Section 1 Definitions and Reg of Persons

Question 1

How long must a Registered Investment Adviser keep business records available for examination by the Administrator for?

Answer 1

5 years.

Must be readily accessible (in the principal office) for the first 2 years

Question 2

How long must a Registered BD keep records available for?

Answer 2

3 years

Must be readily accessible (in the principal office) for the first 2 years

Question 3

Issuers and Trust Companies are EXCLUDED from the definition of a broker-dealer

Answer 3

Issuers and Trust Companies are EXCLUDED from the definition of a broker-dealer

Question 4

BD’s and IA’s must BOTH file what with the Administrator?

Answer 4

BD’s and IA’s must both:

1. Meet the appropriate net worth requirements of the state
2. Update all information promptly

Question 5

The Uniform Securities Act(USA) provides for 3 types of registration for Non-Exempt Securities. What are they?

Answer 5

1. Registration by NOTICE FILING
2. Registration by COORDINATION
3. Registration by QUALIFICATION

Question 6

The Adminstrator can only deny or revoke the REGISTRATION exemption for 2 types of securities. What are they?

Answer 6

The Administrator can only deny or revoke the registration exemption for:

1. Securities sold by religious and charitable organizations.
2. Securities sold in connection with employee pension, profit sharing, or saving plans

Question 7

Consent to Service of Process

Answer 7

A legal document entered into by ALL registrants whereby the Administrator is given the power to accept legal papers on behalf of the registrant.

The Consent to Service of process appoints the Administrator as the applicants attorney to receive and process noncriminal securities-related complaints against the applicant. Under the consent to service of process, all legal documents(e.g. subpoenas or warrants) received by the Administrator have the same legal effect as if they had been served personally on the applicant.

The consent of service or process remains in force permanently and does not need to be supplied with each renewal of registration.

*TestTopic! If a securities professional is registering in multiple states they must submit a consent to service of process to each Administrator of each state they’re registering.

Question 8

Under the U.S.A., you must file what in order to register as BD, Agent, IA or IAR?

Answer 8

Any person that meets the definition (under USA) of a Broker-Dealer, Agent, Investment Adviser or Investment Adviser Representative must:

Submit an application,

Provide a Consent to Service of Process

Pay filing fees.

Post a bond(if required by the Administrator)

Take and pass an examination if required by the Administrator, which may be written, oral, or both

*Unlike FINRA, registration DOES NOT require FINGERPRINTS

Question 9

Under the U.S.A. the record keeping requirements established by the Administrator for OUT OF STATE Investment Advisers wishing to register in his state are subject to the limitations of what requirements?

Answer 9

The requirements set by the Administrator of the Advisers HOME STATE

Question 10

Powers granted to the Administrator under the Uniform Securities Act(USA) include the ability to inspect records of a Broker Dealer how often?

Answer 10

At any time. (during the BD’s normal business hours)

Question 11

Who is EXCLUDED from the definition of a Broker-Dealer?

Answer 11

Agents
Issuers
Banks, savings institutions and trust companies(not engaged in BD activites)
No Place of Business rules(detailed on another card)

*Commercial banks and financial institutions are generally excluded from the definition. Most of them have BD Subsidiaries which are subject to registration and are not excluded.

On the test, you can assume that any question mentioning securities activities by a bank it will be treating the bank as exempt from registration and is not a BD UNLESS the question specifically describes the entity as a “wholly owned subsidiary”

Question 12

No Place of Business Exclusion from BD definition

Answer 12

If the BD does not have a “place of business” in a state other than their home state they can do business in that state without being defined a BD if they deal exclusively with or through the issuers of the securities involved in the transactions (such as UW a new issue), other broker dealers, or banks, savings institutions, trust companies, ins companies, investment companies, and pension or profit sharing trusts. Or if they’re dealing with “Snow Birds”.

If the snow birds officially change their address to the other state the BD has 30 days to continue business transactions and after 30 days they would be required to register in order to keep that client.

In other words, as long as they’re dealing with other business directly and not directly with residents or general public of the other state they don’t fall under the definition of BD

Question 13

Under U.S.A. who or what would be considered a “PERSON”

Answer 13

There is an extremely wide variety of entities defined as persons so always just remember there are ONLY 3 NON PERSONS:

1. Minors
2. Deceased Individuals(their estate WOULD be a person)
3. Mentally incompetent individuals

Question 14

Under U.S.A. at the time of registration of a BD, any partner, office, or director of the broker-dealer who is active in the BD’s securities business is automatically registered as an agent of the BD.

Answer 14

This DOES NOT mean that they don’t have to take an exam. It means that these individuals submit a Form BD when registering the BD in a state for the first time which enables the Administrator to determine their eligibility for registration so a separate application does not have to be filed.

There is no separate principal registration category for those in supervisory positions the way that FINRA requires. They are all agents.

Question 15

Can Broker-Dealers who meet the net capital or bonding requirement of the SEC be required to meet higher ones in any state in which they do business?

Answer 15

NO

Question 16

The Administrator of a State may require BD’s that have custody of, or discretionary authority over, clients funds or securities to post SURETY BONDS.

In lieu of a surety bond, what with the Administrator accept?

Answer 16

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

Question 17

Employees representing an ISSUER are excluded from registration(def of agent) when effecting which transactions

Answer 17

Individuals are excluded form the definition of agent and therefore exempt from registration in a state when representing issuers in effecting transactions in:

• in exempt securities
• exempt from registration
• with existing employees, partners, or directors of the issuer if NO COMMISSION OR REMUNERATION is paid or given directly or indirectly for soliciting any person in this state.

Question 18

An employer CAN pay a year end bonus to all of their employees based on company profits and it would not require registration for the employees provided:

Answer 18

that it’s not related to any INDIVIDUALS sales efforts

Question 19

An individual is excluded from the term agent when that individual represents an issuer in effecting transactions for what 5 exempt SECURITIES

*(only these 5 for the agent exclusion…close to 12 different exempt securities total)

Answer 19

1. Any security issued or guaranteed by the United States, any state, any political subdivision of a state or any agency of one or more of these or any security issued or guaranteed by Canada, any Canadian province or any political subdivision of such province.
2. Securities of governments with which the United States has diplomatic relationships
3. Any security issued by or guaranteed by any bak organized under the laws of the United States or any bank, savings institution or trust company organized and supervised under the laws of any State.
4. Commercial paper rated in the top 3 categories by the major rating agencies with denominations of 50k or more AND maturities of 9 months or less.
5. Investment contracts issued in connection with an employees stock purchase, savings, pensions, or profit sharing plans

Question 20

An employee of an ISSUER is not an agent when representing an ISSUER in exempt transactions. What are examples of exempt TRANSACTIONS

Answer 20

• Isolated nonissuer transactions
• transactions between issuers and underwriters
• transactions with financial institutions such as banks or trust companies
• insurance companies and investment companies
• offerings to a limited # of investors, usually referred to as private placements.

Question 21

Investment Adviser (IA)

Answer 21

under USA and SEC from Release IA-1092
The “3 Prongs” are as follows:
1. Provide advice about securities(not about jewelry, rare coins or real estate)
2. Provide that advice as part of an ongoing business
(hang a shingle and have an office for conducting business)
3. Receive Compensation

**An individual can also be an IA vs. and IAR when the business is organized as a sole proprietorship

Question 22

What professions are included in the definition of Investment Advisers (IA)

Answer 22

Financial Planners
Pension Consultants
Sports and Entertainment Representatives

(an agent that gets an athlete a contract and gets a commission would only be considered an IA if they also advised on how to invest in securities and received compensation for that as well)

Question 23

Professionals EXCLUDED from the definition of Investment Adviser(IA) under the USA’s Definition

Answer 23

• Investment Adviser Representatives
• Banks, savings institutions, and Trust Companies

*Lawyers, accountants, teachers and engineers(LATE)
(If they advertise or offer separate business or services for specific investment advise they would not qualify for the exclusion.)

• Broker Dealers who’s advice is incidental and no separate compensation is charged for
• Publisher of news shows or radio so long as the advice isn’t specific to specific individuals and there is no subscription fee’s for the show or magazine or radio show.
• Federal Covered IA’s registered with the SEC
• Any other person the Administrator specifies

Question 24

Test Note ALERT!

Sometimes the exam will refer to EXCEPTIONS rather than EXCLUSIONS. Both terms mean the same thing for test purposes

Answer 24

Sometimes the exam will refer to EXCEPTIONS rather than EXCLUSIONS. Both terms mean the same thing for test purposes.

Question 25

Potential Trick….

The term “BANK” does NOT include a savings and loan association or foreign bank

Answer 25

The term “BANK” does NOT include a savings and loan association or foreign bank.

Question 26

If a person is Excluded from the definition of investment adviser under the act of 1940(SEC) than the states (USA) Can NOT define them as an AI

Answer 26

If a person is excluded from the definition of investment adviser by the SEC they would not be defined as an IA on the state level either.

If the states could define the persons who were excluded from the federal definition the federal law would have no meaning,

Question 27

How long does the Administrator have to initiate disciplinary action after an agents withdrawal of registration?

Answer 27

The Administrator has a maximum of 1 year after termination to initiate any actions

Question 28

Person representing an underwriter in a transaction with an issuer would be what?

Answer 28

A person representing an Underwriter in a transaction with an Issuer would be an Agent of a BD, this is one of the roles of an agent of a BD

Question 29

De Minimis Exemption

Answer 29

Excludes registration for IAs and IAR’s(NOT BD’s or agents) if they are limited to 5 or fewer clients in another state in the preceding 12 months. No place of business in the given state is required

Question 30

Wrap Fee Program

Answer 30

A “Wrap Fee Program” is a type of asset management program where the BD wraps all of it’s services together including transactions, advice, custody, and research all for one flat fee that is usually a percentage of AUM.

Because the wrap fee includes payment for securities advice, generally the BD must be registered as an IA and any participating agent of the BD must be registered as an IAR.

Firms offering Wrap Fee Programs MUST disclose these 5 things:

1. amount of the wrap fee charged for the program
2. whether fees are negotiable
   3 the services provided under the program, including types of portfolio management services.
3. a description of the nature of any fees that the client may pay in addition to the wrap fee
4. A STATEMENT THAT THE PROGRAM MAY COST THE CLIENT MORE THAN PURCHASING THESE SERVICES SEPARATELY(this one noted for test)

Question 31

What are the 5 critical disclosures required from firms offering Wrap Fee Programs?

Answer 31

1. The amount of the wrap fee charged for the program
2. Whether the fees are negotiable

3 The services provided under the program, including types of portfolio management services.

4 A description of the nature of any fees that the client may pay in addition to the wrap fee

5 A STATEMENT THAT THE PROGRAM MAY COST THE CLIENT MORE THAN PURCHASING THESE SERVICES SEPARATELY(noted to remember this one for test)

Question 32

Fiduciary

Answer 32

A fiduciary is a person legally appointed and authorized to hold assets in trust for another person.

The fiduciary manages the assets for the benefit of the other person rather than for his or her own profits and MUST exercise a standard of care imposed by law.

Specific for this test an IA is a fiduciary. Other examples would be an executor of an estate or a trustee..

Under state law IA’s MUST make full disclosure and avoid conflicts of interest with their clients in this fiduciary responsibility/role

Question 33

Who defined the term “Federal Covered Adviser”?

Answer 33

The National Securities Markets Improvements Act of 1996 (NSMIA)

Question 34

Tip for remembering who notifies the Administrator regarding termination procedures for I AR’s and agents

Answer 34

Remember Agents (A) for ALL because all parties involved must notify the Administrator.

Remember for IA and IAR I=1 for one party. If the IA is state registered the firm must notify the Administrator. If the IA is Federally covered the IAR must notify the Administrator.

Both IAR’s and agnets file a U-5 for termination

Question 35

Investment Adviser and any Predecessor record keeping potential test question

Answer 35

Partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least THREE years after termination of the enterprise

Question 36

Registration by Coordination

Answer 36

The type of State Securities Registration that becomes effective when the security is cleared by the SEC

Requires that an agent give out a prospectus no later than at the time of the confirmation

The federal securities law that relates to State Registration by coordination is the Securities Act of 1933

Question 37

Registration by Qualification

Answer 37

When a security is to be registered in ONE STATE ONLY it would have to be registered by QUALIFICATION. This type of security becomes effective when the Administrator clears it.

Requires that an agent give out a prospectus PRIOR to the sale

This is known as “Intrastate Offering”

Question 38

Securities Registration Effective Dates

Answer 38

Under the USA, every securities registration, whether by filing, coordination, or qualification is effective for one year from it’s effective date

Question 39

Private Placement

Answer 39

When you purchase stock in a private placement you are buying unregistered securities.

Private Placements are an Exempt Transaction under the USA

Question 40

An Administrator may NOT require a net capital requirement for a broker dealer greater than set by the SEC

Answer 40

This is found in Section 15 of the Securities Exchange Act of 1934.

• Don’t confuse this with the State registered IA’s who are only required to meet the net capital requirements of their “home state”

Question 41

IA’s with discretionary but NOT custody are required 10k

if they have custody, 35k

Answer 41

IA’s with discretionary but NOT custody are required 10k

if they have custody, 10k

Question 42

Remember, when discussing the definition of an Agent or an IAR the option will ALWAYS be an individual…NOT an entity…

Answer 42

Remember, when discussing the definition of an Agent or an IAR the option will ALWAYS be an individual…NOT an entity…

Question 43

Registration by Notice Filing

Answer 43

This applies to Federal Covered Securities. The Notice filing is done with the Administrator in order to sell these securities in the state. The Administrator may require the following as a condition to sell in the state:

Documents filed along with their registration statements filed with the SEC

Documents filed as amendments to the initial federal registration statement

A report on the value of such securities offered in the state

Consent to service of process

Question 44

What forms are required in addition to consent to service of process for Registration by COORDINATION?

Answer 44

Copies of the latest form of prospectus filed under the Securities Act of 1933 if the Administer requires

Copy of articles of incorporation and bylaws, a copy of the underwriting agreement or a specimen copy of the security

If the Administration requests, copies of any other information filed by the issuer under the Securities Act of 1933

Each amendment to the federal prospectus promptly after it is filed with the SEC