Unit 11 | Regulation of Broker-Dealers & Their Agents Flashcards
First Securities Corporation (FSC) is a broker-dealer registered in State A, the location of its only office. One of their agents contacts a client currently on vacation in State B and recommends the purchase of XYZ common stock. The client agrees and purchases 100 shares of XYZ. Neither the broker-dealer nor the agent is registered in State B. Is this a problem?
When a broker-dealer has no place of business in a state and deals with an existing client who is temporarily in that state, the USA does not define that entity as a broker-dealer in the state. Therefore, FSC would not be required to register in State B, and neither would any of its agents.
First Securities Corporation (FSC) is a broker-dealer registered in State A, the location of its only office. One of their agents contacts a client who is currently on vacation in State B and recommends the purchase of XYZ common stock. The client agrees and purchases 100 shares of XYZ. Neither the broker-dealer nor the agent is registered in State B. What if the client enjoys being in State B to the extent that it becomes his permanent residence?
Suppose the client becomes a resident of State B. Once that client’s residence has officially changed, the relationship can only continue for 30 days. After that, both FSC and the agent must register in State B to keep the client.
First Securities Corporation (FSC) is a broker-dealer registered in State A, the location of its principal office. They have begun doing business in State B with the First Fidelity Bank and Trust Company and opened a small branch office in State B to service the account. Which of the following statements is correct?
A. FSC does not need to register in State B because its only client is an institution.
B. FSC needs to register in State B because it has a place of business in the state.
C. Broker-dealers are only required to register in the state where their principal office is located.
D. FSC would have to register in State B even if it didn’t have a place of business there.
B. We learned that the USA excludes from the definition of broker-dealer a firm with no place of business in a state whose only clients are, among others, institutions, such as banks. That exclusion only applies when there is no place of business in the state; opening a small branch in State B voids that exclusion, so B is the correct answer. Even if there is no place of business in the state, if they have a single individual (called a retail client on the exam) who resides in the state, then registration is always required.
Under the Uniform Securities Act, a broker-dealer is defined as any person who
A. buys securities.
B. sells securities.
C. is in the business of effecting securities transactions for its account or for the accounts of others.
D. is registered with the SEC.
C | A broker-dealer is any person engaged in effecting securities transactions for the accounts of others (broker) or its account (dealer).
LO 11.a
A broker-dealer, having no place of business in the state, would be exempt from registration under the Uniform Securities Act if its only clients were
I. banks or other financial institutions.
II. investment companies.
III. accredited investors.
A. I and II
B. I and III
C. II and III
D. I, II, and III
A | Do not be misled by the term accredited investor. It has no meaning other than when referring to a private placement of securities under the Securities Act of 1933. This term will appear frequently on the exam out of context (i.e., unrelated to private placements). Whenever it does, you can make the question easier by replacing the term with the phrase “ordinary public investor who needs all of the protection available under the law.” As long as the broker-dealer has no place of business in the state, it is exempt from registration if its only clients are institutional investors such as banks, insurance companies, investment companies, other investment advisers, broker-dealers, $1 million or larger employee benefit plans, college endowment funds, and governmental units.
LO 11.b
Under the Uniform Securities Act, which would be considered an agent?
A. An individual employed by a small community bank to sell stock in the bank
B. A broker-dealer with a place of business in the state with an extensive retail clientele
C. An individual whose broker-dealer is registered in the state, but her only clients are institutions
D. An individual with no place of business in the state dealing with more than five existing clients who are vacationing in the state
C. Even though the individual’s only clients are institutions, the fact that her BD is registered in the state means she must also register. Yes, transactions with institutions are exempt transactions, but that exemption only applies to individuals selling on behalf of the issuer, not when representing a broker-dealer. Individuals selling the securities of certain exempt issuers (like a bank) are excluded from the definition, as are broker-dealers. If the individual has no place of business in the state and only deals with existing clients (regardless of the number) who are temporarily in the state, that individual is exempt from registration.
Which of the following persons is defined as an agent by the Uniform Securities Act?
A. A silent partner of a broker-dealer whose only relationship to the firm is a contribution of capital
B. The secretary of a branch office sales manager who is in charge of scheduling the manager’s interviews with new agents
C. A clerk at a broker-dealer who is authorized to take orders for stock but not bonds
D. The vice president of diversity training for a broker-dealer who is not authorized to solicit or transact securities business
C | Anyone who solicits or receives an order while representing a broker-dealer is an agent. Silent partners and administrative personnel are not agents under the terms of the USA if they do not solicit or receive orders. As long as the officer has no supervisory role or other active participation in the securities business of the broker-dealer, the USA does not consider this position to require registration as an agent. An example might be the vice president of human resources. Remember, broker-dealers are not agents; agents represent broker-dealers. If, however, any of these individuals were authorized to accept orders, registration as an agent would be required.
LO 11.c
Under the Uniform Securities Act, the term agent would include an individual who represents the issuer in effecting nonexempt transactions in
A. a city of Montreal general obligation bond.
B. common stock offered by a commercial bank.
C. a New Jersey Turnpike revenue bond.
D. commercial paper with a 19-month maturity.
D | As long as the individual represents the issuer in a transaction involving specified, exempt securities, such as those issued by the government or banks, he is not included in the agent definition, even when the transaction is nonexempt. On the other hand, when the securities themselves are nonexempt, and the transactions are nonexempt, the individual is defined as an agent. And, yes, you may see this many negatives in a single question. Notice that a 19-month commercial paper is not an exempt security (over nine months), but the other choices are.
LO 11.d
The City of Chicago issues bonds for the maintenance of local recreational facilities. Purchasers have two choices: purchase the bonds directly from the city through Ms. Stith (an employee of the municipality responsible for selling the bonds), or they can purchase them from Mr. Thompson (an employee of First Allied Securities Corporation). Neither Ms. Stith nor Mr. Thompson charges a commission, although the city remunerates FASC with an underwriting fee. It would be correct to state that
A. Ms. Stith and Mr. Thompson must be registered as agents.
B. Ms. Stith must be registered as an agent, but Mr. Thompson is excluded.
C. Mr. Thompson must be registered as an agent, but Ms. Stith is excluded.
D. Mr. Thompson and Ms. Stith are excluded from the definition of agent.
C. Any individual selling securities while representing a registered broker-dealer is always defined as an agent, even when the securities are exempt from registration (as are these municipal bonds). When an individual represents the issuer of particular exempt securities, such as municipal bonds, that individual is excluded from the definition of agent and does not register. This stipulation means the correct answer is C. It is important to remember the five categories of exempt issuers to which this exclusion applies.
Under the Uniform Securities Act, which of the following statements regarding registering a successor firm is true?
A. The appropriate filing fee must be included with the application.
B. The successor firm must be in existence before the filing of the application.
C. The registration of the successor firm will be effective until the December 31 renewal date without payment of a registration fee.
D. All of the above
C | No filing fee is necessary, nor is it required that the successor firm even exist at the time of filing. The registration is effective for the unexpired portion of the year and then must be renewed (with a renewal fee) each December 31.
LO 11.e
When an agent’s permanent residence address changes, updates must be made to the information on file with the regulatory bodies. The proper procedure is to file
A. a Form U4 within 30 days.
B. a Form U4 within 45 days.
C. a Form U5 within 30 days.
D. a Form U5 within 45 days.
A | Form U4 is most commonly used when registering as an agent of a broker-dealer. Changes to material information, such as one’s home address or a bankruptcy filing, are accomplished by filing an amended Form U4 within 30 days. Form US is used for terminations or withdrawals.
LO 11.f
