Securities And Their Issuers, Registration, And Exemptions

Question 1

As defined in the Uniform Securities Act, every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value is

Answer 1

a Sale

This is the definition of a sale. The offer precedes the sale; it is the attempt to make the sale. Once the deal is made, it is a sale. Isn’t it also a transaction? Yes, it is, but on the exam, when you are faced with two possible answers that could be right, only one of them is a more complete response. In this case, a transaction could be a buy or a sell, so answering that a sale took place is more accurate.

Question 2

De minimis is from the Latin meaning

Answer 2

insignificant. In this exam, de minimis is used to define the number of clients of an investment adviser or IAR at which registration with the state is not required

Question 3

Certain securities may be sold without registration because of the way the sale takes place. When that is the case, it is

Answer 3

an exempt transaction.

It is important to recognize the difference between an exempt transaction and an exempt security. An exempt transaction always involves a purchase or sale (a transaction). The security involved in the transaction is exempt from registration based on the method of sale or the nature of the party involved in the transaction.

Question 4

If the Administrator suspects a prohibited action is about to take place, a _ order will be issued in an attempt to prevent that activity. Should the agent refuse to halt, then the Administrator will apply to the courts for an _.

Answer 4

Ceast & Desist.

Injunction

Suspension of registration takes place after a hearing, and the Administrator does not have the power to arrest anyone.

Question 5

One of the distinguishing characteristics of a stock exchange is that

Answer 5

stock prices are determined by auction.

Prices on an exchange are determined by auction, while those in the over-the-counter (OTC) market are determined through negotiation. It is where securities listed on that exchange trade. Unlisted securities trade in the OTC market. Stock exchanges are open a stated number of hours each day. Typically, the hours are from 9:30 am to 4:00 pm.

Question 6

refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government.

Answer 6

Person

A minor child is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.

Question 7

is a template rather than the actual law of any state or territory of the United States.

Answer 7

the Uniform Securities Act

Question 8

The _ purpose is to eliminate dual registration, not to require identical laws.

Answer 8

the National Securities Markets Improvement Act of 1996 (NSMIA)

Question 9

A broker-dealer has offered a security to a customer. If the customer accepts the offer, the broker-dealer has made

Answer 9

a sale.

The first step was the offer to sell. That is the attempt to sell the security. The acceptance of the offer, as indicated in the question, means there is a sale by the dealer to the customer. Isn’t it also a transaction? Yes, it is, but on the exam, when you are faced with two possible answers that could be right, only one of them is a more complete response. In this case, a transaction could be a buy or a sell, so answering that a sale took place is more accurate

Question 10

model legislation passed in 1956 in an effort to unify state securities laws.

Answer 10

The Uniform Securities Act is

Question 11

Who receives the proceeds from a nonissuer transaction of a bond?

Answer 11

The seller

Who receives the proceeds from a nonissuer transaction of a bond?

Question 12

The Uniform Securities Act is

Answer 12

model legislation passed in 1956 in an effort to unify state securities laws.

Question 13

must have not less than $5 million in investments.

Answer 13

a qualified purchaser

Question 14

any person who issues or proposes to issue any security.

Answer 14

issuer

those who issue securities are issuers. Under the USA, these persons are issuers even when the issue is only proposed and may not, in fact, ever be issued.

Question 15

IAs get paid for giving advice and BDs get paid for executing transactions. When the charges for these two activities (plus several others) are wrapped into a package with a fee, generally based on the size of the account, it is a

Answer 15

Wrap Account

Question 16

True or False

A wrap account and a managed account are one in the same

Answer 16

False

The confusion often arises because many wrap accounts are also managed accounts. That is, for the all-inclusive fee, the investor not only gets the benefits of the wrap (like trade execution without per-trade charges) but also has their assets actively managed by professionals. However, not all managed accounts are wrap accounts, and not all wrap accounts have active management as a part of their offering.

Question 17

Purchases and sales of publicly traded unlisted securities are made

Answer 17

in the over-the-counter market.

Listed securities trade on the exchanges while unlisted securities trade OTC. If the question says these are publicly traded, privately is not going to be a correct answer.

Question 18

Buying and selling securities is the role of a

Answer 18

Broker Dealer

Question 19

being in the business of giving advice on securities for compensation is what makes a person an

Answer 19

Investment Advisor

Question 20

The Financial Industry Regulatory Authority functions as

Answer 20

an SRO.

FINRA is the main self-regulatory organization (SRO) for the securities industry. It is a member organization and, although authorized through an act of Congress, it is not a governmental agency. The various stock exchanges are SROs for the activities on those exchanges by their members. Although FINRA does provide educational information to investors, its primary function is as a regulator

Question 21

an individual or entity considered able to enter into an enforceable contract.

Answer 21

a person

According to the Uniform Securities Act (USA), a person is a competent, adult individual or an entity that is able to enter into an enforceable contract. For example, the American Red Cross is a person (legal entity), although as a charitable organization, it is not subject to federal income tax.

Question 22

The term person has an extremely broad definition. It is best to remember the three things that are not persons: minors, individuals who have been judged incompetent, and deceased individuals. Minors can have passports; any natural person would include them and they are not persons under the act.

Answer 22

Note

Question 23

Magnum Manufacturing Company (MMC) wishes to raise capital through a public offering of its common stock. When filing the required paperwork with the Administrator, MMC is legally referred to as

Answer 23

the registrant.

When an issuer files the registration papers with the Administrator, the USA refers to that person as the registrant. Any person wishing to register in any capacity, whether a broker-dealer, investment adviser, agent, or investment adviser representative, is legally referred to as the registrant.

Question 24

The federal act that essentially eliminated the dual system of state and federal registration of certain investment advisers is

Answer 24

the National Securities Markets Improvement Act of 1996.

It is the NSMIA, passed in 1996, that created the category of federal covered investment adviser—an adviser that is not required to register at the state level. The USA is not federal law and the Securities and Exchange Act established regulation of exchanges. There is no Dual Registration Elimination Act.

Question 25

When a security is sold in a manner that creates an exemption from registration in a state, it is

Answer 25

an exempt transaction.

An exempt transaction is one where the security involved in the transaction does not require registration. The determining factor is either how it is sold or to whom it is sold. This question does not describe an exempt security because we are told it is the way in which it is sold that creates the exemption. At this point, we are only concerned with definitions.

Question 26

The term qualified client would include a natural person who has

Answer 26

Either the natural person has at least $1.1 million under the investment adviser’s management or has a net worth (spouse can be included) of more than $2.2 million exclusive of the equity in a primary residence.

It is the accredited investor who has the $200,000 annual income or $1 million net worth requirement.

Question 27

A customer of a broker-dealer has been trading securities for several years. She recently purchased $10,000 of newly issued U.S. Treasury bonds and asks why she never received a prospectus. The agent would reply,

Answer 27

“U.S. Treasury securities are exempt from registration on the federal and state level, so there is no prospectus.”

Question 28

They are securities but qualify for an exemption from the registration requirements. That is why there is no prospectus.

Answer 28

U.S. Treasury securities

Question 29

Under both state and federal laws, when a broker-dealer wants to offer wrap fee programs,

Answer 29

it must also register as an investment adviser.

Because a wrap fee program involves compensation for advice, broker-dealers offering it must be dually registered (BD and IA). The Administrator’s consent is not required and there are no commissions charged. That is the attraction of a wrap fee program; for the one fee, all expenses are covered. In general, these programs are more suitable for customers with larger accounts, but nothing near the accredited investor minimum. Furthermore, the term accredited investor is a term applicable solely to private placements.

Question 30

The only person who can become an investment adviser representative is a

Answer 30

natural person (an individual)

Question 31

Handling the accounts of an investment adviser’s clients is one of the functions that makes a person an

Answer 31

Investment Advisor Representative

Account executive is an old term used to refer to an agent, and there is no such legal term as a financial advisor. Portfolio manager is another descriptive term in the industry but is not a legal definition. Those who manage portfolios may be IARs or IAs.

Question 32

By definition, an agent must be a

Answer 32

natural person (an individual)

As a person, the individual cannot be a minor. However, not all persons can be agents, only natural persons. That eliminates business structures such as partnerships and corporations.

Question 33

is the deliberate or willful attempt to deceive a person.

Answer 33

Here is a case where you must pick the specific legal term. Fraud is the deliberate or willful attempt to deceive a person. Yes, it is deceitful, prohibited, and unethical, but the legal term for this activity is fraud.

Question 34

are those persons who, by dint of wealth, income, or investment sophistication, are able to invest in ventures that are generally unsuitable for the average person. Most commonly, those ventures are private placements.

Answer 34

accredited investors.

Although qualified purchasers meet the requirements, that is under a different federal law. Institutional investors are accredited, but, once again, that is not the term defined in Rule 501. This exam can get that fussy. It is, after all, a test on the laws.

Question 35

One of your customers has inherited 2,000 shares of Shortline Railroad guaranteed preferred stock. Being wary of the term guaranteed, you are asked for its meaning in this context. You would explain that

Answer 35

the dividend payments on this stock are guaranteed by someone other than the issuer.

The Uniform Securities Act defines a guaranteed security as one whose interest and principal (if a debt security) and dividends (if an equity security) are guaranteed by someone other than the issuer. However, in the case of a stock, there are no guarantees to the capital value.

Question 36

This method is for securities that aren’t being registered federally.this could be because the offering is only taking place in one state or it doesn’t meet criteria for federal registration

• it’s the most detailed and comprehensive form of state registration
• issues provides detailed info about the security, its business, it’s financial condition, and its management.

Answer 36

Registration by Qualification

Question 37

This method of registration is most commonly used when a security is simultaneously being registered with the SEC for a new issue. Essentially to coordinate the state registration process and the federal registration process

• issuer must file copies of the same materials that have been or will be filed with the SEC, such as a prospectus
• generally, the security can’t be sold in the state until its effective at the federal level and the state has cleared it for sale.

Answer 37

Registration by Coordination

Question 38

Test Topic Alert

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 (difference between the public offering price and what they pay the issuer) or receive a commission on the sales, which they then turn around and pay their agents who actually made the sales to the clients.

Question 39

Persons not included in the definition of a broker-dealer are?

Answer 39

• agents (they work for the broker-dealer)
• issuers (they issues securities, stocks, or bonds that broker-dealers buy and sell)
• banks, savings institutions, and trust companies (they are not engaged in broker-dealer activities)

Question 40

Test topic alert

Will be safe to assume? that any question mentioning securities activities by a bank will treat the bank as exempt from registration. The only exception will be if the question specifically describes the entity as a “wholly owned subsidiary, engaged in securities transactions”

Question 41

Reasons someone might be excluded from the broker-dealer definition in such a scenario:

Answer 41

1. Dealing Exclusively with Insiders: The person transacts business solely with other broker-dealers, institutional investors, or existing clients who are not residents of the state.
2. Occasional Business Activities: If someone’s activities are sporadic or the individual is in the state temporarily (for instance, because of an emergency or natural disaster), they may not be subject to broker-dealer registration.
3. Federal Covered Securities: If transactions involve federal covered securities and don’t require state-specific registration, then the individual or entity might not be classified as a broker-dealer in the state.
4. No Solicitation: The person doesn’t actively solicit or advertise their services in the state and only works with clients who initiated contact.
5. Limited Clientele: In some instances, if the individual or firm deals exclusively with a limited number of clients (like less than five) in the state over a 12-month period, they might not be considered a broker-dealer in that state.
6. Other Exemptions: Specific exemptions may apply depending on the state’s securities laws, the nature of the transaction, or the parties involved.

Question 42

Test Topic Alert

Note: even one retail client who resides in a state triggers the need for a broker-dealer to register in that state.

Investment advisers and their representatives have a de minimis exemption. That means as long as the number of retail clients in the state does not exceed the stated number, the person is not an IA or IAR.

Question 43

Test topic alert

if a person or entity just generally advertises on the internet, it does not have to be registered in the state. However, if it follows up with advice (IA) or offering securities (BD), it either has to register or find some kind of exemption

Answer 43

this follows under the model rules of the NASAA

Question 44

Test Topic Alert

As stated previously the form U4 requires disclosing if an agent has ever been convicted, or even just charged with no time limit. The 10 years is for statutory disqualification. In the case of a broker dealer, there are similar disclosures on the form. BD, for the applicant, or a control affiliate. a control affiliate is any person that is a director, general partner, or officer exercising executive responsibility. A “yes” answer to most of the above disciplinary issues will lead to statutory disqualification.

Answer 44

The consent to service a process is submitted with the initial application, It is included in the form U4 or the form BD. It remains in force permanently. it does not need to be supplied with each renewal of a registration.

Take Note

Question 45

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

Question 46

True or False.

Net capital requirements of the states may not exceed those required by federal law.

Answer 46

True

Question 47

Take note

When it comes to broker dealers, regardless of how many states in which they are registered, other than enforcing anti fraud statutes, the administrator has relinquished most control to the SEC.

Question 48

Test topic alert

You will need to know that broker dealers who meet the secs met capital, or bonding requirements, cannot be required to meet higher ones in any state in which they do business.

Question 49

once withdrawal of registration has taken place, the Admin can jurisdiction of the former registrant for a period of

Answer 49

1 year

Question 50

Test Topic Alert

Althought it is required to keep all records relating to customers, there are no requirements to keep copies of their (BDs) tax returns

Remember, documents must be kept for 3 and readily accessable for 2 years.

Question 51

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

• in certain exempt securities
• exempt from registration (exempt transactions); and
• with existing employees, parnters, or directors of the issuer, if no commission or other remuneration is paid or given directly or indirectly for soliciting any person in this state

Answer 51

take note

Question 52

exempt transactions include:

Answer 52

• unsolicitied brokerage transactions (the client initiates the trade)
• transactions between issuers and underwriters;
• transactions with financial institutions, such as banks or trust companies, insurance companies, or investment companies and
• offerings to a limited number of investors, usually referred to as private placements

Question 53

Test Topic Alert

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 54

Note

It broker dealer domiciled in Canada that has no office in this state may affect transactions and securities with or for, or attempt to induce the purchase or sale of any security by:

• a person from Canada who is temporarily resident in this state and who was already a client of the broker-dealer or
• a person from Canada who is a resident in this state and who transactions are in a self-directed tax-advantaged retirement cplan in Canada, of which the person is the holder or contributor. Canada’s equivalent of our IRA is called *Registered Retirement Savings Plan (RRSP).

Answer 54

Renewal applications for Canadian BDs and agents who file for limited registration must be filed before December 1 each year.

take note

Question 56

True or false. Securities of public utility companies are exempt from State registration requirements

Answer 56

True

Question 57

• requires that corporate bond issues in excess of 10 million that are to be repaid during a term in excess of one year issue a trust and denture for the issue
• attempts to ensure the issuer is in compliance with all the promises and Covenants made to the bondholders by requiring a trust indenture
• only applies to corporate issuers. Both Federal and Municipal issuers are exempt

Answer 57

They trust indenture Act of 1939