Unit 5

Question 1

An agent based in Alabama directs a solicitation to a customer who lives in Connecticut while the customer is temporarily in Indiana. The customer does not accept the offer until he arrives back in Connecticut. According to the Uniform Securities Act, the Administrators of which of the following states have jurisdiction?

Answer 1

All 3 sates.

The Administrator from any state from which an offer is made, directed, or accepted has jurisdiction over the offer.

Question 2

Administrators have no jurisdiction over the activities of federal covered investment advisers.

Answer 2

when a covered adviser pursues an activity in the Administrator’s state that violates the antifraud provisions of the Uniform Securities Act. In that case, the Administrator can take action against the covered adviser.

Question 3

The Uniform Securities Act invests the office of the Administrator with a number of powers
However, the act does not permit the Administrator to

Answer 3

A)
inspect offices of registered broker-dealers without prior notice
B)
issue an injunction when there is evidence of wrongdoing
C)
issue a cease and desist order without prior notice
D)
insist that specific forms be used to register securities

Question 4

Exclusions from the definitions of Sale/Sell and Offer/Offer to Sell

Answer 4

bona fide pledge or loan, gift of nonasessable stock, stock dividend, class vote, merger, claims, property interest

Question 5

As defined in the Uniform Securities Act, the term “offer to sell” would include

Answer 5

a gift of warrants
Even though a gift is not normally a sale or an offer to sell, when it is of a warrant, a right, or any convertible security, it is considered to be an offer to sell the underlying security.

Question 6

An applicant for registration as an IAR in this state was convicted 4 years ago of a nonfinancially related crime in another state. Under that state’s laws, the crime was a misdemeanor, but under this state’s laws, it is a felony. When viewing this IAR’s application, the Administrator will

Answer 6

treat the crime as a nonfinancial misdemeanor
B)
censure the investment adviser for even thinking of employing this individual
C)
treat the crime as any felony
D)
treat the crime as a nonfinancial felony

Even though the crime is a felony in the state where registration is being sought, the applicant’s record shows a misdemeanor and, therefore, this individual would not be subject to statutory disqualification.

Question 7

Investment adviser brochure rules

– Brochure is Form ADV Part 2A (describes the firm) and Supplement, Form ADV Part 2B (personnel).

Answer 7

Deliver annually
within 120 days after the end of fiscals year if there are changes
only the portion of changes

Question 8

Deliver the current brochure to a client or prospective

client before or at the time of entry into an investment advisory contract with that client.

Answer 8

– Delivered 48 hours before contract
or
at time of contract with five business days right to rescind without penalty (USA)

Question 9

Brochure include

Answer 9

Must include balance sheet 
if investment adviser requires substantial prepayment of fees 
<6 months or in advance
Federal IA $1,200 
USA IA $500 or custody (USA)

Question 10

legal action taken on IA

Answer 10

• Disclosure of material legal or disciplinary action within past 10 years, including fines of $2,500 or more

Question 11

Brochure exemptions

Answer 11

investment companies, inpersonal subscriptions under $500 (both Federal and USA)

Question 12

When it comes to advertising by investment advisers and their representatives, which of the following would be most likely to be acceptable to the Administrator?

Answer 12

A)
A “like” from a client on an investment adviser representative’s Facebook page post that announced the birth of her most recent child
B)
Showing past performance over the past 12 months of a group of securities selected from all of the adviser’s recommendations
C)
A “like” from a client on an investment adviser representative’s Facebook page with a comment on the wonderful service the client received
D)
Offering prospective clients a free 3-month trial to the investment adviser’s special investment formula that assures success
When showing past performance, an investment adviser cannot “cherry-pick” the ones it wishes to show—all recommendations of similar types of securities (all common stock, or all bonds) must be shown. No securities professional can ever assure investment success—that would be considered a performance guarantee.

Question 13

Which of the following would NASAA consider to be a substantial prepayment of fees?

Answer 13

A)
$1,000 covering the next month
 B)
$600 covering the next calendar quarter
 C)
$500 covering the next 6 months
 D)
$600 covering the entire contract year
D is a better answer than C

Question 14

Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except

Answer 14

A)
changes to the fee schedule must be announced in advance.
B)
it must be filed with the Administrator of the state in which the broker-dealer’s principal office is located.
C)
changes to the fee schedule may be shown on the firm’s website.
D)
it must be up-to-date.

There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees, the firm’s website is one of them.

Question 15

According to NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT

Answer 15

A)any record of securities industry violations by the investment adviser
B)
whether or not the contract grants discretionary authority
C)
that assignment of the contract cannot occur without client consent
D)
the amount of prepaid fee to be returned if the contract is terminated

An investment advisory contract is not required to disclose securities industry violations by the investment adviser.

Question 16

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

Answer 16

A)
as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers
B)
the schedule should be made available on the broker-dealer’s public website without requiring any login or password
C)
the schedule should be made available on the broker-dealer’s public website and should be password protected
D)
fee schedules should only be delivered by hand or postal mail to reduce cyber security threats

Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects

Question 17

Entanglement

Answer 17

term used to describe material posted to a securities professional’s social media site by a third party where the securities professional has taken part in the preparation of the material

Question 18

advertisements may not contain

Answer 18

(1) untrue statements of material fact;
(2) testimonials;
(3) references only to specific past recommendations;
(4) references to charts, tables, formulas, or other devices used to forecast securities prices without setting forth the difficulties or limitations in their use;
(5) offerings of free service without the intent or ability to perform; or
(6) guarantees of future performance.

Question 19

Form ADV

Answer 19

An officer or partner of the firm need not sign the disclosure brochure.

Question 20

agency cross transactions

Answer 20

The investment adviser handling an agency cross transaction may not recommend the transaction to both parties.
An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan.
An investment adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties.

Question 21

selling away

Answer 21

transactions that are not recorded on the books, not authorized in prior to execution

Question 22

ABC Advisers, Inc., a federal covered investment adviser is a wholly owned subsidiary of ABC Corporation, a holding company that also owns ABC Securities, a full-service broker-dealer that is a member of the New York Stock Exchange and FINRA. One of the clients of ABC Advisers calls his IAR to explain that he has just received a margin call in his ABC Securities account. Under these circumstances, it would NOT be prohibited for the IAR to use securities owned in the advisory account to obtain a loan for this client

Answer 22

because 2 firms are affiliated

In most cases, the only money lenders on the exam will be banks and broker-dealers. If an advisory client receives a margin call from activity in his brokerage account, securities owned in the advisory account may be used by the affiliated broker-dealer to meet the margin deficiency.

Question 23

An agent’s client calls on Monday to discuss the current market situation. They discuss how 100 shares of KAPCO common stock would be an appropriate addition to the client’s portfolio. On Thursday, the client calls and tells the agent to place an order for the KAPCO stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday’s low. In this case the agent acted

Answer 23

improperly; the order should have been placed on Thursday

In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day—those are considered “day” orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

Question 24

The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm’s clients is known as

Answer 24

blanket recommendations

When the same security is recommended to all or most of an IA’s clients, the regulators considered this to be an unethical practice known as “blanket recommendations” because the same security will almost never be suitable for everyone.

Question 25

A succession plan under a Business Continuity Plan would likely be most important for an investment adviser

Answer 25

organized as a sole proprietorship

When an investment adviser is organized as a sole proprietorship, frequently the only contact clients have is with that individual. The death or permanent disability of that individual could cause a host of legal problems, such as termination of the entity, cancellation of all powers of attorney, and termination of the advisory client. Without a succession plan in place, things could be very difficult for those clients.

Question 26

If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within

Answer 26

180 Days of the adviser’s fiscal year-end by filing Form ADV-W.

Question 27

Under the NSMIA, state securities Administrators retain authority to

Answer 27

enforcing antifraud provisions of state and federal securities laws

Question 28

As an IAR for a federal covered investment adviser, you are only required to register in those states in which you have a place of business

Answer 28

as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

Question 29

Which of the following are exempt securities under the Uniform Securities Act?

Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940
Preferred stock issued by an insurance company authorized to do business in this state
Municipal bonds issued by Toronto, Ontario
Private placements

Answer 29

Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.

Question 30

An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC.

Answer 30

In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement.

Question 31

Form PF must be filed by

Answer 31

private fund AUM reaches or exceeds the $150 million threshold

Question 32

Both state and federal law have record keeping requirements for broker-dealers. When it comes to email correspondence, the requirements are

Answer 32

Email correspondence is treated the same as written correspondence. The records must be kept for three years.