Series 66

Question 1

An agent is using social media to try to build her business. If her Facebook page allows for followers to “like” her, that would be considered….
A)
interactive content
B)
illegal content
C)
misleading content
D)
static content

Answer 1

A.

One of the things that differentiate interactive content from static content is the ability for persons other than the originator of the content to have access. Posting a like to a Facebook page is an example of this.

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Question 2

What types of accounts can have TOD designations on them?

Answer 2

The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased’s estate.

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Question 3

Washington, Adams, and Jefferson, Inc. (WAJI) is an investment adviser whose principal and only office is in Alexandria, VA. WAJI’s sole business is advising institutional investors. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm’s bank and insurance company clients. Which of the following statements is correct regarding Rutherford’s licensing requirements?

A) Rutherford must register as an IAR of WAJI with the state of Virginia.

B) Rutherford cannot register as an IAR of WAJI because providing advice exclusively to institutions exempts the firm from registration.

C) Rutherford is exempt from registration because his only clients are institutions.

D) Rutherford is exempt from registration because he has fewer than 6 retail clients.

Answer 3

C.

Regardless of whom the clients are, Rutherford has a place of business in Virginia and that requires registration with the Administrator as an IAR. If WAJI does business in other states where it does not have a place of business, it is exempt from registration because the only clients are institutions. If WAJI is not registered in the state, Rutherford can’t register as their IAR. The de minimis exemption for fewer than 6 retail clients only applies when there is no place of business in the state.

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Question 4

Under the Investment Advisers Act of 1940, a registered investment adviser who provides investment advisory services to individuals must

A)
avoid the control or custody of client funds and securities
B)
provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement
C)
sell only listed securities
D)
have a net worth of $100,000

Answer 4

B

The brochure rule requires that each client be given a written disclosure statement by the adviser no later than the time of entering into the advisory agreement. It may consist of a copy of Part 2A and 2B of Form ADV or another document providing similar information. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser’s fiscal year. If there are no material changes, a brochure does not have to be sent.

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Question 5

a registered investment adviser who provides investment advisory services to individuals must provide each client with a disclosure statement or brochure no later than when?

Answer 5

No later than when entering into the advisory agreement

Question 6

What must you do first if you receieve inside information?

Answer 6

Promptly inform your supervisor

An agent cannot trade on inside information and is not obligated to inform the SEC

Question 7

Can an investment adviser share in the gains and losses in a customer’s account?

Answer 7

No, Remember that investment adviser representatives may never share in the gains and losses in a customer’s account in the same fashion that agents can.

Question 8

Under the Uniform Securities Act, any partner, officer, or director of a registered investment adviser is an investment adviser representative if a function of the position involves

I. offering advice concerning securities
II. managing client accounts or portfolios
III. determining securities recommendations for representatives to disseminate
IV. supervising personnel engaged in advisory activities but not directly dealing with the public

Answer 8

All of them.

The Uniform Securities Act defines persons associated with an investment adviser, who offers advice concerning securities, as an investment adviser representative. This includes any partner, officer, or director. The definition also includes persons who manage client accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities.

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Question 9

SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within how many days?

Answer 9

Within 120 days of the end of the adviser’s fiscal year.

SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser’s fiscal year. If there are no material changes, a brochure does not have to be sent.

Question 10

Confirmation bias

Answer 10

Confirmation bias is the tendency to pay attention to information that supports one’s preconceived opinions, while disregarding accurate, unsupportive information.

Question 11

What is herding?

Answer 11

You realize there is a tendency to follow the actions of a larger group of people when making financial decisions. It makes no difference if those actions are rational or not.

Question 12

Overconfidence

Answer 12

Overconfidence occurs when investors consider their abilities to be much better than they actually are.

Question 13

Anchoring

Answer 13

Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

Question 14

Strong Form EMH

Answer 14

“Stock prices fully reflect all information from public and private sources,”

Question 15

Weak form EMH

Answer 15

Weak includes historical pricing and volume information.

Question 16

Semi-strong EMH

Answer 16

Semi-strong includes all publicly-available information, such as earnings reports.

Question 17

Which of the following is (are) not exempt from registration as an investment adviser representative in the state in which they conduct business?

I. A Certified Financial Planner who, while affiliated with a broker-dealer and an investment adviser, prepares comprehensive financial plans and whose only compensation is commissions generated from the purchase of recommended securities.
II. An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients
III. A broker-dealer with extensive business in the state
IV. A mutual fund company with offices and clients in the state

Answer 17

I and II… because both cases these individuals are holding themselves out as offering investment advice.

A Certified Financial Planner who prepares comprehensive (the exam could say detailed) financial plans and is compensated by the commissions earned when the customer purchases the recommended securities, must register in the state as an investment adviser representative of the advisory firm. This is considered indirect compensation because the regulators take the stance that the CFP would not go through the effort to prepare the plan (which contains securities advice) without receiving the compensation from the trades. Note that the CFP is affiliated with both a BD and an IA. That’s how the CFP can earn commissions on the securities sales.. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

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Question 18

Are Broker-dealers and mutual fund companies considered investment adviers?

Answer 18

No.

Question 19

What is strategic asset allocation?

Answer 19

A portfolio manager who is engaging in rebalancing on a semiannual basis

At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the portfolio to bring it back to its ideal.

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Question 20

What is tactical asset allocation?

Answer 20

Active (also called tactical) asset allocation attempts to time the market and doesn’t pay the same amount of attention to proportionate holdings as does strategic asset allocation.

Question 21

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns?

A)
6% Treasury bond maturing in 2035
B)
5% Treasury bond, maturing in 2037
C)
8% Treasury bond maturing in 2036
D)
Treasury STRIPS, maturing in 2036

Answer 21

C.

Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile because they have the longest duration. The actual calculation of the duration of each of the other bonds given is beyond the scope of this exam.

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Question 22

Calculating holding period return of 1 year

Answer 22

(CMV - Price paid + dividends/interest) / price paid = Holding period return for 1 year

Question 23

Superb Wealth Opportunities (SWO) is a broker-dealer registered with the SEC and 10 states. Recently, the SEC has completed an investigation of SWO’s recordkeeping practices and has determined that they are not in accordance with SEC Rule 17a-4. If, as a result of a hearing, SWO is fined,

A)
no state could take action, because only the SEC would have jurisdiction
B)
no state could take action under the “double jeopardy” provisions of the law
C)
the Administrator of the state where SWO maintains its principal office could investigate SWO to determine if their recordkeeping requirements were violated
D)
it is likely that at least one of the states would revoke SWO’s registration

Answer 23

C.

Even though no state can enforce more stringent recordkeeping rules than those of the SEC, a broker-dealer can still be subject to state action if the rules of the state in which the broker-dealer maintains its principal office are broken. It is the usual case that when the SEC suspends or revokes the registration of a BD, the states in which that BD are registered follow suit, but it would be highly unlikely to revoke the registration when the SEC only levied a fine.

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Question 24

What are the two most common forms of valuation of a common stock?

the price-to-earnings ratio
the dividend discount model
the discounted book value model
the dividend growth model

Answer 24

Dividend growth and dividend discount models

Question 25

What document must accompany an initial registration application for those individuals required to register as agents under the Uniform Securities Act?

A)
Proof of U.S. citizenship
B)
Consent to service of process
C)
A birth certificate confirming the registrant is over 18 years of age
D)
State photo identification

Answer 25

B.

The USA requires that a consent to service of process accompany an application for registration. Although the Administrator will generally request information about the applicant’s citizenship, it is not necessary to be a U.S. citizen. Proof of age is not a requirement.

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Question 26

What is a matched order?

Answer 26

The practice of two investors buying and selling a security to each other in order to create the impression of higher trading volume. This is an illegal practice intended to artificially inflate the security’s price.

Question 27

Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required if…

Answer 27

If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register.

The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of “investment adviser.”

Question 28

Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if

I. more than 2 years ago, the client realized the advice rendered was improper
II. the adviser has died
III. the client willingly signed a statement waiving the adviser’s compliance with the provision of the act on which the suit is based

Answer 28

I only.

The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser’s compliance with the rules.

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Question 29

What is the effective date of an initial registration and expiration of the registration of a broker dealer?

Answer 29

The effective date of an initial registration is at noon on the 30th day after receipt of a completed application; expiration, unless renewed, is each December 31st.

Under the USA, it states, “If no denial order is in effect and no proceeding is pending under section 204, registration becomes effective at noon of the thirtieth day after an application is filed.” Further, it states, “Every registration or notice filing under this section expires December 31st unless renewed.”

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Question 30

What is the maximum fine for violation of the USA and the maximum prison term?

Answer 30

The maximum fine for a violation of the USA is $5,000, and the maximum prison term is 3 years.

Question 31

A registered investment adviser has been investigated by the Administrator for fraudulent misrepresentations purportedly made to several clients. If the IA is found to have been in violation of the Uniform Securities Act, this may result in…

Answer 31

a receiver being appointed over the adviser’s assets AND the requirement that the investment adviser make restitution to the victims

The Administrator may request that the court appoint a receiver over the investment adviser’s assets and require the IA to make restitution to the victim.

Question 32

Are fingerprints necessary requirement for submitting an application for becoming an agent of a broker-dealer?

Answer 32

No.

Question 33

All of the following must be specified in a security’s state registration statement EXCEPT
A)
the expected use of the projected proceeds of the offering
B)
the total amount of the security that will be offered in other states
C)
the amount of securities to be offered in the state
D)
a stop order from another state that affects the offering of the security within that state

Answer 33

B.

The total amount of the security to be offered in other states need not be specified although identifying those states is required. The amount of the security to be offered in the state of registration is required, as it generally provides the basis on which the registration fee is calculated. A stop order from another state that affects the offering of the security within the state must be included. The registration statement will always describe the intended use of the proceeds.

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Question 34

In addition to the normal required filings, an investment adviser who maintains custody of client funds and/or securities will be required to complete what part of FORM ADV

Answer 34

Form ADV-E (E for Examination annually by an accountant)

The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser’s records. The accountant is the one who submits the ADV-E to the SEC (or the state, if appropriate).

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Question 35

What is Form ADV-E?

Answer 35

The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser’s records. The accountant is the one who submits the ADV-E to the SEC (or the state, if appropriate).

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Question 36

Is performance-based compensation permitted for agents?

Answer 36

No, performance-based compensation is never permitted for agents.

Question 37

How many days after it’s fiscal year does a federal covered adviser have to file its annual amendment to its form ADV?

Answer 37

90 days.

The annual updating amendment to Form ADV must be filed within 90 days of the adviser’s fiscal-year end.

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Question 38

An individual wishing to register as an agent with a broker-dealer may have to

1. pass an examination
2. post a bond
3. maintain minimum net capital
4. meet minimum state educational requirements

Answer 38

1 and 2

In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.

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Question 39

Registration with the SEC as an investment adviser would be required for a person who

Answer 39

Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.

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Question 40

Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for how many years?

Answer 40

3 years after the dissolution.

Both ​​the Investment Company Act of 1940 ​(applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping ​require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than 3 years after dissolution.

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Question 41

What are the requirements for registration of an investment adviser with the SEC?

Answer 41

Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for:

• pension consultants once their AUM reach $200 million;
• small and mid-size advisers who would be required to register in 15 or more states; and
• those advisers with at least $100 million in AUM, but not $110 million in AUM.

Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.

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Question 42

What are the two requirements for an investment adviser to use the term “investment counsel”?

Answer 42

In order for the term “investment counsel” to be used, two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client’s needs.

Question 43

Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser EXCEPT

A) a federal covered adviser

B) broker-dealers and their agents

C) banks

D) an individual providing advice on municipal bonds

Answer 43

Providing advice on municipal bonds (even though they are exempt securities) does not entitle one to an investment adviser exclusion.

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Question 44

If a Broker-Dealer is registered in more than 1 state how must it maintain its records?

Answer 44

Regardless of the recordkeeping requirements of other states, the only requirements that must be met are those of the state where the principal office is located. Please note that in most cases, broker-dealers are registered with the SEC in addition to the states in which they do business. In that case, the recordkeeping requirements of the SEC trump those of any state.

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Question 45

If you are soliciting business for an investment adviser’s wealth management service what must you register as?

Answer 45

Registration as investment adviser representatives is required

Question 46

USA exclusions from the definition of agent…

Answer 46

First of all, the USA’s exclusions from the definition of agent only apply to individuals working for the issuer, never broker-dealers. Then, the exclusion only applies when selling the following exempt securities in nonexempt transactions:

• U.S. government and municipal securities;
• Securities of governments with which the United States has diplomatic relationships;
• Securities of U.S. commercial banks and savings institutions or trust companies (when not engaged in securities-related broker-dealer activities);
• Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less; and
• Investment contracts issued in connection with employee’s stock purchase, savings, pensions, or profit-sharing plans.

Selling other exempt securities, such as those issued by a federally chartered credit union, on behalf of the issuer, requires one to become registered as an agent of the issuer. Don’t confuse this with the exemption offered in the case of exempt transactions. In that case, regardless of whether the security is exempt or not, if an individual’s only sales activity while representing an issuer is in exempt transactions, then the exclusion from the definition of an agent applies. It is obviously a much broader exemption than when selling exempt securities.

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Question 47

A federal covered investment adviser registered with the SEC that has offices in 5 states must do which of the following?

1. Pay state filing fees if required by the Administrator
2. Notify the Administrator within 1 business day if net worth falls below the required minimum
3. Notice file in any of those states where required by the Administrator
4. Become licensed as a broker-dealer

Answer 47

1 and 3

Although exempt from state registration, federal registered investment advisers must notice file and pay state filing fees (if required by the Administrator) to practice within a given state. Federal covered advisers do not come under the financial or recordkeeping requirements of the state, only the SEC.

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Question 48

An investor’s required rate of return is 6%. If the internal rate of return of the investment offered is 6%, then the NPV is

Answer 48

Zero.

When an investment’s IRR equals the required rated of return, the NPV is zero. If the IRR is higher than the required rate of return, the NPV is positive; if the IRR is lower than the rate of return, the NPV is negative.

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Question 49

Under the Investment Advisers Act of 1940, for how many years must an investment adviser maintain the records required by regulation?

Answer 49

5 years

The Investment Advisers Act requires records to be kept readily accessible for a period of 5 years from the end of the fiscal year in which the record was made. The records must be kept in the principal office of the firm for the first 2 years and are subject to SEC examination at any time.

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Question 50

Life insurance companies offer many different products. Which of the following would NOT be considered a security?

1. Index annuity
2. Modified endowment
3. Variable annuity
4. Variable life

Answer 50

1 and 2

Any insurance product that includes the word variable is a security. Otherwise, it is not.

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Question 51

There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are…

Answer 51

There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are:

1. commissions;
2. markups and markdowns; and
3. advisory fees for those firms that are also registered as investment advisers.

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Question 52

investment policy statement 5 constraints

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Answer 52

Time horizon, Taxes, liquidity, laws, and unique

Question 53

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle?

A)Tactical portfolio management

B)Cyclical rotation

C)Strategic portfolio management

D) Segment rotation

Answer 53

Segment rotation

Segment rotation, more commonly known as sector rotation, involves altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.

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Question 54

How many days after filing the application as an investment adviser representative does registration generally become effective?

Answer 54

30.

Registration becomes effective 30 days after the application is filed unless the Administrator begins a proceeding or issues a stop order before that time. The Administrator may specify an earlier date, or if an application must be amended, the Administrator may extend the date to 30 days after the amendment was filed.

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Question 55

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts

A)the schedule should be made available on the broker-dealer’s public website without requiring any login or password

B)the schedule should be made available on the broker-dealer’s public website and should be password protected

C)as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers

D)fee schedules should only be delivered by hand or postal mail to reduce cyber security threat

Answer 55

C)as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers

Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer’s website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.

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Question 56

All of the following statements are true regarding investment advisory contracts under NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers EXCEPT

A)the contract must describe the services the adviser will provide to the client

B)the contract must describe the discretionary powers the client is granting to the adviser

C)the contract must be written in 10-point type or larger

D)the contract may be for an initial period of more than 1 year

Answer 56

C.

There is no specific requirement in NASAA’s Model Rule concerning type size. Contracts must describe the adviser’s services, discretionary powers, and initial term period, which may be for any period of time.

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Question 57

An individual representing an issuer in the sale of that issuer’s security is not defined as an agent if the security is:

Answer 57

An individual representing an issuer in the sale of that issuer’s security is not defined as an agent if the security is:

• any bank 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;
• issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing;
• any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;
• a promissory note, draft, bill of exchange or bankers’ acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or
• any investment contract issued in connection with an employees’ stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan.

It is not just any exempt security that qualifies the individual for the exemption—only the five listed above. A confusing point is that the individual is not an agent when the sales are made in any exemption transaction with no exceptions.

Question 58

EMH notes

Answer 58

Market efficiency assumes active portfolio management cannot help earn abnormal (excess) risk-adjusted returns. The weak form indicates that technical analysis doesn’t work. The same is true for the use of inside information under the strong form. Semi-strong says that neither technical nor fundamental analysis will work.

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Question 59

Is there a form of the efficient market hypothesis that claims technical analysis works?

Answer 59

No.

The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price. The weak form claims that fundamental analysis works and the semi-strong form claims that inside information works. True believers in EMH claim that none of these can outperform random selection.

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Question 60

What is the purpose of a living will?

Answer 60

The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to “pull the plug”. There is no such thing as an incapacitated will. A living trust deals with how assets are distributed and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

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Question 61

Securities issued by which of the following would be exempt from the registration requirements of the Uniform Securities Act?

1. Nonprofit organization
2. Exchange-listed security
3. Federal savings and loan association
4. Federal credit union

Answer 61

All of them.

All of the issuers listed are exempt from the registration provisions of the Uniform Securities Act.

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Question 62

A Schedule K-1 would be received by an individual with an ownership interest in all of the following

Answer 62

S corp, Partnership, and LLC.

Not a C corp because C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner’s share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.

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Question 63

What is a Schedule k-1 tax form from a S corp, partnership, or LLC for?

Answer 63

A schedule K-1 is the owner’s share of income (or loss) is reported to them.

Question 64

One of your clients is viewing a stock held in her portfolio and wishes to know how to calculate the holding period return for that security. In order to do that, she must know all of the following:

Answer 64

You need to know the the purchase price, the dividends received during the holding period, and the current market price

Holding period return is the total return on an investment over the period it was held. In order to compute this, one must know the income received (dividends) plus any capital appreciation (the difference between the purchase price and the sale price if sold, or current market price if still held). If you read the question carefully, it refers to a security “held” in her portfolio. Therefore, we don’t have a sale date.

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Question 65

With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for

Answer 65

5 years, the first 2 in the principal office of the adviser

For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser.

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Question 66

Normal distribution standard deviations

Answer 66

Approximately two-thirds, or 68.26%, of observations will be within one standard deviation on either side of the mean. Approximately 95% will be within two standard deviations and approximately 99% will be within three.

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Question 67

Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in

A)States Y and Z

B)State Y

C)States X and Y

D)States X, Y, and Z

Answer 67

State Y

Those who supervise the activities of investment adviser representatives are themselves defined as IARs. An IAR representing a federal covered investment adviser need only register in the state or states in which she (the IAR) has a place of business. There is nothing in this question to suggest that Brenda has a place of business anywhere other than in State Y, where her branch office is located. Remember, when it comes to federal covered advisers, registration of their IARs is dependent on the IAR’s place of business, not the location of their clients.

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Question 68

What are the two requirements to act as a principal (or agent) in a trade with an advisory client?

Answer 68

In order to act as a principal (or agent) in a trade with an advisory client, there are 2 requirements:

• The client receives full written disclosure as to the capacity in which the adviser proposes to act
• Consent of the client

Both of these are required prior to the completion of the transaction.

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Question 69

Under the USA, most books and records of investment advisers must be maintained for

Answer 69

5 years, the first 2 in the firm’s principal office

With few exceptions, the accounting records, correspondence, and advertising of investment advisers must be kept for a minimum of 5 years after the end of the year in which they were created, the first 2 years in the firm’s principal office (on premises).

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Question 70

Rule of 72 when an investment quadrupled from $2,500 to $10,000 over 12 years

Answer 70

Under the Rule of 72, we can determine an earnings rate by dividing 72 by the number of years it takes for money to double. In this case, the money had quadrupled. That means it has doubled twice in 12 years or, every 6 years. Dividing 72 by 6 years results in an annual return of 12%.

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Question 71

Investment advisers SEC exemptions (register with state instead)

Answer 71

1. Intrastate advisers - clients and offices in single state
2. only clients are insurance companies
3. De minimis: No place of business in the state and fewer than six retail (individual) clients in the last 12 months
4. No place of business in the state and deals only with institutions, broker-dealers, or other investment advisers
5. Snowbird exemptions

Question 72

Is there a De minimis rule for registering broker-dealers or just investment advisers?

Answer 72

ONLY INVESTMENT ADVISERS HAVE THE DE MINIMIS RULE.

Broker-dealers must register even if they have only 1 client

Question 73

Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act.

What are the Federal exemptions to registration with the SEC?

Answer 73

Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches $150 million.

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Question 74

Under the Investment Advisers Act of 1940, if an investment adviser’s sales literature describes an investment system, the description must include

1. the length of time the system has been used
2. the difficulties and limitations of using the system
3. the performance history of the system

Answer 74

2 Only

References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited. It is not necessary to indicate how long the system has been used or its performance history. However, nothing prevents this information from being included. The question asks only what must be included.

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Question 75

Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator?

Answer 75

With the original application only

Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant.

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Question 76

What ratio would be looked at to determine the liquidity of a corporation?

Answer 76

The current ratio.

A company’s current ratio is their current assets divided by their current liabilities. If their current ratio is strong, they have a highly liquid position.

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Question 77

What is the dividend discount model for valuing a stock?

Answer 77

The discounted present value of future dividends

Question 78

Can nonresident aliens own an S corp or LLC?

Answer 78

Nonresident aliens may not own an S corporation.

Question 79

Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Among the most common ways for making this disclosure are

1. presenting a chart with all of the fees
2. preparing a list of all of the fees
3. displaying the fees in tabular form

Answer 79

All of them.

Whether using a table, a chart, or a list, broker-dealers must make sure that it is easy for customers to determine what the fees and charges are and how they are computed.

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Question 80

Expected return formula

Answer 80

Expected Return formula: Risk free rate + (expected return of market - risk free rate) * Beta of the security

Question 81

An individual representing an issuer in the sale of that issuer’s security is not defined as an agent if the security is:

Answer 81

1. issued by any bank, savings institution, or trust company
2. issued by the U.S. government, any state, or political subdivision
3. issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;
4. or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;
5. any investment contract issued in connection with an employees’ stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan.

It is not just any exempt security that qualifies the individual for the exemption—only the five listed above. A confusing point is that the individual is not an agent when the sales are made in any exemption transaction with no exceptions.

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Question 82

Current yield on a mutual fund formula

Answer 82

Annual dividend / price of purchase (POP)

NOT NAV!!

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Question 83

When does a broker-dealer need to register with the state?

Answer 83

A broker/dealer must register with the state if:

1 Office in the state

2 No office in state but dealing with the general public

Question 84

Definition of Broker/dealer does NOT include:

Answer 84

Agent (agent of the B/D has Series 63 or Series 66)

Issuer

Bank or trust department of the bank or trust company

Question 85

State registration process of a Broker/Dealer requires:

Answer 85

a. File an application (Form BD)
b. Pay filing fee
c. File a consent to service (service of process)
d. Registration becomes effective 30 days after application
e. Registration expires on December 31 unless renewed
f. Administration may set minimum capital requirements for B/Ds
g. Administrator may require a B/D to post a surety or fidelity bond if B/D has custody or discretion

Question 86

If there is a merger, acquisition or sale of the Broker dealer, who files the application?

Answer 86

he successor firm files application.

Also, the Filing fee is waived for the balance of the year.

Question 87

USA requires B/D to keep records:

Answer 87

1. Administrator may examine at anytime
2. May require filing of sales literature and advertising and approved prior to first use
3. Records must be kept for three years, with the two most recent years being readily accessible

Question 88

Can federally covered IAs hire broker-dealers as third party solicitors?

Answer 88

Yes.

if you are not a FEDERALLY COVERED IA then you cannot hire a BD as a third party solicitor.

This requires a separate brochure for the BD and then one for the IA. This must be signed for the disclosure.

Question 89

Does a B/D need to register as a federally covered IA firm to be a third party solicitor to an Federally covered IA?

Answer 89

No.

Associated persons of the B/D do not need to take the 65 or 66 to be a third party solicitor for an IA.

Question 90

Can an agent be registered in a state that his broker-dealer is not registered in?

Answer 90

No! This would mean that you are an independent person and that is a no no.

Question 91

An person is not an agent IF:

Answer 91

1. They transact business with existing customers who are not residents of the state, less than 30 days temporary residence
2. Individual who represents the issuer in exempt transaction (Reg D)

Question 92

Does a Reg D private placement need to be register under the ‘33 act or the USA?

Answer 92

No. This is an exempt transaction.

Question 93

Registration process for agents:

Answer 93

1. File Application.
2. Pay filing fees
3. File consent to service of process
4. Registration is effective 30 days after the application was filed
5. Registration expires on December 31 unless renewed

Withdrawal of registration becomes effective 30 days after Administrator receives notice.

Question 94

Customer cross transaction allowed?

Answer 94

Yes, as long as you are not trading against your recommendation and this must be disclosed to the client

Also called an agency cross transaction.

Question 95

Excluded from the definition of an Investment adviser

Answer 95

1. Investment Adviser Representative (ME)
2. L.A.T.E. as long as the advice is incidental
3. Broker-dealer
4. General Circulation publishers

Question 96

Registration process for an Investment adviser

Answer 96

1. File application (Form ADV for firm)
2. Pay filing fees
3. File consent to service of process
4. Administrator may require surety bond
5. Audited balance sheet
6. Administrator may require minimum capital
7. Registration becomes effective 30 days after application is filed
8. Custody $10k or $35k
9. Registration expires on December 31st

Question 97

$10,000 or $35,000 rule for Investment Adviser?

Answer 97

If another broker-dealer has custody of the clients funds/securities then I need to maintain $10,000 in minimum capital.

If I have custody of client funds/securities then I need to maintain $35,000 in minimum capital

If I have discretionary authority to deduct my advisor fee from your account, but that is the only thing I have custody of (client funds/securities held at un-affiliated broker-dealer) then that is still only $10k… However, if I can tell the Broker-dealer to cut a check and send it here or there then it is considered custody and i must maintain $35k

Question 98

Record Retention for an Investment Adviser

Answer 98

5 years, most recent 2 years readily accessible.

Administrator may examine records any time.

Question 99

If the Administrator has summarily suspended an investment adviser representative’s registration, the registrant may request a hearing by written request and the hearing will be granted within

Answer 99

15 days

When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day and an appeal for review of an Administrator’s order must be filed within 60 days.

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Question 100

If an agent chooses to appeal an Administrator’s order, when must the agent file for review of the order with the appropriate court?

Answer 100

Within 60 days after the entry of the order

Under the USA, a registered person has up to 60 days to appeal any disciplinary finding by the state Administrator.

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Question 101

What are the 5 standardized parts to an exchange-traded futures contract:

Answer 101

• Quantity of the commodity (e.g., 5,000 bushels of corn or 100 oz. of gold)
• Quality of the commodity (specific grade or range of grades may be acceptable for delivery, including price adjustments for different deliverable grades)
• Delivery price (similar to exercise or strike price with options)
• Time for delivery (e.g., December wheat to be delivered)
• Location (approved for delivery)

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Question 102

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan, and after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral…

Answer 102

she would be engaging in an prohibited practice

Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward.

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Question 103

What is the homeowner capital gain exclusion rule?

Answer 103

As long as a homeowner has lived in the primary residence at least 2 of the previous 5 years, the first $250,000 of profit on a home sale is excluded from tax. In the event it is a married couple, as in this question, the exclusion is doubled to $500,000. The profit on the sale was $720,000 ($800,000 minus the cost of $80,000) and the exclusion of $500,000 reduces the reportable gain to $220,000.

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Question 104

Due to health reasons, Danny has decided to withdraw his registration as an agent. The withdrawal will take effect

Answer 104

on the 30th day after filing of the Form U5 unless the Administrator determines an earlier date

Although the normal time for withdrawal of a registration is the 30th day after filing the Form U5, the Administrator has the jurisdiction to shorten that period if circumstances warrant it.

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Question 105

Nobody Walks Motor Company, a licensed automobile dealer, is running a promotion offering anyone who purchases a car over the weekend to receive a $1,000 corporate bond at no additional cost. Under the Uniform Securities Act, in order to make this offer,

Answer 105

Nobody Walks Motor Company must be registered as a broker-dealer in the state

The USA states that “any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered to constitute part of the subject of the purchase and to have been offered and sold for value.” Therefore, Nobody Walks Motor Company would have to be registered as a broker-dealer in this state.

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Question 106

The compliance rules of the Investment Advisers Act of 1940 require all of the following EXCEPT

A) appointment of a chief compliance officer (CCO)

B) annual compliance review

C) written compliance policies and procedures

D) independent review of an advisory firm’s compliance procedures

Answer 106

D) independent review of an advisory firm’s compliance procedures

While the rules require annual compliance reviews, such reviews may be conducted internally by the firm’s appointed chief compliance officer rather than an independent party. The rules require written policies and procedures, an annual compliance review, and the appointment of a chief compliance officer (CCO).

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Question 107

Which of the following statements regarding a qualified profit-sharing plan is TRUE?

A) It must be established under a trust agreement.

B) It can permit regular direct cash payouts to participants before retirement.

C) Contributions are required annually.

D) It must define a specific contribution amount.

Answer 107

A) It must be established under a trust agreement.

All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

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Question 108

Which of the following is TRUE regarding a state Administrator’s authority?

A) The Administrator may suspend an agent’s license based solely on the public good doctrine.

B) If a specific securities transaction meets the USA’s definition of “exempt transaction,” the Administrator does not have the power to void that exemption.

C) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating.

D) The Administrator’s subpoena power covers that state only where officiating.

Answer 108

C) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating.

With certain limited exceptions, a state Administrator has jurisdiction over securities transactions conducted in the officiating state. The Administrator may issue subpoenas or otherwise conduct inspections of records in states other than where officiating if circumstances warrant. Such inspections may be made if the Administrator deems doing so to be in the public’s interest. A person’s license can only be suspended when it is in the public interest AND a specific provision of the act or rules has been violated. Only in the case of a transaction involving a federal covered security does the Administrator not have the power to void the exemption.

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For A. it is not right because there must be two reasons why their license is suspended. It cannot just be in the public interest.

Question 109

A federal covered investment adviser is one who

1. has $110 million or more in assets under management
2. manages an investment company registered under the Investment Company Act of 1940
3. limits his advice to securities listed on the NYSE
4. is affiliated with a federally chartered bank

Answer 109

1 and 2.

Federal registration is generally required of any investment adviser managing at least $110 million in assets. The NSMIA provides that any investment adviser under contract to a registered investment company under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Determining if one is a federal covered investment adviser is not based on affiliations; it is generally a function of AUM or managing an investment company.

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Question 110

What are the 6 things that are not securities (under the USA)?

Securities are a piece of paper that can be traded to a third party at a profit or loss.

Answer 110

a. Commodity futures, precious metals
b. Trade confirmation
c. Non-securities products (insurance)
d. Retirement plans (you cannot trade your retirement plan)
e. Collectibles
f. Currency
g. Condominium

Question 111

Exempt issuers:

Answer 111

US Government

Municipal

Canadian (sovereign and provincial) - Canada and its provinces are just like American states and cities

foreign national governments - Only NATIONAL government securities are exempt. Not cities or states

public utilities

banks

common contract carriers (these are transportation carriers)

religious and charitable organizations

Question 112

Federally covered securities:

Answer 112

NYSE and NASDAW securities

Mutual Funds and Closed-end investment companies

Reg D Private Placements (Exempt at both levels state and federal)

Question 113

Exempt securities because of the issuer:

Answer 113

Commercial paper and bankers acceptances.

These are sold to money market fund managers who are capable of protecting their own assets. These are not sold to retail customers.

Question 114

Exempt Transactions continued:

Answer 114

Unsolicited transactions

Private placement (limited to 10 offers) - This is 10 OFFERS not ACCEPTED OFFERS

Pre-organization certificate (less than 10 subscribers) - No body has paid capital yet, just certificates written up

Question 115

Three ways to register a security:

Answer 115

1. Filing or Notice Filing (mutual funds)
2. Coordination (IPO’s under ‘33 act)
3. Qualification. Qualification is for securities that do not use coordination or filing

Question 116

Any security that is non-exempt and cannot be registered by coordination or notice filing will be registered through what?

Answer 116

Qualification.

Example Rule 147 intrastate offering. This means that the intrastate offering does not need to be federally registered but it must be registered with the state.

Question 117

When and how long is the registration under Qualification?

Answer 117

It is effective only when the administrator says so.

Registration is effective for one year from the effective date. This means I have 1 year to raise money this money issuing the securities.

Question 118

Qualification registration and whether it can be amended or not.

Answer 118

Registration can be amended after the effective date to increase offering size if terms remain unchanged… This means I cannot change my commission.

Registration may be filed by the issuer, a broker/dealer, and interest party like selling stockholder.

Question 119

Penalties for the USA

Answer 119

$5,000 and/or imprisonment for 3 years

Right of rescission accepted or rejected in 30 days. This means that if there is a violation of the USA then the customer can exercise their right of rescission and be made whole and they have 30 days to act.

means that Investment advisory client recover of fees and losses, on recommendations and legal fees

Question 120

Penalties for the USA

Answer 120

$5,000 and/or imprisonment for 3 years

Right of rescission accepted or rejected in 30 days. This means that if there is a violation of the USA then the customer can exercise their right of rescission and be made whole and they have 30 days to act.

If the IA is found guilty of prohibited practices on the USA then the Investment advisory client can recover fees and losses, on recommendations and legal fees

Question 121

A corporation calls in a portion of its long-term debt at 101. This will have the effect of

1. decreasing working capital
2. increasing working capital
3. decreasing net worth
   
   1. increasing net worth

Answer 121

1 and 3

Working capital is computed by subtracting current liabilities from current assets. Using a current asset, like cash, to call in the bonds, reduces those assets with no corresponding reduction to current liabilities. Whenever a bond is called at a premium, net worth is reduced by that premium.

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Question 122

If one of the 5 partners has retired from Five Partners Advisers, Ltd., and been replaced by a new partner. What must happen?

Answer 122

Five Partners Advisers, Ltd., must inform all clients that one of the 5 partners has retired and been replaced by a new partner.

Both state and federal law require advisers operating as partnerships to notify their clients of changes in partners where it represents a minority interest in the firm. An advisory firm can be sold without client permission. However, if the transaction results in a change that would be deemed to be an assignment, the adviser must obtain the consent of the clients to maintain their contracts. The regulatory bodies consider a pledge of clients’ contracts to be an assignment.

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Question 123

If an adviser were to pledge a client’s contract as collateral would that be considered to be an assignment of the contract?

Answer 123

The regulatory bodies consider a pledge of clients’ contracts to be an assignment.

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Question 124

A nonqualified, single premium variable annuity differs from a Keogh plan in that

A) all payouts are fully taxable in a Keogh plan

B) earnings are tax deferred

C) it is open to self-employed persons

D) both are subject to early withdrawal penalties

Answer 124

A) all payouts are fully taxable in a Keogh plan

Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

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Question 125

Is any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000 considered an exempt transaction?

Answer 125

No. In general, the USA does not consider a transaction with an employee benefit plan to be exempt unless the plan has assets of at least $1 million.

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Question 126

Form ADV Part 1A includes:

Answer 126

a. Business name and form of ownership
b. past five years’ business and current affiliations of control persons (25% or greater voting power); change in control requires amended form ADV
c. Educational background
d. Nature of business
e. Balance sheet certified by independent public accountant
f. scope of authority over client funds; discretion? custody?
g. compensation arrangement; percent of AUM or performance based? If performance based $1m in AUM with advisor or $2.1m net worth + NASAA disclosure of greater incentive for IA to take risk + Benchmark to be used
h. criminal record
i. portion of business devoted to providing investment advice

consent to service of process (permanent)

Question 127

On form ADV Part 1A… under the compensation arrangement section. If the IA chooses to use performance based compensation what must happen?

Answer 127

If performance based the client must have $1m in AUM with advisor or have $2.1m net worth.

A NASAA disclosure of greater incentive for IA to take risk must be given to client

Disclosure of the Benchmark to be compared against

Question 128

Form ADV Part 1B is for what type of IA?

Answer 128

Form ADV Part 1B is for state- registered advisers only and you pay a filing fee.

Question 129

When is registration effective under the USA for an Investment Adviser?

Answer 129

Registration is effective at noon on the 30th day (USA)

State registration expires December 31st unless renewed.

Question 130

When is registration effective under the SEC for an investment adviser?

Answer 130

Registration is effective within 45 days (SEC)

Question 131

Form ADV part 2A and B as a Disclosure Brochure

Answer 131

The brochure rule is Form ADV part 2A (describes the firm) and Supplement, Form ADV Part 2B (personnel)

Delivery to a client or prospective client the current brochure and supplement before or at the time of entry into an investment contract

If not delivered 48 hours in advance, the client has 5 business days’ right to rescind without penalty (USA)

This 5 day right can be viewed as a free look period.

Question 132

If there are material changes in the brochure since last annual updating amendment, deliver the following to each client annually within 120 days after the end of the fiscal year:

Answer 132

a free current brochure, or

Summary of material changes to the brochure including an offer to provide a copy of the updated brochure

May be delivered electronically

Question 133

In the brochure you must include a balance sheet if the IA requires prepayment of fees of more than $____ SEC or $____ USA, 6 months or more in advance, or custody

Answer 133

$1200 for SEC

$500 for State registered

Question 134

In the brochure you must disclose of material legal or disciplinary action within past 10 years, including fines of $____ or more

Answer 134

$2,500

Question 135

An investment adviser does not have to deliver a brochure if the advisory clients are limited to the following:

Answer 135

Investment companies

Impersonal advice (subscriptions) - cost under $500

Question 136

Investment adviser contracts must include (whether State or Federally registered):

4 things

Answer 136

Services to be provided

Duration of the contract

Advisory fee

Formula for computing advisory fee

Amount of prepaid fee returned if contract is terminated

Whether discretion is granted

No waiver of fees for underperformance

Assignment only with consent

Notification to clients of changes in adviser partnerships

• Only when the change is to a minority interest
  
  • if a major interest changes, it is assignment (consent needed)

Question 137

If the Federally covered investment adviser then the Solicitor’s (broker/dealer) brochure would include:

5 things

Answer 137

Name of the solicitor (B/D)

Name of the Federally covered IA

Nature of the relationship between Solicitor (BD) and IA

The fact that solicitor (broker/dealer) will receive compensation, the terms of the compensation, and indicate whether client will pay a specific charge or a higher advisor fee because the solicitor recommended the federally covered IA to the client

Only Federally covered IAs can use B/D as third party solicitors

Question 138

B/D soft dollar compensation for directed transaction

Answer 138

1. No Travel
2. No rent
3. No non-customer related expenses

Question 139

If an IA becomes a successor firm because of;

Answer 139

1. Merger
2. Acquisition
3. or Sale

The the application filed, is effective for the remainder of the year

No additional filing fees

Question 140

If a state registered investment adviser has discretion only, no custody of funds/securities means you must have at least ____ in net worth

Answer 140

$10,000 is the net worth requirement.

You can also have direct fee deduction from the place that has custody

Also if you are advising pooled investment vehicles

Question 141

Disclosure of financial impairment of an Investment adviser is required if

Answer 141

1. Has discretion
2. has custody over customer funds or securities
3. requirements prepayment of more than $500 in fees six or more months in advance (state); or
4. requirements prepayment of more than $1,200 in fees, six or more months in advance (federal)

Question 142

Partnership agreements, articles of incorporation, charters, and minute books of the IA and any predecessor must be preserved until how long?

Answer 142

These documents must be preserved for at least 3 years after termination of the enterprise

Question 143

If you withdraw from registration as an investment adviser then you file what form?

Answer 143

Use form ADV-W (Withdraw)

Effective on 30th day (USA)

Effective on 60th day (SEC)

Question 144

If an IAR is terminated who notifies the administrator

Answer 144

It depends on if the IAR is state registered or federally registered…

If a state registered IAR is terminated then the IAR notifies the Administrator

If a Federally covered IAR then your firm will notify the administrator

(I believe if you are state registered for a federal covered adviser then you and your firm will notify the administrator)

This is effective 30 days after receipt of application to withdraw, but Administrator retains jurisdiction for one year.

Question 145

No recordkeeping requirements for an IAR except if there is a material change (disciplinary, change of address) reported on Form U4 within how many days?

Answer 145

30 days

Question 146

Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include

Answer 146

1. general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b)
2. all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501, whereas Rule 506(b) permits a limited number of sophisticated but not accredited investors
3. the issuer must take “reasonable steps” to verify that all purchasers are accredited investors in a 506(c) offering, while no such obligation falls upon issuers in a 506(b) offering

Question 147

Rule 506 of the JOBS act made several important to Reg D. A company seeking to raise capital through a private placement under Rule 506(B) can sell the offering to how many accredited investors and how many non-accredited investors. Can advertising be done on behalf of the offering?

Answer 147

Under Rule 506(b) can sell the offering to an UNLIMITED number of accredited investors and up to 35 non-accredited investors. In addition no advertising may be done on behalf of the offering.

Accredited investor means institutional investors as well as individuals with a net worth excluding primary residence exceeds $1m OR an individual with $200k+ in income in the 2 most recent years or $300k with a spouse in the 2 most recent years, AND has a reasonable expectation of reaching the same income level this year.

Question 148

Rule 506 of the JOBS act made several important to Reg D. A company seeking to raise capital through a private placement under Rule 506(C) permits the offering to be advertised, but there are two primary requirements to do this:

Answer 148

All purchasers are accredited investors, or the issuer reasonably believes that they are accredited investors.

The issuer takes reasonable steps to verify that all purchases are accredited investors, which could include reviewing documentation, W-2s, tax returns,….

Question 149

Are issuers disqualified from using Rule 506 if they fall under the “Bad Actor” provisions:

Answer 149

Yes. If the issuer or other relevant persons, (such as underwriters, directors, officers, or significant shareholders of the issuer) have been convicted of securities fraud or certain securities violations, then the Rule 506 may not take place.

Question 150

In defining an investment adviser under SEC Release 1A-1092, which of the following would meet the business standard?

1. A person who advertises himself as an investment adviser
2. A person who provides securities-related advice on a frequent or regular basis
3. A person who receives separate or additional compensation for securities-related advice

Answer 150

1, 2, and 3

To meet the business standard, persons must meet 3 criteria. First, they must hold themselves out (advertise) as persons who provide investment advice. Second, they must provide such advice on a frequent or regular basis, but it need not be their principal business activity. Third, they must receive separate or additional compensation for doing so.

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Question 151

When grandma gifts her stock to her grandson, how is the tax liability figured?

Answer 151

Her cost basis and date of purchase is used.

When stock is given as a gift, the donee (recipient) takes over the cost basis and the holding period of the donor.

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Question 152

Can a referral fee be paid to another registered firm?

Answer 152

Yes.

When a referral fee is paid to another registered firm, there is no problem. The only other requirement is that disclosure of this relationship and any additional cost possibly resulting from the referral fee must be made to each client who signs up with RIP as a result of the referral.

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Question 153

When are advisers required to disclose trades made for their own account?

Answer 153

Advisers are required to disclose trades made for their own account only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. However, no disclosure is needed when the trades in the personal account are consistent with the advice rendered.

Question 154

On the topic of compensation between an adviser and a client, what must be disclosed?

3 things.

Answer 154

The method of computing compensation

Refunding of prepaid fees

The type of compensation (hourly fees, fees based on AUM, commissions, etc.…)

Any incentives or other compensation from the issuer of securities recommended

All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure.

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Question 155

Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves what type of advisory services?

Answer 155

Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.

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Question 156

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is allowed if;

Answer 156

permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement

Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor.

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Question 157

Which of the following statements relating to Form ADV-E are CORRECT?

1. The form is completed by an investment adviser who maintains custody of customer funds and/or securities.
2. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser.
3. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser.
4. The form may be used to amend the IA’s registration.

Answer 157

1 and 3

The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.

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Question 158

Pledging a majority interest in the company as collateral for a loan to the business is considered what type of assignment, and is it necessary to obtain consent?

Answer 158

Pledging a majority interest in the company as collateral for a loan to the business is considered an indirect assignment.

The NASAA Contents of Investment Advisory Contract Model Rule states that no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the client or other party to the contract.

Question 159

Under the USA, an investment adviser’s current clients must be delivered a brochure

Answer 159

Annually whether or not the adviser has custody or discretion

Unless there have been no material changes, a copy of the adviser’s brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser’s fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.

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Question 160

Can the initials RIA be used on an Investment Adviser’s business card?

Answer 160

No.

Because RIA is not an academic designation, it may not be used as such.

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Question 161

An investment adviser must disclose what legal or disciplinary actions to clients and prospective clients if they occurred in the last 10 years:

Answer 161

An investment adviser must disclose adverse regulatory events to clients and prospective clients if they occurred within the last 10 years, such as a conviction relating to a misdemeanor involving an investment-related business; SEC or other federal regulatory agency proceedings in which the person was found to have violated an investment-related statute; or proceedings before FINRA in which the adviser was barred or suspended from membership. Misdemeanors regarding non-investment-related actions are not considered material and need not be disclosed (e.g., a motor vehicle violation).

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Question 162

If a state-registered investment adviser serving primarily retail accounts does not make any material change to their brochure from the previous year does it need to send an annual brochure to all its clients?

Answer 162

The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser’s fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Part 2A and 2B.

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Question 163

If an investment adviser wishes to engage in an agency cross transaction involving advisory clients, it would be prohibited from

A) representing both the buyer and the seller

B) obtaining written consent from the parties prior to engaging in agency cross transactions

C) earning a commission on both the purchase and the sale

D) recommending the trade to both sides

Answer 163

D) Recommending the trade to both sides

In an agency cross transaction, the IA represents advisory clients on both sides of the trade and may earn a buying and selling commission. To engage in these types of transactions, written notice must be furnished to advisory clients before the trade. These transactions can never be recommended to both sides of the trade.

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You cannot recommend to one client that they buy and the other sell in order to line up the agency transaction!

Question 164

What are the 3 primary expenses that are not included in the fee disclosure template?

Answer 164

There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are:

1. commissions;
2. markups and markdowns; and
3. advisory fees for those firms that are also registered as investment advisers.

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Question 165

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if

1. results do not reflect the deduction of fees
2. actual market conditions during the referenced period are not disclosed
3. the advertisement did not reflect performance for a minimum period of 3 years
4. the advertisement did not disclose that it applied to only a specific group of clients

Answer 165

1,2, and 4

Advertising that reflects past performance must show a minimum period of 1 year, not 3. All investment advisers’ advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period.

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Question 166

Disclosure to customers of an investment adviser’s control relationships is required in

1. agency transactions
2. principal transactions
3. exempt transactions

Answer 166

1, 2, and 3

The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.

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Question 167

The capital asset pricing model (CAPM) is an investment theory that serves as a model for pricing securities based on their what?

Answer 167

pricing securities based on their systematic risk

Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset’s systematic risk.

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Question 168

A securities analyst who recommends allocating to industries based on changes to the business cycle would most likely be said to be

Answer 168

sector rotating

Sector rotation is the practice of changing investment emphasis based on patterns to the business cycle. Yes, this could be a form of tactical management, and if the analyst is investing opposite the cycle, the analyst could be contrarian. However, on the exam, you will sometimes have to choose from several answers that could be correct by selecting the one that is most likely to be correct.

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Question 169

In general, the most passive investment style for a portfolio would be

Answer 169

indexing

This is a close call between indexing and buy and hold. We believe that the NASAA philosophy on this would be that buy and hold does require some management after the portfolio is set up. That is, some companies go out of business or are merged into other entities or go private and that requires making new decisions. The same can happen with the companies in an index, but the investor doesn’t have to make the changes.

Question 170

What is the formula for the required rate of return under CAPM?

Answer 170

Under the CAPM, the required return is the RF rate plus the [beta times (the market return – RF rate).]

Risk free rate + [Beta * (Market Return - Risk free rate)]

Question 171

What is the formula for the required rate of return under CAPM?

Answer 171

Under the CAPM, the required return is the RF rate plus the [beta times (the market return – RF rate).]

Risk free rate + [Beta * (Market Return - Risk free rate)]

Question 172

Even though the Administrator’s power to deny a registration is limited to convictions within the past 10 years, not only any conviction of a felony or securities-related misdemeanor, but even an arrest or charge for one must be disclosed without any time limitation.

Question 173

For a preorganization subscription to be an exempt transaction what are the requirements?

Answer 173

There may be no more than 10 subscribers

No payment may be made by any subscriber

No commission may be paid to anyone for soliciting potential subscribers

The offer CAN be advertised.

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Question 174

Which of the following transactions are exempt?

1. XYZ Corp., a local manufacturing firm, sells its common stock to several local individual accredited investors on an infrequent or isolated basis.
2. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation’s 5-year fixed-income securities, rated AAA by Standard & Poor’s, on a regular basis to selected members of his large retail client base.
3. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation’s securities to a high-net worth client on an unsolicited basis.
4. Alexander Wimpton had his sizable portfolio of stocks and bonds sold by the administrator of his estate upon his death.

Answer 174

3 and 4. Unsolicited transaction… and estate’s executor are both exempt transactions.

Unsolicited secondary market transactions and those made by an estate’s executor are exempt transactions; the net worth of the client is immaterial. While the AAA bonds may be an exempt security, soliciting regular transactions (unless with institutional buyers) is not an exempt transaction. XYZ Corp., a local manufacturing firm, is an issuer of the common stock. Had it been a nonissuer transaction on an isolated basis, the transaction would have been exempt and the accredited investor status of the clients is meaningless here.

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Question 175

What are allowable investments in an IRA

Answer 175

There are certain coins minted by the U.S. Treasury that are eligible for inclusion in an IRA - US Government issued silver eagles. No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited.

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Question 176

An investment adviser representative who makes extensive use of third-party research to formulate portfolio recommendations to clients

Answer 176

The adviser need not disclose that fact to the clients

It is not necessary to disclose what sources an IAR uses as the basis for recommendations. If the third-party research is distributed to clients, proper attribution is required.

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Question 177

If someone disclaims an IRA and it goes to the contingent beneficiaries, does the client have to begin taking RMDs?

Answer 177

Yes.

If the IRA is disclaimed, the assets would then go to the contingent beneficiaries , but they would have to begin taking RMDs over a 10-year period.

Question 178

Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies?

1. There are a limited number of outstanding shares.
2. They are traded on registered stock exchanges.
3. They trade at prices that are not dependent upon but close to their net asset value.
4. Investors pay commissions to purchase and liquidate their positions.

Answer 178

2 and 4.

Both exchange-traded funds and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from NAV.

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Question 179

Did the NSMIA take away power of the states to regulate federal covered advisers, except in the case of a violation of the antifraud statues?

Answer 179

Yes.

Question 180

In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered a security, it must represent

Answer 180

an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others

In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.

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Question 181

The Administrator of a state securities department conducted a hearing regarding misconduct by an investment adviser registered at the state level. The Administrator required the adviser, as well as several clients who had lodged complaints against the adviser, to take a sworn oath that their testimony was true. Does the Administrator have the power to require sworn oaths?

Answer 181

The USA empowers Administrators to administer oaths. Sworn oaths typically occur in conjunction with hearings.

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Question 182

Is there a time limit on what criminal proceedings you must disclose?

Answer 182

Even though the Administrator’s power to deny a registration is limited to convictions within the past 10 years, not only any conviction of a felony or securities-related misdemeanor, but even an arrest or charge for one must be disclosed without any time limitation.

Question 183

Full disclosure of Registration with SEC by issuer includes:

Answer 183

A description of the company’s properties and business

A description of the security to be offered

Information about the management of the company

Financial statements certified by independent accountants

Question 184

During the cooling off period of the Securities act of 1933;

Answer 184

There can be a deficiency letter (this pauses the cooling period), after its filed the clock begins again

Due diligence can begin in this period

Solicit indications of interest.

A preliminary prospectus can be handed out - includes the effective date

Question 185

Reg D is considered what type of stock?

Answer 185

Legend, lettered, restricted stock. Because it cannot be sold to the public

Question 186

Reg 506(b) - Traditional

Answer 186

This is the traditional Reg D offering.

It is unlimited Accredited Investors (200k/300k salary or net worth $1m w/o home) / 35 nonaccredited (sophisticated)

NO advertising

Investors must sign an investment letter attesting to their understanding of the risk and illiquidity

The customer just has to sign saying they are accredited.

Question 187

Reg D 506 (c )

Answer 187

General advertising / solicitation is okay

All investors must be accredited

The issuer will make reasonable inquiry into whether or not a customer is accredited or not. (THIS IS DIFFERENT FROM 506B)

Unregistered securities: legend restricts transfer for six months.

Question 188

What form is filed for Reg D issues?

Answer 188

Form D.

It is filed electronically with the SEC

Question 189

Expected return formula

Answer 189

Risk free rate + (Beta * (Market- RF))

Question 190

If you have capital losses greater than $3,000 in a year can you deduct that against your income in that same year?

Answer 190

Yes.

Question 191

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of

Answer 191

24 months

Although state law may allow for periods longer than 24 months, federal law requires a 2-year conversion privilege.

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Question 192

How to solve for alpha?

Answer 192

(Actual return - RF rate) - (beta (Market - risk free)

This is actual return minus risk… compared to how the market should return when looking at its risk…

Question 193

Can administrators issue an injunction?

Answer 193

No .​​

An Administrator has the power to gather evidence both within and outside of the home state, as well as subpoena evidence and witnesses in any state.​ Only the courts can issue an injunction.​

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Question 194

After tax yield formula for a bond or stock

Answer 194

Dividends/interest earned / original amount you paid…

Be careful to use the original amount not the market price unless it asks about Total Return.

Question 195

What are progressive taxes?

Answer 195

Progressive taxes are those where the tax rate increases as the amount being taxed increases. The opposite of that is the regressive tax where the rate remains the same regardless of the dollar amount being taxed. Excise taxes, such as those on cigarettes, are a prime example. Whether someone purchases a pack, a carton, or a case, the tax rate is constant.

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Question 196

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment?

Answer 196

Closed-end investment company

A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.

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Question 197

If a businessowner’s goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate?

S form corporation

Sole propreitroship

limited liability company

General parternship

Answer 197

LLC

If a business owner’s goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.

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Question 198

Is the sale of a warrant to purchase stock considered an offer to sell?

Answer 198

Yes.

he sale of a warrant is legally no different from the sale of the stock.

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Question 199

A transactional exemption would be offered when a sale is made by

A)an attorney as an incidental part of her legal practice

B)a sheriff

C)a broker-dealer

D)an investment adviser

Answer 199

B) A sheriff

Among the list of exempt transactions are sales made by a sheriff or marshal. It is possible that the attorney could be acting in the role of a fiduciary and, if so, the transaction would be exempt. From a test-taking standpoint, if you have to read something into an answer to make it correct, as we just did with the attorney, don’t do it; go for the straightforward choice.

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Question 200

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer?

Answer 200

Accept the certificate and give the customer a receipt.

When a client delivers a stock certificate to the broker-dealer’s office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers.

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Question 201

When a security is being registered under coordination, all of the following are required EXCEPT

A)prompt filing with the Administrator of any amendments filed with the SEC

B) a description of the proposed use of the proceeds of the underwriting

C)payment of the appropriate fee

D)filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting

discounts or commissions concurrently with the filing of the registration statement with the SEC

Answer 201

D) filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting

discounts or commissions concurrently with the filing of the registration statement with the SEC

The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least 2 full business days before the effective date, not with the initial filing.

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Question 202

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations,

Answer 202

this would be a prohibited transaction.

An IRA may invest in real estate if it is for business purposes only. If done improperly, serious problems with the IRS can result. If it is done as a truly hands-off investment, it is unlikely that there will be an issue. However, the moment the participant derives any personal benefit from the property, it becomes a prohibited transaction.

We have not heard of it being tested at this level, but here is how serious this is.

Generally, if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA (usually zero if the contributions were tax deductible), the IRA owner will have a taxable gain that is includible in his or her ordinary income.

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Question 203

Can an IRA be used to purchase personal real estate?

Answer 203

No.

An IRA may invest in real estate if it is for business purposes only. If done improperly, serious problems with the IRS can result. If it is done as a truly hands-off investment, it is unlikely that there will be an issue. However, the moment the participant derives any personal benefit from the property, it becomes a prohibited transaction.

Question 204

As a rule, loans from a 401(k) plan must be repaid within how many years?

Answer 204

5 years.

Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.

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Question 205

The Administrator may deny an application for registration as an agent if

1. the applicant has been convicted of a misdemeanor involving securities fraud within the past 120 months
2. the applicant is insolvent
3. the applicant has been convicted of a felony within 10 years of the date of application
4. the applicant has filed an incomplete application

Answer 205

All of them.

A record of any felony conviction or misdemeanors involving securities fraud during the last 10 years is sufficient grounds for the Administrator to deny an application for registration in the securities industry. Insolvency and failure to file a complete application are also grounds for denial.

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Question 206

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE?

1. The brochure must be updated each time Part 1A of Form ADV is updated.
2. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500.
3. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser’s fiscal year.

Answer 206

2 and 3

Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser’s fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.

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Question 207

A client, who is a famous tennis player, offers to record a testimonial for a covered investment adviser. The recording will be used in a television commercial. Under the SEC’s Marketing Rule for Investment Advisers, the firm may

Answer 207

use the testimonial provided disclosure is made that the athlete is a client and the extent of any compensation paid.

Testimonials promoting investment advisers’ services are permitted under the SEC rule. The rule distinguishes between a testimonial and an endorsement. The former is from a client and the later from someone who is not a client.When accepting a testimonial, the fact that the person is a client must be disclosed. Disclosure is also required if any compensation is being paid. Advertisements are not filed with the SEC.

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Question 208

Your client’s wife retired as a 3rd grade teacher in 2009, where she was covered under the school system’s 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 72 date?

Answer 208

RMDs may be deferred only from the plan sponsored by the current employer.

The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were 2 different school systems with 403(b) plans.

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Question 209

NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one

Answer 209

who was an affiliate of the adviser

Loaning money to a client is prohibited unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA’s client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money.

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Question 210

What does the loan consent form allow the firm to do?

Answer 210

loan out the customer’s margin securities

A signed loan consent agreement permits a firm to loan out a customer’s margin securities. This is the only part of the margin documentation that is optional.

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Question 211

Under an intrastate qualification registration and the issue is taking longer than expected to sell, the administrator may require the issuer to file reports how often?

Answer 211

Quarterly.

These reports contain information about how much has been sold.

Question 212

Who can file a registration statement?

Answer 212

The issuer.

A broker/dealer

An interested party, usually a selling stockholder.

Question 213

In order for a preorganization certificate to be exempt, what are the requirements?

Answer 213

Preorganization certificates must be;

• before incorporation (promise of seed money
• Maximum of 10 subscribers and no funds paid in

Question 214

In order for a private placement to be exempt, what are the requirements?

Answer 214

• Restricted to 10 offers in any 12 consecutive months other than to institutional clients
• No immediate resale except for institutions
• No compensation paid on sales to non institutional buyers

Question 215

When an issuer plans to IPO and the issuer sells securities to the broker-dealer does this need to be registered?

Answer 215

No. This is an exempt transaction.

This is called an issuer transaction.

Question 216

Financial institution transactions are exempt if they are:

Answer 216

Investment companies

Insurance companies

Banks and trust companies

Employee benefits plans with more than $1 million in assets

Broker dealers

Investment advisers

Individuals meeting the SEC definition of accredited investors are NOT considered institutional investors for the purpose of this exemption