Additional (Part 2)

Question 1

True or false: Hedge funds are liquid investments?

Answer 1

False

Question 1

An agent of a broker-dealer is registered in State X. The agent wants to open an account for a new client, who currently lives in State Y, where neither the firm nor the agent are registered. The prospect suggests using his brother’s address in State X to open the account. May the broker-dealer open the account?
A. No, the broker-dealer may not open the account
B. Yes, if the broker-dealer is federal covered
C. Only if the agent immediately applies for registration in State Y
D. Only if the broker-dealer sends duplicate confirmations and statements to the client’s address in State Y

Answer 1

A. The broker-dealer will be violating the registration provisions of the Uniform Securities Act if it opens the account. Both the firm and the agent will also be knowingly creating a false account record, which will violate both the state and federal securities laws.

Question 2

An agent inadvertently misrepresents the risks associated with U.S. Treasury bonds. Under the Uniform Securities Act, which of the following statements is TRUE?
A. The activity constitutes fraud.
B. The activity is unethical.
C. There’s no violation since the action was inadvertent.
D. Since there are no risks associated with U.S. Treasury bonds, there’s no violation of the USA.

Answer 2

B. Misrepresenting the investment risks of a security is unethical and could lead to civil liabilities since clients have the right to sue and recover their losses. Because the agent inadvertently misrepresented the risks, the activity doesn’t constitute fraud. Despite the fact that U.S. Treasury securities are safe, misrepresenting their characteristics is a violation of the USA.

Question 3

Individuals who represent issuers in which of the following transactions would NOT be excluded from the definition of an agent?
A. Sales of commercial paper
B. Sales of municipal securities
C. Sales of IPOs
D. Transactions between an issuer and an underwriter

Answer 3

C. In general, persons who represent issuers of exempt securities are not agents. Exempt securities include commercial paper that matures in nine months or less, choice (a), and municipal securities, choice (b). Someone who represents an issuer in certain exempt transactions is also NOT an agent. Transactions between issuers and underwriters, choice (d), are exempt transactions.

Question 4

According to the Uniform Securities Act, the term sale means:
I. Any attempt to dispose of a security
II. A solicitation of an offer to buy
III. Any contract to dispose of a security for value

Answer 4

III only. The term sale means every contract to sell or disposition of a security or interest in a security for value. Included in the above would be a gift of assessable stock or any security given or delivered with, or as a bonus with, any purchase of securities. Attempting to dispose of a security for value or a solicitation to buy or sell a security would be considered an offer, not a sale.

Question 5

A Canadian agent has many clients who visit the United States for extended periods. In order to continue to service these accounts while these clients are in the United States, the agent must:
A. Register with the SEC under NAFTA
B. Register with the relevant states
C. Become associated with a U.S. registered broker-dealer
D. Open an office in the states in which these clients are temporarily residing

Answer 5

B. A Canadian agent, who wishes to continue to service the accounts of clients who are visiting the United States, must register with the states where these clients are staying. The agent’s broker-dealer must also register. Both broker-dealers and agents who are registered properly in Canada may take advantage of the limited registration provisions available to Canadian broker-dealers and agents under the Uniform Securities Act.

Question 6

An order ticket does NOT need to include which of the following pieces of information when it is created?
A. The account number
B. The time of receipt
C. The time of execution
D. Whether the order was solicited or unsolicited

Answer 6

C. An order ticket must include the number of the account for which the order was taken, choice (a). It must also include the time the order was received from the client, choice (b), and whether the order was solicited or unsolicited, choice (d). The ticket does not need to include the time of execution when it is first created. (That information will be added later unless the order is not executed for some reason.)

Question 7

All of the following items should be included on a customer’s order ticket, EXCEPT:
A. The terms and conditions of the order
B. The identity of the registered principal who preapproved the order
C. The identity of the registered representative assigned to the account
D. The time the order was entered

Answer 7

B. An order ticket must include the terms and conditions under which the order is submitted—is it a limit order or a market order? It must also state the identity of the registered representative assigned to the account (if any) and the time the order was entered. An order does not need to be preapproved by a registered principal. A principal must review all orders after they are executed, usually by the end of the day.

Question 8

A customer’s sole investment objective is income. The agent, who has discretionary authority over the account, buys large-cap stocks and sells some of the shares every two weeks, which generates income for the client and commissions for the agent. What is the main issue with the agent’s actions?
A. Abuse of discretion
B. Churning
C. Making unsuitable recommendations
D. Front-running

Answer 8

C. The agent has written discretionary authority over the account. This means that he has permission to buy and sell securities on the client’s behalf without asking the client to approve these transactions. By purchasing and later selling stocks, the agent has not necessarily abused this authority, choice (a). If he had taken securities or money out of the account, this would be a clear abuse of discretion. Large-cap stocks are not a suitable investment for someone whose only investment objective is income. The agent should have purchased fixed-income securities (bonds) or perhaps preferred stocks for the account. Large-cap stocks would be an appropriate choice for an investor who was seeking capital growth. The agent has clearly violated his suitability obligations, making choice (c) the best answer. Arguably, the agent has also churned the account, choice (b), by selling a portion of these securities every two weeks and generating commissions for himself. However, choice (c) is the best answer since the purchase was unsuitable in the first place. Also, stocks are long-term investments. Buying them and selling some of them every two weeks is not a good strategy for this customer—there are better, more cost-effective ways to produce income for the client.

Question 9

An individual is applying for registration as an agent. The applicant filed for bankruptcy nine years ago. Additionally, the applicant’s home is currently in foreclosure and there’s a tax lien on the property. Which of these issues is the applicant required to disclose?
A. Only the bankruptcy
B. Only the tax lien
C. None of the events need to be disclosed
D. The bankruptcy and tax lien, but not the foreclosure

Answer 9

All applicants for registration must disclose on Form U4 any personal bankruptcies or bankruptcies of entities that they controlled if any of these bankruptcies occurred within the last 10 years. Applicants must also disclose all unsatisfied judgments and tax liens. The foreclosure proceedings are not required to be disclosed on Form U4. The applicant is not required to disclose the bankruptcy if it had occurred more than 10 years ago. The responsibility to disclose these financial events continues as long as a person is registered. A bankruptcy, tax lien, or unsatisfied judgment must be disclosed within 30 days after it occurs.

Question 10

An agent overhears a colleague saying that the firm has just received a large block order to buy ABCD from an institution. The agent immediately buys ABCD for several client accounts. This is an example of:
A. Unauthorized trading
B. Insider trading
C. Front-running
D. Selling away

Answer 10

The agent has committed front-running. Front-running occurs when an agent places trades based on the knowledge of a pending client order that will affect the price of the security. Front-running is similar to insider trading, choice (b). In both cases, the agent is acting on confidential information. However, front-running specifically relates to situations in which the agent has insider knowledge about a pending order. Insider trading may involve trading on many different types of confidential information, such as earnings releases, mergers and acquisitions, or other corporate events that will affect stock prices.

Question 11

An investment adviser representative advises a client in a low income tax bracket to purchase municipal securities. Which of the following statements best describes this action?
A. The advice by the representative is unethical
B. Advice concerning tax-free securities is excluded from the provisions of the Investment Advisers Act of 1940
C. The action constitutes fraud
D. The Administrator has no jurisdiction over municipal securities unless the securities are out-of-state bonds

Answer 11

A. The action taken by the representative is unethical rather than fraudulent. Municipal securities provide federally exempt interest income. This is advantageous to individuals in higher tax brackets. Recommending the security to an individual in a lower tax bracket is not suitable. There is no indication that an intent to deceive the client was employed, therefore, an assertion of fraud is inappropriate.

Question 12

An investment adviser has an office next door to a broker-dealer. The adviser directs client transactions to the broker-dealer for execution. In exchange, the broker-dealer rebates 10% of the commissions that it receives to the adviser. This practice is:
A. Prohibited under the Uniform Securities Act
B. An irreconcilable conflict of interest
C. A conflict of interest that must be disclosed to clients in writing
D. An acceptable practice, provided that the broker-dealer is registered as a solicitor

Question 13

Which of the following statements is TRUE regarding a broker-dealer’s use of digital and electronic communication?
A. Correspondence must be sent electronically.
B. Electronic communications are not subject to recordkeeping requirements.
C. Trade confirmations may be sent electronically or by mail.
D. Electronic communications must be kept for five years.

Answer 13

C. Broker-dealers are permitted to send trade confirmations and customer statements either electronically or through the mail. Both physical and electronic communication must be kept by a broker-dealer for three years. On the other hand, investment advisers keep records for five years. Correspondence can be sent electronically or through physical mail.

Question 14

Which of the following products are defined as securities according to the Uniform Securities Act?
I. ADRs
II. REITs
III. Endowment policies
IV. Interests in oil and gas drilling programs

Answer 14

I, II, and IV. ADRs, REITs (real estate investment trusts), and interests in oil and gas drilling programs (or other investment programs that involve the extraction of mineral resources) are all securities according to the Uniform Securities Act (USA). Endowment policies and traditional insurance policies are not defined as securities.

Question 15

Which of the following would be a violation of the Uniform Securities Act?
I. Buying and selling the same stock on the same day on different exchanges
II. Offering shares of an unregistered nonexempt security to exactly 14 clients
III. Offering a Canadian Government bond to a resident of a state in which the agent is not registered

Answer 15

II and III. It is a violation of the Act to offer unregistered nonexempt securities to one client, let alone fourteen. Also, the sale of exempt securities in a state does not exempt the agent from being registered in that state.

Question 16

Under the Uniform Securities Act, which of the following constitutes grounds to warrant the issuance of an injunction restraining the sale of securities?
I. The failure to make a required report regarding securities
II. The making of false, fraudulent, or misleading representations
III. The failure to disclose the speculative nature of securities offered

Answer 16

I, II, and III. All of the activities listed would warrant the issuance of an injunction by the appropriate court restraining the sale of securities

Question 17

According to the Uniform Securities Act, the application process for an investment adviser may include:
A. Meeting a capital requirement equal to at least 2% of the assets managed
B. Filing contracts with the Administrator
C. Making a daily determination of the value of each account
D. Posting a notice in a newspaper that the adviser is an applicant for registration

Answer 17

D

Question 18

An agent opens a new account. The client refuses to answer most of the financial and suitability questions in the New Account Document, checking only the boxes that indicate a conservative risk tolerance and an investment objective of capital appreciation. According to NASAA’s Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents, the agent may recommend which securities for the account?
A. A variable annuity
B. A conservative growth fund
C. A hedge fund
D. None

Answer 18

B. According to the North American Securities Administrators Association (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may recommend only securities that are suitable for a client, given the client’s investment objectives, financial situation and needs, plus any other relevant information of which the agent is aware. In this scenario the agent’s job is complicated by the client’s refusal to provide all of the requested suitability information. The agent may recommend investments that are suitable based on the information that the client did provide. Thus, a conservative growth fund, choice (b), would be an appropriate recommendation since it seems to meet the client’s conservative risk tolerance and investment objective of capital appreciation. A variable annuity, choice (a), might also meet this client’s risk tolerance and investment objective, depending on how the subaccounts are invested. However, we do not know if the client will need access to his funds in the next five to seven years. Variable annuities often impose surrender charges during these years that effectively limit investors’ liquidity.

Question 19

Which of the following fee structures is NOT permitted for broker-dealers that offer investment advisory services to retail customers?
A. Commissions for each trade and a separate fee for each research report sent to the customer
B. A fee based on a percentage of the profits of the account
C. An initial set-up fee, a fee based on the assets under management, and commissions for each trade
D. Commissions and service charges

Answer 19

B

Question 20

An issuer is going to sell a federal covered security in State A. The Administrator of State A may ask the issuer to do all of the following, EXCEPT:
A. File a Consent to Service of Process
B. Provide copies of all documents filed with the SEC
C. Furnish additional information that was not required by the SEC
D. Pay a filing fee

Answer 20

C. The National Securities Markets Improvement Act (NSMIA) places limits on states’ power to regulate federal covered securities. Generally, states may not require an issuer of a federal covered security to furnish more information than the SEC requires, choice (c). State securities Administrators may require certain issuers to Notice File, which includes filing a Consent to Service of Process and all the documents that have been filed with the SEC, choices (a) and (b). The states may also require the issuers of certain federal covered securities to pay filing fees, choice (d). Securities listed on a national exchange, such as the NYSE or Nasdaq, are exempt from Notice Filing, however, states retain the right to investigate all issuers that sell securities within their states and reserve the right to bring enforcement actions against any violators.

Question 21

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. Begin contacting clients in State Y immediately since the agent has the approval of the broker-dealer
B. Refrain from soliciting retail clients in State Y until the agent and the broker-dealer are registered in State Y
C. 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
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 21

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 exception 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. The agent loses this exemption once he begins to solicit retail clients in State Y. Both the broker-dealer and the agent need to register in State Y before the agent may begin soliciting retail clients in that state.

Question 22

Under the Uniform Securities Act, which of the following would NOT be considered an offer?
I. Pledging securities to collateralize a loan
II. A tombstone advertisement
III. A sale of securities for value

Answer 22

I, II, and III. An offer is defined as an attempt to dispose of securities for consideration or value. Pledging stock is not a permanent disposition of shares. A tombstone does not constitute an offer, which can be made only by a prospectus. A sale is the culmination of the offer and completes the transaction.

Question 23

The Administrator in State A is investigating potentially fraudulent activities by a broker-dealer that’s registered in every state. The Administrator in State A wants to inspect records of the broker-dealer in State B. Which of the following statements regarding the inspection by the Administrator of State A is TRUE?
A. It may issue a subpoena, but only for records of clients who reside in State
B. It must coordinate its investigation with the Administrator of State B.
C. It may issue a subpoena, but only for records of transactions that are made by agents who are registered in State A.
D. It may independently subpoena all records

Answer 23

D.

Question 24

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 must register in State B
B. The investment adviser representative 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 24

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 25

A client experiences depreciation in the value of a security that was recommended by her agent. If the agent refunds the commission to the client, what’s the violation?
A. Selling away
B. Lending money to a customer
C. Churning
D. Sharing in a loss

Answer 25

D.

Question 26

According to the Uniform Securities Act of 1956, under which of the following circumstances is a registration statement NOT required to be filed for a promissory note?
A. It’s issued in maximum denominations of $50,000.
B. It’s secured by common or preferred stock of the issuer.
C. It’s payable in cash no more than nine months after its issuance.
D. It must have received the highest credit rating that’s assigned by a nationally recognized statistical rating organization (NRSRO).

Answer 26

C.

Question 27

In which of the following situations does the registration of a broker-dealer result in an Administrator automatically registering an individual of the firm as an agent?
A. The individual is an attorney who represents the firm
B. The individual is a director of the broker-dealer and is actively engaged in the business of the firm
C. The individual is an agent of the broker-dealer and is registered in another state
D. The individual had been previously employed by the broker-dealer

Answer 27

B. The registration of a broker-dealer in a state will automatically constitute the registration of an individual as an agent if this person is actively engaged in the business of the firm and is a partner, director, officer, or occupies a similar status.

Question 28

Under the Uniform Securities Act, which TWO of the following practices are prohibited?
I. Accepting orders from a client’s brother with written, third-party authorization
II. Recommending securities without regard for the client’s financial resources
III. Quoting a price that is marked up from the current offering price
IV. Crediting a portion of mutual fund’s sales load back to a client’s account

Answer 28

II and IV. Under USA, recommending securities w/o considering a client’s resources or rebating commissions are considered prohibited practices. It’s acceptable to take an order from someone w/ written, 3rd party authorization. Quoting a price that includes a markup is an acceptable practice.

Question 29

An agent of a broker-dealer recommends that a client purchase stock worth $10,000. The client agrees and the trade is executed. Two days later, the client tells the agent that he cannot pay for the stock. Which of the following statements is TRUE?
A. The agent may have violated antifraud provisions of the Uniform Securities Act by recommending transactions beyond the client’s ability to pay
B. Since the agent accepted the client’s order, the broker-dealer is obligated to lend the client the funds necessary to pay for the transaction
C. Once the client accepts the agent’s recommendation, the client cannot later claim the transaction was unsuitable
D. This situation cannot occur since the client must pay for the stock before the trade is executed

Answer 29

A. An agent must always have reasonable grounds for recommending a particular security. The recommendation must not only take into account the security, but also the financial condition of the client. An agent may not recommend transactions that are excessive in size in relation to the client’s financial resources.

Question 30

A brokerage firm that operates on the premises of a bank must do all of the following, EXCEPT:
A. Locate its activities in a separate area if possible
B. Conspicuously display its name in the area where it conducts business
C. Make sure its services are easily distinguished from the services provided by the bank
D. Disclose that it is a member of both FINRA and the FDIC

Answer 30

D. A brokerage firm would be a member of FINRA, but not the FDIC. The firm must do all of the things listed in the other choices.

Question 31

A broker-dealer is registered in State A. Which TWO of the following statements are TRUE regarding the examination of that broker-dealer’s records by the Administrator of State A?
I. The Administrator may examine the broker-dealer’s records even if they are located in State B
II. If the records are located in State B, the Administrator of State A must obtain the consent of the Administrator of State B to examine the records
III. The Administrator may examine the broker-dealer’s records under any circumstances
IV. The Administrator may examine the broker-dealer’s records with good reason

Answer 31

I and IV. The Administrator may examine the broker-dealer’s records even if they are located in another state. Cooperation from the Administrator of the other state is not required. Although the Administrator’s inspections may be unannounced, such examinations must be reasonable.

Question 32

According to the Uniform Securities Act, a security is said to be guaranteed as to:
I. Prevention of investment loss
II. Interest
III. Dividends
IV. Principal

Answer 32

II, III, and IV. Under the Uniform Securities Act, by definition, the term guaranteed refers to a security for which payment of dividends, interest, and principal are guaranteed. For example, the U.S. Treasury guarantees the interest on the bonds it issues. A utility can also guarantee payments of dividends on its securities, though, of course, if the utility goes bankrupt, the guarantee does not mean much. This is a definitional term only. Do not confuse this with guaranteeing a customer profits or something similar.

Question 33

An agent can split commissions with:
A. An agent from a different BD who has provided services to the customer
B. No other person
C. Another agent from her BD who has not provided services to the customer
D. An unregistered employee of her BD

Answer 33

C. Agents of a broker-dealer can split commissions with other agents of the same broker-dealer; however, both agents must be registered in the state in which the customer resides. Unregistered employees cannot receive commissions resulting from brokerage trades under any circumstances.

Question 34

An agent of a broker-dealer is also employed as an investment adviser representative. A client asks the agent for assistance in placing the shares of his start-up company’s initial public offering (IPO). Under what conditions may the agent accept the client’s offer of commissions for completing the offering?
A. Only with the written permission and supervision of the broker-dealer
B. Only when the purchases are made by clients of another broker-dealer
C. Only if a separate set of books and records is used to track these trades independently from the trades of other clients
D. Only if disclosure is made to the clients that this investment will not appear on their statements

Answer 34

A. This is an allowable action provided written permission is obtained from the supervising broker-dealer and the transactions are recorded on the broker-dealer’s books and records. If the agent fails to notify her firm, it is considered selling away, which is an unethical and prohibited business practice.

Question 35

A broker-dealer wants to include an offering of securities through a private placement on its platform. Before offering the securities to its customers, what would fulfill the broker-dealer’s due diligence requirements?
A. Reviewing the prospectus that’s filed with the SEC
B. Conducting an independent review of the issuer and its management
C. Filing a due diligence document with the state Administrators so that they can approve the offering
D. Reading the offering memorandum that’s provided by the issuer

Answer 35

B. In order to offer and sell a private placement, broker-dealers need to review the issuer’s business and its finances. This process is referred to as performing due diligence. Since private placement offerings are exempt transactions, this information is not required to be filed with the SEC or Administrator(s). The offering memorandum should be reviewed, but it alone is not sufficient to satisfy the broker-dealer’s due diligence requirement.

Question 36

When is an investment adviser permitted to use a testimonial in its advertising?
A. When the person making the testimonial discloses his investment objectives and account performance.
B. When the testimonial is filed with the SEC or the state Administrator(s).
C. When the testimonial is created by a third party, its unedited, and the investment adviser maintains no control or influence over it.
D. When the person making the testimonial meets the definition of a qualified client.

Answer 36

C. IAs are permitted to use testimonials in their advertising as long as they’re not misleading. A testimonial that’s created by a 3rd party is acceptable if the investment adviser didn’t edit or promote it.

Question 37

Under the Uniform Securities Act, which of the following persons automatically becomes registered as an investment adviser representative when the investment adviser’s registration becomes effective?
A. Only individuals who have been IARs in another state
B. All officers, directors, and partners of the IA
C. Only those officers, directors, and partners w/ mgmt responsibilities
D. Any person who performs clerical service for the IA

Answer 37

C

Question 38

An investment adviser has created promotional material that will be sent to five institutional clients. The material promotes a stock that’s about to be listed on the Philadelphia Stock Exchange. Under the Uniform Securities Act, does the adviser’s promotional material need to be filed with the state Administrator?
A. Yes, because the advertisement is being sent to more than five investors.
B. Yes, because advisers must always file promotional material.
C. No, because the advertisement is not being disseminated publicly.
D. No, because the security in the advertisement is exempt from registration under the Uniform Securities Act.

Answer 38

D. The USA provides an exemption for filing advertisements related to securities that are either currently listed on an exchange or are approved to be listed on an exchange. Since the stock in this question is about to be listed on the Philadelphia Stock Exchange, the advertisement is not required to be filed with an Administrator.

Question 39

An agent’s recommendations have made a client a lot of money over the last two years. The client is so pleased that he tells the agent that she can keep 5% of any gains in his account from now on. Which of the following statements is TRUE?
A. This is acceptable as long as the broker-dealer and the client agree in writing
B. This is acceptable if the broker-dealer is also registered as an investment adviser
C. This is not acceptable unless the agent is also registered as an IAR
D. This is not acceptable since it is considered to be sharing in the client’s profits

Answer 39

D. Sharing in the profits and/or losses in a client’s account is generally not permitted. However, there’s an exception if the client and the agent have a joint account, the client and the broker-dealer consent to the arrangement in writing, and the profits and losses are shared in proportion to the capital that each person contributed to the account. Having the broker-dealer’s written agreement alone is insufficient. Under certain circumstances, an investment adviser may charge a performance fee, but the clients must be qualified. To be qualified, the client must have either $1.1 million managed by the IA or a net worth of $2.2 million.

Question 40

An order ticket must include all of the following information, EXCEPT:
A. The account for which the order was entered
B. The price and time at which it was executed
C. The time of entry
D. Authorization of a registered principal

Answer 40

D. An order ticket must include the client’s account number, the time and price at which the order was executed (to the extent feasible), and the time the order was entered. A registered principal is not required to approve all orders before they are executed but is required to review all orders afterward.

Question 41

Company A will be issuing securities and it hires Company B to assist in selling its securities. Since Company B’s employees will be receiving commissions, the employees of Company B are:
A. An agent of an issuer
B. An agent of a broker-dealer
C. An investment adviser representative
D. A BD

Answer 41

A. An issuer of securities may decide to market them directly to the public in a state and therefore not use a broker-dealer to distribute its securities to the public. The issuer can either use its own employees or hire a third party for the purpose of soliciting buyers. These individuals may be considered agents of the issuer, rather than agents of a broker-dealer. If the securities being issued are exempt or the transactions are exempt, then the individuals would not be defined as agents of an issuer.

Question 42

The Uniform Securities Act requires that an investment adviser deliver a written disclosure document to an advisory client or prospective advisory client. In which TWO of the following situations is the adviser NOT required to send this document to clients?
I. The firm advises only investment companies but does not send its brochure to them
II. The firm sends a newsletter to subscription clients who pay an annual fee of $120
III. The firm has no office in the state
IV. The firm advises only institutional investors

Answer 42

I and II. According to the USA Rule 203, an IA must give a client or prospective client a disclosure document (usually Form ADV Part 2) either 48 hours before or at the time of opening the account. Exceptions to this rule include an adviser whose clients are only investment companies or where the contract is for impersonal services for which the client pays a fee of less than $500. Please note, while an investment company is an institutional investor, not all institutional investors are investment companies. An investment adviser is required to provide the brochure to institutional investors other than investment companies. While there are many exemptions regarding institutional investors, this rule is NOT one of them.