Other Federal and State Regulations

Question 1

The primary purpose of the Trust Indenture Act of 1939 is to:

A. protect the interests of holders of “non-exempt” bonds by appointment of a trustee
B. protect the interests of unit investment trust holders by appointment of a trustee
C. protect the interests of charitable trust beneficiaries by appointment of a trustee
D. regulate the securities activities of banks and trust companies

Answer 1

The best answer is A.

The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act.

Question 2

The Trust Indenture Act of 1939 was enacted to:

A. regulate the activities of Real Estate Investment Trusts not included in the Investment Company Act of 1940
B. require the registration of Trust Company issues with the Securities and Exchange Commission
C. protect holders of non-exempt bond issues from issuer misconduct
D. require that trustees in bankruptcy, where new securities will be issued, are subject to the Securities Act of 1933

Answer 2

The best answer is C.

The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders.

Question 3

A primary offering of $200,000,000 of ACME Corporation 10% debentures with a 20 year maturity would be regulated under the:

A. Securities Act of 1933 only
B. Securities Exchange Act of 1934 and Trust Indenture Act of 1939
C. Securities Act of 1933 and Trust Indenture Act of 1939
D. Investment Company Act of 1940 and Securities Act of 1933

Answer 3

The best answer is C.

New corporate bond issues are non-exempt securities under the Securities Act of 1933 and thus must be registered and sold under a prospectus. In addition, corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture. The Securities Exchange Act of 1934 regulates the trading markets (secondary market) - not the primary market. Investment companies fall under the Investment Company Act of 1940; regular corporate securities are not subject to this Act.

Question 4

New corporate bond issues in excess of what dollar amount are subject to the Trust Indenture Act of 1939?

A. $5 million
B. $10 million
C. $50 million
D. $100 million

Answer 4

The best answer is C.

Corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture.

Question 5

A trustee in a bond issue:

A. is charged with the responsibility of protecting the issuer’s claim to assets
B. is typically a broker-dealer
C. is appointed by the bondholders
D. is paid by the issuing corporation

Answer 5

The best answer is D.

The trustee for bondholders is a fiduciary who is appointed and paid for by the issuer. The trustee ensures that all of the terms of the agreement are adhered to by the issuing corporation, thus it is protecting the bondholders from issuer misconduct. The trustee must not have any conflicting interests that would prejudice it towards either the bondholders or the issuer in its oversight role. Bank or a Trust Companies are appointed as trustee, not broker-dealers.

Question 6

The Trust Indenture Act of 1939 applies to which of the following offerings?

A. $100,000,000 of Sewer Revenue Bonds sold interstate
B. $100,000,000 of Corporate Debentures sold interstate
C. $10,000,000 of Corporate Debentures sold interstate
D. $100,000,000 of 30 day commercial paper sold interstate

Answer 6

The best answer is B.

The Trust Indenture Act of 1939 applies solely to non-exempt interstate securities offerings over $50,000,000. Sewer revenue bonds (which are municipal securities) are exempt, as is commercial paper. Corporate debentures are non-exempt, but only the $100,000,000 offering is subject to the Act. The $10,000,000 corporate debt offering is under the $50,000,000 limit.

Question 7

The Trust Indenture Act of 1939 applies to:

A. U.S. Government Bonds
B. Municipal Bonds
C. Corporate Bonds
D. All bond issues over $50,000,000

Answer 7

The best answer is C.

The Trust Indenture Act of 1939 applies to corporate bond issues of more than $50,000,000.

Question 8

A lawyer is a partner at a major investment advisory firm and is paid a fee by a customer for investment advice. Which statement is TRUE?

A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser
B. The lawyer must be registered with FINRA as a representative
C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative
D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative

Answer 8

The best answer is A.

Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. Thus, a lawyer that is a partner in a major advisory firm who renders advice for a fee is defined as an adviser that must register.

Also, note that the lawyer/adviser will only be required to register with the SEC as a federal covered adviser if the adviser has $100 million or more of assets under management. If it does not meet the threshold, then it must register in the State and not with the SEC.
Finally, please note that an exemption is granted if a lawyer renders investment advice that is solely incidental to the regular business of that person. Thus, a lawyer who renders investment advice as part of an overall estate tax plan would be exempt from registration as an adviser.

Question 9

Securities Investor Protection Corporation protects against:

A. broker-dealer failure
B. credit risk
C. fraudulent trading
D. loss of principal

Answer 9

The best answer is A.

Securities Investor Protection Corporation protects customer accounts when a broker-dealer fails.

Question 10

Which statement about the Securities Investor Protection Corporation (SIPC) is FALSE?

A. SIPC is a non-profit government sponsored corporation
B. Every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC
C. SIPC is an insurance fund protecting against broker-dealer insolvency
D. SIPC is funded through annual assessments paid by customers

Answer 10

The best answer is D.

Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC is funded by annual assessments paid in by its broker-dealer members, not customers. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.

Question 11

Which statement is TRUE about SIPC coverage for customer accounts at banks that solely handle exempt securities?

A. The bank must be registered as a broker-dealer under the Securities Exchange Act of 1934
B. The bank only needs to obtain supplemental SIPC coverage because all securities losses would primarily be covered by FDIC.
C. The bank must be a member of the Securities Investor Protection Corporation unless it obtains a waiver from the FRB
D. The bank does not need to be a member of the Securities Investor Protection Corporation

Answer 11

The best answer is D.

Dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities or municipal securities, are not covered by SIPC. If a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.

FDIC does NOT cover losses on securities. The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at banks.

Question 12

Which statement is TRUE about insurance coverage on customer brokerage accounts maintained at banks registered solely as municipal securities dealers?

A. Insurance coverage is provided solely by the Federal Deposit Insurance Corporation (FDIC)
B. Insurance coverage is provided solely by the Securities Investors Protection Corporation (SIPC)
C. Insurance coverage is provided by both the FDIC and by the SIPC
D. No insurance protection is offered on customer municipal accounts maintained at bank broker-dealers

Answer 12

The best answer is D.

Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. However, dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities, are not covered by SIPC. Similarly, customer accounts at banks who are municipal securities dealers, are also not required to be covered under SIPC.

Please note that if a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.

The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at banks.

Question 13

The maximum coverage provided by Securities Investor Protection Corporation for securities held in a customer’s account is:

A. $250,000
B. $400,000
C. $500,000
D. $600,000

Answer 13

The best answer is C.

Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit.

Question 14

General creditor status in the liquidation is given to any customer claims that are:

A. below Securities Investor Protection Corporation coverage limits
B. above Securities Investor Protection Corporation coverage limits
C. for securities held in margins accounts that had a debit balance
D. for cash balances below $250,000

Answer 14

The best answer is B.

Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer. Coverage limits apply to both cash and margin accounts.

Question 15

A customer has an individual cash account, an individual margin account, a joint cash account with his wife, and a custodial account for each of his 2 children. If the firm liquidates, Securities Investor Protection Corporation covers:

A. only the custodial accounts
B. the custodial accounts separately, the joint account separately, and both individual accounts separately
C. the custodial accounts separately, the joint account separately, and both individual accounts are combined and treated as one
D. any one account of the customer’s choosing; the other accounts become general creditors of the broker-dealer

Answer 15

The best answer is C.

Securities Investor Protection Corporation coverage is applied “per customer name.” If John Jones has both an individual cash and margin account, they are treated as one account; a joint account with someone else is a separate account; each custodial account is a separate account.

Question 16

A customer has an account holding $310,000 of securities and $290,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?

A. The customer will become a general creditor for $40,000 owed
B. The customer will become a general creditor for $100,000 owed
C. SIPC will provide coverage for $310,000 of securities only
D. SIPC will provide coverage for $250,000 of cash only

Answer 16

The best answer is B.

SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $310,000 of securities and $290,000 of cash, for a total claim of $600,000. $250,000 of the cash is covered, leaving $40,000 uncovered. The remaining $250,000 of coverage is applied against the $310,000 securities position, leaving $60,000 of securities uncovered. The customer becomes a general creditor for the $100,000 total of the uncovered claims.

Question 17

A customer has a cash account holding $200,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?

A. SIPC will provide coverage for the $200,000 of securities only
B. SIPC will provide coverage for the total of $540,000 of securities and cash
C. SIPC will provide coverage for only $340,000 of cash
D. The customer will become a general creditor in the amount of $90,000

Answer 17

The best answer is D.

SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $200,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $450,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.

Question 18

In an SIPC liquidation, the trustee has distributed all securities registered in customer name. After this distribution, a customer has a claim for $590,000 in securities and another $260,000 of cash (free credit balance). Which statement regarding SIPC coverage limits is TRUE?

A. The customer is covered for the total amount of $850,000
B. The customer is covered for $500,000 total, and becomes a general creditor for $350,000
C. The customer is only covered for $500,000 of the securities; cash is not covered
D. The customer is only covered for $250,000 of the cash; securities are not covered

Answer 18

The best answer is B.

SIPC coverage is limited to $500,000 total, inclusive of maximum cash coverage of $250.000. This customer has a total of $590,000 of securities and $260,000 of cash, for a total claim of $850,000. Cash is covered to a maximum of $250,000, so $10,000 of the claim for cash is uncovered. Since total coverage is $500,000 and $250,000 of this has been used for the cash claim, only another $250,000 of coverage is available against the securities claim of $590,000, leaving $340,000 of the securities claim uncovered. The customer becomes a general creditor for the uncovered claim amount of $10,000 + $340,000 = $350,000.

Question 19

A customer has a margin account at a broker-dealer who goes bankrupt. The account holds $900,000 of securities and has a $400,000 debit balance. The customer will receive:

A. $400,000 in cash
B. $500,000 in securities
C. $500,000 in cash
D. $900,000 in securities

Answer 19

The best answer is B.

The SIPC coverage limit of $500,000 in securities is based on the equity in a customer’s account. An account with $900,000 in securities and a $400,000 debit has $500,000 of equity. The customer will receive $500,000 of securities in the liquidation.

Question 20

A customer has a brokerage account at a failed broker-dealer. For SIPC coverage purposes, the securities in the account are valued on the date:

A. of purchase of each position
B. SIPC returns securities to the customer
C. SIPC petitions a court to appoint a trustee in bankruptcy
D. SIPC sends the customer a claim form by certified mail

Answer 20

The best answer is C.

The “valuation date” for coverage purposes in an SIPC liquidation is the date that SIPC files in court to be the trustee in the bankruptcy of the failed broker-dealer.

Question 21

All of the following communications fall under the Federal Telephone Consumer Protection Act of 1991 EXCEPT:

A. Live human callers
B. Robot callers
C. Facsimile transmission
D. Courier delivery

Answer 21

The best answer is D.

The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited offers made through the phone - whether these are made by personal contact, pre-recorded messages (robot callers), facsimile or electronic mail. It does not apply to offers made through the U.S. mail or by delivery services.

Question 22

All of the following information must be disclosed when making unsolicited phone calls to potential customers EXCEPT:

A. Caller’s name
B. Firm’s name
C. Address or phone number from which the caller is dialing
D. CRD number of the Registered Representative placing the call

Answer 22

The best answer is D.

The Federal Telephone Consumer Protection Act of 1991 requires the following procedures for making unsolicited “commercial” phone calls.

1. Unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient.
2. The caller must identify him or herself by:

• **Name;
• **Firm;
• **Address or telephone number from which the caller is dialing

3. If the person called states that he or she does not wish to receive calls, the person must be placed on a “Do Not Call” list.

Violations of the Act can be enforced by each State Attorney General and by the FTC (Federal Trade Commission).

The is no requirement for the Registered Representative to provide his CRD number when making an introduction but if asked, this information should be provided to a client.

Question 23

Which of the following callers is NOT subject to the provisions of the Federal Telephone Consumer Protection Act of 1991?

A. An Animal Shelter
B. Securities Firm
C. Telemarketing Firm
D. Real Estate Company

Answer 23

The best answer is A.

The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited “commercial” phone calls. Charitable (not-for-profit) institutions are exempt from the Act’s provisions.

Question 24

A registered representative based in Los Angeles is working at the office late making cold calls to potential customers. At 6:45 PM in Los Angeles, the registered representative is making cold calls to individuals in Miami and individuals in Sacramento. Which statement is TRUE?

A. Cold calls to potential customers in Miami are prohibited but permitted for potential customers in Sacramento
B. Cold calls to potential customers in both cities are permitted
C. Cold calls to potential customers in both cities are prohibited
D. Cold calls to potential customers in Sacramento are prohibited but permitted to potential customers in Miami

Answer 24

The best answer is A.

Unsolicited cold calls cannot be made after 9:00 PM in the time zone where they are received. Since this representative is in California, he or she can make cold calls to California at 6:45 PM Pacific time. However, since it is 9:45 PM (3 hours later) in Miami, cold calls to that city are not permitted.

Question 25

A registered representative calls a potential customer about investing in mutual funds. The customer states “Don’t call me. Good-bye” and hangs up the phone. The registered representative should:

A. use the redial function on his phone
B. wait for the 20 day cooling off period to expire and then call the customer again
C. fax the customer about the mutual fund being offered
D. place the customer on a “Do Not Call” list

Answer 25

The best answer is D.

If a potential customer who is being solicited says “Do not call me,” then the Federal Telephone Consumer Protection Act requires that the customer be placed on a “Do Not Call” list at that firm; and that the customer not be recontacted by that firm.

Question 26

A registered representative is considering prospecting a wealthy family member to see if she will open a brokerage account at his firm. The registered representative checks the National Do-Not-Call List and finds the family member there. The registered representative checks the firm’s Do-Not-Call list and does not find the family member there. Which statement is TRUE?

A. This prospect cannot be called by the registered representative
B. This prospect can be called by the registered representative
C. This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM
D. This prospect can only be called by the registered representative with written approval of the #24 General Principal

Answer 26

The best answer is B.

There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the:

Established Business Relationship (EBR) Exception;

Prior Express Written Consent Exception; and

Personal Relationship With The Associated Person Exception.

Because this prospect is a family member, she comes under the “personal relationship” exemption, as long as she is not on the firm’s Do-Not-Call list - which is the case here. Note that if the family member were on the firm’’s Do-Not-Call list, then she could not be solicited.

Question 27

Which of the following maintain “Do Not Call” lists?

A. SEC and FTC
B. Member firm and FTC
C. FTC only
D. FINRA and FTC

Answer 27

The best answer is B.

There is both a Federal “Do Not Call” list requirement and a FINRA “Do Not Call List” requirement. The Federal List is maintained by the FTC (Federal Trade Commission). FINRA requires each member firm to keep its own “Do Not Call” list. FINRA itself does not keep the list, nor does the SEC.

Question 28

After 3 cold calls, a prospect asks to be placed on the firm’s “Do Not Call” list. His name will remain on the list for:

A. 3 years from the date of the request
B. 3 years from the initial phone call
C. 5 years from the date of the request
D. 5 years from the initial phone call

Answer 28

The best answer is C.

Under “former” FINRA and FTC rules, any individual who asked to be placed on either a Firm Do Not Call list or the National Do Not Call registry remained there for 5 years from the date of the request.

Subsequent rule changes now place an individual on the list “indefinitely,” but this is not reflected in the question. This is the way it should be known for the exam, unless “indefinitely” is presented as a choice.

Question 29

Under FTC and FINRA rules, individuals who ask to be placed on “Do Not Call” lists go on the list for:

A. 3 years, and then must renew to remain on the list
B. 4 years, and then must renew to remain on the list
C. 5 years, and then must renew to remain on the list
D. 10 years, and then must renew to remain on the list

Answer 29

The best answer is C.

Under “former” FINRA and FTC rules, any individual who asked to be placed on either a Firm Do Not Call list or the National Do Not Call registry remained there for 5 years. Subsequent rule changes now place an individual on the list “indefinitely,” but this is not reflected in the question. This is the way it should be known for the exam, unless “indefinitely” shows as a choice.

Question 30

The legislation that requires a broker-dealer’s research analysts to be completely separated from that firm’s investment banking department the:

A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Trust Indenture Act of 1939
D. Sarbanes-Oxley Act of 2002

Answer 30

The best answer is D.

The Sarbanes-Oxley Act of 2002 requires that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not “encouraged” or “intimidated” by the firm’s investment bankers to write favorable reports to get future investment banking business.

Question 31

State registration (Blue Sky) requirements apply to the registration of:

A. government securities
B. corporate securities
C. state chartered bank issues
D. municipal securities

Answer 31

The best answer is B.

Generally speaking, if a security is exempt from federal law, it will be exempt under state “blue sky” laws (though there are some exceptions). Governments, municipals, and state chartered bank issues are exempt under both federal and state law; corporate issues are non-exempt.

Question 32

A customer wishes to place a buy order for a security that has not been registered in the state. The security may be purchased if the security:

A. falls under a “Blue Chip” exemption by being listed on a recognized national stock exchange
B. files SEC reports
C. is traded by at least 2 market makers
D. has been trading in the market for at least 1 year

Answer 32

The best answer is A.

Generally, securities that are exempt from Federal registration are also exempt from state registration. For example, government and municipal securities do not have to be registered in each state.

States also allow for “Blue Chip” exemptions for non-exempt securities. Under this exemption, stocks listed on national stock exchanges are exempt from state registration. The logic for this exemption is that the issuer must meet stringent exchange listing and reporting requirements, as well as federal registration requirements. Therefore, separate state registration is overkill.

There is no exemption offered from state registration for securities trading for at least 1 year or securities traded by at least 2 market makers.

Many OTCBB and Pink OTC Markets issues file SEC reports. The mere filing of these reports does not grant a “Blue Chip” exemption.

Question 33

“Blue Sky” laws generally require registration in the state for:

A. agents only
B. agents and broker-dealers only
C. broker-dealers and securities issues only
D. agents, broker-dealers and securities issues

Answer 33

The best answer is D.

State blue sky laws require registration of resident agents and broker-dealers, as well as registration of non-resident agents and broker-dealers that direct offers into the state. Any issues that are offered in the state must also be registered, unless an exemption is available.

Question 34

State XYZ’s registration (Blue Sky) requirements would apply to:

A. resident salespersons soliciting in State XYZ only
B. non-resident salespersons soliciting in State XYZ only
C. firms selling in State XYZ only since salespersons are already registered at the federal level
D. both resident and non-resident salespersons and firms soliciting in State XYZ

Answer 34

The best answer is D.

Blue sky laws apply to both resident and non-resident salespersons who solicit in that state, as well as to their brokerage firms, who also must be registered in that state. Any issues that are offered in the state must also be registered, unless an exemption is available.

Question 35

A sales representative and his broker-dealer are registered in the State of Ohio. He wishes to prospect customers in the State of Massachusetts. Which statement is TRUE?

A. Both the sales representative and the broker-dealer must be registered in Massachusetts
B. Only the sales representative must be registered in Massachusetts
C. Only the broker-dealer that employs the sales representative must be registered in Massachusetts
D. Neither the broker-dealer or the registered representative need to be registered since Ohio would have primary jurisdiction over all transactions emanating from within its border

Answer 35

The best answer is A.

Before any offer can be directed into a state for a non-exempt security, the registered representative making that offer must be registered in that state; and the broker-dealer employing that salesperson must be registered in that state. There are some exemptions allowed, but they are very limited.

Question 36

When a sales representative wishes to sell an exempt security to an out of state customer, which statement is TRUE?

A. Both the broker-dealer and the registered representative must be registered in the state where the sale of the exempt security is going to be made
B. The broker-dealer does not have to be registered in the state where the sale is going to be made because the security is exempt but the registered representative is required to register
C. Neither the sales representative or the broker dealer is required to be registered in the state where the sale of the exempt security is going to be made
D. The registered representative does not have to be registered in the state where the sale is going to be made because the security is exempt but the broker-dealer is required to register

Answer 36

The best answer is A.

While exempt securities are not registered under both Federal and State law, broker-dealers and their sales employees that sell these bonds must still be registered under state law in any state in which the securities are offered.

It makes no difference that the security being offered is exempt; the agent and broker-dealer offering them in the state must still be registered in the state (since they can offer these securities fraudulently, and the state wants to know where to find these persons if they do so!).

Question 37

A Series 7 licensed individual wishes to sell “wrap” accounts. Which statement is TRUE?

A. This individual must be state-registered as an investment adviser representative and must pass either the Series 65 exam or the Series 66 exam
B. This individual must be federal-registered as an investment adviser representative and must pass either the Series 65 exam or the Series 66 exam
C. This individual is not required to take any additional licensing exams but must be state-registered as an agent
D. This individual is not required to take any additional licensing exams but must pay a separate wrap fee registration to each state

Answer 37

The best answer is A.

A “wrap” account is not defined as a brokerage product. Any flat annual fee account is defined as an “advisory product” and the firm must be a registered investment adviser to sell them.

The representative that sells them, in addition to being registered as an agent of the broker-dealer, must also register as an agent of the investment adviser firm.

There is no federal registration of investment adviser representatives. Only the investment adviser firm may be required to register with the SEC (and only if its assets under management exceed $100 million).

Any investment adviser representative is state-registered and must pass either the Series 65 or Series 66 exam.

Question 38

In most states, uniform state law requires that individuals representing broker-dealers that sell managed accounts:

A. register as agents in the state but no licensing exam is needed
B. register as investment adviser representatives in the state but no licensing exam is needed
C. register as agents in the state and pass the Series 63 exam
D. register as investment adviser representatives in the state and pass the Series 65 exam

Answer 38

The best answer is D.

Uniform state law, in most states, requires individuals who sell securities in a state to register as an agent and pass the Series 63 examination.

In addition, most states define managed accounts as “investment advisers” and individuals who sell these accounts must register as “investment adviser representatives” and pass the Series 65 examination.

Question 39

A registered representative who has passed the Series 63 examination wishes to sell managed accounts to customers in differing states. Which statement is TRUE?

A. The registered representative needs no further licenses to sell managed accounts
B. The registered representative must pass either the Series 65 or Series 66 examination to sell managed accounts
C. The registered representative must post a surety bond prior to selling managed accounts
D. The registered representative is prohibited from selling managed accounts

Answer 39

The best answer is B.

Managed or wrap accounts are defined as “investment advisers” in most states. As such, the firm selling managed accounts must register as an investment adviser; and the individuals selling managed accounts for these firms must register as “investment adviser representatives” and pass either the Series 65 or Series 66 examination.

Question 40

A customer who lives in New York has an account with a broker-dealer and sales representative that are both registered in the State of New York. The customer moves to the State of Georgia, a state where the broker-dealer and the sales representative are not registered. Which statement is TRUE?

A. Orders may be solicited from this customer under an “existing customer” exemption without the agent or broker-dealer having to register in the State of Georgia
B. The firm must cease doing business with the customer until it and the agent register in the State of Georgia
C. Only unsolicited orders may be accepted from this customer
D. The customer must place any orders with the firm in writing; telephone orders cannot be accepted

Answer 40

The best answer is B.

Because the broker-dealer and sales representative are not registered in the State of Georgia, they cannot solicit the purchase of securities in the State of Georgia (to do so requires registration in the state - there is no such thing as an “existing customer” exemption). Under State law, there is an “unsolicited transaction exemption” that gives an exemption from State registration to any security involved in an unsolicited transaction.

However, it does NOT give an exemption from registration to the agent involved in the transaction! In order for the agent to deal with a customer in Georgia (either solicited or unsolicited), the agent and broker-dealer must be registered in Georgia as well!

Question 41

Which of the following is a securities account opened by legal person?

A. Individual
B. Joint Tenants With Rights of Survivorship
C. Tenants in Common
D. Trust

Answer 41

The best answer is D.

When it comes to legal terms, you have to know the details! A “natural person” is a human being. A “legal person” is a legally-created entity, such as a corporation, limited partnership or trust, that has the same legal abilities as a human being (a natural person), such as the ability to sue, own property, and enter into contracts.

Question 42

All of the following actions taken by a fiduciary would be consistent with the obligations imposed by the “Prudent Man Rule” EXCEPT:

A. Diversifying a fixed income portfolio with securities of varying maturities
B. Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains
C. Investing in small capitalization unlisted new issue investments for long term growth
D. Writing covered calls against securities positions held in the account to increase income

Answer 42

The best answer is C.

The “prudent man rule” is part of Uniform State Law, and it requires fiduciaries to make investments for accounts under their control as would a “prudent man.” This makes sense, since fiduciaries are investing for the benefit of others, and the investments are supposed to provide a long term future benefit to these persons.

Investing in unproven, speculative new issues would not be consistent with the “prudent man rule.” Diversifying a portfolio, investing in AA rated convertible bonds to meet an objective of both income and growth, and writing covered calls against stock positions are all proven, prudent investment strategies.

Question 43

Blue Sky Laws require registration of all of the following EXCEPT:

A. exempt issues
B. non-exempt issues
C. broker-dealers
D. sales representatives

Answer 43

The best answer is A.

State blue sky laws are independent of the federal securities acts. As a general rule, securities exempt from federal registration are also exempt from state registration.

Blue sky laws require registration of broker-dealers, sales representatives, and non-exempt issues in that state. Under these laws, states have the power to suspend or expel individuals or issues from registration.