Practice Exam Explanations Flashcards
Registration by coordination is used by an issuer for securities that (are/are not) listed on an exchange?
ARE NOT
Is an estate considered a person?
YES
No front-end sales charges or contingent deferred sales charges is what kind of mutual fund?
no-load mutual fund
In order for an agent of a broker-dealer to sell securities to a resident to another state, what must occur?
Both agent and broker-dealer must be registered in that state
Can an agent markup or alter a prospectus for a client?
NO!
How are classes of shares in mutual funds distinguished?
By their sales charges
How does an agent renew his registration?
Pay a fee (fees occur at initial registration + annually up renewal)
Does a Federal Covered advisor need to register with the SEC? Does it need to register with states? Does an IAR of a Federal Covered advisor need to register with the state?
No; No; Yes, must register in the state in which it maintains an office
Does an Agent need to forward all written complaints to a supervisor? What is the client rescinds the complaint?
Yes; Yes;
Is a supervisor of an agent required to submit a customer complaint to the administrator?
No
Does a copy of the complaint and response, if any, need to be filed by the broker-dealer?
Yes
Individuals who have an annual income of ____ during the last 2 years are accredited; a married couple with a joint income of ____ is accredited; an individual or couple with a net worth of at least _____
$200k; $300k; $1m
Is it okay to send materials to clients that only show the positives and don’t highlight the negatives?
No
The licenses of all agent, broker-dealer, investment adviser, and investment adviser representatives expire on ______
December 31
If an agent leaves a broker-dealer to go to another broker-dealer, do both broker-dealers have to notify the administrator?
Yes
Can an agent only solicit business in a state if both the agent and broker-dealer are registered?
YES
Do securities have to be registered or exempt in order for an agent to sell the securities?
Yes
What is the exception for advisors charging performance based fees?
Can only charge to QUALIFIED retail or institutional investors with >$1m under management or a net worth of >$2.1m (if an individual, that amount must exclude home equity value)
Prudent Investor Standards are applied to individual investment selections or the total portfolio?
Total portfolio
When is a loan consent form used?
Customer authorizes member to lend his securities
When opening a margin account, what are the items a customer must sign?
Hypothecation agreement + margin account form + credit agreement
What are viatical investments?
Purchasing death benefits of an individual
Viatical investors must be accredited investors according to regulation D or have a minimum net worth of _____ (not including ____) and annual income of ____ or a minimum net worth of ____ (not including ____)
$150k and $100k, or $250k
What is a nonissuer transaction?
Purchase or sale of a security whereby the issuer does not benefit, directly or indirectly. A secondary market trade is an example of a non-issuer transaction
Is an adviser permitted to use a broker-dealer to execute transactions in exchange for certain services? What is the key part of the soft dollar arrangement?
Yes; the services that the broker-dealer provides to the advisor must benefit the advisor’s clients
Are the following allowed for soft-dollar arrangements?
Travel costs
Cost of computer terminals
Cost of data services
Travel costs-no
Cost of computer terminals- no
Cost of data services- yes
What is a Consent to Service of Process? Who must provide it when applying?
Appointment of Administrator as the applicant’s attorney to receive and process any noncriminal legal complaints
Agent, broker-dealer, investment advisor, investment advisor representative
If an offer occurs in 2 states, do both administrators have jurisdiction?
Yes
If an advisor only advises on exempt securities, does that IAR still need to be registered?
Yes
Can personal insolvency of a broker-dealer’s partners, officers, directors, or controlling persons be used as a basis for revoking or suspending a broker-dealer’s registration?
No
Why are advisors generally prohibited from charging clients performance fees?
What is the exception to the above rule?
The concern is that advisers receiving performance fees will be tempted to invest in speculative securities in order to increase their fees which might not be in their clients long-term interests.
The exception is that advisors can charge performance fees on clients that have >$1m under management or have a net worth of >$2.1m (excluding value of primary residence)
What regulation establishes equity requirements for trading on margin? And, what is that equity requirement?
Regulation T; 50% of market value of security at time of transaction
Just think about why the following are considered securities: Variable products, voting trust certificates, and oil, gas, and mining interests
Variable products, voting trust certificates, and oil, gas, and mining interests
Are Universal Life Insurance Policies securities?
No
If a customer signs a written statement that an order was unsolicited, is the security exempt?
Yes
Can clients sue to recover losses if a security was sold that was unregistered?
Yes
How do BROKERAGE firms settle monetary disputes?
Arbitration
T/F: The adviser may only purchase securities that are consistent with client objectives
True
What is a breakpoint sale?
Pursuing a large quantity purchase in order to save on commissions
Does a trading authorization form have to be SIGNED by the OWNER in order to open a third-party account (an account that allows one person to trade on behalf of another person)
Yes; signed by the owner
T/F: A broker-dealer may execute an initial transaction in a margin account as long as a properly executed (signed) written margin agreement is obtained promptly afterward
True
T/F: A broker-dealer may not charge a client a higher-than-normal commission under certain circumstances, such as when a security is particularly difficult to obtain, as long as this is disclosed to the client.
False; a broker-dealer may charge a higher-than-normal commission under certain circumstances
Can an agent open a joint account with a client? If so, who must approve?
Yes; both the broker-dealer and the client must approve via written permission
Would a marketing marketing brochure that contained only the positive facts from the prospectus and none of the negative ones (risk factors) be considered misleading and deceptive?
Yes, 100%
What is the central consideration for a fiduciary when making investment decisions?
Trade off between risk and reward
When do an agent, broker dealer, adviser, and IAR’s license expire? When are their fees paid?
Dec. 31; fees are paid at initial registration and at annual renewal
If a broker-dealer has no office in a state and effects transactions only with institutional clients, would it be exempt from the definition of a broker-dealer?
Yes, 100%
If an adviser maintains custody of a clients funds and securities, then the minimum financial requirement is $______
If an adviser does not maintain custody of a clients funds and securities, then the minimum financial requirement is $______
$35,000
$10,000
If an IA receives prepaid fees of more than $500, then what financial requirement must occur?
Must have positive net worth (assets minus liabilities)
For a new issue, is a tax identification number required?
No
T/F: An Administrator may inspect the records of a broker-dealer or investment adviser located within or outside the state.
True!
If a registered broker-dealer’s or investment adviser’s ownership structure is changed (from a partnership to a corporation, for example), or is bought or sold by another person, it is permitted to file an application for registration as a successor firm. Can that the successor firm file before it is in existence? How long will its registration be effective? Is a filing fee required?
Yes, the successor firm can file before it is in existence; registration is effective until the end of the year; a filing fee is not required
Can an agent borrow or lend funds to a client?
No
Is an agent borrowing from or lending to a client considered unethical or fraud?
Unethical
Is a broker-dealer or an agent of a broker-dealer always required to notify a client if the fees charged are excessive or out of the ordinary?
Yes
Who is required to file a form ADV Pt. 2?
Investment Advisors
Is a prospectus required in the primary market, secondary market, or both?
Primary market
After a client purchases securities as part of an offering, he must receive _____ or _____ along with an additional document from the broker-dealer executing the transaction?
Final prospectus or a preliminary prospectus
How long must a prospectus be delivered after an IPO/follow on offering on NYSE/NASDAQ
How long must a prospectus be delivered after a follow on offering for Pink Sheets for: 1) IPO 2) follow on offering
1) 25 days
1) 90 days
2) 40 days
Under the Uniform Securities Act, all clients must receive the adviser’s brochure or ADV Part 2 no later than the time they enter into an agreement with the adviser. If the client is not given an ADV Part 2 or brochure at least ______ hours before signing the contract, then the contract must specify that the client has ____ days to rescind the contract.
48 hours
5 days
T/F: Only individuals who are registered agents may receive monetary compensation from a broker-dealer based on the sale of a security.
True
T/F: Effecting client transactions that are not recorded on the books and records of the agent’s employer is a prohibited practice, regardless of the type of security or client involved.
True
If broker-dealers have custody of, or discretionary authority over, client funds or securities, the administrator can require them to post ____? When is that waived?
Bonds; broker-dealer’s net capital exceeds a specified amount as determined by the Administrator
T/F: In order to sell a security in a state, the broker-dealer and the agent must both be registered in the state.
True
Is prior approval from a supervisor for every order?
No
Must a supervisor approve every new account before the first trade is executed?
Yes
A broker-dealer that opens a securities account at a bank must disclose that _____ and must be located where?
Also remember physical segregation
securities products are not FDIC insured; all account statements and confirmations
Bankruptcy is not required to be disclosed if it occurred more than ____ years ago
10 years ago
Registered personnel must disclose all unsatisfied judgments and tax liens on Form U4 within ___ days
30
T/F: If an agent opens a joint account with a client, the agent may share in the profits proportionate to his investment, provided employer and client approval was obtained.
True
T/F: A court has the power to enjoin (prohibit) an investment adviser from participation in the securities business, but the state Administrator does not.
True
The withdrawal of an agent’s registration generally becomes effective ____ days after filing.
The Administrator may initiate proceedings against an agent up to ____ year from the effective date of the withdrawal.
30 days; 1 year
T/F: A broker-dealer may not commingle client securities?
False, a broker-dealer can commingle client securities
Can a broker-dealer commingle client and broker-dealer securities?
Nope
Can the administrator accept cash or securities in lieu of a bond?
Yes
Can the administrator determine acceptable securities or altogether disallow use of cash/securities in lieu of a bond?
Yes and no- the administrator can determine which securities are acceptable; but, it can NOT altogether disallow use of cash or securities in lieu of a bond
x
x
Is a prospectus required for securities issued by banks?
No
Are state securities Administrators allowed to impose requirements that are more stringent than SEC regulations?
Nope
The Administrator may or may not require that sales materials related to exempt securities, exempt transactions, or federal covered securities be filed?
May not
Can property be accepted in lieu of a bond?
No
What is the bond called to cover possible legal costs?
What is a fidelity bond?
Surety bond
Protects a brokerage firm against employee fraud, such as embezzlement
Are securities issued under Rule (Section) 504 of Regulation D federal covered securities?
No
Are securities issued under Rule (Section) 506 of Regulation D federal covered securities?
Yes
T/F: All securities listed on the national exchanges are federal covered securities.
Yup
Unlike a broker-dealer that may have a pre-dispute arbitration agreement, an investment adviser may or may not compel an investor to settle disputes through arbitration
Investment adviser may not compel and investor to settle disputes through arbitration
Does an administrator regulate advertising addressing federal covered securities?
No
T/F: If an agent opens a joint account with a client, the agent may not share in the profits, even if proportionate to her investment
False
If an agent opens a joint account with a client, the agent may share in the profits, proportionate to her investment, provided employer and client approval was obtained.
T/F: Withdrawal will not become effective until the Administrator declares whether there are proceedings pending or instituted against the firm at the time the application for withdrawal was filed
True
the Administrator may, by order, deny, suspend, revoke, cancel, or withdraw the registration of any registrant (i.e., broker-dealer, agent, investment adviser, investment adviser representative) that has been the subject of a foreign securities regulator’s disciplinary action, within the past ____ years.
5 years
Do you need to notify the SEC of intent to transact business in a particular state?
No!
An agent’s license is only effective when the ______ registration remains in effect.
Broker-dealers
When an _______ license is suspended, the investment adviser representative’s license is no longer in effect.
Investment advisors
A person who sells securities in violation of state securities law is _____ liable for principal, interest, reasonable attorney fees, and court costs.
Civilly
A person who meets the financial test of either annual income of _____, or a net worth of _____, is also considered accredited.
Note: While it is possible that a portfolio manager or a senior officer would be accredited in real life, no single professional is specified in the definition of an accredited investor. Senior officers are included only if they are senior officers of the issuer of the Regulation D offering. Just being a senior officer of any institution is not enough to be included in the definition.
Accredited- $200k annual income or net worth of $1m
Is a warrant that is attached to another offering also considered an offer?
Yes
Is a gift of nonassessable securities is considered a sale or an offer to sell?
No
A no-load fund may not have:
- sales charges (loads)
- 12b-1 fees that are greater than twenty-five basis points (.25%) of the fund’s average annual net assets
Insider traders face SEC civil penalties of up to ____ times the amount gained or loss avoided (____ damages).
3 times; treble damages
T/F: FINRA fines may be assessed only against FINRA members and their associated persons
True
Insider trading is civilly, criminally liable or both?
Both civil and criminal
T/F: An adviser must notify the Administrator of its intention to maintain custody of client funds and securities.
True
When does the Uniform Securities Act allow splitting of commissions?
Agents are employed by the same firm and registered in the same state
Are the names and addresses of the agents the broker-dealer intends to register required?
No
if more than ____ of the newspaper’s circulation is outside of its state of publication, the offer is not considered to occur in any state.
2/3rds
Is a foreclosure a reportable item on the U4?
Nope
For the U4, bankruptcy history applies to both ____ and _____ bankruptcy within the last ____ years
Person and professional (entities controlled) over last 10 years
A form ____ is not required for a Canadian broker-dealer to do business with clients who are temporarily in the US
B/D
While a Keogh Plan is not a security, what part is?
Participation unit in the plan
Is a REIT a security?
Yes
If an agent discovers that she has inadvertently sold an unregistered, nonexempt security to a customer, the agent may offer to repurchase the security from the customer through a _______; The customer must respond to the letter of rescission within ____ days or the customer waives the right to sue.
Letter of Rescission; 30 days
Are Federal Covered advisors subject to state record-keeping requirements?
No
T/F: a person is defined as a legal entity, which would include individuals (natural persons) and business entities such as corporations, broker-dealers, partnerships, and investment advisers. It also includes trusts and estates.
True
T/F: The insolvency (personal bankruptcy) of one of the broker-dealer’s partners, officers, directors, or controlling persons may be used as a basis for revoking or suspending a broker-dealer’s registration.
False; May NOT be used as a basis for REVOKING or SUSPENDING
Prior felony convictions on a U4 must be reported going back for what period of time?
ANY prior history- no specific limit
According to the NASAA Model Rules for Sales of Securities at Financial Institutions, a networking arrangement between a financial institution and a broker-dealer must:
Set forth the compensation schedule for both parties
Are ADRs securities?
Yes
T/F: If an adviser does not have a place of business in a particular state and limits clientele to institutional investors (or no more than five retail investors), the adviser is exempt from registration.
True
Securities that are listed or authorized for listing on a national stock exchange (e.g., the NYSE or Nasdaq) are examples of federal covered securities and are (generally / not generally) exempt from state registration and notice filing.
Generally exempt
Registration by coordination is typically used by an issuer that is conducting an IPO of securities that will (be / not be) listed on an exchange
Not be
T/F: In order for an agent to sell securities to a resident of another state, both the agent and broker-dealer must be registered in that state.
True
T/F: There is a registration exception for broker-dealers and their agents who do not have an office in the state and do business only with certain institutional clients, such as other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, and pension plans.
True
Who may be charged performance fees by investment advisors- accredited investors or qualified clients? What is the difference?
Qualified clients
Qualified clients- $1m or more under management or net worth of $2.1m (ex house value)
Accredited Investors- under Regulation D- total net worth of $1m or more
T/F: In other words, an agent may not call a PROSPECTIVE client before 8:00 a.m. or after 9:00 p.m. However, she may call an EXISTING client after 9:00 p.m. or before 8 a.m. to service his account.
True!
T/F: An agent may not effect transactions not recorded on the books and records of the broker-dealer even if the transactions are authorized in writing in advance by the broker-dealer of their execution.
False. An agent can effect transactions that are not recorded on the broker-dealers books with authorized in writing in advance by the broker-dealer
T/F: A no-load mutual fund may not have any front-end sales charges (loads) or any contingent deferred sales charges (back-end loads). It may have a 12b-1 fee as long as this fee does not total more than .25% of the fund’s average annual net assets.
True
T/F: The supervisor is required to submit the complaint to the Administrator. A copy of the complaint and any response must be maintained by the broker-dealer.
False; the supervisor is not required to submit the complaint to the administrator
T/F: When making investments, a trustee must take into account the different interests of all beneficiaries.
True
Are warrants securities?
Yes
Do trade authorizations have to be in written form?
Yes
Can deny someone from registration for securities misdemeanor if it occurred in past ____ years
10
Is there a specific definition for institutional investor or is it designated by the Administrator?
Designated by the administrator
Can an investment adviser exercise discretion for 10 days if provided with oral authorization?
Yes
In order for a Canadian broker-dealer to continued to transact with its clients who temporarily visit the US, it must ____ and _____
Register in the state and register the agent with that state (both broker-dealer and agent must register in state)
Are customer complaints are not grounds for license revocation?
No
T/F: An agent’s registration is effective only for the period during which the agent is employed by a properly registered broker-dealer.
True
T/F: The Administrator may deny registration if it is in the public interest AND if any provision of the USA has been or will be violated.
True; has to be within the provision of the USA
T/F: If an INVESTMENT ADVISOR has no place of business in a state and limits the number of noninstitutional clients in the state (no more than five), it is exempt from registration in the state.
True
Is participation in multi-level marketing arrangements a security?
Yes
Are rights received due to a corporate rights offering considered a security?
Yes
Are Whole Life Insurance Policies considered a security?
No
Can an Investment Advisor be compensated for capital gains?
No
T/F: Ads concerning exempt securities (such as Treasuries) are not subject to the filing requirements under the USA.
True
For mutual fund purposes, is a summary prospectus okay?
Yes
T/F: If an INVESTMENT ADVISOR does not maintain custody of client assets and has a minimum net worth of $35,000, the surety bonding requirement could be waived by the Administrator.
True
What is a fulcrum fee?
Increase or decreases proportionately with the performance of a clients account in relation to the investment record of a proportional index
Automatic denial for a felony occurs with ____ years.
10 years
Administrator judgement for application denial/approval for any felony over ____ time period.
Unlimited
Can Investment Advisors have custody of client funds?
Yes
Who does the Investment Advisor have to notify if it has custody of client funds?
Administrator
Can the administrator permit or deny an advisor from maintaining custody of client funds and securities?
Yes
T/F: Any insurance policy, endowment policy, or annuity contract, under which an insurance company promises to pay a FIXED sum of money either in a lump sum or periodically, is not considered a security.
True
Even if the advice is only for exempt securities, can you still be an Investment Advisor?
Yes
Is a government entity considered a person?
Yes
Is an unincorporated organization considered a person?
Yes
Do home foreclosures need to be reported on a U4?
No
Is being charged and/or arrested the same as being convicted?
No; being convicted is worse than those
Can an agent engage in securities activities in her spare time if she has received her firm’s written permission?
Yes
If an agent does not have discretionary authority over an account, what judgement does the agent have (assuming action (buy/sell), amount and asset are specified)?
Time and/or price execution
Is it unethical to wait 20 days to receive payment after selling securities in your account?
Yes
Is it unethical to wait 20 days before receiving the securities purchased?
Yes
Is it unethical to require clients to pay for securities by the settlement date?
No
Can an agent receive a fee for having discretionary authority over a customer’s account?
No
Does the USA require a response to all written complaints?
Yes
T/F: Neither the Administrator nor any of his officers or employees may disclose nonpublic information obtained in the course of performing their duties, except among themselves or when it is necessary as part of a proceeding or investigation.
True
When can an IA charge performance based fees?
Only for qualified investors- those with $1m under management or a net worth of $2.1m
Is Time of Entry a requirement for an order ticket?
Yes
Is a customer’s account number a requirement for an order?
Yes
Is the client’s name a requirement for an order ticket?
No
If an IA’s clients are employee benefit plan recipients, does that exclude the IA from registration?
Yes
Do investment seminars need to be recorded for compliance purposes?
No
Who can be the custodian of a client’s money- agent or broker-dealer?
Broker-Dealer
Is there a deposit agreement associated with opening a margin account?
NO!
Can a IA or IAR be held liable for client losses for reposting an article that wasn’t written by them but contains material false facts?
Yes, possibly
Does the client and the agent’s supervisor need to approve a joint agent/client account? What other criteria must be met?
Yes; the agent must be proportionally exposed to the risk/upside according to his investment in the account
Investment advisor advertising must be kept for ____ years after use?
5 years
Broker-dealer advertising must be kept for ____ years after use?
3 years
T/F: Advisers and IARs may refer to the ratings they receive from third-party social media sites in print advertising as long as the site is independent and not materially connected to the adviser.
True
Is a Consent to Service of Process on the U4 form?
Nope
T/F: State Administrators have the authority to revoke registrations in other states/ other than the ones they have issued
False; State Administrators only have the authority to revoke registrations that they have issued (i.e., only in their state)
How long must new customer account information be kept?
6 years
How long must a broker-dealer maintain suitability information?
6 years
T/F: In general, all advertising and sales-related materials created by broker-dealers and investment advisers must be filed with the Administrator.
True
T/F: If the security or the transaction is exempt under the Act or is a federal covered security, the materials still need to be filed with the Administrator.
False; materials do not need to be filed if the security or transaction is exempt
Do corporations that are listed on the Toronto Stock Exhange need to register with the administrator?
No, they are exempt. Stocks that are listed on foreign exchanges, except for the Toronto Stock Exchange, need to register
