Q&A Test 1 Flashcards
Which of the following activities is an exempt transaction according to the Uniform Securities Act?
a. An agent sells securities listed on the Toronto Stock Exchange
b. A broker-dealer solicits 35 retail investors within the state regarding a private placement during a 12-month period
c. An agent sells unregistered, nonexempt securities to a client on a solicited basis
d. There is a sale of securities by a bona fide pledgee, the purpose of which is to circumvent the Act
A.
Choice (a) would qualify as an exempt transaction according to the NASAA Model Rule on Secondary Market Trading Exemptions for Qualifying Canadian Securities. Note that in order to qualify for this exemption, the transaction must be effected through the agent of a broker-dealer, the securities must be listed on the Toronto Stock Exchange (or the TSX Venture Exchange), and the issuer must have been a reporting company in Canada for at least the previous six months.
Sales of private placements, choice (b), are not exempt transactions if they are offered to more than 10 retail investors during a 12-month period. Sales of unregistered, nonexempt securities are exempt if done on an unsolicited basis, choice (c). Transactions by a bona fide pledgee are normally exempt, but not if the purpose of the sale is to evade the requirements of the USA. (75487)
A broker-dealer may need to file all of the following material with the Administrator, EXCEPT:
a. The prospectus for an oil and gas limited partnership
b. The marketing materials for a new issue of municipal bonds
c. The sales literature for an issue that will be sold within the Administrator’s state only
d. A form letter distributed to an adviser’s current clients explaining the benefits of a variable annuity
B.
Generally, the Administrator may require the filing of “any prospectus, pamphlet, circular, form letter, advertisement or other sales literature or advertising communication” intended for distribution to investors or prospective investors. However, the Administrator may not require that sales materials related to exempt securities, exempt transactions, or federal covered securities be filed. Municipal securities, choice (b), are exempt securities. (75565)
A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE?
a. The withdrawal will become effective within 60 days after the application is received by the Administrator
b. The withdrawal will become effective when the Administrator determines whether there is an action for revocation of the firm’s license pending at the time the application was filed
c. By filing an application to withdraw, the firm agrees to settle all charges currently pending without admitting or denying them
d. The Administrator has two years after the date the firm’s registration is withdrawn to initiate a proceeding for revocation of its license
B.
An application for withdrawal generally becomes effective 30 (not 60) days after it was filed. However, the 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. (This is also true if the Administrator institutes proceedings within 30 days after the application was filed.) The Administrator has one year (not two) after the registration is withdrawn to begin revocation or suspension proceedings against the firm.
In practical terms, the reason for this is because if violations have occurred in a state and the broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the B/D for up to one year after the withdrawal. The cause of action may carry over to other states. This prevents a B/D from avoiding the consequences of rule violations. (89521)
When a security is sold under an exemption from registration under the Uniform Securities Act, the burden of proof for establishing the exemption is on the:
a. Administrator
b. Person claiming the exemption
c. SEC
d. Purchaser
B.
The Uniform Securities Act requires that an investment adviser deliver a written disclosure document to an advisory client or prospective advisory client. In which TWO of the following situations is the adviser NOT required to send this document to clients?
I The firm advises only investment companies but does not send its brochure to them
II The firm sends a newsletter to subscription clients who pay an annual fee of $120
III The firm has no office in the state
IV The firm advises only institutional investors
a. I and II
b. II and III
c. I and IV
d. II and IV
A.
According to the Uniform Securities Act Rule 203, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) either 48 hours before or at the time of opening the account. Exceptions to this rule include an adviser whose clients are only investment companies or where the contract is for impersonal services for which the client pays a fee of less than $500. Please note, while an investment company is an institutional investor, not all institutional investors are investment companies. An investment adviser is required to provide the brochure to institutional investors other than investment companies. While there are many exemptions regarding institutional investors, this rule is NOT one of them. (89551)
A married couple in their early forties with no children has decided it is time to start thinking about retirement. Which of the following portfolio allocations would you recommend for them?
a. 100% equity securities
b. 25% fixed-income and 75% equity securities
c. 80% fixed-income, 10% equities, and 10% money-market securities
d. 50% fixed-income, 10% equity securities, and 40% in foreign securities
B.
This couple is in their early forties. Presumably, they have about 20 years before retirement. Their primary investment objective should be growth. Equity securities meet this need as they have shown more potential for growth than fixed-income securities. Therefore, a greater percentage of the assets should be invested in equities. Concentrating a portfolio in foreign securities is not a good idea.
Diversification is also important. If the portfolio of investments is too heavily weighted in equities, as in choice (a), the client takes unnecessary risk. The best choice would be to diversify the client’s portfolio and allocate their investments in equities and fixed-income investments, which is the case in choice (b). (75848
Which of the following choices is considered a stock offering under the Uniform Securities Act?
a. Creditors receive stock as part of a bankruptcy proceeding
b. Shareholders receive a stock dividend
c. Shareholders receive the right to purchase additional shares in a subsidiary at a prearranged price
d. An issuer pledges its securities as collateral for a loan
c.
choice (c) describes an offering of stock rights, which is defined as an offer, or offer to sell, under the USA (sometimes called a rights offering). Choice (a) refers to a situation in which the issuer is bankrupt and the creditors receive stock as part of the reorganization plan. Any securities received as a result of a reorganization plan approved by the bankruptcy courts are not an offer or an offer to sell (and neither is stock that is received as a result of a merger or acquisition, or other corporate reorganization). Stock dividends, choice (b), are not defined as sales or as offers to sell. Choice (d) describes a situation where securities are being pledged as collateral for a loan, which also is not a sale or an offer to sell. (89647)
An unregistered agent who is an employee of a licensed broker-dealer is allowed to sell exempt securities to the public:
a. Under no circumstances
b. If it is an exempt transaction
c. Because the security is exempt
d. If the employee is not paid a salary or commission
A.
An individual who sells securities (whether or not the securities are exempt) must be registered as an agent in order to sell such securities to the public for a licensed broker-dealer. (75568)
Which of the following activities would NOT meet the definition of an exempt transaction under the Uniform Securities Act?
a. A bankruptcy trustee liquidates a debtor’s securities and divides the proceeds among its creditors
b. An agent sells a client shares in a Canadian venture capital fund after the client agrees to sign a form stating that the transaction was unsolicited
c. An agent sells units in a Canadian limited partnership to several of her clients
d. An issuer distributes shares in an IPO to the lead underwriter
c.
This is another example of a question where the entire point hinges on the word “NOT”. This is typical of regulatory examinations so it is important to understand what the question is asking. In this situation, you are supposed to recognize which of the following items is not defined as an exempt transaction. This means three of them are exempt. If you can identify which ones are exempt, then you can narrow down the correct answer by process of elimination.
In choice (c), the sales appear to have been solicited and there is no indication that the partnership qualifies for any other exemption. As an aside, you may be required to know that nonissuer transactions in certain Canadian securities are exempt, but the securities must be (1) issued by an entity that files reports with the Canadian regulators and be (2) listed on the Toronto Stock Exchange.
Choice (b) is exempt because the sale is unsolicited. Transactions by a trustee as part of bankruptcy proceedings are exempt, choice (a), as is a transaction between an issuer and an underwriter, choice (d).
The state Administrator has suspended Heathrow Securities, a broker-dealer. Which of the following statements concerning the broker-dealer is TRUE?
a. The firm is allowed to accept unsolicited orders
b. The only activity the firm may not participate in is new issue distributions
c. The firm may apply to the state court for a review of the order
d. The firm may continue business as usual during the appeal process
C.
Although the firm may apply to the state court to review the Administrator’s order, there is no stay of the order. The firm is still suspended during the appeal process and cannot participate in any securities-related activities in that state. (75627)
A hedge fund is being sold to investors as a private placement under Regulation D. An agent believes that this fund would be an excellent investment opportunity for several of his clients. The agent may discuss the fund with which of the following clients?
a. A newly retired man, whose annual income last year was $200,000
b. A middle-aged couple who are both physicians with a joint annual income of $400,000
c. A young, aggressive investor with a net worth of $500,000 and an annual income of $150,000
d. A couple that just won the lottery, whose annual income this year was $500,000 and whose net worth is $550,000
B.
Many hedge funds are issued as private placements under Regulation D. In order to qualify for the exemption, they must be offered only to accredited investors, and no more than 35 nonaccredited investors may participate in the offering. Accredited investors include:
- Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future
- A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future
- An individual or a couple with a net worth of at least $1 million
The investor in choice (a) meets the income requirement but his income will probably drop now that he is retired. While this is an assumption, it is still not the best answer compared to choice (b). The investor described in choice (c) does not meet either the income or the net worth requirements. The couple described in choice (d) just won the lottery. Therefore, their income is probably much higher this year than normal, and it is unlikely to remain at the same level. Only the couple described in choice (b), two doctors in their prime earning years, can reaso
An insurance agent works in an office building down the hall from a broker-dealer. They are not affiliated. What compensation may the agent receive from the broker-dealer in exchange for referrals?
a. Discounted commissions
b. Insurance referrals
c. Commissions
d. 12b-1 fees
B.
Only individuals who are registered agents may receive monetary compensation from a broker-dealer based on the sale of a security. In this scenario, the insurance agent is not licensed and may not receive compensation in the form of commissions or fees, or soft-dollar compensation (noncash compensation) in the form of discounted commissions. If a broker-dealer wants to refer its clients to an insurance professional, this is permitted. Only licensed insurance professionals may be compensated for the sale of life insurance. (75551)
An agent unknowingly misrepresents the risk associated with a security. Under the Uniform Securities Act, which of the following statements is correct?
a. This is considered an act of fraud
b. Since the agent unknowingly made misrepresentations regarding a security, the agent is not subject to disciplinary action
c. Unknowingly making misrepresentations will result in the denial, suspension or revocation of the agents registration
d. Unknowingly making misrepresentations regarding securities must be reported to the Administrator
B.
Unknowingly making misrepresentations regarding a security is not considered fraudulent as there was no willful intent to mislead. As such the agent is not subject to disciplinary action by the Administrator. If the misrepresentations were intentional the Administrator may deny, suspend or revoke the agent’s registration. (89422)
A new client approaches an agent regarding opening a new account but refuses to discuss his financial status. The agent should:
a. Sell any type of securities
b. Accept only unsolicited orders until more information is known
c. Not open an account for this individual
d. Sell only high-grade securities
B
An agent may not solicit orders from a client when no information about the client’s financial status is known. (75668)
An advisory client of your firm has contacted the Administrator of the state of Kentucky about a possible violation of the Uniform Securities Act. The firm has its home office in Illinois and is registered in both states. Which of the following actions would the Administrator of Kentucky be LEAST likely to take regarding the possible violation?
Begin an investigation in Kentucky
Open an investigation in Illinois
Contact the Illinois Administrator
None
None
The Administrator has the authority to begin an investigation if a violation has occurred or is about to occur. The investigation may take place within or outside the state as deemed necessary. (75511)
