Ch. 3 State Regulations Governing Broker-Dealers and Agents

Question 1

What is the first step of the registration of financial professionals?

Answer 1

General registration

Question 2

What is a consent to service of process?

Answer 2

Document that irrevocably appoints the Administrator as a registered person’s attorney for the service of legal papers

Question 3

When must a filing fee be paid for General Registration?

Answer 3

Initial registration + annually at renewal

Question 4

Heritage Securities, a California broker-dealer, purchased GST Investments, a small New York-based broker-dealer. Heritage completed the purchase of GST in March and will now operate as Heritage Investments. The new firm will have offices in California and New York. What are the requirements for Heritage Investments to operate as the successor firm for the remainder of the year?

Answer 4

Heritage Investments will be required to file a new application with the Administrator in California and New York. However, since Heritage Securities and GST Investments were properly registered, including having paid their filing fees, the successor firm (Heritage Investments) will not be required to pay another fee until its registration is required to be renewed.

Question 5

Is simply passing an examination sufficient for registration for a person?

Answer 5

No, must meet other requirements

Question 6

What is a surety bond?

Answer 6

insurance which is issued by a bonding company that agrees to pay the sum of money awarded by a court up to a certain amount.

Question 7

If a broker-dealer’s net capital or an investment adviser’s minimum financial requirement meets specified minimum amounts, is posting of a bond required?

Answer 7

No, net capital and an investment adviser’s minimum financial requirements

Question 8

LJ Securities has completed all of its requirements for registration as a broker-dealer and filed its application with the Administrator on May 1. Provided the Administrator doesn’t deny LJ’s application, when will it become effective?

Answer 8

LJ Securities’ registration becomes effective at noon on May 31 and will remain effective until December 31.

Question 9

What is the CRD?

Answer 9

Central Registration Depository. It is a computerized database that contains information about broker-dealers and their agents

Question 10

What is the IARD?

Answer 10

Investment Adviser Registration Depository (IARD) is also an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure of information

Question 11

For Net Capital for Broker-Dealers, can the state administrator set a level that exceeds requirement by SEC rules?

Answer 11

No, the administrator may not set a level that exceeds the requirement established by federal (SEC) rules

Question 12

All advertising, sales literature, and other written materials (prospectuses, pamphlets, circulars, form letters, etc.) intended for distribution to current or potential clients must be filed with ____

Answer 12

The administrator

Question 13

Unless otherwise indicated by the Administrator, advertising, correspondence, confirmations, and trade tickets are examples of records that must be preserved for _____ years

Answer 13

3 years

Question 14

A broker must be registered _____?

Answer 14

With the SEC and any state which it is defined as a Broker-Dealer

Question 15

Banks are excluded from ___ and ____ definitions

Answer 15

broker-dealer and investment advisor

Question 16

If a broker dealer has an office in a state, it must _____

Answer 16

register in that state

Question 17

If a broker-dealer doesn’t have an office in a state and its non-institutional clients don’t live in a state, then ____

Answer 17

Broker-dealer does not have to register in that state

Question 18

Rocksolid is a broker-dealer with its only office located in Wyoming, but it consistently engages in securities transactions with mutual fund managers in Colorado. If Rocksolid has not opened an office in Colorado and its only clients there are institutional investors, is it required to register as a broker-dealer in Colorado?

Answer 18

No. Under the Uniform Securities Act, Rocksolid is not considered a broker-dealer in Colorado because it has no place of business there and its clients are limited to institutional investors in Colorado.

Question 19

Rocksolid decides to expand and open a branch office in Colorado. It has yet to open accounts with non-institutional clients. Therefore, its only clients are institutional. Since Rocksolid has no retail clients in Colorado, is it required to register as a broker-dealer in Colorado?

Answer 19

Yes. Although Rock Solid has no retail clients in Colorado, it now has a place of business in Colorado and is required to register there.

Question 20

Younge Securities, a Michigan broker-dealer, has both institutional and retail clients. Grace, an existing retail client of the firm, is spending three weeks in Florida house-sitting for her best friend who’s traveling out of the country. If Younge Securities is not registered in Florida, will it be able to do business with Grace while she’s in Florida? Will the agent that assists Grace be required to register in Florida?

Answer 20

Since Grace is only in Florida temporarily, Younge Securities will not be required to register in Florida. In addition, Grace’s agent will not be required to register in Florida since Grace is not a resident of Florida.

Question 21

If asked to identify whether a firm is considered a broker-dealer in a state:
(1) Identify the activity in which the firm is involved
(2) Determine whether the firm has an office in the state
 If YES, the firm must register
 If NO, identify the type of client
− If all clients are institutional clients, the firm is NOT required to register.
− If one or more clients are retail clients who are residents of the state, then the firm must register.

Answer 21

If asked to identify whether a firm is considered a broker-dealer in a state:
(1) Identify the activity in which the firm is involved
(2) Determine whether the firm has an office in the state
 If YES, the firm must register
 If NO, identify the type of client
− If all clients are institutional clients, the firm is NOT required to register.
− If one or more clients are retail clients who are residents of the state, then the firm must register.

Question 22

Henry is the president of a newly formed company. In an effort to help his company raise capital, Henry has been publicly offering his company’s shares to friends and other potential investors. Is Henry an agent?

Answer 22

Yes. Since Henry is representing the issuer in the public offering of its stock, he’s considered an agent of the issuer (the company).

Question 23

The treasurer’s office of the city of Metropolis frequently issues municipal notes directly to large institutional investors. Mona, a Metropolis government employee, arranges these transactions. Is Mona considered an agent and required to register?

Answer 23

No. Although Mona is representing the issuer (Metropolis) in effecting transactions in securities, she’s not considered an agent because of the nature of the securities she’s selling (municipal notes).

Question 24

When an individual represents a broker-dealer in effecting securities transactions for compensation, that person (must or must not) be registered as an agent, even if the security is exempt from registration.

Answer 24

must

Question 25

any persons who are employed by a broker-dealer (must or don’t need to) be registered if they’re authorized to receive either solicited or unsolicited orders, open customer accounts, or service accounts.

Answer 25

must

Question 26

Norm and his broker-dealer are registered in New York. One of Norm’s New York clients is on a business trip and calls him from the airport in Kansas to place an order. Is Norm required to register in Kansas to be able to accept the order?

Answer 26

No. Since the client is only in Kansas temporarily, neither Norm nor his broker-dealer is required to be registered in Kansas.

Question 27

Al, Bob, and Charlene are the founders of a brokerage firm and were named senior officers when the company was formed. Al is responsible for handling the finances, but doesn’t participate in securities transactions in any way. Bob and Charlene are responsible for managing the brokerage business. Two years after the firm was founded, Elsie replaced Bob as a senior officer. In this situation, how do the rules regarding the registration of agents apply?

Answer 27

When the firm’s registration as a broker-dealer became effective, Bob and Charlene were automatically registered as agents. Al’s responsibilities didn’t involve effecting securities transactions, so he was not required to register as an agent. Since Elsie was not a partner, officer, or director at the time of the firm’s initial registration, she didn’t receive the benefit of automatic registration. Elsie was required to register and follow the same procedure as any other agent.

Question 28

Jim is an agent with a broker-dealer in Canada. Sally, one of Jim’s long-term clients, spends every winter in Florida. Both Jim and his broker-dealer are registered in a limited capacity in Florida since they have many senior clients who spend every winter there. Is Jim able to contact Sally about some new investment opportunities while she’s in Florida?

Sally is very excited about a new investment opportunity that Jim has just proposed and mentions it to her broker Kevin, who retired to Florida many years ago. If Kevin is interested, is Jim able to contact him?

Answer 28

Yes. Jim may contact Sally in Florida since she’s an existing client who is in the U.S. temporarily.

No. Jim may not contact Kevin since is not an existing client.

Question 29

Under Regulation T, customers who buy securities on margin must deposit ____% of the initial purchase price; however, brokerage firms (may or may not) have more stringent internal (house) rules.

Answer 29

50%

brokerage firms MAY have more stringent internal rules

Question 30

Mark recently joined a brokerage firm and is in the process of becoming registered as an agent. What information is he required to provide to the Administrator as part of his application?
(Choose all that apply.)
a. His name and address
b. Employment history
c. Educational history
d. Financial condition and history
e. Outside business activities
f. Having been charged or convicted for any felony
g. Having been charged or convicted for any misdemeanor

Answer 30

(A, B, D, E, F) In order to be registered as an agent, an applicant may be required to provide information including name, address, financial condition and history, and any felony charges or convictions. The applicant is not required to furnish information about all misdemeanor charges or convictions, only those involving a security or any aspect of the securities business.

Question 31

The sole proprietor of an investment adviser decides to close the business. Within weeks, several dissatisfied clients file a civil lawsuit alleging abuses in their accounts, but the owner cannot be located. Therefore, the clients serve the complaints on the Administrator. The clients sue the owner in court and receive a judgment. The owner reappears claiming the judgment is invalid since he was never notified of the suit. Which of the following statements is TRUE?

a. The judgment against the adviser is invalid since the owner never received proper notice of the lawsuit
b. The judgment is invalid since the adviser never mishandled the clients’ money
c. The judgment is valid since serving the Administrator is the legal equivalent of serving the firm
d. The judgment is valid unless the Administrator issues an order denying it within 30 days of the court’s decision

Answer 31

(C) When a firm initially registers, it’s also required to file a Consent to Service of Process. The document appoints the Administrator as attorney and allows him to receive civil complaints filed against the registrant.

Question 32

Tom has just been hired as an agent by CTS Brokerage, which is located in Illinois. Is he required to post a bond if he intends to be registered in the state?

a. Yes, but only if Tom becomes an IAR also.
b. Yes, if Tom has discretionary authority over clients’ accounts.
c. No, since Tom’s broker-dealer is bonded, he’s excluded from the requirement
d. No, agents are never required to post a bond.

Answer 32

(B) The Uniform Securities Act states that the Administrator may require a surety bond to be posted by broker-dealers, agents, and investment advisers if any of these securities professionals maintain custody of or discretionary authority over their clients’ funds and/or securities.

Question 33

A new broker-dealer that’s located in North Dakota files an application for registration on November 30. The North Dakota Administrator notifies the broker-dealer that its registration is effective as of December 24. When will the BD’s registration expire?

a. December 24 of next year
b. December 31 of the same year
c. December 31 of next year
d. November 30 of next year

Answer 33

(B) All registrations for investment advisers, broker-dealers, agents, and investment adviser representatives expire on December 31 of the same year and need to be renewed to remain in force.

Question 34

Which of the following choices is considered a broker-dealer?

a. ABC Corporation when it issues ABC stock
b. Elaine, an employee of ABC Brokerage, who specializes in selling government bonds
c. Fifth Bank, which buys corporate bonds for trust account clients
d. PQR Company, which sells only mutual funds to individual investors

Answer 34

(D) A broker-dealer is any person in the business of effecting transactions in securities for its own account or the accounts of others. However, the definition does NOT include issuers, choice (a), agents of broker-dealers, choice (b), or banks, choice (c). PQR Company, choice (d) is a broker-dealer since it’s effecting transactions in securities.

Question 35

Sandstone Brokerage currently has a single office located in Arizona. Sandstone is in the process of opening an office in New Mexico, where it will serve only banks and other institutional customers. Is Sandstone required to register as a broker-dealer in New Mexico?

a. Yes, since Sandstone will have a place of business in New Mexico.
b. Yes, since Sandstone has institutional customers in New Mexico.
c. No, since Sandstone is properly registered in Arizona, it will not need to register in New Mexico.
d. No, since Sandstone is only doing business with institutional customers in New Mexico

Answer 35

(A) Sandstone is in the business of effecting securities transactions for others, so it’s generally considered a broker-dealer and needs to register with the state unless an exception to the definition applies. One exception applies to firms that transact business only with issuers, other broker-dealers, financial institutions, or institutional buyers. However, for this exception to apply, the firm may NOT have an office in the state. Once Sandstone has an office in New Mexico, it’s considered a broker-dealer at the time it starts transacting securities business for others, even if those investors are institutions only.

Question 36

Lloyd is in the process of registering as an agent with a broker-dealer. Just this morning, he passed his regulatory examination and received a printout confirming his passing score. Is Lloyd allowed to begin soliciting client business as soon as he returns to the office?

a. Yes, since Lloyd has qualified by examination, he’s able to solicit clients immediately.
b. Yes, since Lloyd’s broker-dealer is properly registered, he’s able to solicit clients once his compliance officer gives him permission.
c. No, Lloyd is still required to file an application with the state Administrator and then wait for the Administrator to grant his registration before he may solicit clients.
d. No, Lloyd is required to pass a special examination before he may begin soliciting clients.

Answer 36

(C) Passing the exam is only one part of the registration process. His registration will still need to be granted by the Administrator before he’s able to act as an agent.

Question 37

A broker-dealer has offices in every state in the United States. Edward is an agent with the broker-dealer and is presently registered in five of these states. One of Edward’s clients informs him that he’s being relocated by his company. In order for Edward to continue to work with his client after he has moved:

a. Edward must register in the new state and receive verification from the state Administrator that the registration is effective before conducting any new business.
b. Edward is permitted to transact business in the new state for 30 days without becoming registered in the state.
c. Edward is only required to file a Consent to Service of Process with the state.
d. Edward should register in the state, and is generally able to conduct business for 60 days before the state declares his registration effective.

Answer 37

(D) Under the Uniform Securities Act, an agent may transact business in a state that he’s not currently registered in under certain circumstances. The employing broker-dealer must be registered in the state and the individual must be registered in at least one other state. Upon learning of the relocation of the customer, the agent should immediately notify his broker-dealer and file the relevant documentation with the new state. Under the law, the agent is permitted to conduct business in the state for 60 days prior to his registration becoming effective.

Question 38

The limited registration provision available to Canadian broker-dealers conducting business in a state permits a broker-dealer to:

a. Solicit all residents of a state
b. Transact business with existing clients who move to a state
c. Transact business with Canadian residents with whom the broker-dealer had an existing relationship
d. Transact business with institutional investors only

Answer 38

(C) The provisions allowing Canadian broker-dealers to transact business in a state are limited. A broker-dealer may effect transactions with a person from Canada who’s temporarily in the state if there was an existing broker-dealer/client relationship prior to the client’s visit to the United States.

Question 39

Which of the following statements is NOT TRUE concerning the limited registration status of Canadian broker-dealers?

a. They’re exempt from the antifraud provisions of the Uniform Securities Act.
b. They’re exempt from net capital requirements.
c. They’re required to pay a filing fee.
d. They’re required to file a Consent to Service of Process.

Answer 39

(A) The Uniform Securities Act includes a section concerning rules governing the limited registration of Canadian broker-dealers and their agents. It allows broker-dealers and agents properly registered in Canada, with no place of business in a state, to be exempt from certain provisions of the Uniform Securities Act. However, no person, either foreign or domestic, who’s engaged in a securities or advisory business is exempt from the antifraud provisions of the Act.

Question 40

An order ticket must include all of the following information, EXCEPT:

a. The account number
b. The terms and conditions of the order
c. The time of execution
d. The expected confirmation date

Answer 40

(D) An order ticket must include the client’s account number, the terms and conditions of the order, and the time and price at which the order was executed (to the extent feasible).