Additional

Question 1

Canadian broker-dealer has many clients who vacation frequently in the United States. In order to continue doing business with these customers while they are in the United States, the broker-dealer must file all the following material with the Administrator, EXCEPT:
A. A Consent to Service of Process
B. A Form BD
C. Proof of membership in an SRO
D. A copy of current registration filed in Canada

Answer 1

A Canadian BD may continue to do business with any clients in the United States with whom it has a bona fide preexisting relationship and who are here temporarily—not permanent residents of the United States. According to USA, the BD must be registered properly in Canada and must file the following documents with the Administrator: a Consent to Service of Process, a copy of the registration document filed with its Canadian regulator at the provincial level, and proof that it is regulated by a self-regulatory entity, such as an exchange.

Question 2

An investment adviser (IA) is dually registered as a broker-dealer in State A. The IA is also registered in State B, but it’s not registered as a broker-dealer there. If the investment adviser only has advisory clients in State B, is it required to register as a broker-dealer in State B?

Answer 2

No, since the firm does not have any brokerage clients in State B.

Question 3

According to the Uniform Securities Act, which of the following persons must register with the state Administrator?
A. A person who represents a non-exempt issuer in sales to existing employees, and is not compensated
B. A person who represents a non-exempt issuer in an investment banking transaction with a broker-dealer
C. A person who represents an exempt issuer in sales to the public
D. A person who represents a non-exempt issuer in sales to the public

Answer 3

A: doesn’t have to register because they’re not compensated
B: Doesn’t have to register because it’s an institutional transaction and therefore not considered an agent.
C: Doesn’t have to register since persons who represent exempt issuers are not defined as an agent
D: Required to register

Question 4

A client of an advisory firm has contacted the Administrator of the state of Kentucky about a possible violation of the Uniform Securities Act by the firm. The advisory firm has its home office in Illinois and is registered in both states. Which of the following actions is the Administrator of Kentucky LEAST likely to take regarding the possible violation?

A. Begin an investigation in Kentucky
B. Take no action
C. Open an investigation in Illinois
D. Contact the Illinois Administrator

Answer 4

B. The Administrator has the authority to begin an investigation if a violation has occurred or is about to occur. The investigation may take place inside or outside of the state as deemed necessary.

Question 5

According to the Uniform Securities Act, a person is not considered an investment adviser if the advice provided covers only:
A. Exempt securities
B. Viaticals
C. Variable annuities
D. Universal life insurance

Answer 5

D. Universal life insurance is not a security. Someone who provides advice only about insurance would not be viewed as an investment adviser.

Question 6

True or false: If a registered broker-dealer’s or investment adviser’s ownership structure is changed (from a partnership to a corporation, for example), or is bought or sold by another person, it is permitted to file an application for registration as a successor firm. According to the Act, this can be accomplished whether or not the successor firm was in existence prior to the filing and is effective for the unexpired portion of the year. A filing fee is not required when the application is submitted?

Answer 6

True

Question 7

An agent recommends that a client purchase a particular security. The agent believes the client has the resources to pay for the transaction. Three days after the trade is executed the client indicates that he cannot meet his financial obligation to the brokerage firm. If the agent lends personal funds to the client:
A. The client forgoes a right to be offered a letter of rescission
B. The client must pay a statutory rate of interest
C. The agent will be committing fraud
D. The agent will be acting in an unethical manner

Answer 7

D, This is unethical behavior, not fraud. An agent should not borrow or lend funds to a client.

Question 8

An insurance agent works in an office building down the hall from a broker-dealer. They are not affiliated. What compensation may the agent receive from the broker-dealer in exchange for referrals?
A. Commissions
B. 12b-1 fees
C. Discouted commissions
D. Insurance referrals

Answer 8

D. Only individuals who are registered agents may receive monetary compensation from a broker-dealer based on the sale of a security. In this scenario, the insurance agent is not licensed and may not receive compensation in the form of commissions or fees, or soft-dollar compensation (noncash compensation) in the form of discounted commissions. If a broker-dealer wants to refer its clients to an insurance professional, this is permitted. Only licensed insurance professionals may be compensated for the sale of life insurance.

Question 9

An agent is asked by a client to open an account and buy stock for the client’s spouse. Which of the following statements is TRUE?
A. The agent is at risk if the stock declines.
B. The spouse must sign a trading authorization or else these actions are prohibited.
C. Verbal authorization from the client’s spouse is acceptable
D. This is a normal, acceptable practice.

Answer 9

B. In order to open a third-party account (an account that allows one person to trade on behalf of another person), a trading authorization form must be signed by the owner of the account. The person’s signature gives the third party the right to execute trades. Without written trading authorization, this is a prohibited practice.

Question 10

True or false: There is no requirement to deliver a final prospectus if the security is exempt?

Answer 10

False

Question 11

Which of the following choices is considered a fraudulent act?
A. Omitting a fact that is relevant to making an investment decision
B. Misstating a fact about an issuer in a discussion with a client
C. Withholding any fact about an issuer in discussions with clients
D.Neglecting to obtain relevant information about an investor

Answer 11

A. Withholding material facts is considered fraudulent. Withholding any fact about an issuer sounds similar, but is too broad to rise to the level of fraud. Remember, fraud implies intent to deceive. Withholding any fact is not fraud. Here is why. Think of the phone number of an issuer, or other random items that may be interesting. Those are facts. Withholding that information is not fraud, since it may not be relevant to making an informed investment decision. Misstating a fact could be accidental and, therefore, not fraud. Neglecting to obtain relevant information is not fraud. It is a bad business practice. It may be unethical, but it is not defined as fraud.

Question 12

Under the Uniform Securities Act, which of the following statements BEST describes the term inspectorial powers?
A. The State Administrator’s power to have special investigators review the records of registered investment advisers
B. The State Administrator’s power to subpoena records within and outside the state
C. The State Administrator’s power to delegate responsibility to a self-regulatory organization
D. The State Administrator’s power to apply the stop-order test

Answer 12

B. Inspectorial powers refers to the right of the State Administrator to inspect or review any records, both within and outside the state, in order to carry out the provisions of the Uniform Securities Act.

Question 13

True or false: Filing fees are usually pro-rated?

Answer 13

False, usually NOT pro-rated

Question 14

Under the Uniform Securities Act, which of the following transactions is defined as a sale?
A. The payment of a stock dividend paid by an issuer
B. The exercise of a stock option
C. A gift of non-assessable stock
D. The pledge of securities to secure a loan

Answer 14

Exercise of a stock option requires one party to buy and another to sell stock and is defined as a sale under the Uniform Securities Act (USA). The USA also specifically excludes both gifts of non-assessable stock and stock dividends because no money or anything of value (i.e., consideration) has been exchanged for the securities. Pledges of securities are not sales because pledging securities as collateral is not a transfer of ownership at the time of the pledge.

Question 15

True or false: a supervisor must approve every new account before the first trade in that account is executed?

Answer 15

True

Question 16

An agent has just received an unsolicited order from a customer. The customer wants to purchase a large amount of a speculative stock. Although the customer has the financial resources to bear the risks of this investment, the agent does not think it fits the client’s investment objectives. The agent may take all of the following actions, EXCEPT:
A. Hold the customer’s order until the agent has the opportunity to confirm the client’s understanding of the security
B. Attempt to convince the customer not to buy the stock by suggesting alternate investment vehicles that match the customer’s suitability profile
C. Attempt to convince the customer to hedge the unsuitable position with appropriate investment strategies
D. Accept the order

Answer 16

It is considered a dishonest and unethical practice for an agent to knowingly fail to follow client instructions. This would include refusing to place an unsolicited trade until the agent can research the security. However, agents may certainly attempt to convince customers to alter those instructions if they feel another course of action is more suitable for that client.

Question 17

True or false: The Administrator may determine the type of securities acceptable for deposit but may not altogether disallow deposits of securities in lieu of a bond?

Answer 17

True

Question 18

True or false: Form ADV is used for an IA’s employees, not an IA?

Answer 18

False, Form ADV is used for an IA, not its employees

Question 19

What types of securities are suitable for capital preservation?

Answer 19

Money-market securities or a money-market fund would be the only appropriate recommendation under these circumstances.

Question 20

A client may bring civil action if:
I. An agent is not registered
II. An offer is made but no sale occurs
III. Misleading statements are made and the client relies on those statements to make a purchase
IV. Client securities are commingled with other client securities

Answer 20

I and III. Any individual may sue in the civil courts, but civil liability is limited to monetary damages. In choice (II), an offer is made, but no sale occurs, so damages cannot exist. Therefore, a client could not sue in civil court for damages. An Administrator has jurisdiction over the offer, and could still act. Under state securities law, the broker-dealer and the agent must be registered in all the states in which the agent transacts business. If an agent makes misleading statements and a client purchases a security, the client could sue for damages on the grounds that he was misled. Broker-dealers may commingle client securities, but not client and broker-dealer securities.

Question 21

True or false: Under the NASAA Model Rules for Sales of Securities at Financial Institutions, A BD must notify the bank promptly about an agent’s termination.

Answer 21

True

Question 22

True or false: Agents of BDs DO NOT need to disclose to their BDs if they do a private transaction?

Answer 22

False, they must receive permission

Question 23

True or false: Under the USA, third-party solicitors for an investment adviser may be required to register as an IAR?

Answer 23

True

Question 24

True or false: Only an Administrator within the same state may examine the records of an investment adviser or broker-dealer?

Answer 24

False, an Administrator may inspect the records of a broker-dealer or investment adviser located within or outside the state.

Question 25

A customer of a broker-dealer has purchased stock in a margin account. The customer’s exposure in the account is 50%. If the stock falls by 10%, what’s the customer’s percentage of loss in the account?

Answer 25

If a customer has 50% exposure in a margin account, it means they’ve only paid for 50% of an investment and borrowed the other 50%. When a customer has 50% exposure, the easiest way to determine the client’s percentage loss due to the decline in the stock’s value is to double the percentage of decline. In this question, since the stock declined by 10%, the customer has a resulting loss of 20% (i.e., 2 x 10% = 20%).

Question 26

Under what circumstances are agents permitted to sell securities to clients in transactions that are not recorded on the books and records of their employing broker-dealer?

Answer 26

Effecting client transactions that are not recorded on the books and records of the agent’s employer is a prohibited practice, regardless of the type of security or client involved. It is generally considered an unethical business practice for an agent to effect securities transactions and not record them on the broker-dealer’s books and records.

Question 27

What must IA contracts disclose?

Answer 27

• The adviser will not be compensated on the basis of a share of the capital appreciation of the account.
• The adviser cannot assign client contracts w/o the consent of the client.
• If the adviser is a partnership, clients will be notified of changes in the partnership within a reasonable period.

Question 28

What actions will the Administrator take if a C&D is not complied with?

Answer 28

The Administrator may take more severe action if a broker-dealer does not comply with a cease-and-desist order to stop selling unregistered securities in the Administrator’s state. This would entail the Administrator going to state court to ask for an injunction.

Question 29

Which of the following statements is TRUE regarding the minimum financial requirements of an investment adviser under the Uniform Securities Act?
A. An IA that receives prepaid fees doesn’t have a minimum financial requirement.
B. An IA that doesn’t maintain custody of client assets has a minimum requirement of $35,000.
C. An IA that maintains custody of client assets has a minimum requirement of $10,000.
D. An IA that maintains custody of client assets has a minimum requirement of $35,000.

Answer 29

D. An IA that maintains custody of client funds and securities has a minimum financial requirement of $35,000. If an IA doesn’t maintain custody, the minimum requirement is $10,000. An IA that receives prepaid fees of more than $500, more than 6 months in advance, needs to maintain a positive net worth (i.e., assets minus liabilities) at all times.

Question 30

Which of the following statements is TRUE concerning the posting of bonds by a broker-dealer?
A. The bond may be waived if the broker-dealer has been in business for at least 10 years
B. There is no bond requirement if the broker-dealer is registered in another state
C. There is no bond requirement if the broker-dealer does not have custody or discretionary authority
D. The Administrator may not waive the bond requirement for any broker-dealer

Answer 30

C. Not every BD maintains custody of client assets. Some, for example, employ clearing firms to take care of this responsibility. The Administrator may require broker-dealers to post bonds if they have custody of, or discretionary authority over, client funds or securities. The bond is waived if the broker-dealer’s net capital exceeds a specified amount. The Administrator may determine this amount.

Question 31

True or false: sharing of profits and losses in a client’s account by an agent is strictly prohibited?

Answer 31

False, not necessarily. If an agent opens a joint account with a client, the agent may share in the profits proportionate to their investment, provided employer and client approval was obtained

Question 32

True or false: When a BD is suspended, the agent’s registration is still active?

Answer 32

False, an agent’s registration is only effective when the BD’s registration remains in effect.

• When an IA’s registration is supended, the IAR’s registration is also suspended
• If an agent’s registration is suspended, the BD’s registration is unaffected.

Question 33

True or false: When sharing profits of a customer’s account, the client and the BD carrying the account are required to approve any account in which both the agent and the customer share in profit & losses.

Answer 33

True

Question 34

True or false: According the Uniform Securities Act, no person is excused from attending and testifying in response to a subpoena, and no individual can be prosecuted or subjected to any penalty for testifying?

Answer 34

True

Question 35

A securities agent and an investment adviser have offices next door to each other. The adviser directs brokerage business to the agent for execution and, in return, the agent rebates the adviser 10% of the commissions generated by these transactions. According to NASAA Model Rules, this practice is:
A. Acceptable, provided the agent is also registered as an IAR
B. Acceptable, provided it’s disclosed on the adviers’s Form ADV
C. Unethical according to NASAA
D. A violation of USA

Answer 35

B. According to the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this practice is acceptable provided it is disclosed in writing as a conflict of interest. Disclosing the practice on Form ADV, a copy of which all clients must receive, should be sufficient. This would be an unethical practice if the adviser did not disclose the rebate to its clients. Please note, this is a very narrow definition of rebate. It comes under the concept of a business relationship between the adviser and the broker-dealer. This is not the same situation as where an agent rebates a customer a commission as an incentive to enter into a transaction. That scenario is prohibited.

Question 36

True or false: NASAA Model Rule on the Ethical Business Practices of IAs does not specify a limit on the size of fees that may be charged to customers?

Answer 36

False, the rule states that fees that are unreasonably high in relation to fees charged by other advisers for similar services is considered unethical.

Question 37

According to the Uniform Securities Act, an Administrator is NOT allowed to demand that broker-dealers do which of the following?
A. Ensure that their advertising is maintained and available for inspection
B. Review their advertising for accuracy prior to use
C. Approve their advertising prior to use
D. File their advertising related to federal covered securities with their state Administrator prior to use

Answer 37

D. USA requires that all advertising used by a broker-dealer must be supervised and checked for errors. They are also required to keep a file that is subject to audit by the Administrator. However, the Administrator does not regulate advertising that addresses only federal covered securities.

Question 38

A client requests that her agent display a quote in a thinly traded security. The client is the majority shareholder in this security and the broker-dealer honors the request and displays the quote. Which of the following statements is TRUE?
A. A broker-dealer is not permitted to enter quotes on behalf of its clients
B. A broker-dealer may always enter a quote on behalf of a client
C. This would be considered an unethical business practice
D. This would be permissible if the broker-dealer believed the quote was bona fide

Answer 38

D. A broker-dealer is permitted to publish quotes (bid and ask prices) on behalf of its clients or for its own account. The broker-dealer must believe the quotes are bona fide and not intended to manipulate the market price of a security. If the quotes are not bona fide and the broker-dealer publishes them, it would have committed an unethical business practice. (75703)

Question 39

What documentation does a Canadian BD need to continue to do business w/ many clients who frequently vacation in the US?

Answer 39

• A copy of current registration filed in Canada
• A Consent to Service of Process
• A proof of membership in an SRO

Question 40

In order for an investment adviser to maintain custody of funds and securities:
A. At least $100,000 in Treasury bills must be posted as security
B. The investment adviser must notify the Administrator and there must be no rule against custody
C. The Administrator must give permission to the investment adviser
D. The firm must have a three-year track record of no violations

Answer 40

B. An adviser must notify the Administrator of its intention to maintain custody of client funds and securities. In some cases, an Administrator may adopt a rule prohibiting an investment adviser from taking possession.

Question 41

A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer’s conduct is:
A. Allowable only if the shares will be listed on a national exchange
B. Acceptable if the issuer approves of the trade
C. Acceptable since the broker-dealer is accepting risk that the shares may fall in value
D. Unethical and prohibited under the Uniform Securities Act

Answer 41

D. This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, it must sell the shares at the public offering price (POP) as soon as possible.

Question 42

Allied Advisory Services is a registered investment adviser with its home office in the state of Virginia. The minimum financial requirement for an investment adviser in Virginia is a net worth of $50,000. The firm would like to open an office and provide advisory services in Maryland. However, the minimum net worth requirement in Maryland is $100,000. What action should the firm take in order to open an office in Maryland?
A. Increase its net worth to $150,000 to cover both states
B. Post a $50,000 bond to cover the additional requirement in Maryland
C. Increase its net worth by another $50,000
D. Leave its current net worth as is

Answer 42

According to the USA, the minimum financial requirements of the state where an investment adviser maintains its principal place of business sets its registration requirements. No other state may impose higher requirements than the adviser’s home state. Since Allied is already registered in Virginia, it is assumed that is its principal state, and that it has already met the net worth requirements ($50,000). As a result, Allied cannot be forced to meet Maryland’s requirement of $100,000.

Question 43

A broker-dealer is registered in State X, but not in State Y. The firm does not have an office in State Y, but does have some institutional clients in that state. The agent who handles these accounts has developed several contacts in State Y and wants to begin soliciting retail clients in State Y. The agent consults the Compliance Department. A new employee in that department tells the agent that he may solicit retail clients in State Y since he is exempt from registration in that state. What should the agent do?
A. Tell the registration department to begin the application process since the agent and the broker-dealer will need to register in State Y once the agent has five retail clients there
B. Refrain from soliciting retail clients in State Y until the agent and the broker-dealer are registered in State Y
C. Begin contacting clients in State Y immediately since the agent has the approval of the broker-dealer
D. Begin soliciting retail clients in State Y immediately since the agent is exempt from registration in that state as long as he does not maintain an office there

Answer 43

B. Generally, both the broker-dealer and its agent must be registered in a state before they may do business there, which includes soliciting clients. There is an exemption for broker-dealers and their agents who do not have an office in the state and do business only with certain institutional clients, such as other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, or pension plans.

Question 44

A broker-dealer has been selling unregistered, nonexempt securities in nonexempt transactions without the permission of the state securities Administrator. What action would the state Administrator most likely take?
A. There is no violation and therefore no action will be taken by the Administrator
B. Bring an action in criminal court against the broker-dealer
C. Require the broker-dealer to offer letters of rescission
D. Sue the broker-dealer in civil court

Answer 44

C. In the absence of fraud, there is a violation if securities are illegally offered in a particular state when they should have been registered. The Administrator would most likely require the broker-dealer to offer a letter of rescission whereby the broker-dealer must offer to repurchase the securities at their original cost plus interest. (75718)

Question 45

True or false: Treble damages apply only to insider trading?

Answer 45

True

Question 46

When conducting an initial public offering, NASAA’s Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, requires broker-dealers to make certain disclosures by the confirmation of the transaction. Which of the following disclosures meets the requirements for an IPO disclosure?
A. Providing the summary prospectus and an offer to deliver the full version of the final prospectus.
B. Investors are guaranteed to receive capital gains if they hold the securities for 12 months.
C. The securities being offered are registered and approved by the state Administrator.
D. Delivering the preliminary prospectus and an additional document which includes information in the final prospectus that’s not included in the summary prospectus.

Answer 46

D. Generally, BDs must deliver a prospectus to the investors who purchase securities in an initial public offering (IPO). If an investor has received the preliminary prospectus (i.e., red herring), a broker-dealer can deliver an additional document which includes the information in the final prospectus that’s not been included in the preliminary prospectus.

Question 47

What action may the state securities Administrator take without giving the registrant an opportunity for a hearing?
A. Cancel a registration
B. Suspend a registration
C. Bar a registration
D. Revoke a registration

Answer 47

A. Cancel a registration. An Administrator may cancel a registration without a hearing if the registrant is deceased, judged mentally incompetent, or is missing and cannot be located after a reasonable search. If the Administrator revokes or suspends a registration, or bars a registrant, then that person must be given the opportunity for a hearing to contest the Administrator’s action.

Question 48

Under which of the following circumstances will an individual be required to register with the Administrator as an investment adviser representative?
A. She holds herself out as an investment adviser representative
B. She solicits brokerage services
C. She serves on a committee that makes investment decisions for an investment adviser’s managed accounts
D. She supervises the accounting department of a registered investment adviser

Answer 48

C. IARs are typically employees of an IA who solicit ADVISORY services, make investment decisions, or supervise other IARs. Supervising the accounting department and soliciting brokerage services don’t require registration as an IAR. The definition of an IA, not IAR, mentions a firm “holding itself out as an adviser,” but that action is insufficient to require registration as an IAR.

Question 49

When can an issuer use an omitting or summary prospectus?
A. W/ IPOs
B. W/ sales of investment companies and variable contracts
C. W/ pvt placements
D. W/ follow-on offerings of FCSs

Answer 49

B. In most securities offerings, the prospectus is the only disclosure document that’s permitted. However, the SEC does permit the use of a summary or omitting prospectus when selling investment company securities and variable products. The summary prospectus is a shorter document, which summarizes the full prospectus. The disclosure document for a private placement is referred to as an offering memorandum or private placement memorandum.

Question 50

Persons who violate federal insider trading regulations are subject to all of the following penalties, EXCEPT:
A. FINRA fines
B. Treble damages
C. Civil lawsuits by traders
D. Prison terms

Answer 50

A. Insider traders face SEC civil penalties of up to three times the amount gained or loss avoided (treble damages). Criminal penalties for individuals can be as much as a $5,000,000 fine and 20 years in prison. In addition, private individuals who believe their investments were harmed by the actions of an insider trader may file a civil lawsuit to recover damages. However, FINRA fines may be assessed only against FINRA members and their associated persons. FINRA has jurisdiction only over members while anyone can be held civilly or criminally liable for insider trading. FINRA may not take action against someone who is not a FINRA member.

Question 51

Which of the following written disclosure statements is prohibited under NASAA’s Model Rule on Unethical Business Practices of Investment Advisers?
A. If there is a monetary dispute, the client must agree to arbitration to settle the dispute
B. The employees of the investment adviser may receive a commission for the sale of its recommended products
C. The investment adviser receives a management fee for a mutual fund it recommends
D. The investment adviser is an affiliate of a broker-dealer

Answer 51

A. Unlike a BD that may have a pre-dispute arbitration agreement, an IA may not compel an investor to settle disputes through arbitration. The client may sue in a court of competent jurisdiction. Any material fact that may be construed as a conflict of interest and can impair the objective investment advice of an IA must be disclosed to a client, in writing, prior to the recommendation of any product or service provided. The affiliation with a BD, a fee from a mutual fund, or other payments received by the IA may be construed as a conflict of interest and, therefore, must be disclosed.

Question 52

A radio program is broadcast from a bank on the weekend. Which of the following actions would be prohibited by the Administrator?
A. Mentioning that the broker-dealer that sponsored this show is affiliated with the bank
B. Omitting the name of the bank during any 30-second ads that run during the show
C. Mentioning the advantages of investing in mutual funds without sending a prospectus
D. Omitting the name of the broker-dealer in any 30-second ads that run during the show

Answer 52

D. Broker-dealers are allowed to mention that they are affiliated with or subsidiaries of banks. However, they must make the distinction that the products being offered are neither deposits, nor guaranteed. There is no requirement to mail a prospectus with those statements. In reality, this would be difficult to achieve since the radio program’s sponsor (the broker-dealer) has no idea how many people may be listening at a given time, as well as where those listeners are located. Keep in mind, banks are regulated by entities other than the Administrator.

Question 53

A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE?
A. The Administrator has two years after the date the firm’s registration is withdrawn to initiate a proceeding for revocation of its license
B. The withdrawal will become effective within 60 days after the application is received by the Administrator
C. The withdrawal will become effective when the Administrator determines whether there is an action for revocation of the firm’s license pending at the time the application was filed
D. By filing an application to withdraw, the firm agrees to settle all charges currently pending without admitting or denying them

Answer 53

C. An application for withdrawal generally becomes effective 30 (not 60) days after it was filed. However, the withdrawal will not become effective until the Administrator declares whether there are proceedings pending or instituted against the firm at the time the application for withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days after the application was filed.) The Administrator has one year (not two) after the registration is withdrawn to begin revocation or suspension proceedings against the firm.

Question 54

XYZ Inc. is an investment adviser. One of its institutional clients would like to sell 1,000 shares of ABC stock. XYZ believes that this would be a suitable investment for another institutional client. XYZ proposes to arrange a trade between the two clients and would charge each customer a small fee for its services. This would allow each client to receive a better price than either could obtain in the open market. Which of the following statements is TRUE in this situation?
A. This is not permitted under any circumstances unless XYZ waives any fee for arranging the transaction
B. This is permitted if XYZ discloses to the buyer that it is representing the seller in the transaction and receives the buyer’s written permission
C. This is permitted if XYZ discloses to each client that it is acting as a broker for both parties in the trade and receives each client’s written consent
D. This is permitted since the two clients are institutional investors, but would not be permitted if they were not institutional investors

Answer 54

C. An investment adviser that wishes to act as a broker for both a client and another person when effecting a securities transaction for a client must (1) disclose the capacity in which it is acting prior to the completion of the transaction and (2) obtain the client’s written consent. Since both parties to the trade are clients, the disclosure and consent requirements apply to both.

Question 55

A broker-dealer may need to file all of the following material with the Administrator, EXCEPT:
A. The sales literature for an issue that will be sold within the Administrator’s state only
B. The prospectus for an oil and gas limited partnership
C. The marketing materials for a new issue of municipal bonds
D. A form letter distributed to an adviser’s current clients explaining the benefits of a variable annuity

Answer 55

C. Generally, the Administrator may require the filing of “any prospectus, pamphlet, circular, form letter, advertisement or other sales literature or advertising communication” intended for distribution to investors or prospective investors. However, the Administrator may not require that sales materials related to exempt securities, exempt transactions, or federal covered securities be filed. Since municipal securities are exempt securities, their sales materials are not required to be filed with the Administrator. (32340)

Question 56

Gene is an agent of Broker-Dealer Z. Broker-Dealer Z is underwriting a new offering of stock for ShortSight Company, and Gene has sold some of the stock to one of his clients. The client quickly decides she does not want to keep the stock and tells Gene to sell it at the market. Broker-Dealer Z has worked hard to win ShortSight’s investment banking business and does not want to alienate the company. It has, therefore, told its agents to discourage customers from reselling the new stock too quickly. Gene holds on to his client’s sell order for several days before finally executing it. The client actually receives a better price than she would have obtained if the order had been entered immediately. Which of the following statements is TRUE in this situation?
A. Gene acted improperly
B. Gene acted improperly since new issues may not be resold within the first six months
C. Gene would have acted improperly only if the customer had lost money on the trade
D. Gene acted properly in getting best execution for the client

Answer 56

A. Gene acted improperly because it is always an unethical practice to knowingly fail to follow the customer’s instructions. Even if the agent believes that not following the customer’s instructions would be in the best interests of the client, the agent is not permitted to ignore the customer’s directions. Private placements sold under Regulation D may not be sold for six months.

Question 57

True or false: Under USA, a state Administrator may require the application for registration as an IA to include the financial condition and history of an IA?

Answer 57

True

Question 58

Monetary disputes between registered persons and their customers are usually settled by:
A. Arbitration
B. The SEC
C. The federal courts
D. The state courts

Answer 58

A. Monetary disputes between registered persons and their customers are usually settled by arbitration, which is considered more economical than lawsuits pursued through the court system. Almost every brokerage firm includes in their customer agreements a mandatory predispute arbitration provision that forces those investors to submit to arbitration all disputes they may have with the firm or its employees. Many cases are settled and, if not, the only alternative is arbitration.

Question 59

True or false: IAs must have BCPs but BDs do not have to have one?

Answer 59

False, both BDs and IAs are required to create written BCPs

Question 60

When must action be taken for recovery on a transaction made in violation of a registration provision?
A. Within two years of occurrence or three years of discovery, whichever occurs last
B. Within three years of occurrence or two years of discovery, whichever occurs first
C. Within three years of notification
D. Within five years of notification

Answer 60

B.

Question 61

Micro Manager Partners is an investment advisory firm. Micro is creating a new standard contract for its advisory clients. Which of the following clauses should NOT appear in the contract?
A. The Adviser [Micro] will provide the following services to the Client: management of the Client’s portfolio on a discretionary basis, quarterly written summaries of account activity, and quarterly personal review of the Client’s assets under management of the Adviser
B. The Client agrees to pay a quarterly fee to the Adviser consisting of (i) .25% times the value of the portfolio at the end of each quarter, plus (ii) 2% of any increase in the value of the portfolio compared to the end of the previous quarter. Part (ii) of the fee will not be assessed if the portfolio declines in value
C. The Adviser may not assign this contract to another party without the prior written consent of the Client
D. If any partner leaves the business of the Adviser, or if the Adviser adds any partner, the Adviser will notify the Client within a reasonable period, but not more than ten business days after any such change

Answer 61

B. An investment adviser may not charge a fee which is based on a share of the capital gains in the account or a share in the capital appreciation of the funds in the account. The part of Micro’s fee that consists of 2% of any increase in the value of the portfolio each quarter would not be permitted.

Question 62

The Administrator of State A believes that an agent who’s registered in State B is operating in State A without being registered. State A’s Administrator wants to begin investigating the agent by requesting records from State B. Which of the following statements is TRUE regarding State A’s investigative authority?
A. The Administrator of State A must notify the Administrator in State B that it’s conducting an investigation.
B. Both Administrators must notify the SEC of the potential rule violation.
C. The Administrator of State A may begin its investigation without notifying the Administrator of State B.
D. The Administrator of State A must coordinate its investigation with the Administrator of State B.

Answer 62

C. Administrators have broad inspectorial powers and may subpoena records or witnesses from other states. Although many Administrators will coordinate their investigations with Administrators from other states, there’s no requirement to inform another state’s Administrator of an ongoing investigation.

Question 63

All the following descriptions would meet the definition of agent under the Uniform Securities Act, EXCEPT:
I. A sales representative of a broker-dealer who sells only securities covered under a federal exemption
II. An assistant to a sales agent who takes orders when the agent is not available
III. A subsidiary of a bank, registered as a broker-dealer that sells nonexempt securities to the public
IV. A broker-dealer that sells only exempt securities within the state

Answer 63

III and IV. By definition, an agent is an individual and not a firm. It does not matter whether the securities are covered under a federal exemption or not. If administrative personnel are authorized to take orders, they are agents.

Question 64

A client has a $5,000,000 account with an objective of income only. Under the Uniform Securities Act, an agent who has discretionary authorization for the account could:
A. Not buy a speculative stock w/o the client’s approval
B. Speculate with 5% of the client’s assets
C. Speculate with any amount that could be reasonably justified
D. Not purchase equities in the account

Answer 64

A. Regardless of the account size, any amount of speculative investing would be inappropriate in an account with an objective of income only.

Question 65

An unregistered agent who is an employee of a licensed broker-dealer is allowed to sell exempt securities to the public:
A. Under no circumstances
B. If it is an exempt transaction
C. Because the security is exempt
D. If the employee is not paid a salary or commission

Answer 65

A. An individual who sells securities (whether or not the securities are exempt) must be registered as an agent in order to sell such securities to the public for a licensed broker-dealer.

Question 66

An investment adviser is registered in State A and State B. A broker-dealer is registered only in State A. The client of the investment adviser is a resident of State B. The investment adviser asks the broker-dealer to purchase a nonexempt security, which is registered in State B, for the advisory client. The broker-dealer:
A. Should refuse the order because the broker-dealer is not registered in the state in which the client resides
B. May accept the order as long as this practice does not occur with any regularity
C. May accept the order only if the client places the order
D. May accept the order if the broker-dealer has no place of business in State

Answer 66

D. This question is very tricky. Here is the point you need to watch for. The business relationship is between the broker-dealer and the investment adviser, not the advisory client. In other words, the investment adviser is the broker-dealer’s customer. The transaction is being requested by the investment adviser, who is considered an institution. As a reminder, the term broker-dealer EXCLUDES any person who (1) has no place of business in the state and (2) transacts business with or through a financial institution or institutional buyer, whether acting for itself or as a trustee.

Question 67

An agent of a broker-dealer executes a securities transaction that is not recorded on the broker-dealer’s books and records. According to NASAA Statements of Policy, this would NOT be an unethical business practice if the agent had done which of the following?
A. The agent received the broker-dealer’s oral authorization to execute the transaction
B. The agent received the broker-dealer’s written authorization prior to the execution of the transaction
C. The agent received the broker-dealer’s written authorization after the execution of the transaction
D. This type of transaction is considered an unethical business practice regardless of receiving the broker-dealer’s authorization

Answer 67

B. Generally, it is considered an unethical business practice for an agent to effect securities transactions and not record them on the broker-dealer’s books and records. However, according to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may effect transactions not recorded on the books and records of the broker-dealer if the transactions are authorized in writing in advance by the broker-dealer of their execution.

Question 68

Which of the following persons is NOT considered an investment adviser representative under the Uniform Securities Act?
A. A person who makes recommendations about municipal securities at an investment advisory firm
B. A person who solicits advisory services and private offerings for accredited investors
C. An accountant who offers a separate service for securities advice based on his clients’ tax situation
D. A person who assists clients by entering orders for securities transactions

Answer 68

D. This is an agent.

Question 69

An advertisement is printed in State A and circulated in State B. A client in State B feels that she has been treated in an unethical manner by the agent who created the advertisement. Which state has the authority to investigate the agent?
A. State A only since the advertisement was printed in that state
B. State B only since the client is a resident of that state
C. Both States A and B
D. Since this involves an interstate transaction, only the SEC has jurisdiction

Answer 69

C. The Administrator has jurisdiction over a securities professional whose offers originate within his state or who solicits residents of a state. In this scenario, the agent created an advertisement in State A. This is where the solicitation originated. The agent then sent the advertisement to State B. Since the offer occurs in both locations, both Administrators have the authority to investigate the solicitation. The SEC may have jurisdiction as well, but not solely.

Question 70

Under NASAA’s Model Rule on Brochure Rule Requirements, if an investment adviser provides a brochure at the time that a contract is signed, how long must a client be given to terminate the contract without penalty?
A. 48 hours
B. 12 months
C. Five days
D. Two days

Answer 70

C. According to NASAA’s Model Rule on Brochure Rule Requirements, individuals who receive the brochure at the time they sign an advisory contract must also be given a five-business-day period to cancel their contract without penalty (i.e., a five-day free look). If an individual receives a brochure 48 hours before he signs an advisory contract, he is not required to be offered a free-look period.

Question 71

Under the Uniform Securities Act, a state’s Administrator may require the filing of which of the following documents by rule or order?
I. Form letters
II. Pamphlets
III. A prospectus

Answer 71

I, II, and III. The Administrator may require all of these items to be filed as long as the do not involve federal covered securities, exempt securities, or securities sold as part of an exempt transaction.

Question 72

According to the NASAA Model Rules for Sales of Securities at Financial Institutions, a networking arrangement between a financial institution and a broker-dealer must:
A. Be renewed every year by December 31
B. Be filed with the state securities Administrator
C. Set forth the compensation schedule for both parties
D. Specify which functional regulator will be in charge of examining the broker-dealer’s operations at the financial institution

Answer 72

C. These agreements must be in writing and must specify how both the bank and the broker-dealer will be compensated. The agreement must also state the duties and responsibilities of both the broker-dealer and the bank, and must provide that the broker’s supervisory personnel and state regulators will have access to the bank to examine the records maintained there.

Question 73

Prior felony convictions must be disclosed on Form U4 if the conviction occurred:
A. Within the last two years
B. Within the last 5 years
C. Within the last 10 years
D. At any time

Answer 73

The fine point of the question is whether you must disclose something versus whether or not that situation would affect your employment. Agents are required to disclose all felony charges or convictions on Form U4 regardless of when they occurred. On the other hand, an agent will be statutorily disqualified if the conviction was within the last 10 years. The agent may be registered if she requests and receives permission at a special hearing. The Administrator may reject the application of anyone convicted of a felony regardless of when it occurred if the Administrator shows it is in the public interest to do so. Applicants MUST disclose all securities-related misdemeanors, charges or convictions, regardless of when they occurred.

Question 74

When opening a margin account, which TWO of the following MUST be signed?
I. A loan consent agreement
II. A hypothecation agreement
III. A margin account form
IV. A trading authorization

Answer 74

II and III. When opening a margin account, a customer must sign both a hypothecation agreement and a margin account form. The loan consent form is used when a customer authorizes the member to lend his securities, and is not required. Trading authorization is also not required.

Question 75

When trading on margin, clients are required to deposit:
A. 50% of the MV of the security
B. 50% of the amt of money borrowed
C. 25% of the MV of the security
D. 25% of the amt of money borrowed.

Answer 75

A

Question 76

A customer has recently sent in a written complaint regarding the actions of an investment adviser representative. The customer has given the investment adviser representative trading authorization, which has been documented by the investment adviser. After a review, the investment adviser’s representative’s supervisor has determined transactions in the account have been excessive in size and performed without considering the customer’s ability to pay for the transactions. Which of NASAA’s Model Rules has the investment adviser representative violated?
A. Excessive trading
B. Making unsuitable recommendations
C. Exercising discretion w/o authorization
D. Executing trades w/o prior supervisory approval

Answer 76

D. Although the IAR has appropriate authorization, he has executed trades outside the client’s ability to pay, which is referred to as excessive trading. Once an IAR has received written power of attorney from a client, he doesn’t need preapproval from a supervisor to execute trades in the client’s account.

Question 77

Under the Uniform Securities Act, which of the following persons is a broker-dealer in State B?
A. An agent in State A who contacts a client in State B
B. A corporation that sells commercial paper every other week in State B
C. A BD that is registered in State A, where its only office is located, and has insurance companies a its only clients in State B
D. A BD that is registered in State A, where its only office is located, and has only 3 retail clients who are residents of State B

Answer 77

D. A broker-dealer registered in State A that has any retail clients who are residents of State B is required to be registered in State B. This is unlike investment advisers that are able to have no more than five non-institutional (retail) clients in a state in which they have no place of business.

Question 78

An agent is concerned that many customers do not bother to read the prospectus before investing in a mutual fund. Under SEC rules, the agent may take which of the following actions to help his clients become better-educated investors?
A. The agent may give clients a summary prospectus
B. The agent may summarize the prospectus, provided a registered principal approves the resulting abbreviated document and attaches a written notice to all recipients that a full version of the prospectus is available upon request
C. The agent may type a large font version of the prospectus for the clients’ benefit, provided the large print version has been reviewed and approved by the firm’s chief legal counsel
D. The agent may underline or highlight key content areas within the prospectus, but must remind customers that the points emphasized are of no more or no less importance than the balance of the material contained in the full prospectus

Answer 78

A. In the case of mutual funds, clients may be given a copy of a summary prospectus instead of the entire (statutory) prospectus, provided the whole prospectus is available free of charge on the fund’s Web site. A copy of the statutory prospectus (electronic or paper) must be made available to any investor that wants this document at no charge and within three business days of the request.

Question 79

A client tells his agent that he’s a personal friend of the CEO of a company that was just informed that the FDA rejected its new drug. If this information has not yet been announced and the client instructs his agent to sell his entire position in the company, should the agent place the sell order?
A. Yes, since the personal friend of the client provided the info.
B. No, since the agent would be placing an order based on material, non-public info.
C. Yes, if agent discloses this info to all his clients who also own shares of this company.
D. Yes, if the agent verifies this info w/ his firm’s research department.

Answer 79

B. Since the agent was informed by the client that the material, non-public information came from a corporate insider of the company, the best course of action is for the agent to refuse to place the order.

Question 80

A husband wishes to buy stock in his wife’s account. Under the Uniform Securities Act, which of the following statements is TRUE?
A. The agent may accept this order if it’s suitable
B. The agent may accept this order if the wife provided oral authorization within the last 10 days.
C. The husband must have written trading authorization for the account
D. Under no circumstances may the husband place orders in his wife’s account

Answer 80

C. To place orders in the account, trading authorization must be signed by the owner of the account to provide this power to a third party. Without trading authorization, this is a prohibited practice. The agent may not accept the order regardless of its suitability for the wife. Also, an agent of a broker-dealer may not accept oral authorization from the wife with a 10-day grace period. Don’t confuse this with the fact that an investment adviser may exercise discretion for 10 days if provided with oral authorization.

Question 81

If an investment adviser is currently advising a mutual fund, how must it be registered?
A. As a state-registered IA in the state in whihc its main office is located
B. As a federally covered adviser w/ the SEC
C. W/ both the SEC and the Administrators as a dually registered IA
D. It’s not required because it qualifies as an exempt reporting adviser

Answer 81

B. If an IA is providing advice to, or directly managing, a registered investment company (e.g., mutual fund), it must register with the SEC because it’s considered a federal covered adviser.

Question 82

An agent may tell a client that he has been approved by the state Administrator:
A. If the agent pays for his own advertising expenses in a statewide publication
B. In order to qualify him for registration purposes only
C. If the statement is made to a limited # of people
D. Once he has passed the written examinations

Answer 82

B. Agents may tell clients that they have been approved by the state Administrator in order to qualify them for registration purposes only. They may not imply that their registrations or licenses mean that the Administrator has approved their abilities or activities. These statements regarding an agent being approved would be false and misleading.

Question 83

An applicant for registration as an investment adviser indicates that the firm will base its investment decisions on psychic readings and other nonfinancial criteria. According to the Uniform Securities Act:
A. The Administrator may deny/postpone registration only for those reasons specified in the law
B. The Administrator may act in the public interest and deny registration
C. The Administrator must review the track record of the applicant to ascertain the feasibility of such criteria for investing
D. The Administrator should encourage alternative methods of analysis and grant registration if there is a reasonable basis for this methodology

Answer 83

A. The state Administrator must cite reasons found in state law to disqualify a person from registration (e.g., a felony conviction, violation of commodities laws, misleading statements, etc.). The Administrator may deny registration if it is in the public interest AND if any provision of the USA has been or will be violated. While basing investment decisions on psychic readings may be a debatable proposition, the law does not say anything about methods of analysis for advisers, except that it is a disclosure item. Looking at it another way, the Administrator does not want to be in the role of determining which methods of analysis are better than others

Question 84

Which of the following activities is an exempt transaction according to the Uniform Securities Act?
A. An agent sells securities that are listed on the Toronto Stock Exchange
B. A broker-dealer solicits interests in a private placement to 35 retail investors within the state during a 12-month period
C. An agent sells unregistered, non-exempt securities to a client on a solicited basis
D. A sale of securities by a bona fide pledgee, the purpose of which is to circumvent the Act

Answer 84

A. According to the NASAA Model Rule on Secondary Market Trading Exemptions for Qualifying Canadian Securities, selling securities that are listed on the Toronto Stock Exchange is an exempt transaction. To qualify for this exemption, the transaction must be effected through the agent of a broker-dealer, the securities must be listed on the Toronto Stock Exchange (or the TSX Venture Exchange), and the issuer must have been a reporting company in Canada for at least the previous six months. Sales of private placements are not exempt transactions if they are offered to more than 10 retail investors during a 12-month period. Sales of unregistered, non-exempt securities are exempt only if they’re executed on an unsolicited basis; however, the answer indicates that the trade was done on a solicited basis. Transactions by a bona fide pledgee are normally exempt, but not if the purpose of the sale is to evade the requirements of the USA.

Question 85

A registration statement is required to be filed for which of the following?
A. A Canadian government security
B. A CD issued by a trust company
C. A security issued by the State of Washington
D. A security to be listed on the Toronto Stock Exchange

Answer 85

D. Any security that’s issued or guaranteed by Canada, or any Canadian province, any security issued by any state or political subdivision (a municipal security), or any security issued by a bank (certificate of deposit), savings institution, or trust company is exempt from state registration. It’s important to note that a “security to be listed on the Toronto Stock Exchange” is required to be registered because the security involves an issuer transaction (e.g., an IPO). On the other hand, a non-issuer (secondary market) transaction in a security that’s listed on the Toronto Stock Exchange is not required to file a registration statement with the state.

Question 86

The Administrator of State P requests that the Administrator of State Q issue a cease-and-desist order. May the Administrator of State Q grant this request?
A. Not under any circumstance
B. Only if the person against whom the order is being issued is a resident of state Q
C. Only if there is a reciprocal agreement between the two states
D. Only if the Administrator of State Q believes that the laws of that state are being violated, or will be violated

Answer 86

D. The USA gives the Administrator the power to issue a cease-and-desist order anytime he believes that someone has violated one of the provisions of this Act or believes that someone is about to violate one of its provisions.

Question 87

Under the Uniform Securities Act, an institutional investor:
A. Is any financial institution
B. Has more than $2.2MM of net worth
C. Has a minimum of $1.1MM of AUM w/ an IA
D. Is designated by rule or order of the Administrator

Answer 87

D. The best answer is that the definition of an institutional investor is designated by rule or order of the Administrator. The net worth of more than $2.2 million or minimum of $1.1 million under management with the adviser is the definition of a qualified client. Although financial institutions are considered institutional investors, the definition is ultimately determined by the Administrator.

Question 88

The Uniform Securities Act requires investment advisory firms to keep their books and records for:
A. 5 years
B. 3 years
C. 2 years
D. 1 year

Answer 88

A.

Question 89

An agent provides an investment seminar that’s open to the public. In doing so, which of the following is considered an unethical business practice for the agent?
A. Asking the attendees for their e-mail addresses so that the agent can contact them individually.
B. Handing out promotional brochures at the end of the seminar.
C. Contacting the customers who attended the seminar and recommending the same security to all of the attendees.
D. Contacting the customers who attended the seminar and inquiring as to whether they have any existing brokerage account.

Answer 89

C. It’s considered an unethical business practice for an agent to recommend to a customer the purchase, sale, or exchange of any security without reasonable grounds to believe that such transaction or recommendation is suitable for the customer. It’s extremely unlikely that the same security will be suitable for all clients.

Question 90

According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning private placements?
A. The offer may not be made to more than 10 persons in that state during any 12-month period.
B. The offer may be made to 35 or fewer persons in that state during any 12-month period.
C. The offer may be made to any number of institutional investors during any 12-month period.
D. Commissions may not be paid if the buyers are non-institutional customers.

Answer 90

B. Under the Uniform Securities Act, a “private placement” is any transaction that involves an unlimited number of institutional investors and no more than 10 other persons (non-institutional investors) during any 12-month period. Along with limiting the number of non-institutional investors, a private placement must meet the following conditions: 1) the seller must believe that all of the non-institutional buyers are purchasing for investment purposes only, and 2) no commission or other remuneration can be paid for soliciting non-institutional buyers. Any reference to an offering of securities to 35 or fewer persons (non-accredited investors) is a private placement under Regulation D of the Securities Act of 1933 and NOT the Uniform Securities Act.

Question 91

According to the Uniform Securities Act, when a broker-dealer distributes bonds with warrants attached as a bonus:
A. This constitutes an offer to sell the bonds only
B. This constitutes an offer to sell the bonds and the underlying stock
C. There is no offer to sell the warrants because they are not technically securities
D. This constitutes an offer to sell the bonds and the warrants

Answer 91

D

Question 92

Under the Uniform Securities Act, which of the following choices is NOT disclosed in an investment advisory contract?
A. Any other states in which the investment adviser is registered
B. The manner in which the advisory fee will be computed
C. A provision disallowing the investment adviser to assign the contract to another party without client consent
D. A provision prohibiting the investment adviser from being compensated based on a share of capital gains

Answer 92

An IA contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains.

Question 93

Under the Uniform Securities Act, a person effecting transactions in commodities:
A. Is automatically considered an agent if her employer is a broker-dealer
B. Is subject to oversight by the Administrator
C. Does not meet the definition of an agent
D. Avoids the definition of an agent only if the person’s duties are merely clerical

Answer 93

C. Since commodities are not securities, a person effecting transactions in commodities is not considered an agent.

Question 94

If a bank owns a broker-dealer subsidiary, what would its registration requirements be under the USA?
A. Since banks are exempt from state securities registration, the subsidiary would also be exempt
B. If the subsidiary is registered with the SEC, it would be exempt from registering with any particular state
C. The subsidiary would need to register in any state in which it planned to do business
D. The subsidiary would register in all states under the provisions of qualification

Answer 94

C. Commercial banks, thrifts, and savings and loans are specifically exempted from the definition of a broker-dealer. However, a broker-dealer subsidiary of a bank would still be required to be registered as a broker-dealer.

Question 95

An agent for a broker-dealer finds a handwritten note on her desk left by a client. The note states that the client is unhappy with the recommendations the agent made recently. The agent recommended stocks that the firm’s research department had on its buy list. The client lost money on some of the recommendations that she accepted. Which of the following statements is TRUE regarding this situation?
A. The note shoulod be given to a principal
B. The agent must send the cleint a writen acknowledgement immediately and record the actions taken in the firm’s complaint file
C. The agent should send the client a written acknowledgement of the complaint that explains to the client that investing in securities involves risk, that investors may lose money, and that recommendations do not imply that past results are not guarantees of profitability
D. The note should be forwarded to the supervisor of the analyst who made the recommendation

Answer 95

A. It is an unethical practice for agents to fail to notify a supervisor of written customer complaints. Agents should NOT handle complaints. This is the role of a principal (supervisor). Complaints do not need to conform to a specific format—any written grievance from a customer should be considered a complaint. The decision regarding how to respond to a complaint is a supervisory or management issue. The complaint should be handled by the principal who supervises the agent, not the supervisor of the analyst who made the recommendation. The actions taken by the agent in the remaining two choices will eventually occur, but they will be undertaken by the principal, not the agent. This is why these are wrong choices for this question.

Question 96

A security is being registered with the state Administrator by the issuer using registration by qualification. When investors purchase the security from the issuer, when must the prospectus be delivered?
A. Within five days of delivery
B. Within five days of settlement
C. Before the sale
D. No prospectus is required

Answer 96

C. Under the Uniform Securities Act, a prospectus must be delivered to an investor at the time a security is being offered under registration by qualification. Since the offer of a security occurs before the sale, a prospectus must be delivered before the sale.

Question 97

The Administrator of State X has reason to believe a broker-dealer that is registered in State Y is violating the law in that state. The Administrator of State X will:
A. Issue a temporary restraining order (TRO)
B. Issues a C&D
C. Coordinate an investigation w/ the Administrator of State Y
D. Suspend the firm’s registration

Answer 97

Coordinate an investigation w/ the Administrator of State Y

Question 98

An agent of a broker-dealer refers a customer to another agent. Both agents want to split commissions on the customer’s transactions. The agents work for different broker dealers, but the two firms are under the same control. Also, both broker-dealers are registered in the state in which the client resides. According to the Uniform Securities Act, are the agents allowed to split commissions?
A. No, because the agents work for different broker-dealers.
B. Only if the agents were both related to the customer.
C. No, splitting commissions is strictly prohibited under the Uniform Securities Act.
D. Yes, because the agents’ broker-dealers are under common control.

Answer 98

D. Agents are able to split commissions with one another if they’re employed by the same broker-dealer or their broker-dealers are under common control. In addition, the agents and broker-dealers must be registered in the state in which the client resides.

Question 99

An investment adviser is registered in State A, where all of its offices are currently located. One of its representatives lives in State B and is in the process of opening a satellite office there to see if she can attract more clients in State B. Right now, the adviser’s only clients in State B are institutions. What must take place before the IAR may commence doing business from her new office?
A. The investment adviser representative must register in State B
B. The investment adviser must register in State B
C. Both the investment adviser and the investment adviser representative must register in State B
D. Neither the investment adviser nor the investment adviser representative needs to register in State B since the firm’s only clients there are institutions

Answer 99

C. An adviser with no place of business in a state and whose only clients in that state are institutions does not need to register there. In this case, however, the adviser loses the exemption as soon as it opens an office in State B. Both the adviser and its representative must register in State B before the IAR may start soliciting clients from his new office

Question 100

A licensed insurance agent and an investment adviser have offices next door to each other. The insurance agent refers clients to the investment adviser, and the adviser pays the agent a referral fee plus a percentage of the management fee for each client who opens an account with the adviser. The insurance agent:
A. May be required to register as an investment adviser representative
B. Must disclose the arrangement on Form ADV
C. Is considered a captive agent
D. Is exempt from registration

Answer 100

A. Under the Uniform Securities Act, an investment adviser representative includes any person who “solicits, offers, or negotiates for the sale of or sells investment advisory services.” Therefore, some states require solicitors to register as investment adviser representatives.