STC Missed Questions Flashcards
You are the chief financial officer of Colfax Advisers, LLC, a registered investment adviser located in Dallas, Texas. Your firm manages portfolios and has safekeeping services for its clients. The state of Texas requires that all registered advisers who have custody of client assets, maintain a minimum net worth of $35,000. In reviewing the month-end financials for the firm, you calculate the current net worth at $32,875. What would your best course of action be considering these circumstances? A) Increase net worth to $35,000 and notify the Administrator of the increase. B) Notify the Administrator and post a $35,000 bond. C) Cease operations in the state and file a notice of withdrawal. D) Notify the Administrator within one business day and file a statement of financial condition.
Answer: D
Explanation: If the investment adviser’s net worth falls below the minimum required by the state, the adviser must notify the Administrator within one business day and file a statement of financial condition. The Administrator may then require the adviser to post a bond or take other actions to protect the clients’ assets. Increasing the net worth to $35,000 is not sufficient, as the adviser must still notify the Administrator of the deficiency. Ceasing operations and withdrawing from the state is not necessary, unless the adviser cannot remedy the situation.
In which of the following situations may an Administrator deny, revoke, suspend, or cancel an agent’s registration? A) A misdemeanor conviction that occurred seven years ago B) The agent has declared personal bankruptcy within the past 10 years C) The agent shares an account with a customer and has received written authorization from both the customer and the employing broker-dealer D) The agent filed an application which, as of its effective date, was incomplete in any material respect
Answer: D
Explanation: The Uniform Securities Act (USA) gives the Administrator the power to deny, suspend, or revoke an agent’s registration. Reasons for taking such action against a registration include the filing of an incomplete application as of its effective date or having been convicted of any felony or securities related misdemeanor within the last 10 years. A person’s insolvency at the time of an application is a disqualifying event, but not a bankruptcy within the past 10 years.
Define Market Manipulation
Market manipulation would include disseminating false quotations or information, or creating a misleading appearance of trading in a stock. Buying a security on one exchange and selling it short on another (arbitrage) would not be considered market manipulation.
A radio program is broadcast from a bank on the weekend. Which of the following actions would be prohibited by the Administrator? A) Mentioning that the broker-dealer that sponsored this show is affiliated with the bank B) Mentioning the advantages of investing in mutual funds without sending a prospectus C) Omitting the name of the broker-dealer in any 30-second ads that run during the show D) Omitting the name of the bank during any 30-second ads that run during the show
Answer: C
Explanation: Occasionally, regulatory examinations present questions that appear to be lacking enough information to answer. This question illustrates the need to recall basic knowledge of a topic and logically apply it to determine the best answer. The focus is on identifying which action is prohibited at all times. The prohibited action is omitting the name of the broker-dealer that approved the ad. The one exception is that broker-dealers and agents are allowed to publish a blind ad if it is a recruiting advertisement for a new hire. A blind ad is one in which the name of the broker-dealer or agent is not mentioned in the ad. Broker-dealers are allowed to mention that they are affiliated with or subsidiaries of banks. However, they must make the distinction that the products being offered are neither deposits, nor guaranteed. There is no requirement to mail a prospectus with those statements. In reality, this would be difficult to achieve since the radio program’s sponsor (the broker-dealer) has no idea how many people may be listening at a given time, as well as where those listeners are located. Keep in mind, banks are regulated by entities other than the Administrator.
- A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer’s conduct is: A) Acceptable if the issuer approves of the trade B) Unethical and prohibited under the Uniform Securities Act C) Allowable only if the shares will be listed on a national exchange D) Acceptable since the broker-dealer is accepting risk that the shares may fall in value
Answer: B
Explanation: This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, it must sell the shares at the public offering price (POP) as soon as possible.
Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services? A) Telling a client to buy municipal bonds in order to reduce her tax liability B) Providing clients with a recommended list of mutual funds for their retirement accounts C) Giving a client a list of mutual funds with the lowest expense ratios for the past five years D) Telling a client that investment XYZ will meet her investment objectives
Answer: C
Explanation: Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or that do not render an opinion of the investment merits of a particular security.
- Which TWO of the following actions would fall under the jurisdiction of a state securities Administrator? I) The purchase of options through the Internet by a state resident II) The sale of long-term certificates of deposit by a bank III) The delivery of securities to a customer who is a resident of a particular state IV) The offer of securities by an out-of-state broker-dealer to a resident of the state A) I and II B) I and III C) I and IV D) III and IV
Answer: C
Explanation: State securities Administrators have jurisdiction over securities transactions that are: Originated in their state Directed to and received in their state Accepted in their state Delivery of securities to a particular state does not fall under an Administrator’s jurisdiction, nor do general commercial banking transactions.
- A securities agent and an investment adviser have offices next door to each other. The adviser directs brokerage business to the agent for execution and, in return, the agent rebates the adviser 10% of the commissions generated by these transactions. According to NASAA Model Rules, this practice is: A) Acceptable, provided the agent is also registered as an investment adviser representative B) Acceptable, provided it is disclosed on the adviser’s Form ADV C) A violation of the Uniform Securities Act D) Unethical according to NASAA
Answer: B
Explanation: According to the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this practice is acceptable provided it is disclosed in writing as a conflict of interest. Disclosing the practice on Form ADV, a copy of which all clients must receive, should be sufficient. This would be an unethical practice if the adviser did not disclose the rebate to its clients. Please note, this is a very narrow definition of rebate. It comes under the concept of a business relationship between the adviser and the broker-dealer. This is not the same situation as where an agent rebates a customer a commission as an incentive to enter into a transaction. That scenario is prohibited.
According to the Uniform Securities Act, which of the following persons must register with the state Administrator? A) A person who represents a non-exempt issuer in sales to the public B) A person who represents an exempt issuer in sales to the public C) A person who represents a non-exempt issuer in an investment banking transaction with a broker-dealer D) A person who represents a non-exempt issuer in sales to existing employees, and is not compensated
Answer: A
Explanation: Persons who represent exempt issuers are not defined as an agent so there is no need for registration. Persons who represent non-exempt issuers in sales to the public are defined as agents and must be registered whether or not they receive compensation. Persons who represent non-exempt issuers in sales to existing employees are only defined as agents (and must be registered) if they receive compensation related to the transaction(s). If a person represents a non-exempt issuer involved in an institutional transaction (e.g., investment banking transaction with a broker-dealer), he is not considered an agent and therefore not required to be registered.
Allied Advisory Services is a registered investment adviser with its home office in the state of Virginia. The minimum financial requirement for an investment adviser in Virginia is a net worth of $50,000. The firm would like to open an office and provide advisory services in Maryland. However, the minimum net worth requirement in Maryland is $100,000. What action should the firm take in order to open an office in Maryland? A) Increase its net worth by another $50,000 B) Increase its net worth to $150,000 to cover both states C) Leave its current net worth as is D) Post a $50,000 bond to cover the additional requirement in Maryland
Answer: C
Explanation: According to the Uniform Securities Act, the minimum financial requirements of the state where an investment adviser maintains its principal place of business sets its registration requirements. No other state may impose higher requirements than the adviser’s home state. Since Allied is already registered in Virginia, it is assumed that is its principal state, and that it has already met the net worth requirements ($50,000). As a result, Allied cannot be forced to meet Maryland’s requirement of $100,000.
Which of the following is not a security as defined by the USA? A) A certificate of interest in a profit-sharing agreement B) A certificate of interest in a mining title C) A preorganization certificate D) A futures contract in precious metals
Answer: D
Explanation: Futures and commodity contracts are not securities. However, the Uniform Securities Act includes some seemingly odd instruments as securities, such as interests in mining or drilling titles and preorganization certificates.
An agent selling investment products on the premises of a bank should always: A) Disclose to clients that these products are not FDIC-insured B) Explain the differences between the FDIC and SIPC C) Collect signed waivers of compliance from clients D) Disclose to clients that she is an employee of the broker-dealer and not an employee of the bank
Answer: A
Explanation: An agent selling investment products on the premises of a bank must always disclose that these products are NOT FDIC-insured, that they are not bank deposits or guaranteed by the bank, and that they are subject to investment risks, including the loss of principal.
What information may an issuer change by amending its registration statement after it receives an effective date? A) The public offering price B) The number of shares C) The underwriting spread D) Nothing
Answer: B
Explanation: Under the Uniform Securities Act, an issuer may amend its registration statement to increase the number of shares being sold after the statement has been declared effective by the Administrator. The issuer does not need to file a new registration statement for this purpose. The issuer may not amend its statement to change the public offering price of the securities, or the underwriters’ compensation or commission schedule.
Under the Uniform Securities Act, which of the following choices is NOT a security? A) Non-traded REITs B) Stock futures C) Keogh Participation Units D) Options on currency futures
Answer: B
Explanation: Under the Uniform Securities Act, futures, forwards, currencies, and commodities are not considered securities. Although futures are not securities, options on futures are. While a Keogh Plan is not a security, a participation unit in the plan is defined as a security. A real estate investment trust is a security regardless of how or if it is traded.
A mutual fund may be described as a no-load fund only if the fund has no: I) 12b-1 fees in excess of .25% of the fund’s average annual net assets II) 12b-1 fees in excess of .50% of the fund’s assets under management III) Front-end loads IV) Back-end loads A) I only B) I and III only C) I, III, and IV only D) I, II, III, and IV
Answer: A
Explanation: According to NASAA’s Statement of Policy on Dishonest or Unethical Business Practices in Connection with Investment Company Shares, a no-load fund may not have any sales charges (loads). It is also prohibited from charging 12b-1 fees that are greater than twenty-five basis points (.25%) of the fund’s average annual net assets.
A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE? A) The withdrawal will become effective within 60 days after the application is received by the Administrator B) The withdrawal will become effective when the Administrator determines whether there is an action for revocation of the firm’s license pending at the time the application was filed C) By filing an application to withdraw, the firm agrees to settle all charges currently pending without admitting or denying them D) The Administrator has two years after the date the firm’s registration is withdrawn to initiate a proceeding for revocation of its license
Answer: B
Explanation: An application for withdrawal generally becomes effective 30 (not 60) days after it was filed. However, the withdrawal will not become effective until the Administrator declares whether there are proceedings pending or instituted against the firm at the time the application for withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days after the application was filed.) The Administrator has one year (not two) after the registration is withdrawn to begin revocation or suspension proceedings against the firm. In practical terms, the reason for this is because if violations have occurred in a state and the broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the B/D for up to one year after the withdrawal. The cause of action may carry over to other states. This prevents a B/D from avoiding the consequences of rule violations
When can an issuer use an omitting or summary prospectus? A) With initial public offerings B) With follow-on offerings of federal covered securities C) With sales of investment company securities and variable contracts D) With private placements
Answer: C
Explanation: In most securities offerings, the prospectus is the only disclosure document that’s permitted. However, the SEC does permit the use of a summary or omitting prospectus when selling investment company securities and variable products. The summary prospectus is a shorter document, which summarizes the full prospectus. The disclosure document for a private placement is referred to as an offering memorandum or private placement memorandum.
Under the Uniform Securities Act, a person who sells securities in violation of state securities law is civilly liable for which TWO of the following penalties? I) Fines II) Interest III) Punitive damages IV) Attorney fees A) I and III B) I and IV C) II and III D) II and IV
Answer: B
Explanation: A person who sells securities in violation of state securities law is civilly liable for principal, interest, reasonable attorney fees, and court costs.
Under which of the following circumstances will an individual be required to register with the Administrator as an investment adviser representative? A) She solicits brokerage services B) She supervises the accounting department of a registered investment adviser C) She holds herself out as an investment adviser representative D) She serves on a committee that makes investment decisions for an investment adviser’s managed accounts
Answer: D
Explanation: Investment adviser representatives (IARs) are typically employees of an investment adviser (IA) who solicit advisory services, make investment decisions, or supervise other IARs. Supervising the accounting department and soliciting brokerage services don’t require registration as an IAR. The definition of an IA, not IAR, mentions a firm “holding itself out as an adviser,” but that action is insufficient to require registration as an IAR.
What action may the state securities Administrator take without giving the registrant an opportunity for a hearing? A) Revoke a registration B) Suspend a registration C) Cancel a registration D) Bar a registrant
Answer: C
Explanation: An Administrator may cancel a registration without a hearing if the registrant is deceased, judged mentally incompetent, or is missing and cannot be located after a reasonable search. If the Administrator revokes or suspends a registration, or bars a registrant, then that person must be given the opportunity for a hearing to contest the Administrator’s action.
