Regulation of Persons--Test Topic Alerts!

Question 1

North American Securities Ad- ministrators Association (NASAA)

Answer 1

the advisory body of state securities regulators re- sponsible for the content of the exam

Question 2

Nonpersons

Answer 2

■ minors (anyone unable to enter into contracts under the laws of the state);
■ deceased individuals (but their estate would be a person); and
■ individuals legally declared mentally incompetent.

Question 3

Exam tip

Answer 3

On your exam, always keep in mind which one of the four categories of persons is the subject of the question. Rules that apply to agents, for example, are not the same as those that apply to broker-dealers. You will be tested on your understanding of the distinctions between each class of person defined in this unit.

Question 4

Broker-dealer

Answer 4

One of the roles of a broker-dealer is underwriting (distributing) shares of new securities for issuers. When they do that, they generally earn a spread (the difference between the public offering price and what they pay the issuer) or receive a commis- sion on the sales, which they then use to pay their agents who actually made the sales to the clients.

Question 5

Securities Activities by a Bank

Answer 5

It will be safe to assume that any question mentioning securities activities by a bank will treat the bank as exempt from registration—it isn’t a broker-dealer. The only exception will be if the question specifically describes the entity as a “wholly owned subsidiary.”

Question 6

Exclusion from the definition of Broker-dealer

Answer 6

The exam focuses more on the exclusions from the definition of broker-deal er
than on the definition itself. Know these exclusions well.

Question 7

NASD requirements

Answer 7

Please note that, unlike FINRA (NASD) registration requirements, fingerprints do
not have to be submitted.

Question 8

Form U4

Answer 8

the Form U4 requires disclosing if you have ever been convicted
or even just arrested (charged) with no time limit. The 10 years is for statutory
disqualification (by statute, that is, generally automatic denial or revocation).

Question 9

Consent to Service

Answer 9

If a securities professional is registering in six states, the Administrator of each
state must receive a consent to service of process.

Question 10

Payment of Initial and Renewal Filing Fees

Answer 10

One of the tricks the exam likes to play is asking about a person who registers in
November. When does that registration come up for renewal? Well, even if it is only a
month or so later, every registration of a securities professional comes up for renewal
on the next December 31, so your first year is always a short one.

Question 11

SEC’s net capital or

bonding requirements

Answer 11

You will have to know that broker-dealers who meet the SEC’s net capital or
bonding requirements cannot be required to meet higher ones in any state in which
they do business.

Question 12

Financial requirements for Broker-dealers

Answer 12

In lieu of a surety bond, the Administrator will accept deposits of cash or
securities.

Question 13

Withdrawal of registration

Answer 13

Although withdrawal of registration normally takes 30 days, the Administrator
has the power to shorten that period, in effect, permitting a rush order.

Question 14

Pending registration

Answer 14

While registration as an agent or IAR is pending, the individual may not take part
in any activity that would require registration. Clerical work or assisting with research
would be permitted.

Question 15

Customer’s tax returns

Answer 15

Although it is required to keep all records relating to customers, there are no
requirements to keep copies of their tax returns.

Question 16

Retention

requirements for electronic communications

Answer 16

Keeping up with current trends, the exam is likely to ask about retention
requirements for electronic communications, specifically email. Email has the same
requirements as any other documents: three years for broker-dealers and five years
for investment advisers. Emails from a registered person that are strictly of a personal
nature and not to a client (“Honey, I’ll be late for dinner,” or, “I’ll pick up the kids
after basketball practice”) do not have to be retained.

Question 17

Inspection by Administrator

Answer 17

The Administrator’s authority does not stop at the state line. The Administrator,
or his representative, of any state in which the person is registered may demand an
inspection of any of these books and records during reasonable business hours with
whatever frequency the Administrator deems necessary.

Question 18

Cold Callers

Answer 18

Cold callers working for a broker-dealer would have to register as agents if they
did any more than ask if clients wanted to receive information. For example, if they
pre-qualified clients or suggested ways to receive more money for their stocks or
bonds, they would have to register as agents.
As is customary in other industries, broker-dealers frequently hire summer interns.
If these interns received any selling-related compensation, such as $10 for each existing
client solicited, they would be considered agents and would have to register.

Question 19

Employees

Answer 19

Individuals representing broker-dealers in a sales capacity must register as agents
whether they sell registered securities, securities exempt from registration, or in exempt
transactions.

Question 20

Representing the Issuer

Answer 20

When representing the issuer, the only time where compensation comes into
play is when effecting transactions with existing employees, partners, or directors of
the issuer. In that case, the individual is not an agent only if no commission or other
remuneration is paid or given directly or indirectly for soliciting any person in this
state.

Question 21

U4 amendment

Answer 21

If there is a change to any material information in the Form U4 (e.g., change of
permanent address or change to military status), an amendment must be filed within
30 days.

Question 22

EXCLUSIONS FROM THE DEFINITION OF INVESTMENT

ADVISER

Answer 22

An investment newsletter is being published for a subscription fee. Rather than
being published on a regular basis (weekly, monthly, quarterly, and so forth), issues
are released in response to market events. How does the law view this publisher? In
this case, the publisher would be considered an investment adviser requiring registration.
The exclusion requires that the publication is published with some sort of regular
schedule rather than being timed to specific market events.

Question 23

Dodd-Frank and Assets Under Management

Answer 23

An investment adviser registered under state law whose assets reach $110 million
under management has 90 days to register with the SEC. A federal covered investment
adviser whose assets under management fall below $90 million no longer qualifies
for SEC registration and has 180 days to register with the state(s).

Question 24

The de minimis provision

Answer 24

The de minimis provision applies only to IAs and IARs, not to broker-dealers or
agents.

Question 25

REGISTERING WITH THE FORM ADV

Answer 25

Under the USA, if a federal covered investment adviser has an office in the state,
the Administrator may require, by rule or by order, that the IA submit any documents
that have been filed with the SEC. A federal covered IA submits only Part 1A of the
Form ADV. Therefore, if the Administrator requests the Form ADV, all that will be sent
is Part 1A. If it is a state-registered adviser, the investment adviser has already filed
Parts 1A and 1B.

Question 26

REGISTRATION REQUIREMENTS FOR INVESTMENT

ADVISER REPRESENTATIVES

Answer 26

The effect of the previous statement (found in Section 203A of the Investment
Advisers Act of 1940), is that for those performing as IARs for federal covered advisers,
state registration is required only in those states where that individual has a place
of business. Place of business of an investment adviser representative means:
(1) an office at which the investment adviser representative regularly provides
investment advisory services, solicits, meets with, or otherwise communicates with
clients; and
(2) any other location that is held out to the general public as a location at which
the investment adviser representative provides investment advisory services, solicits,
meets with, or otherwise communicates with clients.

Question 27

Registered investment advisers are responsible for the supervision of individuals
registered as investment adviser representatives

Answer 27

Registered investment advisers are responsible for the supervision of individuals
registered as investment adviser representatives, but acting in the capacity of independent
contractors, to the same extent that they supervise those who are actual
employees of the firm.

Question 28

Registration as an IAR

Answer 28

Registration as an IAR is done solely on a state basis. IARs never register with
the SEC, even when they are representing a federal covered adviser. That is why it is
NASAA who has the responsibility for this exam, rather than FINRA or the SEC.