Hard Questions Flashcards
A broker-dealer (BD) registered in multiple states must meet the record retention requirements of
A)the SEC
B)the state with the most stringent requirement
C)the state where the BD is incorporated
D)the state where the principal office of the BD is located
A
One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well.
However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located.
ABC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities would not be defined as a broker-dealer in State N under the Uniform Securities Act if it had no offices in State N and
I.its only clients were insurance companies
II.it had contact with fewer than 6 State N residents in any 12-month period
III.its only solicitation of State N residents was through radio advertisements originating in State M but received in State N
IV.it occasionally engaged in firm commitment underwriting with issuers based in State N
A)I and IV
B)I and II
C)II and III
D)III and IV
A
A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state.
Which of the following statements is CORRECT regarding an unsolicited trade in an unregistered nonexempt security?
A)The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received.
B)It is only an exempt transaction if it is an order to buy; orders to sell an unregistered, nonexempt security would not be an exempt transaction.
C)The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period.
D)The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period.
D
The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgment of unsolicited orders be recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another.
MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA’s Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents?
A)Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price
B)Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price
C)Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation
D)Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm’s investment account, hoping to gain from market appreciation
D
Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, (that is their underwriting compensation), and market makers buy at the bid and sell at the ask earning the spread.
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state?
I.An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only
II.An adviser with a place of business in the state whose total fee income in the state amounts to $150
III.An adviser with no place of business in a state who only provides advice on fixed annuities
IV.An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940
A)I, II, and IV
B)I and II
C)I only
D)I, II, and III
B
Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable.
Which of the following firm’s earnings are likely to exhibit the greatest degree of sensitivity to the business cycle?
A)Food and beverage producer
B)Furniture producer
C)Entertainment producer
D)Telecommunications provider
C
Consumers buy fewer durable goods, such as furniture, during recessions and buy more during expansions. As a result, producers of these goods tend to have cyclical demand, revenues, and earnings. People do not decide to go to a movie (or rent one) based on the economy. Food and beverages is the stereotypical defensive industry and people use their phones regardless of the economic cycle.
Under the Investment Advisers Act of 1940, which of the following would NOT meet the criteria of persons associated with an investment adviser?
A)An individual whose only connection to the firm is a position on the board of directors
B)A manager in an investment advisory firm who supervises 5 investment adviser representatives
C)The individuals responsible for bringing new clients to an advisory firm
D)An individual whose only function is posting trades to client accounts
D
Persons associated with an investment adviser include members of the board of directors, officers, partners, or managers of an investment advisory firm. Sales representatives and other employees whose duties are not limited to clerical or ministerial functions are included as well. In most, but not all, cases, associated persons are required to register as investment adviser representatives.
A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should
A)accept the order because she received it in State A
B)accept the order because her broker-dealer is registered in all 50 states
C)accept the order because it is unsolicited
D)reject the order because she is not registered in State B
D
Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.
Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT
A)CIA’s advisory contract calls for the automatic deduction of advisory fees
B)checks made out to 3rd parties are forwarded within 3 business days
C)checks made out to CIA are deposited within 3 business days
D)CIA has a power of attorney granting authority to withdraw funds from the custodian
B
When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody.
The NASAA Model Rule dealing with business continuity plans is NOT concerned with
A)assignment of duties to qualified individuals in the event of the death or unavailability of key personnel
B)office relocation in the event of temporary or permanent loss of a principal place of business
C)ensuring that the investment adviser continues to generate profits during a business interruption
D)the protection, backup, and recovery of the investment adviser’s books and records
C
Although it would be nice if the IA could continue to be profitable, that was not NASAA’s concern when drafting this Model Rule. All of the other choices are important concerns.
If the yield curve becomes inverted, a likely cause would be that the Fed has
A)tightened long-term credit
B)loosened short-term credit
C)tightened short-term credit
D)loosened long-term credit
C
The Fed’s influence on rates is primarily on the short end of the yield curve. Both the discount rate, which it sets, and the federal funds rate, which it influences, are short-term rates. The Fed tightens short-term credit when the economy appears to be overheating. To slow things down, the Fed raises short-term rates to extremely high levels.
Which of the following corporate actions would have an effect on the company’s working capital?
A)Declaring a 15% stock dividend
B)Borrowing money from the bank on a 90-date note
C)Paying a utility bill
D)Calling in a portion of a 20-year bond at par
D
Working capital is the difference between the corporation’s current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash.
When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT
A)adverse rulings by a court, regulatory authority, or the SEC with respect to the offering
B)the amount of securities to be offered in the state
C)the effective date of the offering
D)all other states in which the security is to be registered
C
The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering.
An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments?
A)Municipal bonds
B)Direct participation programs (DPPs)
C)Treasury notes
D)Common stock
D
The internal rate of return (IRR) is the discount rate that makes the future value of an investment equal to its present value. Because this computation involves the time value of money, in order to reasonably compute present value, there must be either a maturity date or some other kind of ending date, such as that which is usually projected in a DPP. Common stock has nothing comparable to that.
Seven years ago, Sarah Smith was convicted of possession of a controlled substance in a state where that violation is considered a felony. Sarah has just filed an application for registration as an agent with Kapco Securities, a registered broker-dealer in a state where that violation is only considered a misdemeanor. When viewing this agent’s application, the Administrator will
A)treat the crime as a financial misdemeanor
B)treat the crime as any felony
C)censure the broker-dealer for even thinking of employing this individual
D)treat the crime as a nonfinancial misdemeanor
B
Even though the crime is a misdemeanor in the state where registration is being sought, the applicant’s record shows a felony conviction and, therefore, this individual would be subject to statutory disqualification.
The XYZ Corporation’s income statement contains the following information:
Total revenue$200,000
Cost of goods sold60,000
Administrative expenses30,000
Depreciation10,000
Miscellaneous expenses3,000
Taxes paid5,000
Based on this information, XYZ’s gross profit is
A)$100,000
B)$140,000
C)$110,000
D)$97,000
B
Gross profit is sales (or revenues) minus the cost of goods sold (COGS). When the depreciation expense relates to the equipment used directly in the production of the sales, it is included in COGS. In this question, there is no choice of $130,000 (which would include depreciation in COGS). Clearly, by not including that choice, NASAA is taking the position that depreciation is excluded from COGS.
XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wished to examine certain financial records of XYZ’s, the Administrator would be able to do all of the following EXCEPT
A)examine those records located in State U
B)ask the State C Administrator to perform the examination
C)do so during normal business hours without prior notice
D)ask FINRA to perform the examination
A
This broker-dealer does not have a place of business in State U so there are no records located there. How can an Administrator examine records that don’t exist. All records are kept in the principal office and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm’s books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator.
