Study

Question 1

A Canadian broker-dealer with no offices in this state has a Canadian client who is on a temporary work assignment in this state. To accept orders from this client, the broker-dealer must

I. File an application for limited registration with the Administrator in the form required by the jurisdiction in which it has its head office.

II. File a consent to service of process.

III. Provide the Administrator with evidence that it is currently in good standing as a broker-dealer in the jurisdiction from which it is effecting securities transactions.

IV. Be a member of a recognized self-regulatory association or stock exchange in Canada.

Answer 1

All of the above

Question 2

Is an employee of an issuer who sells the issuer’s common stock exclusively to trust companies and savings institutions required to register?

Answer 2

Not required to register

Question 3

Would an individual representing the issuer in the sale of that issuer’s securities to the public would have to register in this state if the issuer is a federal savings and loan association authorized to do business in that state?

Answer 3

Yes

Question 4

What are the five exclusions from the definition of Broker-Dealer?

Answer 4

Agents
Issuers
Banks
Savings institutions
Trust companies

Question 5

Does a small IA who advises an investment company registered under the Investment Company Act of 1940 have to register with the state or the SEC?

Answer 5

Both

Question 6

What does LATE exclusion from IA stand for?

Answer 6

Lawyers
Accountants
Teachers
Engineers

Question 7

Comprehensive financial planning always includes:

Answer 7

Securities advice

Question 8

Is a federal covered adviser, for definitional purposes, considered an adviser under the USA?

Answer 8

No, to avoid duplicate registration

Question 9

Is there a minimum net worth or bonding requirement for IARs?

Answer 9

No, just for the IA

Question 10

Are commercial banks included in the definition of IA?

Answer 10

No, never

Question 11

IA filings Part 2A and 2B constitute what and are given to whom?

Answer 11

The full brochure, given to the client or prospective client.

Question 12

How does the Uniform Securities Act define a private placement?

Answer 12

The Uniform Securities Act defines a private placement as an offering made to no more than 10 noninstitutional investors in a 12-month period.

Question 13

The Beneficial Protected Life Insurance Company (BPLIC) is authorized to do business in this state. Under the Uniform Securities Act (USA), included in the definition of exempt security would be BPLIC’s:

A) variable life insurance policies.
B) common stock.
C) fixed annuity policies.
D) variable annuity policies.

Answer 13

B

Question 14

Which of the following terms pertains to registration with the Administrator of a mutual fund, closed-end investment company, or unit investment trust that is registered under the Securities Act of 1933 and also registered as an investment company under the Investment Company Act of 1940?

A) Qualification
B) Dissemination
C) Notice filing
D) Coordination

Answer 14

C. Federal covered securities are exempt from registration.

Question 15

When is a BD with no office in a state not considered a broker dealer?

Answer 15

A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities.

Question 16

Does nonmaterial information affect the decision process for securities or advice?

Answer 16

No

Question 17

Question ID: 1409955

As defined in the Uniform Securities Act, which of the following constitutes an offer or sale of stock?

I. Solicitation of a tender offer by a corporation

II. Gift of assessable stock

III. Purchase of shares through the exercise of a warrant

IV. Exchange of shares in a corporate reorganization, such as a merger

A) I and II

B) III and IV

C) I, II, and IV

D) II and III

Answer 17

D

Explanation

A purported gift of assessable stock is considered to involve and an offer and sale under the USA because the corporation that issues assessable stock can bill shareholders for cash representing the par value shortfall at a future date. Upon the exercise of a warrant, the holder of the warrant purchases stock and the issuing corporation sells the stock. Under the USA, the solicitation of tender offers by corporations and exchange of shares in corporate reorganizations are not sales.

Question 18

What is the purpose of the Customer Identification Program (CIP)?

Answer 18

Enable a BD to form a reasonable belief that it knows the true identity of each customer.

Question 19

When does a customer have to receive the options disclosure document?

Answer 19

Before the first order

Question 20

The NASAA Model Brochure Rule for investment advisers states that delivery of the brochure and related brochure supplements need not be made to

I. clients who receive only impersonal advice and who pay less than $500 in fees per year.

II. individual clients meeting the definition of accredited investor.

III. an investment company registered under the Investment Company Act of 1940.

IV. an employee benefit plan with assets in excess of $1 million.

Answer 20

I and III

Question 21

Trade confirmations sent by broker-dealers to their customers must always include

Answer 21

Commissions charged

Question 22

There are three items that are not part of the broker-dealer (BD) fee disclosure document. Those are

Answer 22

commissions;
markups and markdowns; and
advisory fees (for those BDs that are also investment advisers).

Question 23

Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery, which was covered in the new offering prospectus when explaining why he felt the issuer “found the next Aspirin.” He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following?

A) Phishing
B) A performance guarantee
C) Entanglement
D) Fraud

Answer 23

B

Question 24

Test Id: 255161243
Question #11 of 15
Question ID: 1409968
NASAA has a Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents in Connection with Investment Company Shares. One of the things the policy does is restrict statements that may be made when referring to a mutual fund as no-load. Under the policy, one could claim or imply that a mutual fund is no-load as long as the fund did not have a

I. contingent deferred sales load.

II. 12b-1 fee in excess of .25% of average net fund assets per year.

III. service fee in excess of .25% of average net fund assets per year.

IV. front-end load in excess of .25% of the purchase price.

Answer 24

I, II, III

There are four things that will prohibit a fund from being referred to as no-load:

Any front-end load
Any CDSC
A 12b-1 charge in excess of .25% of average net fund assets per year
A service fee in excess of .25% of average net fund assets per year

So, what is wrong with choice IV? Any front-end load, even one LESS than .25%, will lead to a prohibition against using the term no-load.

LO 7.b

Question 25

A person registering as a broker-dealer with the Administrator must disclose its form of business organization. Which of the following are permitted forms?

I. Sole proprietorship
II. Corporation
III. Partnership
IV. Limited liability company (LLC)

Answer 25

I, II, III, and IV

Question 26

The SEC’s Customer Protection Rule is found in:

A) the Investment Advisers Act of 1940.

B) the Uniform Securities Act.

C) the Securities Exchange Act of 1934.

D) the Securities Act of 1933.

Answer 26

C
Rule 15c3-3, the Customer Protection Rule, is found in the Securities Exchange Act of 1934. It certainly would not be in the USA—that is state law only.

Question 27

NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Which of the following statements correctly identify those delivery requirements?

I. The brochure must be delivered to prospective and new advisory clients at least 48 hours prior to entering into the advisory contract.
II. The brochure must be delivered to prospective and new advisory clients no later than entering into the advisory contract.
III. Annual delivery of the brochure to existing clients must be made within 90 days of the end of the adviser’s fiscal year.
IV. Annual delivery of the brochure to existing clients must be made within 120 days of the end of the adviser’s fiscal year.

A) II and IV
B) II and III
C) I and III
D) I and IV

Answer 27

A

The initial delivery requirement is no later than the date of entry into the advisory contract. The 48-hour rule deals with an advance delivery to avoid having to honor a five-day penalty-free withdrawal. The annual delivery date is within 120 days of the end of the adviser’s year. The 90-day requirement is for the annual updating amendment to the Administrator.

LO 6.a

Question 28

Under the Uniform Securities Act, when an IAR acting in the capacity of trustee of a family trust executes a transaction on behalf of the trust, it is

A) an exempt security.

B) an exempt transaction.

C) a nonexempt transaction.

D) a violation of the trustee’s fiduciary responsibility.

Answer 28

C

Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question.

LO 4.e

Question 29

As defined in the Uniform Securities Act, the term used to describe an agent of a broker-dealer attempting to dispose of a security to a customer is

A) a sale.
B) an offer to sell.
C) a disposal attempt.
D) fraud.

Answer 29

B

The terms offer and offer to sell include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. A sale is when the offer has been accepted.

LO 1.a

Question 30

An IAR is registered in New York and Vermont. While working in his New York office, he places a call to the cell phone of one of his New York clients who happens to be on vacation in Ohio. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Indiana. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrator of

I. New York.
II. Ohio.
III. Indiana.
IV. Illinois.

A) I, II, III, and IV
B) II and III
C) I and IV
D) I and III

Answer 30

D

Administrators have jurisdiction if they are from the state in which the offer was made, directed, or accepted. The offer was made in New York and, because it was directed to the cell phone of a New York customer, the USA considers that the offer was directed to New York. The offer was accepted in Indiana. The mailing of the certificate is of no consequence and calling a local number and having it answered in another state is viewed the same way as mail sent to a customer’s residence that is forwarded to another state: the offer was not directed to that other state .

LO 4.f

Question 31

Under the Uniform Securities Act, the term agent refers to individuals who act on behalf of a broker-dealer or issuer in effecting securities transactions. Which of the following individuals are not included in the definition of an agent?

I. A lawyer acting on behalf of an issuer in preparing documents describing the issuance of nonexempt securities

II. A lawyer acting on behalf of a broker-dealer who prepares documents describing the sales or purchase of securities to the general public

III. A partner or officer of a broker-dealer whose only securities activity is the purchase of shares of an issuer for his personal investment account

IV. An officer of an issuer who sells shares of the issuer’s stock to employees without receiving any special compensation

A) I, II, III, and IV
B) II and III
C) I and II
D) II, III, and IV

Answer 31

A

An agent is described in the Uniform Securities Act as an individual, other than a broker-dealer or issuer, who represents a BD or issuer in effecting transactions in securities. The lawyer is not engaged in effecting securities transactions on behalf of the issuer or BD. Therefore, the lawyer is not considered an agent subject to regulation by the Uniform Securities Act. A partner (or anyone else) of a securities firm making a personal investment is not an agent. An officer of an issuer not receiving any compensation for sales of the issuer’s stock to employees is not an agent under the USA.

LO 2.f

Question 32

The Uniform Securities Act excludes from the definition of agent individuals who represent certain issuers in the sale of their securities. An individual representing which of the following issuers qualifies for that exclusion?

A) The Midwest Farmers Cooperative, a nonprofit membership cooperative issuing securities solely to members of that cooperative

B) GEMCO Finance Corporation that issues AAA-rated 30-day commercial paper in $100,000 minimum denominations

C) The Eastern Pacific Railroad issuing equipment trust certificates for the purpose of upgrading its fleet of locomotives

D) FINCO Finance Corporation that issues AAA-rated 330-day commercial paper in $25,000 minimum denominations

Answer 32

B

Among the cases where an individual representing the issuer of an exempt security is excluded from the definition of an agent is commercial paper in the three highest rating grades (AAA is the highest) with no more than a 270-day maturity and a minimum denomination of $50,000. Although railroad equipment trust certificates and membership-only sales of securities issued by cooperatives are exempt securities, they are not included in the list of those eligible for the agent’s exclusion. Please check you LEM for that list.

LO 2.f

Question 33

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following are required for an agent to lawfully share in the profits of a customer’s account?

I. The customer’s written approval

II. The broker-dealer’s written approval

III. Sharing in proportion to the agent’s financial contribution to the account

A) II and III
B) I and II
C) I, II, and III
D) I and III

Answer 33

B

To share in a customer’s account, written authorization of both the client and the broker-dealer need to be obtained. Unlike FINRA rules, there are no requirements for proportionate sharing.

LO 7.a

Question 34

Under the Uniform Securities Act, the definition of an investment adviser does not include

I. investment adviser representatives.

II. lawyers and accountants whose investment advisory services are solely incidental to their practices.

III. broker-dealers who offer investment advice on an incidental basis without special compensation for the advice provided.

IV. federal covered investment advisers.

A) I only
B) II and III
C) I, II, and III
D) I, II, III, and IV

Answer 34

D

None of these are included in the term investment adviser as used in the Uniform Securities Act. Federal covered advisers are regulated by the Securities Exchange Commission (SEC). The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual registration of IAs by federal and state authorities. If federal covered advisers were defined as IAs under the USA, then they would be subject to the same state registration procedures as local or state IAs.

LO 3.a

Question 35

An investment adviser is registered in New Jersey and has offices in Georgia, and Arkansas. One of their IARs lives in Georgia, and in addition to his local clients, he has one client who lives in Arkansas. The IAR would be required to register in

A) Georgia, Arkansas and New Jersey.
B) Georgia and New Jersey.
C) Georgia.
D) Georgia and Arkansas.

Answer 35

C

The IAR is living in Georgia and has local clients, so he must be registered there. With only one client in Arkansas, the de minimis exemption would apply to the IAR. There is no need to register in New Jersey because the IAR has no clients there.

LO 3.d

Question 36

Rona is an agent with Banff Investment Securities (BIS) registered in Province A. Rona has several clients who travel for business in the United States. To be able to serve their needs while they are traveling, Rona and BIS have obtained a limited registration in the states most frequented by those customers. The renewal date for Rona’s annual registration is

A) on the anniversary of the initial effective date.
B) January 1.
C) December 31.
D) December 1.

Answer 36

D

Unlike securities professionals in the United States, where the annual renewal date is December 31, for those using the limited Canadian registration, it is December 1.

LO 8.b

Question 37

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transactionexcept

A) a sale of nonexempt securities to a broker-dealer.
B) a sale of securities to a bank.
C) a sale of securities to an individual investor with a net worth of more than $5 million.
D) a sale of unregistered nonexempt securities in an unsolicited transaction.

Answer 37

C

Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions (e.g., isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions.

LO 4.e

Question 38

Which of the following statements best describes the effect of the NSMIA of 1996 on securities regulation?

A) Increased the power of state securities Administrators over registration of securities

B) Provided for the registration of intrastate securities

C) Established the need for dual registration of securities

D) Preempts state registration of covered securities

Answer 38

D

The National Securities Markets Improvement Act preempts state registration of covered securities. On the exam, the word federal is sometimes omitted, but covered still means federal covered securities. State Administrators may not impose registration requirements on securities that are subject to federal regulation. This has had the effect of reducing their power, not increasing it. Unlike the NSMIA’s effect on investment advisers where there is no longer dual registration, the requirement to register as a securities offering on both the state and federal levels still exists for those securities that are not federal covered. Registration for intrastate securities goes back to the earliest of the blue-sky laws, well before the NSMIA.

LO 4.b

Question 39

Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act?

A) A broker-dealer charging a separate fee for investment advice

B) The publisher of a weekly news-magazine, sold on newsstands, that contains at least five stock recommendations per issue

C) A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims

D) A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price

Answer 39

B

Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice, as would appear to be the case here. On this examination, the term comprehensive financial planning always includes securities advice.

LO 3.a

Question 40

Under the Uniform Securities Act, the term broker-dealer would include

A) agents registered under the act who from time to time sell stock from their personal brokerage accounts.

B) a person with no office in the state who effects securities transactions with over 50 different banks domiciled in the state.

C) an issuer distributing its own common stock offering.

D) a person with no office in the state who effects securities transactions with no more than five individual residents of the state in any 12-month period.

Answer 40

D

Although the person has no office in the state, transactions are effected with individual residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for BDs. A person is exempt from the definition of broker-dealer if there is no office in the state and securities trades are confined to institutional clients, without a numerical limit, or existing individual clients not residents of that state. The agents are merely selling their own stock as would any other individual; that does not make one a BD.

LO 2.b

Question 41

Which of the following is a prohibited business practice?

I. Executing a trade for a client on the orders of a client’s attorney without a written third-party trading authority

II. Executing a purchase order at market when the price of the security was falling

III. Accepting a loan of money from a customer who is an immediate family member and is the chief loan officer at a bank

A) II and III
B) I and III
C) I and II
D) I, II, and III

Answer 41

B

An agent can always execute an unsolicited market order but may never accept third-party orders without written authority or borrow money or securities from a customer, regardless of the family relationship. Loans from clients who are lending institutions are permitted, but not from the individuals who work for them.

LO 7.a

Question 42

Margin is borrowing money from a broker-dealer to buy a stock, using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer’s stock?

A) The credit agreement
B) The hypothecation agreement
C) The loan consent agreement
D) The securities pledge agreement

Answer 42

B

The hypothecation agreement gives permission to the broker-dealer (BD) to pledge a customer’s margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the BD on the basis of the loan value of these securities.

LO 6.d

Question 43

A notice filing would be most appropriate for which of the following new issues?

A) Federal credit union shares

B) Intrastate offering

C) Open-end investment company shares

D) Railroad equipment trust certificate

Answer 43

C

Investment companies registered under the Investment Company Act of 1940 are exempt from registration with the states under the NSMIA. However, most states require notice filing and the payment of fees. Federal credit union shares and railroad equipment trust certificates are exempt securities, and intrastate issues would have to register using qualification.

LO 4.d

Question 44

One of the terms defined in the Uniform Securities Act is broker-dealer. Which of the following is included in that definition?

A) An individual employed by a business entity to open new customer accounts for the purpose of trading securities

B) A person whose primary function is providing advice on what assets belong in clients’ investment portfolios

C) A business entity seeking to raise additional capital using the regulated securities markets

D) A person whose primary function is buying securities for his own account and for the accounts of others

Answer 44

D

A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the accounts of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.

LO 2.a

Question 45

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwestern states. Regarding financial requirements, USATrade must meet those of

A) the state in which the principal office of the member is located.

B) FINRA.

C) the state with the most stringent financial requirements.

D) the SEC.

Answer 45

D

In all cases, a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC’s requirements always trump those of the states.

LO 2.c

Question 46

Which of the following transactions are exempt from the registration provisions of the Uniform Securities Act?

I. After a presentation is made to 23 potential individual investors, pre-organization certificates are subscribed to by 8 of them

II. Isolated nonissuer transactions

III. Unsolicited nonissuer transactions effected through a broker-dealer

IV. Transactions between issuers and underwriters

A) I, II, III, and IV
B) I and IV
C) II and III
D) II, III, and IV

Answer 46

A

Isolated nonissuer transactions, unsolicited transactions effected through a broker-dealer, and transactions between issuers and underwriters are all exempt transactions under the provisions of the USA. As long as there are no more than 10 subscribers to pre-organization certificates, the transaction is exempt.

LO 4.e

Question 47

An individual employed by a federal covered adviser would be required to become registered as an IAR in the state if

A) the only clients receiving the individual’s advice are insurance companies located in states where the individual does not maintain a place of business.

B) the only function performed by the individual is preparing the layout of a research report prepared by the firm.

C) the only clients receiving the individual’s advice are large pension plans organized for employees of municipalities located in the state where that individual maintains an office.

D) the only clients receiving the individual’s advice are banks located in states where the individual does not maintain a place of business.

Answer 47

C

Individuals performing the duties of an IAR for a federal covered IA are only required to register in states in which they maintain a place of business. Although pension plans (as long as the total assets of the plan are at least $1 million) are considered institutional investors for exemption purposes, that exemption only applies when the individual has no place of business in the state.

LO 3.d

Question 48

According to the Uniform Securities Act, a sale is

A) a contract to transfer ownership of a security for value.

B) an attempt to transfer ownership of a security.

C) an offer of an equivalent contract.

D) a solicitation of an offer to buy.

Answer 48

A

A sale is defined as every contract to sell a security or an interest in a security, including a security given as a bonus with the purchase of another security or a gift of assessable stock when something of value is given. A sale is not an attempt to transfer ownership of a security, a solicitation of an offer to buy, or an offer of an equivalent contract (i.e., an offer or offer to sell).

LO 4.f

Question 49

Your friend is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent, and your friend wants you to sell the policy and split commissions with him. Splitting commissions

A) would be allowable if both parties were registered as agents for the same or affiliated broker-dealers.

B) is permissible at all times.

C) on variable annuity sales is allowable only if the agents involved are both licensed in life insurance and maintain their securities licenses at the same or affiliated broker-dealers.

D) is an unethical trade practice.

Answer 49

C

You must be licensed in both insurance and securities to sell variable annuities or to split commissions. Commissions on securities transactions may only be split with registered agents of the same or affiliated broker-dealers.

LO 7.a

Question 50

A registered investment adviser advertises that it is offering a free six-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers?

A) “Your free subscription will start once we have received your name and mailing or email address.”

B) “Your free subscription will start upon receipt of your completed financial profile.”

C) “Your free subscription will start after your third trade with our affiliated broker-dealer.”

D) “Your free subscription will start once you have furnished us with the names and addresses of three of your friends.”

Answer 50

A

A free offer must not only be free of financial cost, it must be free of any other burden or commitment.

LO 6.e

Question 51

As fiduciaries, investment adviser representatives owe their clients an affirmative duty of utmost good faith and full disclosure of all material facts. This affirmative duty of disclosure is required by the investment adviser representative in all of the following situations except

A) when a family member has a beneficial interest in a private medical equipment firm that the IAR recommends to a client.

B) when the advice being provided is outside the scope of the services provided by the investment adviser and is not under supervision or control of a supervisory person.

C) when donating funds to a nonprofit medical research institute that owns securities the IAR has recommended.

D) when compensation is received from the affiliated broker-dealer for transactions that are executed through the brokerage house.

Answer 51

C

An investment adviser representative (IAR) need not disclose donations to nonprofit organizations, even to those with whom the IAR has a client relationship. In all of the other cases, even when outside of the scope of the investment adviser’s business, an IAR must always make full disclosure to clients.

LO 7.b

Question 52

Which of the following clients of a registered investment adviser is exempt from the requirement to receive annual delivery of the adviser’s brochure?

A) KAPCO Growth Fund, a mutual fund registered with the SEC

B) Valued Life Insurance Company, authorized to do business in the state

C) An individual receiving impersonal advisory services billed at a rate of $150 per quarter

D) First National Bank of Bigville, a bank whose deposits are insured by the FDIC

Answer 52

A

The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. In this question, the fee is $600 ($150 per quarter times four quarters). The other is when the advisory contract is with a registered investment company such as a mutual fund.

LO 6.a

Question 53

A publicly traded corporation offers its employees an opportunity to purchase shares of the company’s common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the Uniform Securities Act, the employee

A) may receive commissions without registration.

B) need not register as an agent of the issuer under any circumstances.

C) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales.

D) must register as an agent of the issuer.

Answer 53

C

Under the USA, an individual is an agent when effecting transactions with an issuer’s existing employees if commissions or other remuneration related to the sales are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required.

LO 2.f

Question 54

An agent submits a list of recommendations to a customer that includes five different securities on the broker-dealer’s current list of favorite investments. The customer chooses to buy a round lot of one of the five securities recommended (a stock in which the agent’s broker-dealer makes a market). The firm, in completing the trade, charges a markup that is larger than normal for a stock transaction. Is this allowable under the Uniform Securities Act?

A) Yes, markup schedules are dependent upon the type of security, broker-dealer risk, services that the broker-dealer provides, and effort in acquiring the security.

B) No, under the circumstances given, it is a prohibited practice to charge a higher than normal markup.

C) No, the markup schedule is set and cannot be changed for an individual trade.

D) Yes, it is allowable, but proper disclosure is required.

Answer 54

B

Higher than average markups or commissions are not prohibited if they are justifiable and disclosed. However, in this case, there would appear to be no justification because the customer bought a round lot, the normal trading unit of stock. The firm is a market maker, so the security is being sold from their inventory and the stock is on the company’s recommended list.

LO 7.a

Question 55

Tamar is an investment adviser representative for Retirement Solutions of American (RSA), a wholly owned subsidiary of Southeast Retirement Solutions (SRS), a broker-dealer registered in a number of southeastern states. Tamar is also a registered agent with SRS. If one of Tamar’s advisory clients sends a check made payable to SRS for a stock purchase, under NASAA’s Model Rule on Custody by Investment Advisers,

A) Tamar would have to post a surety bond in the amount of $35,000.

B) RSA would be in violation of the NASAA requirement to use a qualified custodian.

C) RSA is considered to be maintaining custody of client funds and securities.

D) Tamar must return the check and request a replacement check made payable to RSA.

Answer 55

C

Under the NASAA Model Rule, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded). The check would not be payable to the investment adviser (RSA) because it is for a securities transaction and that would be through the broker-dealer (SRS). IARs would never take custody, and there is no bonding requirement for IARs.

LO 7.f

Question 56

Myra Johnson is an investment adviser representative with a federal covered investment adviser. Her former college roommate, and very close friend, has approached Myra about opening an account in which the two of them can share in the profits and losses. In order to be in compliance with the Uniform Securities Act,

A) they must open a joint account.

B) Myra must have permission of her employer IA.

C) they must share in proportion to the amount of their invested capital.

D) Myra must inform her friend that this may not be done.

Answer 56

D

Unlike agents of broker-dealers, IAs and their representatives can never share in the profits and losses of an account with a customer.

LO 7.b

Question 57

Rising Tide Investments, a broker-dealer specializing in underwriting new issues, was the lead underwriter of the recent successful IPO for XYZ Biogenetics. The stock is now selling at a 20% premium over the IPO price. When publishing a favorable research report about this stock, the broker-dealer shall

A) await the approval of the issuer before releasing the report.

B) wait at least six months after the distribution ends before releasing the report.

C) go ahead and release the report, being sure to disclose the potential conflict of interest.

D) await the approval of the Administrator before releasing the report.

Answer 57

C

Conflicts of interest must always be disclosed. Underwriting a new issue and then issuing a favorable research report about the stock is one of the many different potential conflicts of interest that broker-dealers encounter. Permission of the Administrator or the issuer is not required for a BD to publish a research report (although it might have to be filed as advertising or sales literature).

LO 7.d

Question 58

A major concern of state regulators is the commission of dishonest or unethical actions by broker-dealers and their agents. In order to give those securities professionals a guide for determining which practices would be considered prohibited, NASAA issued a Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents. Under that policy, it would be considered an unethical business practice for an agent of a broker-dealer to

A) accept unsolicited orders from individual clients for unregistered nonexempt securities.

B) fail to disclose the amount of commission being charged on an exempt transaction involving an exempt security.

C) sell unregistered exempt securities.

D) offer registered nonexempt securities to clients.

Answer 58

B

Any trade involving a commission, regardless of the type of security, must have that commission disclosed. An unregistered nonexempt security can be sold in an exempt transaction, such as an unsolicited order.

LO 5.d

Question 59

You are an agent for a broker-dealer who is world renowned for its outstanding research department. If you were to contact your clients to discuss the contents of the firm’s latest research report prior to that report being released to the public, you

A) could share this information solely with those clients who are accredited investors.

B) would likely be in violation of the rules dealing with trading on inside information.

C) would be permitted to discuss the report only with those clients for whom the recommendations would be suitable.

D) would be permitted to do so immediately.

Answer 59

B

When your research department is world renowned, the likelihood of a report influencing the market price of any securities in the report is high enough so that the regulators would be able to suggest that any use of the information prior to public release could be considered material non-public information (MNPI).

LO 6.f

Question 60

Which of the following would be considered an unethical business practice?

A) Agents exercising discretion in discretionary accounts.

B) Agents correcting bona fide execution errors in their customer’s accounts.

C) Broker-dealers sending retail clients an email 30 days in advance of a change to fees.

D) Broker-dealers charging larger than ordinary commissions on certain transactions.

Answer 60

B

When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm’s website). In a discretionary account, agents are authorized to exercise their discretion—that is the point of the account.

LO 6.c

Question 61

The Administrator may, by rule,

A) suspend federal law if the Administrator believes it to be in the public interest.

B) allow an agent to waive provisions of the Uniform Securities Act.

C) suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract.

D) forbid investment advisers registered in that state from taking custody of client funds.

Answer 61

D

The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes.

LO 7.f

Question 62

According to the Uniform Securities Act, the Administrator has the power to require a person wishing to register as an agent to

A) have minimum net capital, pay filing fees, pass an exam, and post a surety bond.

B) have minimum net capital, post a surety bond, and pass an exam.

C) post a surety bond, pay filing fees, and pass an exam.

D) post a surety bond and pass an exam.

Answer 62

C

The Administrator may require that, as a condition of registration, the agent post a surety bond (if given discretion by clients over their accounts) pay filing fees, and pass an examination that may be written, oral, or both. Minimum net capital orders apply to broker-dealers, not their agents.

LO 8.b

Question 63

Which of the following securities are exempt from the registration provisions of the Uniform Securities Act?

I. Issue of a savings and loan association authorized to do business in this state

II. General obligation municipal bond

III. Bond issued by a company that has common stock listed on the New York Stock Exchange

A) II only
B) I, II, and III
C) II and III
D) I only

Answer 63

B

The USA exempts a number of different issues from registration, including securities issued by a bank or anything that functions like a bank (e.g., a savings and loan or credit union). Securities issued by a governmental unit are always exempt. Securities listed on the New York Stock Exchange are part of a group known as federal covered securities that also includes those listed on the NYSE American LLC (formerly known as the American Stock Exchange) and Nasdaq Stock Market issues. If the common stock is listed, then any security of that issuer that is equal or senior in claim to the common is also considered exempt.

LO 4.d

Question 64

The SEC’s Customer Protection Rule is found in

A) the Investment Advisers Act of 1940.
B) the Securities Act of 1933.
C) the Uniform Securities Act.
D) the Securities Exchange Act of 1934.

Answer 64

D

Rule 15c3-3, the Customer Protection Rule, is found in the Securities Exchange Act of 1934. It certainly would not be in the USA—that is state law only.

LO 7.f

Question 65

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser?

A) Renewal fee to the SEC
B) State licensing fee
C) Consent to service of process
D) Form U4

Answer 65

B

Unlike investment advisers who will register with either the state or the SEC, all investment adviser representatives register with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

LO 3.e

Question 66

An agent’s recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be

I. unsuitable and unethical.
II. a securities felony.
III. grounds, in extreme cases, for suspension or revocation of the agent’s license.
IV. outside regulatory jurisdiction.

A) II and III
B) I only
C) I and III
D) IV only

Answer 66

C

Municipal bonds provide a fixed income, but they are generally suitable only for high tax bracket individuals. In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent’s license.

LO 7.a

Question 67

A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true?

A) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.

B) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents.

C) No material changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end.

D) Material changes to wrap fee programs must be filed promptly with the Administrator.

Answer 67

A

As a state-registered investment adviser (IA), all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV Part 2A. Every IA, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser’s fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included. However, an amended Form ADV needs to be filed promptly with the Administrator only if there are material changes.

LO 6.a

Question 68

An applicant for registration as an investment adviser discloses on its application to the Administrator that it plans to use palm readers to help determine which investments are most suitable for their clients. Under the Uniform Securities Act, the Administrator

A) will probably turn to the SEC for guidance.

B) will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit.

C) is empowered to deny this application for just cause.

D) may only justify denial for reasons listed in the Uniform Securities Act.

Answer 68

D

A denial of registration must be based on the concept of law. There are stated reasons for denial, such as felony convictions, outstanding injunctions, and insolvency. Where in the USA does it say an adviser can’t use palm readers, a Ouija board, or a Magic 8 Ball? Although disclosure of methods of analysis is required, the Administrator is not empowered to pass judgment on the merits of those methods. The USA does state that the Administrator is empowered to “condition a particular applicant’s registration as a broker-dealer upon his not transacting business as an investment adviser if the Administrator finds that he is not qualified as an investment adviser.” But nowhere in this question does it indicate that the applicant is, or is applying for, registration as a broker-dealer.

LO 5.a

Question 69

Burgeoning Capital Associates (BCA) is a broker-dealer specializing in assisting corporations and municipalities with raising funds through the issuance of equity or debt securities. BCA has places of business in States A, B, and C. Great Organic Products (GOP), a corporation domiciled in State D, wishes to borrow $25 million to purchase new equipment. GOP approaches BCA, who suggests a 20-year debenture. GOP agrees and BCA purchases the entire issue with a view to reselling the securities to its retail customers. Based on the Uniform Securities Act, BCA

A) must employ agents registered in State D in order to be able to make the purchase.

B) is a broker-dealer in State D unless sales are confined to residents of State D.

C) is a broker-dealer in State D.

D) is not a broker-dealer in State D.

Answer 69

D

One of the exclusions from the definition of a broker-dealer in the state is when the BD has no place of business in the state and its only clients in the state are issuers of the securities the BD is buying. When BCA resells the GOP debentures, it will be selling them to its customers in States A, B, and C, where the BD is registered.

LO 2.b

Question 70

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include

I. a charge when a client requests that a stock certificate be issued in his name.
II. a commission charge when a client buys a security on a listed exchange.
III. the interest charged by the firm on money owed by customers in their margin accounts.
IV. fees for providing advisory services to high-net-worth individuals.
A) I and IV
B) III and IV
C) I and III
D) II and III

Answer 70

C

If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are

commissions;
markups and markdowns; and
advisory fees for those firms that are also registered as investment advisers.
LO 5.d

Question 71

One thing that banks, insurance companies, and investment companies have in common is that, under the Uniform Securities Act, they are all included in the definition of

A) institutions.
B) sophisticated investors.
C) accredited investors.
D) exempt investors.

Answer 71

A

It is always important to remember the name of this exam: the Uniform Securities State Law Examination. Because this is an exam about the laws, the wording has to be very precise. Do all three of these meet the definition of accredited investor? Yes, but that is a term used in the federal law, not state law. Are they all sophisticated investors? Yes, but that term has no legal meaning in the law. There is no such thing as an exempt investor, although transactions with these institutions are exempt transactions (covered in depth in Unit 4). What is critical is that these are all included in the specific definition of an institution.

LO 1.a

Question 72

Following the advice of its portfolio managers, The Rising Tide Hedge Fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tide to use furniture and facilities at a discounted rate. Under the soft dollar provisions of Section 28(e),

A) this would not fall under the safe harbor.

B) this would not fall under the safe harbor provisions unless the employees were those who directed the transactions to Momentum Securities.

C) as long as the discounted rate reflected the volume of business done by Rising Tide, this would be permitted.

D) this would fall under the safe harbor.

Answer 72

A

The use of furniture or office facilities is not included in the list of safe harbor items, regardless of what role the employees of the fund play.

LO 7.c

Question 73

There is an exclusion from the Uniform Securities Act’s definition of agent for those individuals representing certain issuers in the sale of their securities. That exclusion would apply to individuals representing

A) a savings institution organized and supervised under the laws of any state.

B) a savings and loan association organized under the laws of any state and authorized to do business in this state.

C) a credit union organized and supervised under the laws of this state.

D) an insurance company organized under the laws of any state and authorized to do business in this state.

Answer 73

A

The securities issued by all of these entities are exempt from registration under the provisions of the Uniform Securities Act. However, the only one included in the list of those where individuals representing the issuer are not agents is the savings institution. Please check your LEM for the complete list.

LO 2.f

Question 74

A broker-dealer registered with the SEC has offices in States L, A, and M. The firm has several clients in State G. If the firm does not have a place of business in State G, when would registration as a broker-dealer in that state be required?

A) If the client meets the SEC’s annual income standard to qualify as an accredited investor

B) Never, because once a broker-dealer registers with the SEC, state registration is no longer required

C) If any of its clients are state-chartered banks

D) If one of its clients was the CDL Corporation Employee Pension Trust with assets in excess of $9 million

Answer 74

A

Once a broker-dealer has a retail (individual) client in a state, registration as a BD in that state is required. The fact that the BD does not have a place of business in the state is irrelevant. Although many accredited investors are institutions, it is only individuals who qualify under the income standard. The exemption applies when the firm’s clientele is limited to other BDs or institutional clients in the state. Those would include banks, whether state or federal chartered, and employee benefit plans, such as a pension trust, with assets of at least $1 million. Every BD on the exam will be SEC-registered (unless the question states something to the contrary). That SEC registration does not remove the need for state registration.

LO 2.b

Question 75

Under the Uniform Securities Act, which of the following are excluded from the definition of investment adviser, provided the advice is incidental to their profession?

I. Banks
II. Lawyers
III. Broker-dealers
IV. Teachers
A) I and III
B) I and IV
C) II and III
D) II and IV

Answer 75

D

The key to this question is that it deals with professionals qualifying for an exclusion. Lawyers, accountants, teachers, and engineers (LATE) are excluded from the definition when the advice provided is incidental to the practice of their profession. Financial institutions, such as banks, savings and loans, and trust companies, are excluded without any requirement that advice be rendered on an incidental basis. Broker-dealers are not included in the list of professionals qualifying for this exclusion; however, if they do not receive special compensation when advising their clients, they too are excluded.

LO 3.a

Question 76

The term sale includes which of the following?

I. A contract of sale
II. A contract to sell
III. The disposition for value of an interest in a security
IV. A warrant (for common stock of the issuer) given with the purchase of a bond
A) II and III
B) I and III
C) I, II, III, and IV
D) I, III, and IV

Answer 76

C

Sale, used interchangeably with sell, is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. The sale of a corporate bond is a sale with or without a warrant attached and involves the disposition of an interest in a security of the issuer. Because the distribution of the warrant is conditional upon the purchase of a bond, the acquisition of the warrant is considered to be a sale. Something else to be aware of is that the granting of the warrant (or a stock right) is also considered to be an offer of the security underlying the warrant (or right).

LO 4.f

Question 77

Under the Uniform Securities Act, which of the following statements are true about the authority of an Administrator?

I. A cease and desist order may be issued prior to a hearing.
II. A cease and desist order may be issued after a hearing.
III. A cease and desist order is valid for a maximum of 30 days.
IV. A cease and desist order may be used to suspend the offering of a security.

A) I only
B) I, II, and III
C) II and IV
D) I and II

Answer 77

D

In issuing a cease and desist order, the Administrator may provide prior notice and a hearing or may issue the order without prior notice or a hearing (summarily). There is no time period associated with the order. Cease and desist orders are directed against persons; it is stop orders that are directed against securities.

LO 5.a

Question 78

One way that a financial institution participates in the fight against money laundering is through the filing of

A) FinCEN Form 112 for large cash transactions.
B) IRS Form 1040ML when money laundering is suspected.
C) FinCEN Form 104 for large deposits.
D) FBI Form FD-772.

Answer 78

A

The form filed with the Financial Crimes Enforcement Network (FinCEN) is Form 112. It replaced Form 104 years ago, and there is no IRS Form 1040ML. FBI Form FD-772 is a foreign-travel request form for FBI agents.

LO 7.e

Question 79

Charles Horse is the CEO of Farrier and Nail, a new broker-dealer applying for registration in a number of states. In completing the application, which of the following events in the CEO’s life must be disclosed?

A) Any charge, conviction, or guilty plea to a misdemeanor involving failure to pay child support or alimony or similar domestic offenses

B) Any charge, conviction, or guilty plea to a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses, limited to the past 10 years

C) Any charge, conviction, or guilty plea to a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses

D) Financial condition and history including a recent credit report

Answer 79

C

Any felony must be disclosed. Any misdemeanor that involves investments and many other financial issues, such as those in the correct answer, require disclosure. Note that it is not only convictions, but charges as well. There is no time limit on the disclosures; the question is “have you ever . . . ?” The 10-year limit applies to statutory (automatic) disqualification.

LO 2.c

Question 80

On the Series 63 exam, the term solicitor is used to describe persons who refer business to

A) agents.
B) investment advisers.
C) institutions.
D) broker-dealers.

Answer 80

B

As found in the Uniform Securities Act, and therefore relevant to this exam, solicitors are persons who refer business to investment advisers. There is no comparable term for those referring business to broker-dealers and their agents.

LO 1.a

Question 81

A president of a bank sells shares of the bank to public investors. Under the Uniform Securities Act, she is

A) not defined as an agent.
B) an agent.
C) an investment adviser.
D) underwriting the issue in the role of a broker-dealer.

Answer 81

A

Any individual selling securities on behalf of an issuer of certain exempt securities (bank securities are in that list) is not an agent under the USA.

LO 2.f

Question 82

Which two of the following statements regarding customer accounts are correct?

I. Margin account agreements must be signed before the first trade in the account.

II. Margin account agreements must be signed promptly after the first trade in the account.

III. The option account agreement must be returned by the client before the first trade in the account.

IV. The option account agreement must be returned by the client within 15 days of the account being approved.

A) II and IV
B) I and III
C) II and III
D) I and IV

Answer 82

A

Don’t ask why, but in both cases, trading can commence before the agreements are signed and returned. In the case of the margin account, promptly after the initial trade is the time and for the options account, within 15 days of account approval to engage in options trading.

LO 6.d

Question 83

Long Range Planning (LRP) is a federal covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fergus has retail clients as follows:

16 clients in State A.

12 clients in State B.

6 clients in State C.

4 clients in State D.

Fergus would have to register as an IAR in

A) States A and D.
B) States A and C.
C) States A, B, and C.
D) States B and C.

Answer 83

A

In the Investment Advisers Act of 1940, it states that “no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under Section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State.” Therefore, when employed by a federal covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state covered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).

LO 3.d

Question 84

Under the Uniform Securities Act, a person who owns a business providing advice on commodity futures contracts as well as limiting its securities advice to those issued or guaranteed by the U.S. government is

A) required to be a registered investment adviser representative in the state.

B) required to be a registered agent in the state.

C) not required to register as an investment adviser in the state.

D) required to be a registered investment adviser in the state.

Answer 84

C

This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of investment adviser a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser.

LO 3.a

Question 85

Under the Uniform Securities Act, the definition of sale includes

I. bona fide gifts of securities.

II. giving a security as a bonus with any purchase.

III. exercising a right to convert one security into another.

IV. preliminary agreements between issuers and underwriters.

A) II, III, and IV
B) II and III
C) I and II
D) III and IV

Answer 85

B

Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale.

LO 4.f