Chapter 4: Laws, Regulations and Guidelines

Question 1

What is purpose of Uniform Securities Act

Answer 1

1) Prohibit fraudulent activities,
2) register broker dealers, agents, investment advisors and securities,
3) make uniform (enforce) the law relating to above

Question 2

In whose authority does the act give powers to enforce

Answer 2

State [ Administrator ] has power to enforce by issuing orders to suspend, or revoke license and to sell or stop a security or cease and desist investment advisory in anticipation of and upon violation;

They do not have power to issue injunctions, impose criminal penalties, fines or make arrests - This must be done thru Attorney General of state and court ruling

Question 3

What is contumacy

Answer 3

Failure or refusal to recognize authority of Administrator or cooperate with with any administrative investigation or hearing

Question 4

What are non - punitive orders

Answer 4

• Withdrawal: no longer practicing in state
• Cancellation; death, out of business, mentally incompetent, missing

initiated by individual or firm, except to escape disciplinary action, up to 1yr following

Question 5

What are criminal penalties for willful violations, statute of limitations and parameters for being liable for a willful violation

Answer 5

3 yrs in prison, $5,000 fine or both per violation

Statute of limitations is 5 years from date of alleged violation

Liability is “attached” when individual or firm knew what they were doing and did it anyway, not that they had to know it was against the law

Question 6

What are civil penalties for willful violations, statute of limitations and parameters for being liable for a willful violation

Answer 6

Sue for recovery (Order of discorgement) of (1) price paid for investment or advice, (2) plus interest, (3) plus court/attorney fees, (4) Minus any income received on the security and for advisor, any losses incurred as a result of advice

Statute of limitations is 2 years from discovery of violation (as well as if buyer knows about issue less than 24 mo) or 3 years from date of alleged violation whichever comes first

Liability can pass to estate if defendant passes or to plaintiff estate to file suit if either occurs before statute of limitations

Question 7

What are exceptions to penalties for ignorance of the law

Answer 7

If successfully can prove actions were not intended or expected to violate law, then may avoid imprisonment, but ignorance of law still will be fined

Question 8

What is offer of rescission

Answer 8

In case of unregistered security, offer by issuer/seller to buy back the security with interest from the buyer, who has 30 days to accept ,otherwise they forgo right to sue and recover costs

Question 9

How is a security defined under Uniform Securities Act and Howey Decision

Answer 9

It is not a fixed annuity or whole/term/universal life or forward or endowment policy

It is notes, stocks, bonds treasury stock, warrants, rights, options, commodity futures (not forwards), variable annuity or life insurance..or any other vehicle such as investment contract (Howey Decision) which is an
- investment of money
- with expectation of profits from
- a common enterprise
- which depends solely on efforts of a 3rd party

(ie…selling partnership rights is security, but giving share of LLC to a managing member is not)

Question 10

What are the different ways of registering securities under Securities Act of 1933

Answer 10

Registration by Coordination - first register securities with SEC and then coordinate process with states where they will be offered for sale; Primarily used for small company: Effective date will be set by SEC once the following are met: (1) no stop order in effect, (2) registration on file for at least 10 days (3) Max and min offering price and max underwriters commissions/discount on file for 2 bus days

Registration by Filing - first register securities with SEC and then if meet qualifications, becomes effective at 3pm EST of the second day after filing the registration statement with Administrator; To qualify,
1) If issuer in business for 5 yrs: no default of P/I or Preferred Dividend within 3 preceding fiscal yrs AND during same time had average net earnings of 5% of max offering price or market price, within last 30 days of filing, whichever is higher
2) If not in business for 5 yrs, 2 fiscal years of balance sheet and summary of earnings with as of date within 4 mo of filing,
3) will require documentation supporting this method, info on issuer, seller, security

Registration by Qualification - first register securities with SEC and then must contain a number of requirements as noted under Registration by Filing plus many more covering owners, directors and 10%+ shareholders and copies of all offering literature.

Anyone can file under Qualification but it is the most arduous as it is only one that requires a specific response from Administrator as the others become effective following release time/effective date set by SEC

Question 11

Under what primary situations can an Administrator issue stop order on a security?

Answer 11

• Incomplete, false, misleading or in-eligible registration
• Violation of Uniform Securities Act
• Active Federal or State stop order
• Illegal business practices, including fraud
• Unreasonable underwriter compensation or promoter profits
• Failure to comply with registration by coordination requirements
• Filing fees not paid

Question 12

What are Exempt Securities

Answer 12

Federal or agency securities governed by other Federal laws and jurisdictions outside of state that are not required to be registered with Administrator such as
- Treasuries
- Munis
- Foreign securities
- Banks, S/L, Trusts, Credit Union, Insurance company securities
- Common carrier, railroad, telecom, public utility securities
- Federal covered security:
- Non profit securities
- Promisory notes above $50k, rated in top 3 credit tiers and maturing 9 mo(270 days) or less
- Pension/employee benefit investment contracts

Question 13

What is a Federal Covered Security

Answer 13

Security exempt from registering with States, since covered at Federal level only by National Security Improvement Act of 1996 (NSMIA) and includes:
- Securities on NYSE, ASE, NASDAQ or any other national securities exchange with like standards
- Senior or equal securities of same issuer on national securities exchange (ie…preferred stock, bonds of common stock)
- Investment company securities under Investment Act of 1940-open/closed end funds, UITs, ETFs, Variable Contracts
- Sales to Qualified Purchasers as determined by SEC

Note: Exemptions apply only to registration, not fraudulent activities; If investment is security then can be liable for securities fraud, but NOT securities fraud if non security (ie..fixed income annuity would be State Insurance Commissioner)

Question 14

List out common exempt transactions and why exempt

Answer 14

Exempt from filing under the Uniform Securities act since transactions are covered by other regulations or no registration is required:
- Any sale or offer to investment company, bank, S&L, trust, insurance, pension, profit sharing, broker dealer, institutional buyer
- Private placement (max 10 non institutions buyers offered in state per 12 mo period, held for investment purposes only and no commissions paid
- Transactions between:
-Issuers and underwriters
-Fiduciaries: executors, admins, marshalls, .
- Unsolicited non issuers by broker dealers
- Pledges and offerings of pre-org certificates
- Pre registration offers and mortgage/real estate secured bonds of a security registered or filed under Uniform Securities Act
- Claims by early stage start up to offer shares to specific VC investors

Question 15

For purposes of committing fraud, what is an offer and sale

Answer 15

Every attempt or offer to dispose, or solicitation to buy or contract to sell or dispose a security or interest in a security of value

Question 16

Name common transactions not considered an offer of security

Answer 16

• Pledge or loan of a security (since not offered for sale)
• Stock dividend (not a sale event since just diluting market price with equivalent shares)
• Merger, consolidation, reclassification of stock, or sale of corporate assets (to just create 1 entity)
• Reorganization, bankruptcy actions (to address creditors, not sell to acquire new investment capital)

Question 17

How long must records of client purchase and sales history as well as client securities positions be maintained for Investment Advisors actively managing client assets

Answer 17

5 years from end of fiscal year during which the last entry was made and for first two years in advisors principal office. Accurate recordkeeping is critical requirement and oversight focus of state administrators and NASAA, which includes
- All business operations transactions
- All written communication with clients on investment advice and trades
- All trades and journals of client account activity and balances
- All client agreements and any POA
- All info and investment policies for employees
- Copies of all regulatory filings and disclosure documentation
-Physical and Cyber Security policies & procedures

Question 18

How is it determined which states have jurisdiction over offer or sale?

Answer 18

DOA - based on state where security was Directed or communicated to client, where the sale or offer Originated and state where it was Accepted; all other factors such as payment are irrelevant

Question 19

What is primary focus of Securities Act of 1933

Answer 19

1) Require investors receive financial and other significant info on initial public sale offer via preliminary prospectus - “red herring” and “tombstone ad” requiring min 20 day cooling off period (no selling or general advertising by underwriters) before offer to allow SEC to ensure…

2) Prohibit deceit, misrepresentation and other fraud in sale of securities

After which time SEC grants effective date following review of registration statement

Question 20

What is primary focus of Securities Act of 1934

Answer 20

1) Creation of SEC with broad powers over secondary securities market including registration, regulation, oversee broker dealers, transfer agents, clearing agencies and self regulating organizations (SROs) - NYSE,NASDAQ,CBO,FINRA

2) Prohibit deceit, misrepresentation, fraud and other inappropriate conduct in trading securities with disciplinary power

3) Empowers SEC to require periodic reporting from companies

After which time SEC grants effective date following review of registration statement

Question 21

What are primary objectives of Investment Company Act of 1940

Answer 21

1) Regulate the organization of companies that engage primarily in investing, reinvesting and trading in securities and whose own securities are offered to public

2) Requires disclosure of financial condition and investment policies as well as information about the fund, investment objectives, company structure and operations

3) Does not permit SEC to directly supervise investment decisions or activities of these companies

Question 22

What types of offering and regulations (Reg?) is exempt from Act of 1933?

Answer 22

Reg A offering of just small number of securities, sale to residents in only 1 state, and buyers must wait 9 mo to sell to other state residents. This would be regulated by state only and registered by qualification

Reg D private placement to accredited investors ($1M+ individuals and institutional investors in non public offering

Question 23

What are factors for registration to consider with crowd funding

Answer 23

Anyone can invest in crowdfunding, but investors are limited by their net worth and annual income then investment is limited to
- lesser of $2k or 5% of net worth, IF Net Worth
<$100k
- lesser of $100k or 10% of net worth, IF Net
Worth <$100k

Companies must use broker dealer or funding portal via SEC/FINRA, vs individual direct crowd funding efforts

Investors have up to 48hr prior to end of offer period to cancel commitment, otherwise locked in unless material error made in offering then additional 5 days to reconfirm commitment

Question 24

Contrast Broker-Dealer and agent with Registered Investment Advisor and IAR

Answer 24

Broker dealer is anyone in business of effecting transactions in securities for the account of others or his own. An agent is someone works for Broker Dealer and is compensation is based on executing securities

Investment Advisor is any person or entity such as corp or UIT (ie..legal “person”) whose compensation is based on giving investment advice related to securities or managing securities portfolios and can include financial planners, consultants to pension plans, advisors on hiring advisors, writers of market timing newsletter, Investment Mgmt Co portfolio managers or Internet Advisor Can not be someone dead, mentally incompetent or minor under age 21

Question 25

What are 3 key factors in determining if meet definition of Investment Advisor

Answer 25

1) Do they provide investment advice by helping someone to decide where and how to invest their portfolio of assets

2) Are they in the business of providing advise as part of organization objectives/mandate

3) Do they receive compensation, either directly or indirectly, hard or allowable soft dollars (research reports, custodial service, special software or any service that helps client as opposed to furniture, overhead, vacations, cell phones…)

Question 26

What authorizes the Administrator to receive legal papers on the applicants behalf in any non-criminal legal complaint as part of initial Investment Advisor application

Answer 26

Consent to Service of Process

Question 27

What are the different uses of ADV form

Answer 27

• Initial application via Investment Advisor Registry Depository (IARD) with SEC
• Initial application via Investment Advisor Registry Depository (IARD) with State Administrators
• Annual updating amendment
• Other than annual amendment to registration

Question 28

How are the 2 parts of ADV used

Answer 28

Part 1 is for regulators (SEC and State) and requires key organizational data to be reported upon initial and renewal registration

Part 2 is for advisors to document brochures and supplements with:
- 2A including disclosure brochure and an appendix covering wrap fees, while
- 2B provides disclosure on all advisory personnel/IARs who provide client advice which includes educational and industry background, to be reported at initial registration and updated whenever any change in disciplinary info or personnel change;
ADV Part 2 available annually to new and existing clients

ADV Part 3 is the Form CRS relationship summary disclosing how the firm and its employees are compensated, fees charged and any conflicts of interest from type of account or investment vehicles chosen

Question 29

What are key questions to assess competence of advisor who has custody of client funds and securities via direct or indirect access (per NASAA)

Answer 29

• Compliance with rules related to safeguarding assets
• Form ADV reflect advisor has custody
• Assets maintained in segregated accounts
  -Are required records maintained
• Itemized statement of account balance and activity given to client min every 3 mo
• Surprise audit of client assets conducted at least annually by independent accountant
• Any evidence of excessive or unauthorized trading, self dealing, preferential treatment or unsuitable recommendations or disclosures

Question 30

What is a solicitor and registration requirements

Answer 30

Solicitors are

Individuals or small firms that solicit business on behalf of Investment Advisor

They do not need to be registered with SEC or many states as long as advisor is and conditions are in place:
- Agreement between IA and solicitor spells out activities and comp
- Client is given advisors disclosure brochure and separate solicitor agreement
Advisor receives signed acknowledgement form from client noting receipt of both disclosures

Question 31

How are Notice Filings used and what qualifies IA for using them

Answer 31

For investment advisors not required to register with state but just with SEC, such as
- +100M AUM (over $110M must register)
- Advisor to Registered Investment Company
- Mid size ($25-100M AUM) to bus dev company
- Pension consultants to plans +$200M
- Required to register in 15+ states
- Internet IAs
-Affiliates if in same business location as SEC registered
- Advisors located in US Virgin Islands or outside US

they can file notice with states they have a place of business (for fee), as dictated under NSMIA

Question 32

How and what are conditions to withdraw registration with SEC

Answer 32

Use form ADV-W

6o day review period before effective so SEC can ensure no regulatory action for misleading or fraudulent reporting, felony or securities related misdemeanor in past 10 yrs, court order, violation of securities law, subject of SEC barring or suspending

Question 33

Who are exempt reporting advisors

Answer 33

IAs that under Dodd-Franklin with min of $100M AUM (or still above $90M if dropped below $100m from previous yr) that are exempt from registration but subject to filing certain reports and info with SEC as well as with some States

Question 34

What is wrap account

Answer 34

Account where all transaction costs are included in a fee based on assets under mgmt (AUM); Works better for actively traded portfolios where higher trading fees vs passively traded accounts with minimum trades and fees

Question 35

What are the 5 main items addressed in CRS Relationship Summary and key components of each (pg 366-369)

Answer 35

1) Introduction: Date, distinction of firm as BD, IA or both

2) Relationship and Services: listing of all brokerage and investment advisory services offered and any material limitations, addressing monitoring, investment authority, limited offerings and account minimum/other requirements

3) Fees, Costs, Conflicts and Standard of Conduct: detailing how fees are determined, any conflicts / legal obligations (as noted under Reg BI)

4) Disciplinary History: Directing client to online search tool on advisors/firms plus any criminal, civil securities related charges

5) Additional information: Location of more information on firm, services or individual and to request additional information

Question 36

Describe Regulation BI (pg 368)

Answer 36

Regulation Best Interest is SEC adopted guidance which outlines disclosure requirements and allowed parameters for
- dual registrants: firms which both execute trades as BD and provide advice as IA (employing both agents and IARs)
-dually licensed financial professionals: employee who is both an agent of BD and IAR of an affiliated investment advisor (ie..Series 6&65)

BDs and federal covered IAs serving retail investors must provide prospects and customers Form CRS relationship summary - ADV Part 3, to disclose how firm and employees are compensated, fees charges and any conflicts of interest that may arise based on type of account and investment vehicle

Question 37

What does eligible adults refer to related to BDs, IAs and IARs (pg 369

Answer 37

Adults vulnerable to financial exploitation such as individuals age 65+, and anyone coverd by state statutes (ie…mentally incompetent, illiterate)

Question 38

What is the role of NASAA (pg 373)

Answer 38

North American Securities Administrators Association - is org of US state and Canada provincial securities Administrators that keep the regulators on top of key issues and aligned when writing rules for their jurisdictions such as Rule 102(a) (4) -1 covering Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisors

Question 39

What is relationship of NASAA model rule and federal covered advisors (pg 379)

Answer 39

While IA, IA and FCR are all considered fiduciaries under rule, Federal Covered Advisors are covered only to extent conduct is fraudulent (allowing State Admins to sue FCR) as states have no other power over them, since NOT investment advisors under state law (but are under Federal law)

Question 40

What special compensation rules apply to qualified client (define) (pg 382-383)

Answer 40

A qualified client includes certain institutional clients and individuals with either $2M of net worth (excluding primary residence) or at least $1M of assets under adviser management.

For these clients in addition to AUM or hourly based comp, can also provide performance based compensation based on min 1 yr capital gains or asset appreciation against a specified benchmark - known as Fulcrum Fee - that are increased for over-performance and reduced for under-performance

Details and potential conflicts of interest must be detailed in disclosure agreement

Question 41

What is acting as a principal and requirements associated with it, including trades between client and seller (pg 385)

Answer 41

The adviser trades client securities with a related broker-dealer, which is allowed if the potential conflict of interest is disclosed and the clients written consent is given before the deal is completed

Question 42

What are common conflicts of interest that must be disclosed

Answer 42

• Acting as Principal: trading with related broker dealer
• Agency Cross Transactions: when advisor runs trade thru related broker dealer
• Additional Brokerage Comp: Soft dollar benefits that assist IA with client, NOT furniture, vacations, cell phones, salaries/overhead
• 12b-1 fees: commission to IA for selling and retaining investment co - mutual fund securities
• Personal Investment Holdings: IA owns same stock, expecially if thinly traded
• Trade Allocations (allocating specific cost basis to select clients on bunched trades or IPO allocations - cherry picking)

Question 43

What are special rules governing political contributions and conflicts of interest (pg 388-389)

Answer 43

No advisory services can be provided, coordinated or solicited to government official or PAC in exchange for contract to provide advisory services to government entity or for votes in areas where the firm or IAR/Agent is not eligible to vote.

For BDs who write muni securities, they are called Municipal Finance Professionals and can contribute up to $250 per elected official where eligible to vote for them, without triggering penalty of disallowing firm to do business with issuer for 2 yrs.

For covered associates, if eligible to vote for official can contribute up to $350 to campaign of the issuer candidate or $150 for candidate if covered associate is not entitled to vote

Question 44

When can guarantees be used and not used in disclosures to investors (pg 390)

Answer 44

Guarantees can not used, especially to imply IARs will cover losses ever, and can only be used when speaking about repayment of P&I on US Treasuries (but still must disclose interest rate and purchasing power risk) or any corp bonds or debt instruments where 3rd party promises to pay in case of default

Question 45

What are key rules around custody and how to avoid if receive unsolicited funds (pg 392)

Answer 45

Money held for customer or if advisor has access to funds or can directly deduct fees from funds must ensure the funds are
- maintained in separate accounts with regular account statements of funds or use qualified custodians (Banks, Registered Custodial BDs)
- Administrator is notified and required net worth, auditing and record keeping requirements are met
- Registration information with state/fed is updated
- Written authorization from customer

If want to avoid custody requirements, any money received should be forwarded to independent 3rd party or returned to sender within 3 business days and records are kept of actions

Question 46

Define Access Persons (pg 393)

Answer 46

Any individual able to easily see detailed portfolio activity and what portfolio managers are doing, requiring adherence to a written code of ethics

Question 47

What are the 5 functions covered under NASAA model of Investment Advisor Information Security and Privacy Rule (pg 397)

Answer 47

Identify - develop org capabilities to manage security risk to assets and systems

Protect - implement safeguards for critical infrastructure

Detect - develop and implement activities fo capture occurrences of security events

Respond - take appropriate action when a detected event occurs

Recover - establish and maintain plans for resilience and restoring services

Question 48

What is function of broker dealers and regulatory form requirements (pg 398)

Answer 48

BDs are in business of making transactions in securities for the account of others or for their own account

They must register and file with Form BD, providing similar firm overview of operations and details of associated persons via form U4 outlining any criminal or investment related illegal activity or charges

Question 49

How are net capital requirements for Broker Dealers set (pg 399)

Answer 49

Set by the SEC subject to limitations of Securities Exchange Act of 1934 which could over-ride the level established by state Administrators if not in alignment and are enforced by FINRA

Question 50

When is churning occuring vs inappropriate recommendations (pg 404)

Answer 50

Churning is excessive size and frequency of trading; If agent discusses ahead of time with client who agrees to all the trades this is still churning and can also be construed as unsuitable or in appropriate if does not fit client trade profile

Question 51

Distinguish written confirmation from time/price orders (pg 404) for Broker Dealers (as opposed to IAs)

Answer 51

Broker-Dealer/Agents must have name of security - company and quantity in written format from customer to initiate trade, or have written discretionary consent to avoid un-authorized transactions, whereas IA /IAR with written consent for account discretion can make individual trades without specific instructions

For BD, written consent and instructions must be signed and on file before actions can be taken relative to asset, action and quantity. Time and price are not major considerations such that “market not held” order is held until BD can get best price

Question 52

What is Money Laundering and associated 3 phases (pg 408)

Answer 52

Money laundering is process of taking illegal profits and transacting them thru legitimate means to avoid detection or proof of criminal activity.

3 phases are
1) Placement - funds placed into financial system or smuggled out of country

2) Layering - passing funds through multiple, complex (offshore shell company) transactions to disassociate dirty money

3) Integration - funds are processed thru the legitimate financial system undetected

Bank Secrecy Act - US Treasury requires and financial institution - BDs/IAs to report Suspicious Activity Reports (SARs) to Financial Crimes Enforcement Network (FinCEN)

Question 53

What is required of broker dealers (along with other financial institutions) for any cash transactions over $10k (pg 409)

Answer 53

Currency Transaction Report must be filed with FinCEN; or report min $5k if BD knows, suspects of has reason to suspect activity is illegal

Question 54

When must a Suspicious Activity Report need to be filed by a broker dealer (pg 409)

Answer 54

A transaction that falls within one of four classes:
- funds derived from illegal activity or is conducted to hide assets from illegal activity
- is designed to evade requirements of Bank Secrecy Act
- appears to serve no business or lawful purpose
- involves use of BD to facilitate criminal activity

Question 55

Who are corporate insiders and what are trading restrictions (pg 410)

Answer 55

Corporate officers, members of board of directors and anyone who owns 10% or more of common stock;

Are restricted under SEA of 1933 from:
- selling any shares held less than 1 yr
- trading without first filing Form 144 for proposed sale no later than time of sale
- sell max of 1% outstanding shares or most recent 4 week average trading volume over next 90 days

Question 56

What is regulation S-P and it purpose (pg 411)

Answer 56

To address abusive sharing of customer information SEC created Reg S-P that requires financial institution to provide notice of privacy policies and procedure as well as non disclosure of nonpublic personal information to nonaffiliated 3rd parties unless consumer has not elected to opt out of the disclosure, where consumer is prospect and customer is consumer with ongoing relationship with firm

Question 57

What are 4 elements of Identity Theft Protection Programs - ITPP (pg 413)

Answer 57

Identify relevant red flags for possible data breaches

Detect red flags and risks

Respond appropriately to red flags detected to prevent and mitigate identity theft

Update ITPP and red flags periodically to reflect changes in identify risks

Question 58

What is FACT Act and key provisions (pg 412)

Answer 58

Fair and Accurate Credit Transactions Act which allows consumers access to see and monitor their credit reports annually, requires Credit Agencies to identify and report possible existence of identity theft using FTC defied red flags rule and to require financial institutions such as BDs to properly maintain and dispose of personal financial information

Question 59

The Administrator must provide prior notice, an opportunity for a hearing, and written findings of fact and conclusions of law to the respondent before issuing which of the following?

cease & desist
suspension

Answer 59

suspension

orders to deny, suspend, or revoke only happen after what the question lists. These are AKA “stop orders.”

Question 60

The Securities Exchange Act of 1934 is NOT associated with which of the following- name each?

SEC
SRO
SIPC

Answer 60

SIPC

SIPC is securities insurance protection corp, protecting brokerage customers against missing assets due to broker-dealer failure. The Securities Exchange Act of 1934 created the SEC (securities exchange commission) and requires SROs (self regulating orgs) such as FINRA and NYSE to register.

Question 61

Investment advisers may not charge any client compensation based on a % of capital gains or appreciation.

True
False

Answer 61

False

advisers can only do this for qualified clients, including individuals with at least $1M under the adviser’s management.

Question 62

Based on the Howey Decision, which of the following meets the definition of an investment contract and, therefore, is a security?

a certificate granting the owner the right to breed one mare with a particular stud once per year

a certificate granting the owner a share of winnings from a racehorse

Answer 62

A certificate granting the owner a share of winnings from a racehorse

there has to be an expectation of profits to make it an investment contract. the other certificate is basically a rental contract.

Question 63

The National Securities Markets Improvement Act is rightly associated with which of the following?

notice filings

balance sheets

Answer 63

notice filings

NSMIA allows for exclusive SEC registration, but federal covered advisers and issuers of some federal covered securities are still required to notice file with the state securities Administrators.

Question 64

An additional offer of securities would be registered under which of the following?

Securities Act of 1933

Securities Exchange Act of 1934

Answer 64

Securities Act of 1933

offers of any new securities are registered under the Securities Act of 1933.

Question 65

A broker-dealer with a place of business in State A only would like to act as sole underwriter for an offer of common stock by a company located in State B. Therefore,

the broker-dealer must register in State B

the broker-dealer is exempt from State B’s registration requirements

Answer 65

the broker-dealer is exempt from State B’s registration requirements

broker-dealers who are not located in State B can execute transactions with the issuers of the securities involved without registration.

Question 66

In a primary offering when must an investor receive either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus?

no later than the due date for confirmation of the transaction

as soon as the customer expresses interest in subscribing to any part of the offering

Answer 66

no later than the due date for confirmation of the transaction

when the customer gives an indication of interest, the preliminary prospectus is sent.

Question 67

Under the Uniform Securities Act, the Administrator can issue which of the following?

injunctions
subpoenas

Answer 67

subpoenas

only a court can issue an injunction.

Question 68

Which of the following investment advisers will register with the Administrator of the state in which it maintains a place of business?

a portfolio manager with assets under management of $89 million

a sub-adviser to a registered investment company

Answer 68

a portfolio manager with assets under management of $89 million

the sub-adviser (or adviser) to a registered investment company is a federal covered adviser. (know list of Federal Covered Advisors)

Question 69

Which of the following is designed to protect corporate bondholders?

Trust Indenture Act of 1939
Investment Company Act of 1940

Answer 69

Trust Indenture Act of 1939

the Trust Indenture Act of 1939 is all about protecting bondholders. If a corporation wants to sell $5,000,000 or more worth of bonds that mature outside of one year, they have to do it under a contract or indenture with a trustee, who will enforce the terms of the indenture to the benefit of the bondholders.

Question 70

What are registration requirements of no longer employed agent of broker-dealer

Answer 70

Agent must be registered under similar rules as Broker-Dealer and is NOT in effect during any period the agent is not employed - associated with the broker dealer; Both BD and agent must notify Administrator, and if agent moving to new BD, Form U5 completed by prior BD and U4 on new firm, with agent filling out same and unable to practice until Administrator grants registration no later than noon of 30th day after filing

Question 71

What must be in place to cover potential losses when a firm(BD or IA) has custody over client assets

Answer 71

• Increase in Required minimum net worth/capital requirements as set by SEC (Administrator can require)
• Client signed documents authorizing custody
• Surety Bond up to $10k maintained per account

Question 72

What are requirements for registration of a successor firm

Answer 72

Application for successor firm my be filed, whether or not successor is yet in existence for the unexpired portion of the year without incurring additional filing fee

Question 73

What are dual registrants and determinants of registration

Answer 73

Individuals and orgs registering as both Broker Dealer and Investment Advisor; Administrator determines merit of firm operating as both and can block from operating as one or the other as needed

Question 74

Name some common financial institution exclusions to definition of Broker-Dealer under Uniform Securities Act

Answer 74

Agent
Issuer
Bank, Savings / Loan, Trust company

Question 75

Name common Broker Dealers that are BDs but are exempt from state registration requirements

Answer 75

BDs with no place of business in the state, can operate without registering in the state if involved in following securities transactions within state with:
- Issuers of securities
- other broker dealers
- banks, savings/loans, trust, insurance co.
- investment companies as defined in ICA-1940
- pension or profit sharing
- other financial institutions or institutional buyers

OR no Non Institutional (human) customers residing in the state.

Question 76

How is agent defined and what are registration requirements

Answer 76

Individual other than BD who represents BD or issuer in offering or trading in the purchase or sale of securities.

Registration is required if
(1)individual and/or BD have place of business in the state
(2) investors are individuals (vs institutions)

unless the security or the transaction is exempt (ie..represent US Treasury selling T-Bond or represent issuer of commercial paper in direct sale to pension fund)

Agents must be engaged in selling /buying (ie…Board Member or officer not trading is not agent) and need not register separately if included on U4 of registered BD

Question 77

How is IAR defined and what are registration requirements

Answer 77

Employees of IAs involved directly or indirectly with investing client assets or selling services of firm registered as IA

Registration is required if
(1)individual and/or BD have place of business in the state
(2) investors are individuals (vs institutions) and IAR has more than 5 clients in a state

Unless role is clerical or ministerial work for IA (ie..bookkeeper, receptionist)

Question 78

When must professionals in financially related functions (lawyers, accountants, teachers, newsletter or blog editors, broker dealer agents, ) register as investment advisor

Answer 78

When specific investment selection advice is being provided to client based on client situation that is not within scope of existing professional role (ie….BD agents only execute directed trades - security name and quantity), and not compensated for advice

Can also apply to financial publications and communications based on irregular communication triggered from market movements or signals as well as specific buy and sell positions to take

For electronic media or websites, if specific recommendations are made based on client specific input, then authors of report/website must register as IA

Federal Covered Advisors as defined under Investor Advisor Act of 1940 as IA therefore not defined under state securities law

Administrator has authority to name other individuals/entities outside scope of IA regs

Question 79

When must ADV Part 2 disclosure brochure be delivered to client

Answer 79

For state registered adviser, within 48 hrs of signing service contract or at time of signing IF customer has 5 days to cancel without penalty

Federal covered advisor (non state registered-Fed only) must provide brochure before or at time client signs advisory agreement

Brochure is not required if advice is impersonal (not specific to client) and costs less than $500

For existing clients, disclosure brochure must be delivered annually

Question 80

Distinguish registration from certification

Answer 80

Securities regulators only register professionals but do not certify to their competency whereas other independent orgs- CFP, CFA, CPA..) “certify” competency of professionals

Question 81

How is custody defined

Answer 81

When advisor has direct or indirect control of assets and when advisor can deduct mgmt fees direct from client account unless clients written permission is given and a billing statement explaining how fees determined is provided every time fees taken

Question 82

What are supervisory services

Answer 82

Ongoing relationship with client where advisor is monitoring account, oversees the investments and trades on account with discretion

Question 83

What are 3 main concerns for advisory contracts under Uniform Securities Act

Answer 83

Change in Assignment - advisor can not sell or transfer customer contract to 3rd party without consent

Change in Partnership Structure - Any change in partners must be communicated to all clients within reasonable time of occurrence; If in this change there is a change in primary or majority owner then change in Assignment would occur and client written agreement required

Compensation - advisors can not be compensated on basis of share of capital gain for appreciation performance unless agreed to in writing and basis specified, otherwise should be compensated hourly or by % AUM

Question 84

What are key requirements for IA advertising

Answer 84

• Factual, not contain misleading or inaccurate info
• Can not claim past performances are guarantee
• Can not extrapolate gains from less than 1 yr performance or apply not reflect portfolio gains against related benchmarks
• Software provided online that helps DIY, must disclose limitations, assumptions and difficulties with respect to use
• Free services must be free

Question 85

What are key requirements for IA use of social media

Answer 85

• Develop and implement written policies and procedures reviewed annually
• All communication must comply with securities law covering advertising, communication with clients, compliance, record-keeping and antifraud
• Monitor and provide guidelines for IAR activity in social media
• Solicited or directly written commentary or testimonials as well as direct compensation are not allowed for independent reviews….must be unsolicited, and no control over which comments are shown, including use of “likes” or noting who are clients

Question 86

What agreements must also be in place for Margin, 3rd Party and After Hours trading

Answer 86

Margin:
- Hypothecation: gives BDs authority to pledge customer margin securities as collateral to secure margin loan
-Credit: client gives loan consent that allows client’s securities to be used as part of lending program to short sellers
- Margin disclosure statement: outlining risks, firm rights and client responsibilities when trading on margin
- Options Disclosure: details specifics of trading in options with signed agreement initiating contract

3rd Party: Requires signed agreement for anyone (POA) acting on behalf of client

After Hours: Disclosure that must be provided to outline risks of:
- Lower liquidity
- Higher volatility
- Changing prices
- Unlinked markets
- Exaggerated effects of news announcements
- Wider spreads

Question 87

A broker-dealer needs written discretionary authorization over an account before accepting which of the following orally given orders from the customer?

purchase 100 shares of IBM this afternoon

purchase 155 shares of a technology stock today

purchase 300 shares of IBM today

purchase 100 shares of IBM at a good price today

Answer 87

purchase 155 shares of a technology stock today

if the firm/agent choose the stock or bond on behalf of the customer, they are using their discretion. On the other hand, if the customer tells them to buy or sell a certain number of shares, and only leaves time/price discretion with the firm, that does not require written discretionary authority.

Question 88

True or False: the CFA and CFP allow for an exemption from registration as an IAR

Answer 88

False

the CFA and CFP lead to a waiver of the Series 65 exam, but not an exemption from registration as an IAR

Question 89

How long must IAs keep client records?

Answer 89

Advisers have to keep records not just up to the point when they retire or go out of business; they keep records “in an easily accessible place for a period of five years from the end of the fiscal year during which the last entry was made and, for the first two years, the records must be maintained in the adviser’s principal office.”

Question 90

True of False:

It is prohibited for a broker-dealer to effect an opening transaction in a margin account before receiving a signed margin agreement from the customer

Answer 90

False:

for a broker-dealer (not an RIA) the discretion must be in writing and received BEFORE the first trade–the margin agreement must be signed promptly AFTER the first trade.

Question 91

Which of the following is an investment adviser representative (IAR) subject to registration in state A?

• a financial planner organized as a sole proprietorship with a place of business in State A
• an individual who uses the offices of a federal covered adviser in State A to merely sell the advisory services of the firm for compensation
• an IAR with a place of business in State B only but who now has 5 advisory clients resident in State A
• a securities agent who opens up a total financial planning business outside the scope of his employment with his broker-dealer

Answer 91

An individual who uses the offices of a federal covered adviser in State A to merely sell the advisory services of the firm for compensation
(place of business is State A, is an IAR even though Federal Covered Advisor is not an Investment Advisor - pg 328)

An RIA is not an IAR, and vice versa. (Financial Planner and securities agent setting up FP business is RIA)

The IAR in State B can have up to 5 clients who reside in State A without having to register, provided he is not soliciting in State A or holding himself out as if he were an adviser in State A.

Question 92

Under what circumstances and requirements would offer of rescission occur

Answer 92

Selling security into location where not registered

An offer of rescission will be sent to the investor on the issuer’s letterhead informing him that if he agrees, to sign the form and return it with any certificate or ownership evidence of the security and he’ll receive the purchase price plus the rate of interest used by the courts.

Question 93

Which TWO of the following would likely raise regulatory concerns in respect to an investment adviser’s performance claims in advertising pieces?
I. an adviser does not deduct advisory fees from performance figures without disclosure
II. an adviser does not disclose that the CFA Level 1 or higher has not been attained
III. an adviser publishes returns on a back-tested portfolio without labeling it as such
IV. the adviser is not registered with FINRA

II, III
I, III
II, IV
I, IV

Answer 93

I, III

An adviser does not deduct advisory fees from performance figures without disclosure (of how determined and impact on portfolio results - pg 351)

FINRA might administer the IARD system, but advisers don’t register with FINRA; advisers register with the SEC or the states.

There is no legal requirement to earn the CFA or CFP distinction.

Back-tested portfolios are little pretend investment portfolios containing what the adviser woulda/coulda/shoulda purchased in the past.

Question 94

Slippery Rock Advisers are deemed to have custody of client assets. When filing their balance sheet, the firm should include in its assets which of the following items?

• loans to a silent partner
• marketing rights
• loans to a senior partner
• marketable securities

Answer 94

marketable securities

the NASAA model rule on minimum financial requirements for advisers specifically tells advisers not to include prepaid expenses or loans to partners–if the firm is a partnership–or to officers or stockholders–if the firm is a corporation. Seems like a good idea to me. If the advisory business is doing poorly, what are the chances that the partners are doing well enough to repay the loan they took out? Talk about some shaky assets. Marketable securities have a value–they are an asset. Marketing rights, goodwill and other intangible assets should not be included, either.

Question 95

Name common exempt transactions which allow securities to be sold without registration.

Answer 95

private placement
common stock on NYSE, Nasdaq
(see pg 308)

Question 96

Name common exempt securities which allow securities to be sold without state registration.

Answer 96

US Treasuries or Government
Municipals
Any foreign government
Bank, S/L, Credit Union, Trust company
Debt issued by insurance co
Railroad-Common Carrier
Federal Covered Security

Question 97

Which of the following is required to register as an agent under the Uniform Securities Act?

• an individual representing the issuer in an exempt transaction
• an individual selling U.S. Treasury bonds on behalf of the U.S. Treasury
• the CFO of an issuer negotiating the sale of commercial paper to a pension fund
• an individual selling exempt securities on behalf of a broker-dealer

Answer 97

An individual selling exempt securities on behalf of a broker-dealer

Many people with their Series 7 license sell exempt securities, such as municipal and Government bonds. The fact that they sell securities for compensation on behalf of a broker-dealer is why they must register as an agent of the broker-dealer.

Individual representing issuer is not agent, nor is selling US Treasury bonds for US Treasury (pg 338)

CFO is not agent selling and commercial paper to pension is exempt

Question 98

Barry Berry is a financial planner with a place of business in State A. Recently, three of his clients moved to State B. Barry has recently placed a billboard in State B offering a “total financial check-up, free of charge” with an 800-number and a link to a website. Therefore

Barry is exempt from registration requirements in State B because the number of clients there is 3

Barry must register in State B because he is holding himself out to the public as an investment adviser in State B

Barry is eligible for federal covered status due to the multi-state adviser exemption

Barry must register in State B because the clients who moved there were existing clients

Answer 98

Barry must register in State B because he is holding himself out to the public as an investment adviser in State B

The “de minimis” exemption is for advisers who are not “holding themselves out as advisers” in the state and who have no more than 5 non-institutional clients. If he didn’t have the billboard, he could serve the three clients without registering in State B.

Question 99

Which of the following represents a true statement concerning licensing and registration requirements for securities professionals?

1) agents register with the SEC; investment adviser representatives register with FINRA

2) upon passing a license exam a candidate is licensed subject to being granted a registration by the state

3) passing a license exam constitutes the attainment of a license to sell securities or investment advice

4) conviction of misdemeanor theft does not need to be disclosed on Form ADV after 10 years

Answer 99

4) conviction of misdemeanor theft does not need to be disclosed on Form ADV after 10 years

Some states call it a “license,” others call it a “registration.” either way, passing an exam only allows you to APPLY for a license. Will you get one? Probably not if you have misdemeanor theft convictions in the previous 10 years. Believe it or not, Form ADV only goes back 10 years, while U-4 asks if you have EVER been convicted of securities-related misdemeanors or any felonies.

Agents register with FINRA; IARs register with the state Administrator(s).

Question 100

What is true of ex culpability clauses for investment advisory client contracts?

Provided the clause is clearly explained and the client acknowledges his understanding with a signature, such clauses may be inserted

They are prohibited, as they improperly guarantee clients against investment loss

They are unethical and considered null and void in an administrative or civil proceeding against the adviser

They are standard, boilerplate language for most advisory client contracts

Answer 100

They are unethical and considered null and void in an administrative or civil proceeding against the adviser

ex (without) culpability (fault). An advisory contract can not ask the client to hold the adviser blameless, no matter what.

Question 101

Brianna is an investment adviser representative working for a federal covered investment adviser with an office in State A. Once a week she meets with clients at the adviser’s office in State B, therefore

• Brianna must register as an investment adviser representative in State B because she has a place of business in State B
• Brianna must register as an investment adviser representative in State B because she has clients there
• Brianna must register as an investment adviser in State B
• Brianna must register as an investment adviser representative in State B only if soliciting clients there

Answer 101

Brianna must register as an investment adviser representative in State B because she has a place of business in State B

She has a place of business in State B, so she must register there.
The question doesn’t necessarily indicate that the clients live in State B.

She is an IAR, not an RIA.(3rd bullet)

WOrking for Federal Covered Investment advisor does not exempt IAR from registering in state where have place of business (pg 324)

Question 102

true or false:

An investment advisor could lose his license over fraudulent activities even if no criminal charges are ever filed.

Answer 102

True

Question 103

In an Administrative proceeding against a registrant an investor claims that a registered representative indicated that the ABC corporation was profitable when, in fact, the company had already filed for bankruptcy protection. If the customer loses money on ABC, which of the following is the most important fact to determine in this situation?

• Did the registered representative know that ABC had already filed for bankruptcy protection?
• Did the customer lose $10,000 or more on the investment?
• Did the representative in fact tell the customer that ABC was profitable?
• Was ABC profitable in the financial quarter previous to filing?
  Incorrect

Answer 103

Did the representative in fact tell the customer that ABC was profitable?

in a criminal case it would be important to know the registered rep’s “mens rea, “ or awareness, but the Administrator only needs to know if the registered representative actually told the client something completely wrong and dangerous. There is no minimum amount that must be lost on an investment before the Administrator will proceed against a registrant or applicant.

Question 104

An example of a self-regulatory organization (SRO) registered under the Securities Exchange Act of 1934 is which of the following?

Chicago Board Options Exchange
The Commodity Futures Trading Commission
The Securities and Exchange Commission
All choices listed

Answer 104

Chicago Board Options Exchange

SROs registered with the SEC include FINRA, NYSE, NASDAQ and CBOE.
The SEC is not a mere SRO–they are the federal government.

The Commodity Futures Trading Commission (CFTC) regulates commodities markets the way the SEC regulates securities markets.

Question 105

According to NASAA’s Statement of Policy “Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares, “ capital gains distributions may be combined with income distributions when calculating yield for an investment company share

• for a period not to exceed 3 years
• under no circumstances
• for a period not to exceed 5 years
• only with supporting documentation from an independent third party

Answer 105

• under no circumstances

capital gains are not part of “yield.” Yield only includes income payments (dividends, interest). Capital gains is/are part of “total return, “ a different calculation. Capital gains are sporadic and do not represent a consistent “yield” to an investor.

Question 106

Which of the following represents a true statement in connection with investment advisory custodial practices?

• If the adviser uses the services of a qualified custodian, client account statements must be sent monthly
• If clients do not receive quarterly account statements directly from the qualified custodian, the adviser is not subject to annual surprise inspections
• If the adviser uses the services of a qualified custodian, account statements must be routed through the adviser, who, as a fiduciary, must check for any unauthorized trades in the account
• If the adviser uses the services of a qualified custodian, the advisory firm must have a reasonable belief that the qualified custodian holding the assets provides periodic account statements to those clients

Answer 106

If the adviser uses the services of a qualified custodian, the advisory firm must have a reasonable belief that the qualified custodian holding the assets provides periodic account statements to those clients

So, if the custodian is sending account statements to clients, the IA does not have to. But, the IA has to have a reasonable belief that the statements are, in fact, being sent. Account statements are to be sent at least quarterly, not monthly.

Question 107

What are different types of “load” funds

Answer 107

1) a “no-load fund” can have no front- or back-end sales charge and must keep the 12b-1 to no > .25%.
2) A “100% no-load fund, “ like what T Rowe Price offers, would have no 12b-1 either–of any kind.
3) A “B-share” has a back-end load, also called a Contingent Deferred Sales Charge (CDSC).
4) A shares have front end sales loads but limited fees
5) C Shares or level load funds have higher 12b-1 fees and best for short term investors

Question 108

True or False:

A deposit of cash–but not of securities–may be made instead of a bond if a firm’s net capital/net worth is not met by the firm’s balance sheet

Answer 108

False

Administrators can decide which securities are acceptable, but they must take a deposit of securities and not just cash.

Question 109

An Investment Adviser Representative is obligated to provide the firm’s disclosure brochure to which of the following prospective clients?

• a registered investment company
• a client receiving impersonal advisory services only
• a qualified client with $1.5 million under management
• all choices listed

Answer 109

A qualified client with $1.5 million under management

The other two clients are the exceptions to the disclosure brochure rule (pg 343-344).

Question 110

When three individuals form an investment adviser organized as an LLC, all three intend to either sell the firm’s services or provide portfolio management for client accounts. Therefore,

• each must also register as an IAR by submitting a completed U4
• each is automatically registered as an IAR when the firm’s
  license is granted
• only two of the owners can also act as IARs
• only one of the owners can also act as an IAR

Answer 110

Each is automatically registered as an IAR when the firm’s license is granted

if there is a problem with the 3 owners, the firm won’t get registered. If they pass inspection and want to be IARs, they are automatically registered as such. The other individuals they hire will register as IARs through a Form U4.

Question 111

An investment adviser is about to purchase 1,000 shares of common stock held by their affiliated broker-dealer’s proprietary account for a client’s account. In order to execute this transaction, the adviser must

• disclose the potential conflict of interest for this agency cross transaction
• disclose the potential confict of interest and obtain the client’s consent before settlement of the trade
• disclose the potential confict of interest and obtain the client’s consent before executing the trade
• secure the lowest market price for the client

Answer 111

Disclose the potential conflict of interest and obtain the client’s consent before settlement of the trade

For a principal transaction, the IA must disclose the potential conflict of interest before executing the trade and receive the client’s signed acknowledgement/consent by settlement. (pg 384, last para)

Question 112

On Tuesday a customer tells her registered representative to purchase 300 shares of AMZN at a good price today. The registered representative waits to enter the order and, unfortunately, AMZN rises by 85 cents per share, closing up by that amount. If the registered representative purchases AMZN on Wednesday morning at a price lower than the market price at the time of Tueday’s order

• the representative has acted properly in executing this market not held order
• the representative acted properly so long as the stock was purchased at a better price than the customer would have received on Tuesday
• the representative acted improperly by accepting this order from a non-discretionary customer
• the representative acted improperly by using time and price discretion that had expired

Answer 112

The representative acted improperly by using time and price discretion that had expired

Time/price “discretion” don’t require written authorization. But the time/price discretion also evaporates if the order isn’t executed on that day (Tuesday in our example).

Question 113

What is a a gift of assessable stock

Answer 113

Assessable stock can charge fees to the owner in the future, so it isn’t a “gift,” but, rather, is considered to have been offered and sold–subject to full disclosure just like an offer of securities.

Question 114

What are agent or IAR responsibilities when using social media

Answer 114

any content related to the individual’s investment practice must be approved by the employing firm

what the agent or IAR does through any social media outlet that involves securities/investing/his practice must be monitored and approved by the BD or RIA. And, if the agent or IAR is going to promote his securities practice, he must be clear about his affiliation with the BD or RIA.

Question 115

An investment adviser with its principal office in State X is also registered in State Y, where it maintains a large office. State Y has certain additional books and records requirements that State X does not have. Therefore

• if the adviser is not required to register in State X, it does not need to meet State Y’s requirements
• the adviser must meet the more stringent record keeping requirements
• the adviser must meet State X’s record keeping requirements only
• the adviser must meet both state’s record keeping requirements

Answer 115

The adviser must meet State X’s record keeping requirements only

if the adviser is properly registered in State X and is, in fact, meeting their record keeping (and net capital) requirements, the adviser only has to meet State X’s requirements.

Question 116

If an IAR represents a federal covered adviser in State A, in which case would he have to also register in State B?

If he has more than 5 clients in State B
if he has more than 5 non-institutional clients in State B
if he has a place of business in State B
if he manages portfolios for 6 large pension funds in State B

Answer 116

If he has a place of business in State B

There aren’t many differences for IARs based on whether the employer is federal covered or state registered, but this is one.

The IAR of a federal covered adviser only registers in those states where he has a place of business. IARs for state-registered RIAs use the de minimis rule.

Question 117

A broker-dealer’s customer deposits shares of a thinly traded stock and within a few weeks calls his registered representative requesting to liquidate the securities in order to purchase a mutual fund. When the trading department proceeds to execute the sale, they are unable to find current pricing for the stock. If the firm purchases the stock directly from the customer, they

• must disclose that no ready market currently exists for the security
• must offer a higher bid than the last bid previously published for the security
• may describe the sale as ‘at the market’
• may describe the sale as ‘near the market’

Answer 117

Must disclose that no ready market currently exists for the security

there does not appear to be a liquid market or an accurate “market” price, so if the firm buys the stock from the customer, they can not pretend that he sold it “at the market.” (pg ??)

Question 118

Which of the following accurately describes the organization FINRA?

• a government-sponsored enterprise empowered and funded by tax dollars
• an industry-funded trade association advocating for the rights of member broker-dealers
• a regulatory body with authority over broker-dealers, agents, investment advisers and IARs
• a regulatory body with authority to enforce rules and impose fines and sanctions of members and associated persons

Answer 118

A regulatory body with authority to enforce rules and impose fines and sanctions of members and associated persons

FINRA is not a trade association like the Investment Company Institute–they are also not a government regulator. They might enforce SEC rules, but they are not a government enterprise or regulatory body.
Rather they are an “SRO, “ or self-regulatory organization with power over their member firms and the firms’ principals, agents, and employees. FINRA does not regulate the advisory business.

Question 119

Which of the following is an example of the violation known as front running?

• a registsered representative purchases shares for his son’s UTMA account before placing a large customer buy order
• a registered representative fails to disclose a breakpoint to a mutual fund investor

-a registered representative sells a mutual fund investment based on an upcoming dividend

• a registered representative asks his firm’s investment bankers for stock tips based on upcoming unannounced mergers

Answer 119

a registered representative purchases shares for his son’s UTMA account before placing a large customer buy order

taking advantage of a customer order you’re about to place is called front-running. The other three choices are all violations, as well: insider trading, selling dividends, and breakpoint selling.

Question 120

One of your friends has an office at a local strip mall. On the front door, the following words are stenciled: Jason Smith, Wealth Management Services. Although he has made no outgoing calls, his assistant does answer phone inquiries using the same business name. Therefore

• Jason would be considered an investment adviser upon obtaining his 6th non-institutional client

-Jason likely meets the definition of “investment adviser”

• Jason would be considered an investment adviser by the SEC only
• Jason would not be considered an investment adviser

Answer 120

Jason likely meets the definition of “investment adviser”

Even if you just hold yourself out to the public as being in the business of providing investment advice, you’re an investment adviser. He would likely register at the state level, starting at least with the state where this strip mall resides.

Question 121

Which of the following is not a violation according to NASAA’s policy statement “Dishonest or Unethical Business Practices of Broker-Dealers and Agents”?

• holding customer and firm securities in the same account
• executing a discretionary transaction when notified by the customer that discretionary authorization has been mailed
• choosing the time to enter a market order without signed discretionary authorization
• charging a nominal fee to offset the expense of forwarding proxy materials

Answer 121

Choosing the time to enter a market order without signed discretionary authorization

Broker-dealers can’t use discretion until they have it in writing, unless the ‘discretion’ relates only to time/price to enter a trade that day. Called a “market not held” order, btw.

Question 122

A firm with a place of business in the state charges corporations to advise on mergers & acquisitions and to help structure and sell initial equity offerings. The firm must register as:

an investment adviser
a matching agent
a broker-dealer
a broker-dealer and an investment adviser

Answer 122

a broker-dealer

the firm is acting as an investment banker, which is a broker-dealer. Although the word “advise” was used, we see that the firm is not advising people on how to invest in securities. They are, therefore, not an investment adviser.

Question 123

An agent’s supervisor would be required to review and approve which of the following communications before they were sent to customers?

• any email discussing securities investments
• a brochure introducing the agent to 500 retail investors
• any email discussing retirement planning strategies
• all choices listed

Answer 123

A brochure introducing the agent to 500 retail investors

agent emails must be monitored, but the communications subject to principal approval are delivered to more than 25 retail investors–called retail communications.

FINRA Rule 2210 defines three categories of communications:
Retail communication consists of any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.

Correspondence consists of any written (including electronic) communication distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.

Institutional communication means any written (including electronic) communication that is distributed or made available only to institutional investors as defined but does not include a firm’s internal communications. Institutional investors include banks, savings and loan associations, insurance companies, registered investment companies, registered investment advisors, a person or entity with assets of at least $50 million, government entities, employee benefit plans and qualified plans with at least 100 participants, FINRA member firms and registered persons, and a person acting solely on behalf of an institutional investor.

Question 124

According to NASAA’s Statement of Policy on “Using the Internet for General Dissemination of Information on Products and Services,” which of the following statements is FALSE?

a legend must appear on a website stating that the agent, broker-dealer, RIA or IAR may only transact business in this state if first registered, excluded or exempted from registration requirements

if the agent is not registered in all 50 states, a filter must be applied to make the site un-viewable to visitors outside his state of registration and principal office

follow-up responses to persons in this state that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will comply with registration requirements

all of these statements are false

Answer 124

If the agent is not registered in all 50 states, a filter must be applied to make the site un-viewable to visitors outside his state of registration and principal office

The agent, IAR, BD, or RIA’s website must be clear that they are not attempting to do business in any state where they are not registered or exempt from registration requirements. And, if not registered in a website visitor’s state, no followups will be made in which securities investments or investment advice are offered.

Question 125

ABC Industries has contracted with J J Kale, who will attempt to sell up to 40% of ABC Industries’ common stock to broker-dealers and insurance companies within the state. JJ will receive 7% of the proceeds, which are estimated at $5 million total. Therefore, which statement is accurate?

J J is considered an agent of the issuer and is required to register as such

J J does not meet the definition of “agent” due to the nature of the transaction

J J represents the issuer of the securities and, therefore, would not have to register regardless of the nature of the transaction

J J is considered an agent because the transaction is exempt

Answer 125

J J does not meet the definition of “agent” due to the nature of the transaction

if the individual represents the BD, he is an agent. If he represents the issuer of the securities, he is not an agent if the transaction is exempt, as this one is (offer to certain institutional investors only).

Question 126

Steve E. Nix is an IAR working for a federal covered adviser in State A. If Steve has 7 non-institutional clients in State B–but no place of business there–which of the following statements is true?

because of the number of clients, Steve must also register in State B

because he does not have a place of business there, Steve is exempt from registration in State B

Steve is exempt from registration if he is a CFP or CFA

Steve is exempt from registration in State B, while the RIA must register there

Answer 126

Because he does not have a place of business there, Steve is exempt from registration in State B

for IARs of federal covered advisers, the only thing that matters to the other states is having a place of business in the state. It’s only the state-registered IARs and RIAs who use the “de minimis” exemption.

Question 127

A broker-dealer operating on the premises of a retail bank is known as which of the following?

interpositioning, a violation of securities regulations

a networking arrangement

a joint-back-office arrangement

investment banking

Answer 127

a networking arrangement

the question provides the definition of a “networking arrangement,” a situation requiring much disclosure to the BD customers.

Question 128

A registered investment adviser must deliver a disclosure brochure (ADV 2) to which of the following?

a client receiving impersonal advisory services

a client enrolling in a wrap-fee program sponsored by the adviser

a registered investment company

all choices listed

Answer 128

A client enrolling in a wrap-fee program sponsored by the adviser

The only two clients not required to receive the disclosure brochure are clients receiving impersonal advisory services and clients that are registered investment companies. The adviser to a registered investment company is typically affiliated with the investment company and the distributor, while most advisory clients are outside entities who need full disclosure.

Question 129

What financial institutions are excluded from ever being an investment advisor

Answer 129

Banks,
S&L
Security Issuer
Credit Unions.. (pg

Question 130

If it is in the public interest and provides necessary protection to investors, the Administrator may deny, suspend, or revoke an investment adviser representative’s license for all the following reasons EXCEPT

the applicant filed for personal bankruptcy 5 years earlier

the registrant or applicant is insolvent

the applicant failed to disclose her suspension from FINRA in all capacities four years ago

the applicant has filed a false or misleading application

Answer 130

the applicant filed for personal bankruptcy 5 years earlier

personal bankruptcies in the past are not cited as a reason for Administrative action in the Uniform Securities Act. (pg 296)

Question 131

Sue Ellyn is an IAR properly registered in State A and working for a federally registered investment adviser. Once a month Sue Ellyn meets with clients in State B at the federal covered adviser’s office. What is true about Sue Ellyn’s registration requirements?

because she has clients in State B, she must register there

because she has a place of business in State B, she must register there

because she represents a federal covered adviser, her registration in State B is automatic

because she represents a federal covered adviser, she does not register in any state

Answer 131

because she has a place of business in State B, she must register there

a firm can be federal covered, but the IARs of the firm still register in the state(s) where they maintain a place of business.

Question 132

As noted by Uniform Securities Act, what is

Breakpoint Selling
Selling Away
Churning

Answer 132

Breakpoint Selling - Failure to disclose and offer quantity discounts

Selling Away - Offering investments without knowledge or supervision of agent’s employer

Suitability Sells - Making sell recommendations to customers without determining suitability; ie..recommending certain investment to all of clients

Churning - excessive quantity and frequency of sales within portfolio inconsistent with portfolio /investor makeup

Question 133

Name common disclosures that IAs must provide in ADV Part 2

Answer 133

Types of securities and analysis performed
Services provided/fees charged
Education and business background of all officers and employees determining advice
Any compensation incentives
Balance sheet if retain custody for $500+ or 6mo+
Criminal and regulatory violations over past 10 years

Question 134

Who determines Minimum Net Worth requirements and under what conditions

Answer 134

If a Federal Covered Advisor (know conditions such as size of AUM at $100M+), then SEC determines

If IA registered in state , then Administrator of state where principal main office is located (if have multiple offices and registered in multiple states??)

That rule provides that advisors registered and in compliance with the minimum net worth and bonding requirements of the state where the advisor has its principal office do not need to meet the (higher) requirements of any other states where the advisor does business. 15 U.S.C. § 80b-18a(c).

Question 135

What does Rule and Form 144 restrict

Answer 135

Regulates “control stock” whereby large shareholders, Officers, Board Members to report sales of corp stock adhering to volume limit and frequency of trade, reported quarterly but no later than with sale

Question 136

What are some reasons an Administrator would issue a stop order / cease and desist against an applicant

Answer 136

• False or Misleading application
• Willfully violated or failed to comply (consumancy)
  -Convicted within last 10 yrs of any securities related misdemeanor and of any felony
• Is insolvent
• Enjoined by court from engaging in securities business
• Subject of Admin order within past 5 yrs for suspension, revocation or denial or previous Admin denial or from a national securities exchange under SEC of 1933
• not qualified based on training , experience and knowledge
• failed to pay fees

Question 137

Which of the following statements is permissible for an investment adviser to make on its website?

the firm has been certified by the state securities Administrator to render investment advice

fees charged by the firm are non-negotiable

the firm is an RIA

unlike many competitors, the firm is a REGISTERED Investment Adviser

Answer 137

Fees charged by the firm are non-negotiable

registration is just a statement of fact–either the firm is registered or isn’t required to be. The “RIA” looks like a certification, when it’s just an abbreviation. Advisers must be clear whether fees are negotiable or not.

Question 138

What constitutes front running and selling away

Answer 138

Front running - Selling or buying securities before receiving authorization from investor

Selling Away - offering securities not offered by the firm

Question 139

If a client of yours regularly reinvests dividend and capital gains distributions from the mutual funds that you sell him, which of the following best measures his performance over the long-term?

Risk-free Return
Average Return
Total Return
Sharpe Ratio

Answer 139

Total Return

total return would be the compounded returns an investor makes by reinvesting all dividends and capital gains distributions into more shares earning more dividends and capital gains to be reinvested into more shares, and so on, and so on. The Sharpe Ratio, remember, measures risk-adjusted returns.

Question 140

Can you create a waiver of compliance at federal level for an unregistered, non exempt security

Answer 140

No. Would only be exempt if subject to an exempt transaction

Question 141

An investment adviser representative receives a letter from a client, who is unhappy with the performance of her portfolio over the past several financial quarters. The client calls and asks for the letter back. The IAR should, therefore,

return the letter to the client

return the letter to the client after making a photocopy of it

make a photocopy of the letter and send that copy to the client

forward the matter to the firm’s legal counsel

Answer 141

Make a photocopy of the letter and send that copy to the client

Advisers keep the originals of correspondence received from clients, so the IAR should keep the original and send a photocopy to the client.

Question 142

Under NASAA’s Statement of Policy, “Dishonest or Unethical Business Practices for Broker-Dealers and Agents,” who has authority over Broker Dealers and Investment Advisors?

Answer 142

SEC and FINRA have oversight of Broker Dealers and agents as well as member firms

SEC- Federal Covered and Administrators - State RIAs and IARs

Question 143

John would like to share commissions with Jim. John is a licensed agent of XYZ Broker-Dealers. Jim is a licensed representative of ABC Broker-Dealers. According to NASAA’s Statement of Policy “Dishonest or Unethical Business Practices for Broker-Dealers and Agents,” which of the following best addresses this situation?

The agents must get permission from their respective firms, and the firms must be under direct or indirect common control.

The agents must get permission from their respective firms.

Provided both licenses are in good standing, John and Jim may commence with this sharing arrangement.

Sharing commissions is a prohibited and unethical business practice.

Answer 143

The agents must get permission from their respective firms, and the firms must be under direct or indirect common control.

This is an item from NASAA’S Policy Statement “Dishonest or Unethical Business Practices for Broker-Dealers and Agents.” The agents must not only get permission, but the firms must be affiliated in some way.

Question 144

The investment manager of a pension fund shifted the fund’s assets so that the portfolio represented an allocation of 65% equities. The investment policy statement stated that no more than 50% of the assets would be invested in equities; however, the portfolio appreciated due to a bull market in stocks. Which of the following best addresses this situation?

Modern Portfolio Theory stipulates that such overweighting of asset classes is actually a prudent way to invest

the investment manager violated the fiduciary responsibilities under ERISA by not following the investment policy statement

as a fiduciary, the investment manager is free to alter the allocation of the portfolio

pension funds are not allowed to invest more than 33% of their assets in equities, so the investment policy statement violated ERISA

Answer 144

The investment manager violated the fiduciary responsibilities under ERISA by not following the investment policy statement

follow the investment policy statement.

Question 145

One of your investing clients has a trust with a trustee. As the investment adviser you make decisions for the client and the trust and if the client approves, execute the transactions. At the end of each financial quarter the client tells you to contact the trustee and to take your fees from the trust. You call and direct the trustee to reimburse your fees or commissions, and the trustee then sends you a check. Which of the following is true?

This is an example of exercising discretion
This is prohibited under FINRA rules
This is allowable
This is a fraudulent activity

Answer 145

This is allowable

This is allowed. If the adviser receives advisory fees from the trustee, certain safeguards need to be followed in order to have the usual requirements waived (CPA surprise audit, e.g.)
See Custody page???

Question 146

If a registered securities agent has to make a compromise with a credit card issuer involving a debt of $24,975, what is the agent required to do?

voluntarily resign for a period of not less than two years from his current position

voluntarily resign from the securities industry entirely for a period of not less than two years

promptly update his U4 information and remain in his current position

promptly update his U4 information and await notice from the Administrator as to his impending suspension or revocation pursuant to this matter

Answer 146

promptly update his U4 information and remain in his current position

all he has to do is promptly disclose this information. Unlilke regulatory or criminal disclosures, this will have no direct effect on his career. It might cause him to lose a few clients or prospects, but that is a different matter.

Question 147

What is Interpositioning in finance?

Answer 147

Interpositioning is a financial term that refers to the act of a broker placing themselves between a buyer and a seller in order to facilitate a transaction.

Question 148

Jenny bought 500 shares of ABC two years ago for $44 per share. The stock has since traded between $50 and $57 per share. With the stock trading currently at $56, Jenny is convinced the stock will trade sideways in the near-term. If she would like to increase her return on the stock and receive a partial hedge, she should

purchase five ABC call options

sell five ABC put options

purchase five ABC put options

sell five ABC call options

Answer 148

sell five ABC call options

if she sells five call options, they are “covered calls,” which generate premium income. If the stock does trade sideways (goes nowhere), the options will expire worthless. Rather than getting nothing when the stock goes nowhere, she will pocket the premiums collected.

Question 149

An investment adviser who does not wish to be deemed to have custody of client assets inadvertently receives a client’s stock certificates mailed by a third party. What should the adviser do in this situation?

send the certificates to the custodian
return the certificates to the sender within 3 days and keep special records
amend form ADV and notify the Administrator
hold the securities in safe-keeping for 3 business days before forwarding them to the proper custodian

Answer 149

Return the certificates to the sender within 3 days and keep special records

To avoid being deemed to have custody–and the burdens of maintaining minimum financial net worth plus annual audits of the books–the adviser must return the securities to the sender within 3 days and keep records of what was received, what was sent, and when.

Question 150

An agent may offer or sell a security in a state if the security is under what 4 conditions?

Answer 150

exempt from registration
registered
federal covered
sold in an exempt transaction.”

Question 151

Partners, officers, or directors–or those holding similar positions–of an investment adviser are automatically registered as which of the following when Form ADV is accepted by the Administrator?

agents
principals
investment adviser representatives
investment advisers

Answer 151

investment adviser representatives

similarly, partners, officers, directors, etc. of a broker-dealer are automatically registered as agents of the firm when the firm’s registration is accepted. This means that no separate registration is required from ADV for Advisors and BD for Broker Dealers

IA or Broker Dealer is entity and can be person if sole proprietor, but if multiple employees then registered auto as IAR/Agent. Additional employees would need to be added under Form U4

Principals are hired by BD to supervise operations and registered reps

Question 152

Under the Uniform Securities Act, all of the following are true concerning an agent’s registration EXCEPT

An agent can only sell securities that have been properly registered in a state or qualify for an exemption from registration.
An agent can only solicit business in a state if both the agent and broker-dealer are registered in that state.
An agent’s registration to sell securities expires at the end of the broker-dealer’s fiscal year.
If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change.

Answer 152

TRUE: An agent can only sell securities that have been properly registered in a state or qualify for an exemption from registration.

TRUE: An agent can only solicit business in a state if both the agent and broker-dealer are registered in that state.

FALSE: An agent’s registration to sell securities expires at the end of the broker-dealer’s fiscal year. Registrations of persons (agents, broker-dealers, IA’s, IAR’s) all expire on December 31st unless properly renewed. For securities registrations it’s different—there, the security is effective for one year going forward. So, if an agent gets registered on July 10th, her license will expire on December 31st. If a security is declared effective on July 10th, it’s effective for a year going forward.

TRUE: If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change.

Question 153

Which of the following is a “federally registered investment adviser”?

a financial services firm executing transactions in securities on behalf of clients

an investment adviser acting as a sub-adviser to an open-end fund

a financial planning firm operating in at least 5 states or regions

an investment adviser providing portfolio management services

Answer 153

An investment adviser acting as a sub-adviser to an open-end fund
Other Federally Registered Investment Advisors (Federal Covered Advisor)
- Operating in 15 or more states
- $100M of assets
- Advisor to registered investment company (ie..open end fund)
- Pension consultants with clients of $200M
- Mid size advisors to business development co
- Affiliate of federally registered advisor is if principle office and place of business is same as that of SEC registered advisor
- Newly formed, eligible in 120 days to be federal registered
- Principle business in US Virgin or outside US

Question 154

TLC Broker-Dealers is a wholly owned subsidiary of General Electric. According to NASAA’s Policy Statement, “Dishonest or Unethical Business Practices of Broker-Dealers and Agents,” if TLC would like to sell shares in a private placement of GE stock

Full disclosure must be provided to non-institutional buyers.
This is a fraudulent, unethical practice.
The Administrator must grant prior approval.
Full disclosure must be provided to all buyers.

Answer 154

Full disclosure must be provided to all buyers.

if the underwriter is actually owned by the issuer, or affiliated in any way, that must be disclosed to all investors.

Question 155

What does the term “ investment counsel” refer to?

Answer 155

“Investment counsel” is a term that requires that the adviser’s primary activity is providing investment advice and that advice is deemed “continuous, supervisory management” Pg 347

Question 156

Under what authority does a broker-dealer operate

Answer 156

A registered broker-dealer with state or federal member of FINRA and SIPC

Question 157

Under the “safe harbor provisions” of ERISA 404(c) the trustees of the plan can pass off which of the following to participants?

risk of investment loss
duty to select cost-efficient investment options
both choices listed
neither choice listed

Answer 157

risk of investment loss

if the plan is set up corectly, the investment risk is passed off to participants in, for example, a 401k plan. But the trustees (CEO, CFO, etc.) still have to oversee the plan to make sure that cost-efficient investment options are available, that enough different choices are available, etc.

Question 158

Under the Uniform Securities Act, when a security is exempt, this implies that

The security does not need to be registered with the state to be sold there

Transactions involving the security are not subject to the antifraud provisions of the Act

A broker-dealer that underwrites a new issue of the securities does not need to be registered with the state

An agent who sells the security does not have to be registered with the state

Answer 158

The security does not need to be registered with the state to be sold there

that is all that the word “exempt” means. Excused from registration.

Question does not reference exempt transaction which would be broker dealers underwriting new issue of securities,

nor agents exempt from registering in state

as well as exempt securities are still subject to anti fraud

Question 159

What are the three things to know about the code of ethics for advisers, Rule 204A-1 under the Investment Advisers Act of 1940 relative to activity of access persons?

Answer 159

An access person is anyone who has unsupervised to non public information about clients and their trading activities

1) Access persons must report securities holdings within 10 days of becoming access persons

2) Treasury securities and open-end funds that the adviser and access person do not manage are not considered reportable securities

3) access persons must typically have copies of account statements and trade confirmations sent to the chief compliance officer of the adviser

Question 160

Under what conditions can an agent share in the gains and losses of a client’s account,

Answer 160

When both the customer and broker-dealer provide their written consent. (pg ??)

Question 161

If a broker-dealer earns a “markup” when selling securities, the firm acted in which capacity in the transaction?

agency
advisory
principal
fiduciary

Answer 161

principal is when broker dealer is when a brokerage completes a customer’s trade using their own inventory. Principal trading allows brokers to also profit from the bid-ask spread.

Agency trading involves a brokerage finding a counter-party to the customer’s trade, which can include customers at other brokerages. With agency trading, the broker must find someone willing to buy or sell the security for the same price as the counter-party.

Therefore, when acting as a principal, firms make markups and markdowns with customers. when acting in an agency/broker capacity, commissions are charged.

Question is related to broker-dealer comp NOT IAR acting as principal.

Question 162

Which of the following must register as an investment adviser in the state?

A lawyer occasionally discusses the value of her clients’ securities when putting together trusts

Jennifer Williamson is an investment adviser representative for a federal covered adviser located in the state

An accountant regularly advises clients to make IRA and 401K contributions while preparing their taxes

Joe Williams, an agent for XYZ Securities, has an active financial planning business that he conducts outside the scope of his employment at XYZ

Answer 162

Joe Williams, an agent for XYZ Securities, has an active financial planning business that he conducts outside the scope of his employment at XYZ

the lawyer and accountant are simply doing their jobs in this particular question. And an investment adviser rep is not an investment adviser.

Question 163

Which of the following best describes interest rate risk to a holder of preferred stock?

as interest rates rise, prices fall
as interest rates fall, prices rise
as interest rates rise, credit quality deteriorates
bond interest must be paid first

Answer 163

as interest rates rise, prices fall; Preferred acts like bonds with converse interest rates and yields to prices

there is no risk concerning falling rates, since rising market prices on an investment is a good thing.

bond interest is not relevant, bond repayments are senior to preferred stock in bankruptcy

Question 164

An investment adviser’s disclosure brochure is typically a copy of ADV 2. ADV 2 is associated with all of the following EXCEPT

a narrative format
a Plain English style
a table of contents presenting all items in order
a check-box format

Answer 164

a check-box format

ADV 2 used to be in a check-box format. To make it easier for prospects and clients to read, advisers now use a narrative format, in Plain English.

Question 165

Jolie Jackson has launched an electronic newsletter entitled “How to Make Money in Small Cap Stocks.” The newsletter is blasted out to some 700 recipients in various states on the 15th of each month, and the recipients are all paid subscribers. Therefor

Jolie meets the definition of “investment adviser” if the subscription costs more than $200

Jolie does not meet the definition of “investment adviser” but must register

Jolie meets the definition of “investment adviser” due to the title of the newsletter

Jolie does not meet the definition of “investment adviser” and is not required to register

Answer 165

Jolie does not meet the definition of “investment adviser” and is not required to register; She’s not giving advice based on the needs and situations of clients. She is not an adviser–she’s a writer.

Question 166

If a broker-dealer places large buy orders on a stock above the current market price in order to support the stock in which it makes a market, this practice is known as

hypothecation
matched purchases
front running
pegging

Answer 166

Hypothecation is allowing securities to be used as collateral in margin loan

Matched purchases or matched sale-purchase agreement (MSPA), is when the Federal Reserve sells government securities such as U.S. Treasury bonds to an institutional dealer or the central bank of another country with the contractual agreement to purchase the security back within a short period of time, usually less than two weeks.

Front running is buying or selling securities in firms account before placing customer order

Pegging is when 2 or more parties agree to buy and sell a security at a specific time and price in order to move the market in the desired direction, they are engaging in a form of market manipulation known as “matched purchases.”

Question 167

For an investment adviser to enter into or renew a contract that provides for performance-based compensation, what conditions must be met

Answer 167

Period covered must be 1 year

Capital depreciation must offset capital appreciation, ie fees must reflect performance results in either direction (ie,,lower fees if lower results)

The adviser reasonably believes the client understands the terms.

The client must meet net worth or assets-under-management requirements as a qualified client

Full disclosure of any prepaid fees and comp model (even if includes paper profits)

Question 168

Your firm’s research department is about to issue a positive report on ABC common stock. If applicable, your firm would disclose all of the following in the research report except

your firm makes a market in ABC common stock

your firm participated in the selling group for a recent subsequent primary distribution of ABC common stock

your firm was managing underwriter for a recent offering of ABC common stock

partners of the firm hold warrants on ABC common stock

Answer 168

Your firm participated in the selling group for a recent subsequent primary distribution of ABC common stock

if the firm makes a market in the stock, or is/was part of an underwriting syndicate . . . or if partners will benefit by pushing up the stock price, that all needs to be disclosed in order to avoid “conflicts of interest” that make the “research” less than objective.

Question 169

Modern Portfolio Theory states that investors should only expect to be compensated for which type of risk?

interest rate
non-systematic
systematic
massive

Answer 169

systematic

the theory espouses that investors can easily diversify to reduce non-systematic risk, so they should only expect to be compensated for the risk they can’t diversify away: systematic/systemic.

Question 170

All of the following represent true statements concerning investment advisers and custodial practices except

If the custodian sends account statements directly to an adviser’s clients, the adviser is relieved from sending its own account statements

Advisers with custody no longer need to include an audited balance sheet in their disclosure brochure to clients.

If the custodian sends account statements directly to an adviser’s clients, the adviser is still required to send its own statements to clients

If the custodian sends account statements directly to an adviser’s clients, the adviser is relieved from undergoing an annual surprise examination by a CPA

Answer 170

If the custodian sends account statements directly to an adviser’s clients, the adviser is still required to send its own statements to clients. This is not true

This is different from billing statements which do require advisor to also send in order to avoid additional audits etc..

Question 171

For purposes of offering or selling securities, from which state(s) is the offer considered made

Answer 171

DOA - all states where offer was Discussed, Offered and Accepted

Question 172

A broker-dealer with its principal place of business in State A executes transactions for large pension funds in State B. Provided the broker-dealer also has only 4 non-institutional customers, which statement below correctly states the firm’s registration requirements in State B?

the broker-dealer is exempt from State B’s registration requirements, even if it also maintains a place of business there

the broker-dealer is exempt from State B’s registration requirements, provided it has no place of business there

the broker-dealer is subject to State B’s registration requirements

the broker-dealer is subject to State B’s registration requirements unless the transactions with non-institutional customers are all unsolicited

Answer 172

The broker-dealer is subject to State B’s registration requirements

There is no de minimis rule for broker-dealers. If they have a place of business in State B, the broker-dealer must register there. Or, if they have even one non-institutional customer there, same thing.

Question 173

Which of the following is an accurate statement of advisory contracts?

assignment of contract is allowed only if the practice is disclosed in the contract
a sample client contract must be filed with the Administrator
assignment of contract is allowed only if the practice is disclosed in ADV Part 2
performance-based compensation is prohibited for all clients

Answer 173

a sample client contract must be filed with the Administrator

assignment of contract without client consent is simply NOT ALLOWED. Clients with $1 million+ under management, for example, can be charged performance-based compensation.

Question 174

Under the new SEC Marketing Rule for investment advisers, which of the following statements is true of either the use of testimonials or performance figures in advertisements for an investment adviser?

Gross performance may be cited only if the advertisement also presents net performance.

Performance figures may be presented on either a gross or net basis, at the investment adviser’s discretion.

Testimonials of any kind are prohibited in advertisements for investment advisory services.

Any performance figures must be accompanied by a clear statement that the Commission has reviewed and approved any calculation or presentation of performance results.

Answer 174

Gross performance may be cited only if the advertisement also presents net performance.

Gross performance does not factor in the deduction of advisory fees; therefore, if the advertisement quotes gross performance, it must also quote performance net of fees. Testimonials are now considered a form of advertisement, subject to new SEC rules. The SEC does not allow advisers to claim that the SEC has “approved” of anything connected to the firm.

Question 175

Which of the following securities may have to be registered under Blue Sky laws?

FNMA securities
Treasury Bonds
REITs
GNMA securities

Answer 175

REITs

Treasury’s and GNMA/FNMA/FHLMC . . . are ALL EXEMPT SECURITIES. A REIT would only be exempt if it were a federal covered security–on NYSE, NASDAQ, or NYSE AMEX.

Question 176

The investment policy statement for a qualified retirement plan requires the investment manager to purchase several securities that are clearly not consistent with prudent investor standards. Therefore, the investment manager

must follow the policy statement, regardless of its consistency with ERISA

must follow the policy statement and purchase the securities

may over-ride the policy statement if it is inconsistent with ERISA

may purchase the securities as long as a like amount is sold short

Answer 176

May over-ride the policy statement if it is inconsistent with ERISA

Follow the policy statement, unless the statement itself VIOLATES ERISA. The only time to override policy statement is if it is in violation of ERISA rules

Question 177

what are rules for use of solicitors

Answer 177

If solicator agreements are met and advisor is registered then
not all states consider solicitors to be IARs, and do not need to be registered

Question 178

One of your investment advisory clients has lived in his current residence 4 years and is convinced he could sell for a large capital gain. But, he favors renting the house for a few years to see if real estate prices will continue to rise. Which is the best response to give?

consult with a qualified tax professional
sell the residence and claim up to a $250,000 tax-free capital gain
rent the house for two years and then sell, claiming a tax-free capital gain up to $250,000
rent the house for two years on a cash basis without any formal rental documents, and then sell for a tax-free capital gain up to $250,000

Answer 178

consult with a qualified tax professional
Rationale
if he rents the house for two years, it is no longer a residence, so the tax-free capital gain is not available. Renting the house allows him to depreciate for tax purposes and write off improvements and repairs. Either way, an RIA or IAR needs to know about tax issues, but needs to know when to pass them off to a qualified tax professional.

Question 179

A securities agent is having lunch with a long-time customer. The customer informs the agent that she is not happy with the recent losses in her mutual funds and has a letter in a sealed envelope expressing her displeasure addressed to the branch office supervisor in the office where the agent works. What should the agent do?

attempt to resolve the situation himself
accept the letter and, after reading it himself, decide if it should be escalated to the branch supervisor
deliver the letter unopened to the branch supervisor
check for any supplemental SIPC coverage available to the customer

Answer 179

Deliver the letter unopened to the branch supervisor

agents must forward all written complaints to their principal/supervisor.

Question 180

If a broker-dealer is registered with 11 state securities Administrators, with its headquarters in State A, what is true when the states have different net capital requirements for broker-dealers?

the firm must meet the average of the aggregate requirements for net capital
the firm must meet the SEC net capital requirements under the Securities Exchange Act of 1934
the firm must meet the requirements of the state with the most stringent requirements
the firm must meet the requirements established by State A

Answer 180

the firm must meet the SEC net capital requirements under the Securities Exchange Act of 1934
Rationale
the SEC establishes net capital requirements for broker-dealers under the “exchange Act.” For advisers registered with the state securities Administrator . . . the adviser just has to meet the requirements of its “home state.”

Question 181

Which of the following most likely is subject to registration as an Investment Adviser Representative?

an independent solicitor for an investment adviser who provides no advice himself

a financial planner who owns her business as a single-member LLC

an individual who sells open-end funds and variable contracts on behalf of a broker-dealer with a place of business in the state

an individual working for a state-registered investment adviser, whose job functions are limited to answering inbound calls and performing the role of an office manager

Answer 181

an independent solicitor for an investment adviser who provides no advice himself

not all states require solicitors to register, but most do. The financial planner is an RIA. We also see a securities agent, and an employee of an RIA who does seem to be involved with investments.

Question 182

An investment adviser does not hold custody of client funds and securities, and does not wish to be deemed to be holding custody. However, last week a client inadvertently sent securities to the investment adviser and also a check made out to a third-party. All of the following statements are true of this situation except:

The adviser must forward the third-party check to the appropriate party within 3 business days

The adviser must return the securities to the client within 3 business days to avoid being deemed to have had custody

Even though the check is forwarded and the securities returned within specified time frames, additional records must be maintained by the adviser

To avoid being deemed to have had custody of the securities, the investment adviser may forward the securities to the qualified custodian

Answer 182

To avoid being deemed to have had custody of the securities, the investment adviser may forward the securities to the qualified custodian

securities are returned to the sender; third-party checks are forwarded to the payee … . both within 3 business days.

Question 183

Under state securities law, which of the following does the Administrator determine for investment advisory client contracts?

the maximum term of such contracts

the maximum compensation charged via such contracts

the allowed methodology to be used in managing accounts pursuant to such contracts

none of these choices

Answer 183

none of these choices

if the fees are considered excessive, that could lead to disciplinary action. But, the Administrator does not set the items listed. Primarily, the Administrator is interested in full disclosure, to their office and to clients.

Question 184

Which of the following represent accurate statements of the Uniform Securities Act’s registration requirements for persons? I. an agent is not a broker-dealer II. registrations expire on December 31st unless properly renewed III. registration fees are pro-rated so that registering in the second fiscal quarter would reduce the fee proportionally IV. an individual representing the issuer of the securities in a transaction is exempt

I, II
II, IV
I, II, IV
III

Answer 184

I, II

often the individual representing the issuer is exempt or excluded from the definition of “agent,” but that is only if the security or the transaction qualifies for an exemption.

Question 185

A securities agent meets with a customer in the early evening and sells her two mutual funds from the ABC Funds Family for a total investment of $52,000. Therefore,

the agent may collect a check paid to any of his bona bide business checking accounts, with payment then transferred to the mutual fund company within 3 business days

the agent may collect a check paid to any of his bona bide business checking accounts, but may not accept cash or cashiers checks from customers

the agent should collect payment made out to the mutual fund company

the agent should collect no payment at this time because the markets are closed

Answer 185

The agent should collect payment made out to the mutual fund company

payment should be made to the mutual fund company, NEVER to the agent.

Question 186

what are rules concerning political contributions and municipal securities underwriting firms?

Answer 186

municipal finance professionals–but not their employing firms–may make contributions to any candidate for whom they are eligible to vote up to $250

only the municipal finance professionals can donate to officials for whom they are eligible to vote, up to $250, without causing the firm to take a 2-year break from doing business with the entity related to that governor, mayor, etc.

Question 187

What is true of “exempt reporting advisers” under the Investment Advisers Act of 1940?

they are exempt from SEC registration and registration with any state securities Administrator

they are exempt from SEC registration but may be subject to registration with state securities Administrators

they are registered under the Investment Advisers Act of 1940 but exempt from filing any reports with either the SEC or the state securities Administrators

they are exempt from registration with any securities regulatory authority

Answer 187

They are exempt from SEC registration but may be subject to registration with state securities Administrators

they don’t have to register with the SEC; they may have to register with the state securities Administrators. Either way, they must file reports with the SEC, even though they are exempt from registration with the SEC.

Question 188

A business owner meets a few friends at a local restaurant and over dinner borrows $10,000 from all three friends, issuing them each a promissory note in exchange for their personal checks. Therefore,

this constitutes an offer and sale of a security

this type of business financing is outside the scope of securities law

this type of private business financing does not involve the offer or sale of an actual “security”

provided a reasonable rate of interest was offered on the notes, no fraud has occurred

Answer 188

This constitutes an offer and sale of a security (pg 299)

a NOTE is the first example of a security named in the Uniform Securities Act. If the business owner defaults, the Adminstrator could take action for making unregistered offers of securities, for not being a registered agent himself, and for engaging in fraud. In fact, this is a very common occurrence in most states.

Question 189

According to the Uniform Prudent Investor Act, when can an investment adviser representative acting as a fiduciary decide not to diversify a portfolio?

when so doing would best serve the objectives of the beneficiaries

when the portfolio is comprised entirely of FDIC insured products

at any time, provided the decision is consistent with prevailing standards of investment professionals serving in similar capacities

when the decision would impact only the fixed-income portion of the portfolio

Answer 189

REVISIT ACT:
When so doing would best serve the objectives of the beneficiaries

the Uniform Prudent Investor Act definitely stresses the importance of diversification in managing the risk/reward characteristics of the portfolio, but Section 3 also states that, “A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”

Question 190

Tom and Tina Thompson are a married couple trying to decide whether they should set up a joint account in their name or an account for the beneficial ownership of their daughter, under the Uniform Transfers to Minors Act. If you are their registered representative, what advice should you provide concerning the tax and financial ramifications of their decision?

if you and your immediate supervisor both agree that an UTMA account is best, an UTMA account should be opened

based on your experience, you should provide the paperwork for the account you determine best meets their needs

you should advise the Thompsons to consult with a tax attorney on this legal issue

as a fiduciary, you must determine which account best meets their needs

Answer 190

REVIEW MATERIAL FOR WHEN NEED TO REFER TO ATTORNEY

You should advise the Thompsons to consult with a tax attorney on this legal issue
Rationale
you need to understand the basics when it comes to taxation of bond interest, dividends, etc., but when the issue is complex, it often makes sense to consult with an attorney, CPA, or other specialist.

Question 191

While golfing with you the other day, a business acquaintance informs you that he would like to become a client of your financial planning firm. You have a contract in your golf bag but do not have a copy of the firm’s disclosure brochure. What is true of this situation?

as long as the brochure is delivered within 5 business days, you may obtain the client’s signature on the contract
you may not accept the client’s signature at this time
as long as you provide the disclosure brochure 48 hours after the client signs, you may accept the signature at this time
if the acquaintance has either $1.5 million liquid net worth or $750,000 of assets for the firm to manage, the brochure need not be delivered

Answer 191

REVIEW DISCLOSURE REQUIREMENTS

You may not accept the client’s signature at this time

you shouldn’t get the customer to sign the contract without providing the disclosure document (which can be a copy of ADV Part 2). You either provide it 48 hours before taking their signature, or you give it to them at the time of signing if they have 5 days to cancel.

Question 192

According to the Uniform Securities Act, who must notify the Administrator if an IAR leaves his employment at a federal covered adviser with a place of business in the state and is then hired by a financial planning firm registered with the Administrator

both advisory firms and the IAR must notify the Administrator

only the state-registered firm must provide notification to the Administrator in this situation

only the two advisory firms must provide notification to the Administrator

the IAR must notify the Administrator of his termination with the federal covered adviser, while the investment adviser who hires the IAR must notify the Administrator

Answer 192

REVIEW RULES FOR IAR VS AGENT NOTIFYING UNDER FEDERAL COVERED ADVISOR:

the IAR must notify the Administrator of his termination with the federal covered adviser, while the investment adviser who hires the IAR must notify the Administrator

it’s an either-or situation for the advisory business. If the firm is federal covered, only the IAR provides notification. If the firm is state-registered, only the firm provides notification.

Question 193

An investment adviser in the course of its business relies partially on statistical reports and analyses prepared by others when determining strategies and recommendations for client accounts. According to NASAA’s model rule on unethical business practices for investment advisers, which of the following is accurate?

advisers may not rely on the work of outside third parties when rendering advice to their clients

the adviser must disclose the source of all such reports and analyses connected to each subsequent client recommendation

as long as the adviser discloses this practice in ADV 1 and ADV 2, no further disclosure is required

this practice is considered highly unethical but neither prohibited nor fraudulent

Answer 193

REVISIT DISCLOSURE OF 3RD PARTY E REQUIREMENTS

As long as the adviser discloses this practice in ADV 1 and ADV 2, no further disclosure is required

investment advisers frequently order reports and analyses that assist in making recommendations or trading portfolios. They disclose this practice in the disclosure brochure to prospects and clients, as well as in ADV 1 when registering and renewing.

Question 194

Which of the following present potential conflicts of interest that a compliance officer at an advisory firm should pay special attention to?

Many IARs lack either the CFP or CFA designation.

IARs often invest in the same securities recommended to clients.

IARs are also licensed as securities agents.

A high percentage of customers invest in equity securities and options.

Answer 194

REVIEW ETHICAL PRACTICES

IARs often invest in the same securities recommended to clients.

investment advisory firms are responsible for supervising the personal trading of their IARs to make sure no one is engaging in frontrunning.

Question 195

The CFO of an issuer represents the company in selling short-term debt securities to banks and S&L’s. If he receives no special compensation for the sales, he

must register as a broker-dealer
is an agent but need not register
must register as an investment adviser
is not an agent and need not register

Answer 195

is not an agent and need not register
Rationale
he represents an issuer in an exempt transaction. He’s not being hired to sell securities in exchange for commissions—he is clearly not an agent.

Question 196

Which of the following statements is true of various shareholder voting methods?

large shareholders prefer statutory voting
large shareholders prefer cumulative voting
small/minority shareholders prefer statutory voting
neither term is currently in use since the passage of Dodd Frank

Answer 196

REVIEW VOTING METHODS - PG 119
large shareholders prefer statutory voting
Rationale
cumulative voting benefits minority shareholders, while statutory benefits the large/majority owners, including the officers and directors of the company.

Question 197

Which of the following must register as an investment adviser in the state?

an adviser with an office in the state whose only clients are banks and large pension funds

an IAR with no place of business in the state serving 6 married couples in the state

an IAR with an office in the state working for a federal covered adviser

an SEC-registered adviser with no place of business in the state but who services 7 non-institutional clients in the state

Answer 197

PLACE OF BUSINESS MUST REGISTER

Correct Answer: an adviser with an office in the state whose only clients are banks and large pension funds
Rationale
an IAR is not an adviser. The SEC-registered adviser would only notice file–which is not a registration–in those jurisdictions where it maintains a place of business.

Even though the adviser who has to register only serves institutional accounts, more importantly, it has a place of business in the state.

Question 198

Under the Uniform Securities Act when do registrations of securities offerings that have been declared effective expire?

on December 31st, unless properly renewed
when the underwriters file a statement of completion with the Administrator
one year from the effective date
upon the last sale of the securities so registered

Answer 198

one year from the effective date

1 year from the effective date. Registrations for persons in the industry expire based on the calendar each year. A securities offering is not an ongoing thing, unlike an agent’s registration, for example.

Question 199

What is the main difference between an investment adviser representative and a registered representative?

Registered representatives are fiduciaries.

Investment adviser representatives are compensated both for selling securities and managing customer accounts.

Investment adviser representatives have a fiduciary duty to their clients.

Registered representatives are compensated both for selling securities and managing customer accounts.

Answer 199

RR IS AN AGENT FOR BD

Correct Answer: Investment adviser representatives have a fiduciary duty to their clients.
Rationale
Registered representatives sell securities. IARs manage accounts, sell advisory services, or provide financial planning services on behalf of an IA. Only the RIA and IARs are defined as fiduciaries to all clients.

Question 200

All of the following would violate an investment adviser’s duty to obtain the best execution of client trades EXCEPT

directing transactions to a full-service broker-dealer that charges higher commissions than other firms but also has superior execution capability and superior research services

directing the transaction to a firm that does not make a market in the security, thereby raising execution costs

all of the choices given violate the adviser’s duty to clients

directing the transactions to a broker-dealer that charges high commissions but shares a percentage of the commissions with the adviser

Answer 200

directing transactions to a full-service broker-dealer that charges higher commissions than other firms but also has superior execution capability and superior research services

“best execution” involves more than just “lowest price.”

Question 201

When completing the U-4 form an applicant is asked if she has ever been convicted of a securities-related misdemeanor. Although convicted 13 years earlier of misdemeanor embezzlement from a credit union ($450), the applicant responds “no” to this question. Therefore

the applicant has answered correctly, as the embezzlement did not take place in the securities business
the applicant has answered correctly, as the conviction occured more than 10 years earlier
the applicant has answered untruthfully and is subject to denial of licensure
the applicant has answered untruthfully but is not subject to Administrative action

Answer 201

the applicant has answered untruthfully and is subject to denial of licensure

U-4 doesn’t mention anything about “in the past 10 years.” Only Form ADV asks the question that way. This is “securities-related” because it’s a “money crime” and people handle money in the securities industry.

Question 202

A newly registered investment adviser will maintain custody over some client assets. The Administrator determines that the adviser’s minimum financial requirements are deficient by $15,000. The adviser would like to deposit securities in lieu of a bond. Therefore,

the Administrator may stipulate which securities are acceptable as a deposit
the Administrator may insist that the adviser deposit cash in lieu of securities
the securities deposited must be issued in the state
the Administrator must accept the deposit regardless of the securities’ issuer or issuers

Answer 202

the Administrator may stipulate which securities are acceptable as a deposit

the Administrator can stipulate which securities are acceptable, but the Administrator can not force the adviser to post cash instead of securities to satisfy the bonding requirement.

Question 203

Marvin McVicker makes computer models for an investment adviser that help the IARs determine and make recommendations to their high-net-worth clients, and explains their significance to the IARS at a weekly meeting. Therefore,

Marvin is not an investment adviser representative.

Marvin is an investment adviser representative, but is not subject to registration requirements if the firm is a federal covered adviser.

Marvin is most likely an investment adviser representative, whether the employer is state- or federally-registered.

Marvin is an investment adviser.

Answer 203

Marvin is most likely an investment adviser representative, whether the employer is state- or federally-registered.

if the individual employed by an investment adviser helps to determine recommendations made to clients, he is most likely an IAR.

Question 204

What is a “networking arrangement”

Answer 204

A “networking arrangement” occurs when a broker-dealer operates on the premises of a traditional bank.

Question 205

An investing client is in her early 50’s. She participates in her employer’s 401(k) plan, maximizing her annual contributions. For her taxable account, she is seeking income that is tax-efficient primarily. Which of the following might you recommend to this investor?

municipal bonds, if she is in a lower- or middle- marginal tax bracket
preferred stock, if she is in a lower- or middle- marginal tax bracket
small cap growth stocks or funds
money market mutual funds

Answer 205

preferred stock, if she is in a lower- or middle- marginal tax bracket

Municipal bonds are correctly associated with tax-efficient income, but if the investor is not in the top marginal bracket, her tax-equivalent yield on the municipal bonds would not be especially high. However, paying qualified-dividend rates on preferred stock dividends would be efficient.

Question 206

Which of the following require disclosure on the part of a broker-dealer?

the broker-dealer operates on the same premises where retail bank deposits are taken

a transaction for or with a customer involves a security issued by an entity that controls the broker-dealer, is controlled by the broker-dealer, or is under common control

the broker-dealer is a member of SIPC

Answer 206

All choices listed

Rationale
a BD operating at a bank is known as a “networking arrangement,” requiring many different types of disclosure to customers.

Question 207

All of the following statements are true of open-end funds except

the ex-dividend date is set by the board of directors
they are called mutual funds
their shares trade over-the-counter
they are priced by a formula

Answer 207

Their shares trade over-the-counter
Rationale
mutual fund shares ARE NOT TRADED—they are redeemed to the fund for NAV. The closed-end fund shares trade, either on an exchange or OTC.

Question 208

For an investment adviser to enter into or renew a contract that provides for performance-based compensation, all the following conditions must be met EXCEPT

The adviser holds custody of client funds in excess of $35,000.

Capital depreciation must offset capital appreciation.

The adviser reasonably believes the client understands the terms.

The client must meet net worth or assets-under-management requirements.

Answer 208

The adviser holds custody of client funds in excess of $35,000.

there is no requirement that an IA hold custody; in fact, some Administrators do not allow custody by investment advisers., ALL other factors must be met

Question 209

According to the NASAA model rule, “Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, And Federal Covered Advisers,” an investment adviser may borrow money from all of the following EXCEPT

an affiliate of the investment adviser
an unaffiliated federal covered adviser
a client that is a commercial bank
a client that is a savings & loan

Answer 209

An unaffiliated federal covered adviser
Rationale
an IA may borrow from a client that happens to be a lending institution. IAs may also borrow from individuals and firms affiliated with the adviser.

Question 210

What are Blue Sky Laws

Answer 210

State Securities registration rules

Question 211

If a registered investment adviser uses third-party solicitors, what does the SEC require of the adviser in terms of record keeping?

Answer 211

A copy of the solicitor disclosure document as well as the RIA must keep a list of all parties compensated for soliciting clients including the total cash and non-cash compensation paid and a summary of the business relationship with that entity (e.g., consulting, prime brokerage, securities lending, etc.). And, all agreements, correspondence and the separate disclosure documents for third-party solicitors.

Question 212

When would an investment advisory need to disclose to clients that “assignment” has occurred?

Answer 212

“assignment of contract” occurs when a partner with a majority stake is admitted, leaves, or dies. Assignment can happen when a controlling block of the adviser’s securities are transferred or “hypothecated,” too. If the firm is a partnership, no assignment occurs based on partners with minority stakes, although the fact that the change occurred must be disclosed to clients. It’s just not considered “assignment.”

Question 213

For a properly licensed securities agent, under what types of events would require disclosure by promptly (no later than within 30 days) updating U4 information?

Conviction of misdemeanor assault
Agent accepts a plan to repay a credit card issuer a % of the debt owed
Arrested for misdemeanor DUI

Answer 213

the agent accepts a plan to repay a credit card issuer a % of the debt owed.

Any activity involving credit, bankruptcy, short home sale must be reported

An arrest is not the same as a “charge.” Any charge or conviction of any felony must be disclosed. Any charge or conviction of a misdemeanor involving crimes of a financial or fraudulent nature must be disclosed–not misdemeanor DUI or misdemeanor assault.

Question 214

An accountant provides portfolio allocation strategies for some of her tax preparation clients. What policy accurately addresses this practice?

Answer 214

Unless she charges clients nothing for services–including tax preparation services–she most likely is an adviser and subject to registration requirements.

If she receives compensation of any kind, and part of her services involve providing investment advice, she is an investment adviser. It does not matter how she itemizes her bills–if she provides investment advice for compensation, she is an investment adviser.

Question 215

How does the executor or administrator determine the fair market value (FMV) of inherited stock,

Answer 215

Takes the average of the stock’s high and low trading prices on the date of death. A question like this seems somewhat unlikely given the extreme level of detail.

Question 216

What does it mean to be a qualified custodian

Answer 216

A qualified custodian is a type of institution that is approved by regulators to hold assets on behalf of clients. For example, a bank is a qualified custodian.

Question 217

An investment adviser is the trustee of a testamentary trust. What is true of the adviser’s ability or inability to receive payment for advisory fees directly from the qualified custodian of the trust?

Answer 217

The custodian may pay the adviser directly if attorneys for the trust have authorized the qualified custodian in writing to pay those fees

The qualified custodian has to be authorized to make this payment of advisory fees directly to the adviser.

Question 218

An investment adviser who does not wish to be deemed to have custody of client assets is able to send a bill to the custodian for payment of the clients advisory fee. Under what condition is this allowed?

Answer 218

As long as the adviser follows certain safeguards, the minimum financial requirements and CPA audit are waived

The adviser would be deemed to have custody, but if he follows the safeguards (client authorization, billing statements to custodian and client) the minimum net worth and CPA surprise audit are waived.

Question 219

If an investment adviser is the GP of a pooled investment vehicle, what is true of its duty to report to the LPs?

Answer 219

The adviser must deliver account statements to each LP or deliver audited financial statements annually and notify Administrator

The adviser does have custody and either sends account statements or audited financial statements annually. If the latter, must notify the Administrator.

Question 220

When Karen, an Investment Adviser Representative for a federal covered adviser with an office in the state, leaves that firm and joins a financial planning firm registered in the state, what is the appropriate notification requirements under the Uniform Securities Act?

Answer 220

Karen must notify the Administrator of the termination; the state-registered adviser must notify the Administrator of the new association

Unlike the brokerage side–where both the agent and the employer must notify–on the advisory side either the state-registered IA or the IAR notifies the Administrator.