Chpt 1

Question 1

de minimus

Answer 1

• De minimis is from the Latin meaning insignificant.
• de minimis is used to define the number of clients of an investment adviser or IAR at which registration with the state is not required.

Question 2

qualified purchaser

Answer 2

-Natural persons who wish to meet the qualified purchaser definition must have not less than $5 million in investments. There are no specifications for a sophisticated investor, and the other choices can be met with much less than $5 million.

Question 3

agent of a broker-dealer

Answer 3

• an individual over the age of majority
• an agent must be a natural person (an individual)
• as a person, the individual cannot be a minor
• not all persons can be agents, only natural persons
• that eliminates business structures such as partnerships and corporations

Question 4

qualifies for an exemption from registration as an agent.

Answer 4

Clerical and administrative personnel are specifically excluded from the definition of an agent. As such, there is nothing for them to be exempt from. Registration is not based on how much time the employee works; it is based on the function.

Question 5

self-regulatory organizations (SROs)

Answer 5

FINRA
MSRB
CBOE (any exchange)

Question 6

natural person

Answer 6

• Only a natural person can be an investment adviser representative
• Although there are sole proprietorship investment advisers and broker-dealers, those business more often are structured as legal persons (e.g., corporations or partnerships).

Question 7

guaranteed security

Answer 7

When a security is guaranteed, that means that someone other than the issuer has guaranteed timely payment of interest and principal on a debt security, or the payment of dividends on an equity security. No one ever guarantees that the investor will have a capital gain.

Question 8

securities professional would be exercising discretion

Answer 8

Discretion is noted by having the ability to determine any one or all of the three As. That is, select the Amount (how many shares or bonds); select the specific Asset; or the Action taken (buy or sell). Determining the time to submit the order or the price at which to submit the order is not considered discretion.

Question 9

registrant

Answer 9

Any person wishing to register in any capacity, whether a broker-dealer, investment adviser, agent, or investment adviser representative, is legally referred to as the registrant. The term is also used when an issuer files a registration statement with the Administrator when it wants to issue stock or bonds

Question 10

National Securities Markets Improvement Act of 1996

Answer 10

It is the NSMIA, passed in 1996, that created the category of federal covered investment adviser—an adviser that is not required to register at the state level. The USA is not federal law and the Securities and Exchange Act established regulation of exchanges.

Question 11

qualified purchaser

Answer 11

Natural persons who wish to meet the qualified purchaser definition must have not less than $5 million in investments. There are no specifications for a sophisticated investor, and the other choices can be met with much less than $5 million.

Question 12

excluded from the definition of an agent

Answer 12

Clerical and administrative personnel are specifically excluded from the definition of an agent. As such, there is nothing for them to be exempt from. Registration is not based on how much time the employee works; it is based on the function.

Question 13

state employee

Answer 13

Broker-dealers with no place of business in a state are not required to register in that state if their only clients in that state are institutions, such as banks and insurance companies, are other BDs, or are the issuers of the security. However, if there is even one noninstitutional (retail) client, regardless of the nature of the individual’s employer, registration is required.

Question 14

investment adviser

Answer 14

The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers may have to register as BDs if their method of operation requires it.

Question 15

A broker-dealer with no place of business in the state would not be required to register with the Administrator unless one of its clients was

Answer 15

• an employee benefit plan with assets of less than $1 million.
• As defined in the Uniform Securities Act, broker-dealer does not include a person who has no place of business in this state if he effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions; other BDs; or banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, employee benefit plans with assets of at least $1 million, or other financial institutions or institutional buyers.

Question 16

In compliance with the Uniform Securities Act, a broker-dealer without a place of business in a state meets the definition of a broker-dealer when

Answer 16

• it has fewer than six retail clients who reside in the state
• Once there is even one retail client in a state, the firm is a broker-dealer in that state and must register as such. The exam is likely to throw something like this at you hoping you will confuse it with the de minimis exemption available to investment advisers and their representatives. There is an exclusion when there is no place of business in the state and the clientele is exclusively other BDs, institutions such as investment companies, and employee benefit plans with at least $1 million in assets.

Question 17

Revocation of the registration of that agent’s broker-dealer will result in cancellation of that agent’s effective registration

Answer 17

An agent of a broker-dealer is active only when that BD’s registration is in force. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers, directors and partners when the firm first registers in a state.

Question 18

The term investment adviser representative

Answer 18

An employee who solicits new business for an adviser

A supervisor who oversees employees who manage client portfolios for an adviser

Question 19

According to the Uniform Securities Act, once an individual passes the appropriate exam, asset-based compensation is permitted

Answer 19

when registration has been granted by the state Administrator.
after notification of investment adviser representative status by the appropriate supervisory person of the firm.

Question 20

The sole proprietor of a retirement planning business that exclusively provides advice on fixed-income annuity contracts

Answer 20

need not register under any securities laws.
The sole proprietor of this business need not register under the Uniform Securities Act or Investment Advisers Act. Advice is provided solely on fixed-income annuities, which are insurance products, not securities. Regulations under the USA, as well as federal securities laws, only apply to securities. If the advice was on variable annuities, because those are securities, registration is required.

Question 21

An investment adviser need not register in a state if it has

Answer 21

• no place of business in the state and only advises 33 insurance companies located in the state.
• An investment adviser need not register in a state if it has no place of business in the state and advises such institutional clients as insurance companies or banks. The number of clients is irrelevant as long as they all are of an institutional nature. Without exception, the USA requires an IA to register in a state if it has a place of business in the state. With no place of business in the state, registration would not have been required regardless of the number of banks who were clients. With five or fewer noninstitutional clients, regardless of their net worth, no registration would be necessary under the de minimis provisions of the USA.

Question 22

An investment adviser need not register in a state if it has

Answer 22

• no place of business in the state and only advises three insurance companies located in the state
• An investment adviser need not register in a state if it has no place of business in the state and advises such institutional clients as insurance companies or banks. The number of clients is irrelevant as long as they all are of an institutional nature. Without exception, the USA requires an IA to register in a state if it has a place of business in the state. With no place of business in the state, registration would not have been required, regardless of the number of banks who were clients. With five or fewer noninstitutional clients, regardless of their net worth, no registration would be necessary under the de minimis provisions of the USA.

Question 23

State securities Administrators may require all of the following except

Answer 23

• minimum recordkeeping retention periods by registered investment adviser representatives
• Individuals registered as investment adviser representatives (or agents) never have to meet recordkeeping standards. Broker-dealers and investment advisers have to meet net capital or net worth requirements.

Question 24

Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser?

Answer 24

• ABC Money Managers, a partnership with $385 million under management
• It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply to it. Under the Dodd-Frank Act, the pension consultant must have $200 million under management to be eligible to be federal covered.

Question 25

State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act?

Answer 25

• Investment adviser representative
• The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.

Question 26

Under the Uniform Securities Act, which of the following is an investment adviser?

Answer 26

• Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee
• Although an attorney is generally excluded, Jill is giving investment advice for a fee in a manner that is not incidental to her legal practice. Jane’s advice does not concern securities; banks are excluded from the definition; Tom’s advice is not specific on the basis of the situation of each client (impersonal advice).

Question 27

Which of the following regarding the registration of investment advisers and their representatives is true?

Answer 27

• ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly.
• Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the IAR. IARs of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, both the broker-dealers and the agents must notify the Administrator.

Question 28

Which of the following statements is are true?

Answer 28

Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of notice filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not IAs. A person who conducts business exclusively with banks and savings institutions is a BD under the USA if he has a place of business in the state. Had the person no place of business in the state and conducte

Question 29

The registration of an investment adviser would automatically register investment adviser representatives who are

Answer 29

Section 202(a) of the Uniform Securities Act states, “Registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions.” By including “any investment adviser representative,” it means that these individuals are already registered as IARs in at least one state. Certainly, especially in larger firms, there will be officers or directors who will not be getting licensed because their activities do not require it.

Question 30

Which of the following are not exempt from registration as an investment adviser representative in the state in which they maintain a place of business

Answer 30

A certified financial planner who prepares comprehensive financial plans for commissions must register in the state as an investment adviser representative because the commissions represent compensation for advice on securities. In the language of the industry, comprehensive financial plans include advice on securities. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an IAR and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

Question 31

Enterprise Asset Research (EAR) is an investment adviser whose most recent annual updating amendment showed assets under management of $900 million. EAR’s principal office is in State O and there are branches in State P and State I. Which of the following statements about the registration requirements of EAR’s investment adviser representatives (IARs) is true?

Answer 31

• Those investment adviser representatives with a place of business in State I register in State I only.
• The first step in this question is to recognize that EAR is a federal covered investment adviser ($900 million in AUM). Once we recognize that fact, we know that IARs representing covered IAs are required to register only in those states in which they (the IARs) maintain a place of business. An IAR whose only place of business is State I registers there and nowhere else.

Question 32

State securities Administrators may not impose which of the following?

Answer 32

• Minimum net worth levels on registered investment adviser representatives
• Individuals registered as investment adviser representatives (or agents) never have to meet net worth or net capital standards. Broker-dealers and investment advisers have to meet net capital or net worth requirements. Investment advisers with custody can, at the discretion of the Administrator, post a surety bond in lieu of minimum net worth requirements. In general, that would be a bond in the amount of $35,000.

Question 33

Investment advisers register with the SEC or with the state(s). Which of the following forms is used solely by state-registered investment advisers?

Answer 33

• Form ADV Part 1B
• Form ADV Part 1B asks additional questions required by state securities authorities. Federal covered advisers do not complete Part 1B. All investment advisers complete both Form ADV Part 2A and 2B as well as Form ADV Part 1A.

Question 34

Tom Mix is registered as an investment adviser representative with Destry Digital Advisers (DDA). DDA is registered in States T, O, N, and Y while Mix is registered in State T. If Mix has discretionary authority over several client accounts, what would State T’s financial requirements be?

Answer 34

• No minimum financial requirements placed upon investment adviser representatives
• There are no minimum net worth or bonding requirements for IARs. DDA would have to maintain a minimum net worth of at least $10,000 or a surety bond in the amount of $35,000, but the question asks about Mix. The SEC’s requirements have no relevance here because neither DDA nor Mix are registered with the SEC.

Question 35

A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use

Answer 35

• notice filing.
• Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.

Question 36

Under the Uniform Securities Act, a limited offering transaction would be considered an exempt transaction if

Answer 36

• the offer is directed to no more than 10 individuals during any 12-month period.
• the issuer believes that each noninstitutional purchaser is buying the securities for investment purposes.
• commissions are not paid to agents of the broker-dealer offering the securities to noninstitutional clients.
• In order for a limited offering transaction (private placement) to remain an exempt transaction under the Uniform Securities Act, the offer may be directed to no more than 10 individuals during any 12-month period. When the securities are purchased, payment is made, but no commissions may be paid to agents on sales to noninstitutional buyers. Finally, the issuer must have a reasonable belief that each noninstitutional buyer is buying the securities for investment purposes.

Question 37

As defined in Section 402 of the Uniform Securities Act, which of the following is not an exempt transaction?

Answer 37

• The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered broker-dealer
• In the case of a U.S. government security, the security is exempt, but the transaction is not. The USA does not care about the wealth of the individual; unless specifying the order was unsolicited or the individual was acting in the capacity of an executor (or similar circumstance), sales to individuals are never exempt transactions. All of the other choices are exempt transactions because they are either to an institutional investor, to existing owners for no consideration, or by a fiduciary.

Question 38

Which of the following statements is not true?

Answer 38

• Exempt securities must reestablish their exemptions at least annually.
• Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt, while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive, and a security or transaction may qualify for two or more of these exemptions. The term federal covered securities includes registered investment companies as well as securities listed on national exchanges.

Question 39

Which of the following transactions would constitute a violation of the Uniform Securities Act?

Answer 39

• An individual, acting on behalf of an issuer, selling shares of an unregistered nonexempt security to fewer than 15 noninstitutional clients
• The sale of a Canadian government bond to the resident of a state in which the agent is not registered
• Representing an issuer of certain exempt securities (the municipal bond) or of a non-exempt security that is sold in an exempt transaction (Choice I) does not require registration. If the sale is of an unregistered nonexempt security, the only way the individual could sell on behalf of the issuer without being an agent is if it was in an exempt transaction, one of which is the limited offering exemption (private placement). That applies when there is a maximum of 10 offers to retail clients within a 12-month period and Choice II uses the term sells. Without knowing the number of offers, we cannot determine if the individual’s actions qualify as an exempt transaction. In the case of doubt, assume they don’t. Even though the Canadian bond is an exempt security, any agent must be registered in the state(s) in which the security is sold; the exemption applies to the security, not the agent.

Question 40

Under the Uniform Securities Act, in order for a security to be sold in this state, it must meet any of the following except

Answer 40

• carry a rating of AA or higher.
• The Uniform Securities Act makes it clear that it is unlawful to offer or sell any security in the state unless the security is registered, exempt from registration, a federal covered security, or sold in an exempt transaction. There is nothing stated regarding rating.

Question 41

Under the Uniform Securities Act, in order for a security to be sold in this state, it must meet any of the following except

Answer 41

• carry a rating of AA or higher.
• The Uniform Securities Act makes it clear that it is unlawful to offer or sell any security in the state unless the security is registered, exempt from registration, a federal covered security, or sold in an exempt transaction. There is nothing stated regarding rating.

Question 42

Among the many exempt transactions under the Uniform Securities Act are the private placement an

Answer 42

• The private placement exemption places a limit on the number of sales to retail investors while the preorganization certificate places a limit on the number of offers to all investors.
• Payment for the purchase may be made in the case of a private placement, while no money changes hands in a preorganization subscription.
• No money changes hands in the sale of a preorganization certificate or subscription, while the seller receives payment in the case of a private placement. The state will consider a private placement an exempt transaction if it is anticipated that individual (noninstitutional) investors are purchasing for investment only, not immediate resale. No holding period restrictions are placed on preorganization certificates. Only in the case of a sale of a private placement to an institutional client is it permissible to pay commissions. Finally, Choice I has it backwards. When referring to retail (noninstitutional) investors, there is a limit to the number of offers (10), while in the preorganization certificate, the number of sales (subscribers) is limited to 10, regardless of whether they are retail or institutional.

Question 43

All of the following are exempt transactions under the Uniform Securities Act except

Answer 43

• an initial sale of shares to in-state residents of a local manufacturing company.
• An initial sale of shares to in-state residents is an intrastate initial public offering and must be registered with the state securities Administrator. A securities transaction by an executor; a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator; or a rescission offer, sale, or purchase are exempt transactions.

Question 44

The term used to describe a customer-initiated order that includes all of the details except time and price is

Answer 44

• unsolicited
• When the order to buy or sell is initiated by the customer, it is considered to be an unsolicited order. Discretionary orders leave the decision as to what security, how much, and buy or sell up to the designated agent. This is an exempt transaction, not an exempt order.

Question 45

A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered with the Administrator if each of the following conditions are met except

Answer 45

• it must be in book entry form.
• This is a very rare case where the correct answer is something you haven’t seen anywhere in our units (it is described in the glossary). The term book entry means there is no physical certificate and the record of ownership is kept on a computer. It is not necessary to know what book entry means because you can get this question correct by knowing that the other three are required. Commercial paper may qualify as an exempt security if the minimum denomination is $50,000, it has a maturity of not more than 270 days, and it is rated in one of the three highest rating categories by a nationally recognized rating agency.

Question 46

Under the Uniform Securities Act, which of the following is not a requirement for a preorganization subscription to be an exempt transaction?

Answer 46

• The offer of the security may not be advertised.
• There are three requirements for a preorganization subscription to qualify as an exempt transaction. A preorganization subscription may be advertised.

Question 47

All of the following are exempt from the registration requirements of the Uniform Securities Act (USA) except

Answer 47

• stock issued by a Canadian company that provides actuarial services to insurance companies.
• Securities issued by Canadian governmental entities, such as the federal government or the provincial governments and their municipalities, are exempt from registration under the USA in the same fashion as U.S. government and municipal securities. However, Canadian corporate issuers do not enjoy an exemption from registration unless qualifying under special conditions, such as being listed on the NYSE or Nasdaq, making it a federal covered security. Investment companies registered under the Investment Company Act of 1940, regardless of where they trade, are exempt from registration because they are federal covered securities.

Question 48

ABC Corporation, a newly formed company, has filed a registration statement with the SEC under the Securities Act of 1933. If they wish to use coordination to register in this state, which of the following statements is true?

Answer 48

• A statement of the maximum and minimum proposed offering prices and maximum underwriting discounts and commissions must be on file with the Administrator for two full business days prior to the date the federal registration statement becomes effective.
• One of the requirements of coordination is that a statement of the maximum and minimum expected offering prices and maximum underwriting compensation must be on file with the Administrator for at least two full business days prior to the effective date. The whole purpose of coordination is to coordinate federal and state registration so choosing “the federal registration makes state registration unnecessary” makes no sense. If it had said this was a federal covered security, there would be no discussion of coordination because covered securities are exempt from state registration.

Question 49

The term security includes all of the following except

Answer 49

• a Keogh plan invested exclusively in mutual funds.
• A Keogh plan, or any other retirement plan, is not defined as a security under the Uniform Securities Act. A right or warrant, voting trust certificates, and debentures are defined as securities.

Question 50

Under the Uniform Securities Act, which of the following statements regarding the limited offering exemption is true?

Answer 50

• The security that is the subject of the private placement need not be registered.
• Private placements are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. Such transactions are exempt from registration requirements.

However, payment is made when the purchase is made—these may be exempt from registration, but they are not free of cost. There is no prospectus because a prospectus is the document provided by registered issues.

Question 51

With regard to the registration requirements of the Uniform Securities Act (USA), which of the following statements are true?

Answer 51

• An application for registration must indicate the amount of securities to be issued in the state.
• The Administrator may require registrants to file quarterly reports.
• The USA requires that any application for registration include the amount of securities to be sold in that state. The Administrator has the power to request regular filings of reports, but no more frequently than quarterly. While the issuer is most commonly the registrant, application may also be made by selling stockholders and broker-dealers.

Question 52

Which of the following terms pertains to registration with the Administrator of a mutual fund, closed-end investment company, or unit investment trust that is registered under the Securities Act of 1933 and also registered as an investment company under the Investment Company Act of 1940?

Answer 52

• Notice filing
• Federal covered securities (securities listed on national stock exchanges, Nasdaq Stock Market, or investment companies registered under the Investment Company Act) are exempt from state registration. A notice filing may be required along with a payment of fees based on a schedule set forth by the Administrator.

Question 53

The Beneficial Protected Life Insurance Company (BPLIC) is authorized to do business in this state. Under the Uniform Securities Act (USA), included in the definition of exempt security would be BPLIC’s

Answer 53

• common stock.
• Included in the USA’s listing of exempt securities are securities issued, insured, or guaranteed by an insurance company authorized to do business in the state. Insurance company securities refer to the stocks or bonds issued by insurance companies, not the variable policies sold by the companies. Fixed insurance and annuity policies are not securities.