearing. Administrators have no limits on the amount of time they may devote to an investigation of a registrant. Don’t confuse this with a statute of limitations on when the case can be brought.

Question 26

Under the Uniform Securities Act, an offer to sell would NOT include

I. stock acquired through a merger
II. the issuance of warrants or convertible securities
III. the issuance of stock rights to existing shareholders

A) I, II, and III
B) I and III
C) II and III
D) I only

Answer 26

D) I only

An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.

Question 27

If a car dealer offers $1,000 bonds as a bonus for the purchase of cars, the car dealer is

A)offering a warrant to buy securities
B) engaging in the offering for sale of a security
C) engaging in an unlawful competitive marketing practice
D) committing fraud

Answer 27

B) engaging in the offering for sale of a security

According to the Uniform Securities Act, offering securities as a bonus on the purchase of another thing for value, such as a car, constitutes an offer of securities. For the purposes of the Uniform Securities Act, the dealers are offering securities and are subject to the provisions of the act. The practice is not fraudulent, but registration as a broker-dealer may be required.

Question 28

Under the Uniform Securities Act, a state-registered investment adviser’s records may be examined by the Administrator or his designee

A) only with permission from the investment adviser
B) only by court order
C) at any time during regular business hours
D) only if not repetitious of an SEC exam in the prior six months

Answer 28

C) at any time during regular business hours

All records must be available for examination by the Administrator at any time during regular business hours, within or outside the state.

Question 29

If the Administrator wishes to conduct an examination of an investment adviser’s books and records, how much advance notice must be given?

A) 30 days
B) None
C) 60 days
D) 15 days

Answer 29

B) None

No advance notice is necessary for the Administrator to conduct an examination of the books and records of an investment adviser or a broker-dealer. The USA only requires that the examination be held during normal business hours of the registrant.

Question 30

Under the Uniform Securities Act, the state Administrator may by order deny, suspend, or revoke an investment adviser’s registration for

A) lack of experience as an investment adviser
B) conviction for a non-securities-related felony more than 15 years ago
C) conviction for a securities-related misdemeanor more than 15 years ago
D) violation of another state’s securities laws within the last 10 years

Answer 30

D) violation of another state’s securities laws within the last 10 years

A violation of any state or federal securities or commodities law within the last 10 years is grounds for denial, suspension, or revocation of registration by order. This means that no hearing is required. Convictions are grounds for administrative action only if they occurred within the past 10 years. Lack of experience is not sufficient cause for revoking or denying registration.

Question 31

Under the Uniform Securities Act, the Administrator may deny an application for registration as an investment adviser

I. because of a lack of experience
II. because the applicant was suspended from membership on a Canadian stock exchange
III. if the applicant is also registered as a broker-dealer
IV. when the applicant files an incomplete application

A) III and IV
B) I and II
C) I and III
D) II and IV

Answer 31

D) II and IV

Among the reasons that give the Administrator cause to deny an applicant’s registration are suspension from any securities regulatory agency, both in the United States and Canada, and the filing of an incomplete application.

Question 32

Which of the following statements is TRUE?

A) In the sale of U.S. government securities, a misrepresentation or other fraudulent practice by an agent would not fall under the jurisdiction of the state security Administrator because these securities are exempt.
B) All securities must be registered with the appropriate state Administrator.
C) An agent’s registration may never be revoked without the opportunity for a hearing.
D) An individual may not buy or sell securities unless the transaction is made by a licensed broker-dealer or agents.

Answer 32

C) An agent’s registration may never be revoked without the opportunity for a hearing.

The agent always has an opportunity for a hearing even though the Administrator has broad powers to revoke and/or suspend an agent’s registration. While individuals who transact in U.S. government securities are not required to register, they are subject to the antifraud provisions of the Uniform Securities Act. U.S. government and municipal securities need not be registered.

Question 33

Which of the following would NOT be cause for automatic rejection of an investment adviser representative’s application?

A) Lack of experience
B) Lack of evidence of skills or training
C) Current insolvency
D) Evidence of fraud in the application

Answer 33

A) Lack of experience

Lack of experience on its own is not sufficient cause for an application for registration as an investment adviser representative to be rejected. It is expected that the individual will receive adequate training. Fraudulent information in an application and financial problems are obvious causes for rejection.

Question 34

Under the Uniform Securities Act, which of the following are defined as sales?

I. A gift of an assessable stock
II. A gift of a nonassessable stock
III. A security given as a bonus for purchasing a bond
IV. An offer of securities

A) II and IV
B) I and II
C) III and IV
D) I and III

Answer 34

D) I and III

A sale is a contract or transaction for value. Therefore, when a security is given as a bonus in connection with the sale of another security, it is also considered a sale. Because an assessable stock may require a payment made by the recipient, the gift is considered a sale. The gift of a nonassessable stock is not a sale because it is not a contract for value. An offering of securities is not a transaction or sale of securities until the offer is accepted.

Question 35

Under the USA, which of the following fits the definition of a sale?

A) Contract to dispose of a security
B) Issuing a prospectus
C) Attempt to dispose of a security for value
D) Solicitation of an offer to buy a security for value

Answer 35

A) Contract to dispose of a security

Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers.

Question 36

An individual applying for registration as an investment adviser representative could be denied registration by the Administrator if

I. the applicant had no previous securities experience
II. the application was incomplete
III. the applicant was not a resident of the state
IV. there was an order of suspension in effect in another jurisdiction

A) I and IV
B) I and II
C) II and IV
D) II and III

Answer 36

C) II and IV

An incomplete application and a suspension in another jurisdiction are causes for an Administrator to deny registration to an IAR.

Question 37

Under the Uniform Securities Act, an offer to sell includes all of the following EXCEPT

A) an offer of a warrant to purchase or subscribe to another security
B) a solicitation of an offer to buy a security for value
C) a distribution of a stock dividend in lieu of a cash dividend
D) an attempt to offer to dispose of a security for value

Answer 37

C) a distribution of a stock dividend in lieu of a cash dividend

Under the Uniform Securities Act, an offer to sell includes every attempt or offer to dispose of, or solicitation or an offer to buy, a security for value. If a corporation distributes a stock dividend instead of a cash dividend, and the shareholder is not required to make any payment, then issuance of the stock dividend does not constitute an offer to sell.

Question 38

Which of the following powers are under the jurisdiction of the Administrator?

A) Performing an annual audit of broker-dealers registered in the state
B) Issuing a cease and desist order to an agent without any prior notice
C) Performing an annual audit of investment advisers registered in the state
D) Issuing a final order suspending the registration of a person as long as, upon written request, a hearing will be granted in no more than 15 days

Answer 38

B) Issuing a cease and desist order to an agent without any prior notice

Whenever it appears to the Administrator that any person has engaged, or is about to engage, in any act or practice constituting a violation of any provision of the USA or any rule or order hereunder, he may in his discretion issue a cease and desist order, with or without a prior hearing against the person or persons engaged in the prohibited activities, directing them to cease and desist from further illegal activity. Any person aggrieved by a final order of the Administrator (that means after the hearing has taken place) may obtain a review of the order in the appropriate court by filing a written petition in court, within 60 days, not 15, after the entry of the order. Broker-dealers and some IAs have to file annual audited financials with the Administrator, but the audit is conducted by an independent accountant, not the Administrator.

Question 39

An Administrator may take disciplinary action against a broker-dealer or its agents when the Administrator

I. determines that the action is in the public interest
II. suspects that the registrant’s action violated a rule, order, or the USA
III. issues an injunction that carries the force of law
IV. provides for a public hearing, which must precede issuing a cease and desist order

A) I and II
B) III and IV
C) I and III
D) II and III

Answer 39

A) I and II

An Administrator may take disciplinary action against a broker-dealer or its agents when the Administrator determines that the action is in the public interest and suspects that the action violated a rule, order, or the Uniform Securities Act. An Administrator may act upon suspicion that a violation of a rule, order, or provision of the Uniform Securities Act is about to occur. Administrators cannot issue injunctions; they must seek injunctions from a court of competent jurisdiction. Administrators need not conduct public hearings before issuing a cease and desist order.

Question 40

After conducting an investigation, if the Administrator believes that a violation of a rule issued under the Uniform Securities Act is about to occur, she may

A) levy a fine against an alleged violator prior to any conviction on criminal charges
B) issue a court order requiring the alleged violator to make restitution to the victim
C) issue a court order to have a receiver appointed over an investment adviser’s assets
D) issue a cease and desist order without prior hearing

Answer 40

D) issue a cease and desist order without prior hearing

If the Administrator believes that a violation of the act or any rule or order under the act is about to occur, the Administrator may issue a cease and desist order without prior hearing. The Administrator cannot issue injunctions or levy a fine, because those are under the jurisdiction of the courts. Only courts can issue court orders.