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66 Cards in this Set

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According to the Uniform Securities Act, if an employee of an issuer is soliciting employees of that issuer for the purpose of selling securities, which of the following statements is TRUE?


1. The employee could receive commissions without being registered as an agent
2. The employee would never be considered an agent of the issuer
3. The employee would be considered an agent if she received commissions or other remuneration
4. If the employee was an officer or director of the issuer, she could receive commissions and would not be considered an agent

3.


Generally, an employee of an issuer soliciting employees of that issuer for the purpose of selling securities would be considered an agent of the issuer if the employee received commissions or other remuneration (such as a bonus based on securities sales). According to the USA, these transactions are not exempt if the employee receives a commission.

IA Incorporated is an investment adviser. BD Securities is a brokerage firm with offices down the hall. IA Incorporated and BD Securities have an agreement under which IA directs brokerage transactions to BD and receives a 15% rebate on the commissions that BD charges. This arrangement is:

1. A conflict of interest and an unethical business practice
2. Acceptable, provided BD is also registered as an investment adviser
3. Acceptable, provided IA discloses the arrangement to its clients in writing
4. Acceptable, provided the arrangement is in writing and filed with the Administrator
5.

3.


The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that an investment adviser must disclose all conflicts of interests in writing to clients. These conflicts include the scenario described in this question where the investment adviser (or any of its employees) is receiving compensation (a rebate) for the execution of client transactions.

Which of the following choices would be considered an investment adviser?

1. A banker recommending certificates of deposit to her retail clients
2. A lawyer who offers advice on estate planning
3. An engineer who provides advice for a municipality regarding feasibility studies
4. A teacher who works part-time as a financial planner

4.


Any person engaged in the business of advising others as to the value of securities, for compensation, would be considered an investment adviser and generally would be required to be registered. In this case, the teacher works part-time. The implication of someone working is that he is being compensated for his activities. The other choices are excluded from the definition of an investment adviser. (89558)

Which of the following persons must be registered as an agent under the Uniform Securities Act?

1. A sales assistant authorized to take orders from clients
2. A clerk giving nominal quotes
3. An individual selling securities on behalf of an issuer to the issuer's employees and who is not earning a commission
4. All of the above
5.

1.


The key to this question is the capacity in which an individual is acting. A clerk giving quotes, or an individual selling securities to the issuers' employees and not receiving commissions, is not acting as an agent according to the Uniform Securities Act. A sales assistant taking orders from clients is considered to be acting as an agent and all agents must be registered. (75438)

Sue Whitman is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive Vice President. Under the Uniform Securities Act, Mrs. Whitman is:

1. An agent since all officers of a securities firm are considered agents
2. Not considered an agent since she is not involved in sales or trading
3. Considered an agent but would not need to pass a qualifying exam
4. Not considered an agent but could accept unsolicited orders

2.


Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it depends on their particular job functions. Persons who are involved in ministerial/clerical actions only—in other words, who have no involvement in sales or trading activities—are not agents of a broker-dealer. The Comptroller's Office would not have any involvement in sales-related activities of a firm. (89501)

Which of the following choices is considered a securities offering?

1. An investor receives more shares due to a stock split
2. An investor receives a stock dividend
3. An investor purchased bonds and receives a warrant as a bonus
4. An investor receives a tender offer
5.

3.


According to the Uniform Securities Act, the security that the investor received as a bonus would be considered a stock offering. The Act specifically states that a stock dividend, or shares received due to a corporate action is never considered an offer or offer to sell a security. A tender offer is an offer to buy a security from existing shareholders. (89583)

A client buys unregistered securities at the suggestion of an agent. The agent has the client sign a waiver as to the noncompliance of the transaction with law, absolving the agent of any wrongdoing. The waiver the client signed is:

1. Acceptable
2. Acceptable with the Administrator's approval
3. Null and void
4. Subject to civil liability and criminal penalty
5.

3.


Clients may not sign waivers absolving agents from wrongdoing. Such statements are sometimes called exculpatory clauses. These waivers would be null and void under the Uniform Securities Act. (75644)

A licensed insurance agent and an investment adviser have offices next door to each other. The insurance agent refers clients to the investment adviser, who pays the agent a referral fee plus a percentage of the management fee for each client who opens an account with the adviser. The insurance agent:

1. Is exempt from registration
2. May be required to register as an investment adviser representative
3. Would be considered a captive agent
4. Would need to disclose the arrangement on Form ADV

2.


Under the Uniform Securities Act, an investment adviser representative includes anyone who "solicits, offers, or negotiates for the sale of or sells investment advisory services." Therefore, the states often require solicitors to register. Note that some states, however, have special registration provisions for solicitors. The adviser, not the insurance agent, would need to disclose this arrangement on Form ADV, which is the reason that choice (d) is not the correct answer. (75676)

Persons who violate federal insider trading regulations are subject to all of the following penalties, EXCEPT:

1. Treble damages
2. Prison terms
3. Civil lawsuits by traders
4. FINRA fines

4.


Insider traders face SEC civil penalties of up to three times the amount gained or loss avoided (treble damages). Criminal penalties for individuals can be as much as a $5,000,000 fine and 20 years in prison. In addition, private individuals who believe their investments were harmed by the actions of an insider trader may file a civil lawsuit to recover damages. However, FINRA fines may be assessed only against FINRA members and their associated persons. FINRA has jurisdiction only over members while anyone can be held civilly or criminally liable for insider trading. FINRA may not take action against someone who is not a FINRA member. (89502)

Under the Uniform Securities Act, which of the following statements is NOT TRUE concerning the state registration of an agent?

1. An agent may only sell securities that have been properly registered in a state or qualify for an exemption from registration
2. An agent's registration to sell securities in a given state expires at the end of the broker-dealer's fiscal year
3. An agent may only solicit business in a state if both the agent and broker-dealer are registered in that state
4. If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change

2.


The licenses of all agent, broker-dealer, investment adviser, and investment adviser representatives expire on December 31 each year and must be renewed in order to be effective. Renewal is accomplished by the payment of a filing fee. (62046)

A broker-dealer may need to file all of the following material with the Administrator, EXCEPT:

1. The prospectus for an oil and gas limited partnership
2. The marketing materials for a new issue of municipal bonds
3. The sales literature for an issue that will be sold within the Administrator's state only
4. A form letter distributed to an adviser's current clients explaining the benefits of a variable annuity

2.


Generally, the Administrator may require the filing of "any prospectus, pamphlet, circular, form letter, advertisement or other sales literature or advertising communication" intended for distribution to investors or prospective investors. However, the Administrator may not require that sales materials related to exempt securities, exempt transactions, or federal covered securities be filed. Municipal securities, choice (b), are exempt securities.

Which of the following actions by an agent of a broker-dealer is considered an unethical business practice?

1. Soliciting a client to sell a specific security while simultaneously recommending to another client to buy the same security
2. Accepting an unsolicited trade for an unregistered, nonexempt security
3. Placing a discretionary order in a margin account
4. Selling shares in a friend s business outside the agent s normal course of employment

4.


It is considered an unethical business practice for an agent of a broker-dealer to effect transactions in securities and not record them on the books of the broker-dealer. While choice (d) doesn't clearly state that the agent is failing to notify the broker-dealer, it can be inferred from the phrase "outside the agent's normal course of employment." The other choices represent honest and ethical activities that agents of a broker-dealer should take regarding transactions by their clients.

Which of the following persons is NOT excluded from the definition of a broker-dealer under the Uniform Securities Act?

1. A bank
2. An agent
3. An investment adviser
4. An issuer

3.


This is an example of a question that must be read very carefully. When you are asked "Who is NOT excluded?" you are essentially being asked, "Which one of these might be considered a broker-dealer?" ("Not excluded" means "Which ONE of the following".)

Prior felony convictions must be disclosed on Form U4 if the conviction occurred:

1. Within the last two years
2. Within the last five years
3. Within the last 10 years
4. At any time

4.


This question is an example of a "hair splitter" that sometimes occurs on the real exam. The fine point of the question is whether you must disclose something versus whether or not that situation would affect your employment. Agents are required to disclose all felony charges or convictions on Form U4 regardless of when they occurred. There is no time frame. If an applicant had a felony conviction 20 years ago, it must be disclosed.


On the other hand, an agent will be statutorily disqualified if the conviction was within the last 10 years. The agent may be registered if she requests and receives permission at a special hearing. The Administrator may reject the application of anyone convicted of a felony regardless of when it occurred if the Administrator shows it is in the public interest to do so.


As a follow-up point, applicants must also disclose all securities-related misdemeanors, charges or convictions, regardless of when they occurred.

All of the following people are agents, EXCEPT:

1. A representative of a broker-dealer effecting transactions with employees of an issuer
2. A clerk taking telephone quotes
3. A secretary authorized to accept orders from clients
4. A salesperson of a broker-dealer effecting transactions in exempt securities

2.


A clerk taking quotes over the telephone would not be considered an agent, since such a person is acting in a clerical or ministerial capacity, not a sales capacity. Representatives of broker-dealers taking orders or effecting transactions are considered agents, even if the securities are exempt.

An agent recommends that a client purchase a particular security. The agent believes the client has the resources to pay for the transaction. Three days after the trade is executed the client indicates that he cannot meet his financial obligation to the brokerage firm. If the agent lends personal funds to the client:

1. The agent will be committing fraud
2. The agent will be acting in an unethical manner
3. The client forgoes a right to be offered a letter of rescission
4. The client must pay a statutory rate of interest
5.

2.


This is unethical behavior, not fraud. An agent should not borrow or lend funds to a client.

A client has a $5,000,000 account with an objective of income only. Under the Uniform Securities Act, an agent who has discretionary authorization for the account could:

1. Not buy a speculative stock without the client's approval
2. Speculate with 5% of the client's assets
3. Speculate with any amount that could be reasonably justified
4. Not purchase equities in the account

1.


Regardless of the account size, any amount of speculative investing would be inappropriate in an account with an objective of income only.

Which of the following choices would be considered an offer or offer to sell under the Uniform Securities Act?

1. A group of creditors receives stock in a bankrupt company as part of a court-approved reorganization plan
2. A corporation's current shareholders receive the right to purchase additional shares at a predetermined price
3. A corporation's current shareholders receive stock instead of a cash dividend
4. A used car dealer offers a free savings bond with every car

2.


Choice (b) describes an offering of stock rights, which is defined as an offer or offer to sell under the USA. Choice (c) describes a stock dividend, which is not considered an offer or offer to sell under the USA. Choice (a) refers to a situation in which the issuer is bankrupt and the creditors receive stock as part of the reorganization plan. Any securities received as a result of a reorganization plan approved by the bankruptcy courts are not part of an offer or offer to sell. (75494)

Which of the following investors are considered accredited under Regulation D of the Securities Act of 1933?

1. A portfolio manager at a mutual fund company
2. Banks
3. Any senior officer of a publicly traded company
4. Individuals with a net worth of $1 million or more
5. I and II only
6. II and IV only
7. III only
8. I, III, and IV only

2.


Regulation D is a federal regulation, but still required knowledge for the exam. Institutions, such as banks, are specified in the regulation. A person who meets the financial test of either annual income of $200,000, or a net worth of $1 million, is also considered accredited. While it is possible that a portfolio manager or a senior officer would be accredited in real life, no single professional is specified in the definition of an accredited investor. Senior officers are included only if they are senior officers of the issuer of the Regulation D offering. Just being a senior officer of any institution is not enough to be included in the definition.

Under the Uniform Securities Act, all of the following choices describe an investment adviser representative, EXCEPT:

1. A person who makes recommendations or gives advice regarding securities
2. A person who negotiates the sale of investment advisory services
3. A person acting in a ministerial capacity who speaks with clients of the firm
4. A person who conducts wealth planning seminars for an investment adviser

3.


Clerical personnel, i.e., people acting in a ministerial capacity, do not meet the definition of an investment adviser representative. The other three choices are all covered under the USA's definition of an investment adviser representative.

An order ticket must include all of the following information, EXCEPT:

1. The account for which the order was entered
2. The price and time at which it was executed
3. The time of entry
4. Authorization of a registered principal

4.


An order ticket must include the client's account number, the time and price at which the order was executed (to the extent feasible), and the time the order was entered. A registered principal is not required to approve all orders before they are executed but is required to review all orders afterward. (

An agent selling investment products on the premises of a bank should:

1. Disclose all relevant FDIC information
2. Explain that SIPC covers both banking and investment products
3. Collect signed waivers of compliance from clients
4. Explain that banking products are insured by the Federal Reserve Bank

1.


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. Keep in mind that SIPC is not insurance in the same fashion that FDIC coverage is. SIPC protects investors if a broker-dealer goes bankrupt, not against principal loss. In either case, SIPC does not apply to banks. Bank products are guaranteed by the U.S. Treasury, not the Federal Reserve Bank.

Under the Uniform Securities Act, which of the following persons engaged in the business of advising others regarding securities investments is NOT excluded from the definition of an investment adviser?

1. A bank, savings institution, or trust company
2. A licensed broker-dealer whose advice is incidental to its business
3. A person whose advice relates only to exempt securities
4. None of the above
5.

3.


This is an example of a question that must be read very carefully. When you are asked "Who is NOT excluded?" you are essentially being asked, "Which one of these might be considered an investment adviser?" ("Not excluded" means "Which ONE of the following".)


The Uniform Securities Act does not provide an exclusion for persons whose advice relates only to exempt securities. They are still covered under the definition of an investment adviser.


Persons (entities) who are banks, savings institutions, or trust companies are not considered investment advisers and, consequently, do not need to register as investment advisers. Broker-dealers whose investment advisory services are incidental to their normal course of business, and who receive no special compensation for the advice, are exempt from registration as investment advisers.

Under the Uniform Securities Act, which of the following issuers must file a registration statement with the state Administrator?

1. Corporations with stock listed on the Toronto Stock Exchange
2. Federal Savings and Loan Associations
3. Federal credit unions
4. For-profit corporations
5. I and IV only
6. II and III only
7. I, II, and III only
8. IV only
9.

4.


Choices (II) and (III) are exempt issuers and would not be required to file a registration statement. Nonexempt securities would be subject to this rule. Stock listed on most foreign exchanges must be registered, but there is an exemption for stock listed on the Toronto Stock Exchange, choice (I), and TSX Venture Exchange. Stock issued by for-profit companies would need to be registered.

An investment adviser is in charge of managing the assets of a large charitable trust. The income generated by the portfolio is used to support schools for disadvantaged children. Given the nature of the trust and the Uniform Prudent Investor Act (UPIA), which of the following investments should the adviser NOT recommend for the trust's portfolio?

1. Dividend-paying stocks
2. Tax-exempt municipal securities
3. Corporate bonds
4. U.S. government bonds

2.


One of the main reasons for purchasing municipal securities is that they generate tax-exempt income. The trade-off for investors is that municipal securities usually have lower yields. Charities and nonprofit organizations do not pay income taxes. Their income is already tax-exempt. Therefore, the trust would get lower yields without corresponding tax benefits if it purchased tax-exempt municipal securities.

A married couple in their early forties with no children has decided it is time to start thinking about retirement. Which of the following portfolio allocations would you recommend for them?

1. 100% equity securities
2. 25% fixed-income and 75% equity securities
3. 80% fixed-income, 10% equities, and 10% money-market securities
4. 50% fixed-income, 10% equity securities, and 40% in foreign securities

2.


This couple is in their early forties. Presumably, they have about 20 years before retirement. Their primary investment objective should be growth. Equity securities meet this need as they have shown more potential for growth than fixed-income securities. Therefore, a greater percentage of the assets should be invested in equities. Concentrating a portfolio in foreign securities is not a good idea.


Diversification is also important. If the portfolio of investments is too heavily weighted in equities, as in choice (a), the client takes unnecessary risk. The best choice would be to diversify the client's portfolio and allocate their investments in equities and fixed-income investments, which is the case in choice (b).

Peggy is an agent at a broker-dealer. She also spends several days every month conducting business on the premises of a retail bank. According to the NASAA Model Rules for Sales of Securities at Financial Institutions, what precautions must be in place for Peggy to continue to do business at a bank branch?

1. Peggy's work areas should be segregated from the areas where retail deposits are taken whenever possible
2. The bank must apply for, and be granted, special limited registration from the state securities Administrator
3. Disclosures that securities products are not SIPC-insured must be prominently displayed in the branch
4. There are no special provisions for employees of broker-dealers who sell securities in bank branch offices

1.


According to the NASAA Model Rules for Sales of Securities at Financial Institutions (banks, savings and loans, or credit unions), the activities of broker-dealers and their agents should be physically segregated from the areas where retail banking business is handled whenever possible. A broker-dealer that opens a securities account at a bank must disclose that securities products are not FDIC-insured. The disclosure that securities products are not FDIC-insured must also be on all account statements and confirmations.

An investment adviser representative is managing a portfolio for a client on a discretionary basis. The client's objective is conservative growth. According to prudent investor standards, which of the following statements is TRUE about including options in such a portfolio?

1. Options are never appropriate in a conservative portfolio
2. Options are appropriate only if the investor has previous personal experience investing in options
3. Certain types of options strategies may be appropriate as part of a conservative portfolio
4. Options strategies are appropriate for conservative portfolios as long as they are profitable
5.

3.


Prudent investor standards are applied to the client's total portfolio, not on an investment-by-investment basis. Rather than restricting individual investments, anything might be appropriate as part of a portfolio if the investment helps the portfolio achieve specific aims. For example, writing covered calls could be part of a conservative growth portfolio.

A client requests that her agent display a quote in a thinly traded security. The client is the majority shareholder in this security and the broker-dealer honors the request and displays the quote. Which of the following statements is TRUE?

1. This would be permissible if the broker-dealer believed the quote was bona fide
2. This would be considered an unethical business practice
3. A broker-dealer may always enter a quote on behalf of a client
4. A broker-dealer is not permitted to enter quotes on behalf of its clients

1.


A broker-dealer is permitted to publish quotes (bid and ask prices) on behalf of its clients or for its own account. The broker-dealer must believe the quotes are bona fide and not intended to manipulate the market price of a security. If the quotes are not bona fide and the broker-dealer publishes them, it would have committed an unethical business practice.

According to the Uniform Securities Act, an Administrator is NOT allowed to demand that broker-dealers do which of the following?

1. Approve their advertising prior to use
2. Ensure that their advertising is maintained and available for inspection
3. File their advertising related to federal covered securities with their state Administrator prior to use
4. Review their advertising for accuracy prior to use

3.


According to the Uniform Securities Act, all advertising used by a broker-dealer must be supervised and checked for errors. They are also required to keep a file that is subject to audit by the Administrator. However, the Administrator does not regulate advertising that addresses only federal covered securities.

Mark W. is an agent of Broker-Dealer X. Unknown to his firm, Mark spends his evenings trading the stock of a small, unlisted company through Internet bulletin boards. He dominates and controls the trading in this stock. Under the Uniform Securities Act, which of the following statements is TRUE of Mark's activities?

1. Blue-Sky laws do not apply to activities on the Internet
2. Mark W. may have to register as a broker-dealer
3. The clients of Mark W. would not be able to use a letter of rescission
4. There is no real violation unless a client has lost money and complained

2.


Mark W. appears to be in the business of effecting transactions in securities for others and for his own account, and may need to register as a broker-dealer in those states in which he is doing business. The fact that he is using the Internet does not provide an exemption.

Which of the following statements is NOT TRUE regarding licensing and registration standards for broker-dealers?

1. The Administrator may require that a broker-dealer have a minimum net capital as a condition of registration
2. A broker-dealer must notify the SEC that it intends doing business in a state before it can transact any business
3. The Administrator may require registered broker-dealers to post bonds and may determine their conditions
4. The Administrator may provide for a qualification examination, which may be written, oral, or both

2.


Licensing and registration standards for broker-dealers do not include SEC notification of intent to transact business in a particular state. All of the other choices are correct

Which of the following actions are dishonest and unethical practices if committed by an agent or investment adviser representative?

1. Telling clients that exchange listing of a security is anticipated, without knowledge of the truth of such a statement
2. Providing inaccurate market quotations, such as a bond is yielding 10% when it really is yielding 1%
3. Failing to inform a client of larger-than-ordinary commissions on a transaction
4. Compensating an investment adviser on the basis of a share of capital gains
5. I and II only
6. I, II, and III only
7. II, III, and IV only
8. I, II, III, and IV
9.

4.


All of the items listed are considered dishonest and unethical. (

According to the Uniform Securities Act, which of the following entities or individuals must register as a broker-dealer in State A?

1. The trust department of a bank located in State A
2. A financial planner located in State A
3. A broker-dealer located in State B, that occasionally effects transactions for clients vacationing in State A
4. A company incorporated in State A that processes transactions for other financial institutions
5.

4.


An entity that effects securities transactions for its own account or the accounts of others is defined as a broker-dealer. Incorporating in a state means a firm agrees to abide by that state's laws and is domiciled in that state.


Although choice (c) is a broker-dealer in State B, it does not need to register in State A since it is doing business only with existing customers who are in State A temporarily. Choice (b) would probably need to register as an investment adviser. Trust departments of banks, choice (a), are excluded from the definition of a broker-dealer under the USA.

The Securities Administrator of the State of Alaska had declared the registration statement of Ketchikan Solar Power Company effective. What part of its registration statement may the issuer change by amendment without being required to file a new registration statement with the state?

1. The reallowance paid to the selling group
2. The underwriting discount
3. The price of the securities
4. The number of shares

4.


Under the Uniform Securities Act, an issuer may amend its registration statement after it becomes effective to change the number of shares in the offering. The issuer does not need to file a new registration statement to effect this change. The issuer may not amend its registration statement to reflect a change in the price of the securities, choice (c), or in the compensation that the underwriters or the selling group will receive, choices (b) and (a). (89508)

Which of the following entities are defined as persons according to the Uniform Securities Act?

1. A partnership
2. A government entity
3. An unincorporated organization
4. All of the above

4.


Under the USA, the term person includes legal entities, such as corporations, partnerships, associations trusts, unincorporated organizations, and government bodies and their political subdivisions

An agent handling a client's account may share in the profits or losses as long as all of the following conditions are met, EXCEPT:

1. The client has approved of it in writing
2. The broker-dealer employing the agent has approved it
3. The client and agent have a mutual agreement as to the proportion of profits and losses the agent will share
4. The agent may only share in direct proportion to the amount the agent has contributed to the client's account
5.

3.


An agent is permitted to share in the profits or losses of a client's account if the client has approved of the arrangement in writing (joint account papers must be signed), the broker-dealer employing the agent has approved of the arrangement in writing, and the gains and losses shared are in direct proportion to the funds contributed.

Under the Uniform Securities Act, which of the following issuers are NOT required to file a registration statement with the state Administrator?

1. Companies with stock quoted on the Over-The-Counter Bulletin Board (OTCBB)
2. Federal savings and loan associations
3. Registered investment companies
4. Companies registered with the Securities and Exchange Commission (SEC)
5. II and III only
6. I and IV only
7. II, III, and IV only
8. I, II, III, and IV
9.

1.


Choice (II) is an exempt issuer and would not be required to file a registration statement. Choice (III) is an issuer of federal covered securities and would not be required to file a registration statement. It may, however, need to notice-file with the Administrator. Notice filing applies to certain federal covered securities. The notice filing includes the Consent to Service of Process, payment of a filing fee, and may include copies of material filed with the SEC as part the issuer's federal registration. This is NOT considered a registration.


With regards to choices (I) and (IV), companies that register with the SEC may still be required to file a registration statement with the Administrator for—example, securities that are quoted on the Over-The-Counter Bulletin Board (OTCBB). (89577)

A state securities administrator has decided that a broker-dealer is in danger of becoming insolvent. The Administrator orders the broker-dealer to maintain a minimum net capital of 200% of the federal minimum. How would this be viewed under NSMIA?

1. State Administrators are not allowed to set net capital requirements for broker-dealers
2. State Administrators are not allowed to impose requirements that are more stringent than SEC regulations
3. State Administrators are free to set whatever requirements they feel are necessary to maintain fair and equitable markets within their own state
4. The broker-dealer must first be offered a hearing on the matter
5.

2.


Under NSMIA, state securities Administrators are not allowed to impose requirements that are more stringent than SEC regulations.

All of the following documents may need to be filed with the Administrator, EXCEPT:

1. A prospectus for a limited partnership
2. A pamphlet for an oil and gas program
3. A brochure for a mining company
4. An offering circular for an endowment policy

4.


The Administrator may require the filing of sales and advertising literature for securities investments. Limited partnerships, oil and gas programs, and mining companies issue securities. Endowment policies are insurance products, not securities.

Which of the following practices is an agent prohibited from engaging in?

1. Stating facts relating to material insider information to a client
2. Stating facts relating to material in a final prospectus to a client
3. Stating facts relating to a firm's current financial statements to a client
4. Stating facts relating to a market letter published by a firm to a client

1.


An agent is prohibited from disclosing material insider information to anyone except an immediate supervisor.

According to the Uniform Securities Act, a security is said to be guaranteed as to:

1. Prevention of investment loss
2. Interest
3. Dividends
4. Principal
5. I only
6. I and IV only
7. II and IV only
8. II, III, and IV only
9.

4.


Under the Uniform Securities Act, by definition, the term guaranteedrefers to a security for which payment of dividends, interest, and principal are guaranteed. For example, the U.S. Treasury guarantees the interest on the bonds it issues. A utility can also guarantee payments of dividends on its securities, though, of course, if the utility goes bankrupt, the guarantee does not mean much. This is a definitional term only. Do not confuse this with guaranteeing a customer profits or something similar.

According to the Uniform Securities Act, is an agent of a broker-dealer required to provide its clients with disclosure of a material public fact about an issuer?

1. No, since the fact has already been made public and is in the news
2. No, since the agent's broker-dealer must check the fact first and preapprove any disclosure
3. Yes, firms must provide clients with a written disclosure of all facts for decision-making purposes
4. Yes, if the agent's other comments to the customer could be considered misleading without the additional public information

4.


Material facts are the facts that investors need in order to make informed investment decisions. Agents should make a good faith effort to fully and fairly disclose all material facts during sales presentations. While it may not be possible to disclose every fact, omitting a material fact in order to make an investment appear more attractive is a violation.

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?

1. Increase its net worth by another $50,000
2. Increase its net worth to $150,000 to cover both states
3. Leave its current net worth as is
4. Post a $50,000 bond to cover the additional requirement in Maryland

3.


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 statements about a cease-and-desist order is NOT TRUE?

1. It is issued when or before a violation has occurred
2. It must have been issued by the SEC
3. It must have been authorized by the Administrator
4. It may be issued against anyone who is engaging in activities prohibited by the Uniform Securities Act
5.

2.


Administrators will authorize a cease-and-desist order if they believe a violation of the Act is about to occur or if the Act has already been violated. The order does not need to come from the SEC.

Jeff White and Mary Johnson have formed a corporation to start a new broker-dealer. They are the sole shareholders. Which of the following grounds could the Administrator use as a basis for denying their application?

1. Jeff's liabilities currently exceed his assets and he is having trouble paying his bills
2. Three years ago, Mary's agent registration was suspended for two weeks
3. Eight years ago, Jeff pled guilty to one felony count of tax evasion
4. Neither Jeff nor Mary has previous experience in operating a broker-dealer
5. III only
6. I and III only
7. I, II, and III only
8. I, II, and IV only
9.

1.


When an application is made for a broker-dealer registration, the application may be denied based on the history and condition of the applicant (the broker-dealer) or its controlling persons (Jeff and Mary), officers, or directors. The fact that Jeff was convicted of a felony within the last 10 years could result in denial of their application.


If the applicant is currently subject to a suspension, the application could be denied. However, Mary's suspension has ended. Insolvency could also be used as grounds for denial, but the Administrator must find that the broker-dealer is insolvent, not an individual controlling person. Lack of experience alone cannot be used as grounds for denial

Which of the following choices would fall under the definition of an agent?

1. A trust company, bank, or any savings institution
2. A sales assistant authorized to accept client orders
3. Any person other than a broker-dealer who acts on behalf of a broker-dealer or issuer in effecting sales or purchases of securities
4. II only
5. III only
6. II and III only
7. I, II, and III

3.


Anyone transacting securities business (i.e., accepting orders) on behalf of a broker-dealer or issuer is generally considered an agent. This would include sales assistants who take client orders, as well as registered representatives.

An applicant for registration as an investment adviser indicates that the firm will base its investment decisions on psychic readings and other nonfinancial criteria. According to the Uniform Securities Act:

1. The Administrator may deny/postpone registration only for those reasons specified in the law
2. The Administrator may act in the public interest and deny registration
3. The Administrator must review the track record of the applicant to ascertain the feasibility of such criteria for investing
4. The Administrator should encourage alternative methods of analysis and grant registration if there is a reasonable basis for this methodology

1.


The state Administrator must cite reasons found in state law to disqualify a person from registration (e.g., a felony conviction, violation of commodities laws, misleading statements, etc.). The Administrator may deny registration if it is in the public interest AND if any provision of the USA has been or will be violated. While basing investment decisions on psychic readings may be a debatable proposition, the law does not say anything about methods of analysis for advisers, except that it is a disclosure item. Looking at it another way, the Administrator does not want to be in the role of determining which methods of analysis are better than others.

An investor has been saving for her two children's college education using mutual funds in a taxable account. Her investment profile indicates that she is in a high tax bracket. The oldest child will be starting college in the fall. The younger one will be beginning college in three years. Which of the following allocations would you recommend for the investor's assets?


1. 50% in stock funds, 50% in bond funds
2. 30% in an S&P 500 Index fund, 60% in municipal and corporate bond funds, and 10% in a money-market fund
3. 25% in municipal bond funds, 25% in an S&P 500 Index fund, and 50% in money-market funds
4. 80% in long-term bond funds and 20% in money-market funds
5.

3.


As a child approaches college age, a suitable investment strategy is to rebalance. Typically, the portfolio should hold fewer growth-oriented securities, such as equities, and should increase income-oriented securities, such as bonds and money-market funds. Once a child begins to attend college, most of the funds should be invested in money-market funds or other types of short-term investments that are liquid with very little risk of declining in value. Municipal bonds are appropriate for this investor since she is in a high tax bracket and the funds are being held in a taxable account.

A broker-dealer is opening securities accounts for retail customers at a bank branch. According to the NASAA Model Rules for Sales of Securities at Financial Institutions, what must the broker-dealer's agents do as part of the account opening process?


1. Verify that the client is a qualified investor
2. Provide the client with a written copy of the networking arrangement between the broker-dealer and the bank
3. Make a reasonable attempt to obtain a written acknowledgement from the client that he has received the disclosures required under this rule
4. Notify the client of the address and telephone number of the state securities Administrator where he can lodge complaints
5.

3.


The NASAA Model Rules for Sales of Securities at Financial Institutions state that a broker-dealer must make a reasonable attempt to obtain a written acknowledgement from a customers that he has received the disclosures required under these rules. Under NASAA rules, a client who opens a brokerage account at a bank must be informed both orally and in writing, that securities:


* Are NOT insured by the FDIC (Federal Deposit Insurance Corporation)
* Are NOT the same as bank deposits or obligations and are not guaranteed by the bank
* Have risks—the investor may lose her principal


A networking arrangement means a contractual or other arrangement between a broker-dealer and a financial institution pursuant to which the broker-dealer conducts broker-dealer services on the premises of the financial institution where retail deposits are taken. A copy of this document does not need to be provided to clients. There is no requirement that a client be verified as a qualified investor. There are no qualifications to be an investor. An agent may notify the client of the address and telephone number of the state securities Administrator where the client can lodge complaints, but it is not a requirement.



Which of the following activities would NOT meet the definition of an exempt transaction under the Uniform Securities Act?

1. An issuer distributes shares in an IPO to the lead underwriter

3.


This is another example of a question where the entire point hinges on the word "NOT". This is typical of regulatory examinations so it is important to understand what the question is asking. In this situation, you are supposed to recognize which of the following items is not defined as an exempt transaction. This means three of them are exempt. If you can identify which ones are exempt, then you can narrow down the correct answer by process of elimination.


In choice (c), the sales appear to have been solicited and there is no indication that the partnership qualifies for any other exemption. As an aside, you may be required to know that nonissuer transactions in certain Canadian securities are exempt, but the securities must be
(1) issued by an entity that files reports with the Canadian regulators and be (2) listed on the Toronto Stock Exchange.


Choice (b) is exempt because the sale is unsolicited. Transactions by a trustee as part of bankruptcy proceedings are exempt, choice (a), as is a transaction between an issuer and an underwriter, choice (d). (89517)







An adviser who is instructed by an existing customer to limit losses in the customer's account should:

1. Do none of the above

4.


All of these actions would be considered inappropriate, given the parameters in the question. (75731)



A Canadian broker-dealer has many clients who vacation frequently in the United States. In order to continue doing business with these customers while they are in the United States, the broker-dealer must file all the following material with the Administrator, EXCEPT:

1. Proof of membership in a self-regulatory organization

2.


A Canadian broker-dealer may continue to do business with any clients in the United States with whom it has a bona fide preexisting relationship and who are here temporarily—not permanent residents of the United States. According to the Uniform Securities Act, the broker-dealer must be registered properly in Canada and must file the following documents with the Administrator: a Consent to Service of Process, a copy of the registration document filed with its Canadian regulator at the provincial level, and proof that it is regulated by a self-regulatory entity, such as an exchange.


The Canadian broker-dealer may act only in a limited capacity in the states. Generally, it must restrict its activities to existing clients temporarily in the state and to certain institutions. (75458)



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:

1. Unethical according to NASAA

2.


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. (89518)




A broker-dealer is registering a new issue with the Administrator of State A. What information must be sent to the Administrator?

1. The tax identification number filed with the IRS
2. I, II, III, and IV

3.


This is an example of the detailed nature of the examination. You are expected to know that the number of shares, the issuer's financial information, and Articles of Incorporation (the charter) generally are all required by the states. A tax identification number is not required by the Administrator. (89519)





A hedge fund is being sold to investors as a private placement under Regulation D. An agent believes that this fund would be an excellent investment opportunity for several of his clients. The agent may discuss the fund with which of the following clients?

1. A couple that just won the lottery, whose annual income this year was $500,000 and whose net worth is $550,000

2.


Many hedge funds are issued as private placements under Regulation D. In order to qualify for the exemption, they must be offered only to accredited investors, and no more than 35 nonaccredited investors may participate in the offering. Accredited investors include:

* Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future
* A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future
* An individual or a couple with a net worth of at least $1 million

The investor in choice (a) meets the income requirement but his income will probably drop now that he is retired. While this is an assumption, it is still not the best answer compared to choice (b). The investor described in choice (c) does not meet either the income or the net worth requirements. The couple described in choice (d) just won the lottery. Therefore, their income is probably much higher this year than normal, and it is unlikely to remain at the same level. Only the couple described in choice (b), two doctors in their prime earning years, can reasonably expect to continue making the same income. (89520)



A broker-dealer has filed an application to withdraw its registration. Which of the following statements is TRUE?

1. The Administrator has two years after the date the firm's registration is withdrawn to initiate a proceeding for revocation of its license

2.


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. (89521)




According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning private placements?

1. Commissions may not be paid if the buyers are noninstitutional customers

2.


This is another example of a question where the entire point hinges on the word "NOT". This is typical of regulatory examinations, where it is important to understand what the question is asking. In this situation, you are supposed to recognize which of the following items is false. This means three of them are true. If you can identify which answers are true, then you can narrow down the false statement (which is the correct answer) by process of elimination.


Under the Uniform Securities Act, any transaction involving no more than 10 persons (there is no limit on institutional accounts) during any 12-month period is considered an exempt transaction known as a private placement, if the following conditions are met. The seller believes that all the noninstitutional buyers are purchasing for investment purposes only and no commission or other remuneration is paid for soliciting noninstitutional buyers. Choice (b) refers to a situation for private placements under Regulation D of the Securities Act of 1933. (89651)


A client lists capital preservation as his only investment objective. The agent recommends that the client purchase blue-chip stocks and investment-grade bonds. The agent then tells the client to sell some of the stock every two weeks. According to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the agent has:

1. Done nothing wrong

3.


Stocks (even blue-chips) and bonds are not appropriate investments for someone whose sole objective is capital preservation. Money-market securities or a money-market fund would be the only appropriate recommendation under these circumstances.


Arguably, the agent has also churned the account, choice (b), by advising the client to sell some of these securities every two weeks. However, choice (c) is the best answer here since the securities were not suitable in the first place. Both recommendations to purchase these securities and then sell them were unsuitable. (


A woman in Alabama is reading a daily financial newspaper containing an advertisement that could be interpreted as an offer to sell securities. The newspaper is published in New Jersey, but its circulation is spread evenly throughout the United States. According to the Uniform Securities Act, which of the following statements is TRUE regarding the advertisement?

1. The ad is not an offer of a security in any state

4.


An advertisement such as this could only be an offer of a security in the state in which the newspaper is published (in this case, New Jersey). However, if more than two-thirds of the newspaper's circulation is outside of its state of publication, the offer is not considered to occur in any state. Since that is the condition that applies in this situation, an offer is not made in any state.


A bank president is selling his bank's debentures to banking clients. In this capacity, he is considered to be:

1. Excluded from the definition of agent

4.


Those persons representing the issuer, who are involved in the direct marketing of certain exempt securities, are excluded from the definition of a securities agent. This includes persons representing the issuers of bank securities, commercial paper, municipal bonds, securities of other governmental bodies, and employee benefit plans (A full, detailed list is included in your Study Manual and we recommend that you review that list before your exam). In this scenario, since the bank president is selling his own bank's securities, these securities are exempt. This is why he is not an agent of the issuer.


An employee of XYZ Corporation is selling common stock to the public but is not being paid a commission. Under the Uniform Securities Act, which of the following statements is TRUE?

1. The employee would be considered an agent of the issuer but would not need to register

3.


Under the Uniform Securities Act, an individual representing a nonexempt issuer in sales to the public is defined as an agent of the issuer (XYZ Corporation) and must register as such whether or not compensation has been paid. Conversely, if the transactions are with existing employees, directors, or partners of the issuer, and no compensation is paid for soliciting any person in the state, then the employee is not required to register


A client wants to invest a rollover from a 401(k) account into an IRA upon retiring. Which of the following choices would be the most suitable recommendation?

1. An annuity

2.


A person who has just retired is presumably seeking income. However, it may be advisable to invest a portion of her assets in growth-oriented investments as well since she may be retired for 20 to 30 years. Of the choices given, a balanced fund, which invests in both stocks and bonds, is the best answer. A balanced fund would provide the investor with both income and capital appreciation because it invests in both stocks (appreciation) and debt securities (income). A large-cap stock fund, choice (a), would provide capital appreciation, but probably little income. It would also be risky. Treasury bonds, choice (c), would provide safety and income, but little appreciation. An annuity, choice (d), would probably have a surrender period and high expenses. Additionally, the annuity provides tax-deferred income. Therefore, buying an annuity in an IRA or other tax-deferred account would be counter-productive. (89591)



In a discussion with a client regarding mutual funds, an agent states that if dividends and capital gains distributions are reinvested, the client will be able to liquidate at a value higher than the original investment. Which of the following statements is TRUE?

1. The statement may be used if the broker-dealer is willing to make up any losses to the client

2.


Guaranteeing a profit, regardless of the investment medium, is always considered unethical and may even be fraudulent, and is prohibited under the Act



According to the NASAA Model Rules for Sales of Securities at Financial Institutions, a networking arrangement between a financial institution and a broker-dealer must:

1. Specify which functional regulator will be in charge of examining the broker-dealer's operations at the financial institution

3.


A networking arrangement is an agreement between a broker-dealer and a bank (or a savings and loan or credit union) under which the broker-dealer does business at a retail banking location. According to the NASAA Model Rules, these agreements must be in writing and must specify how both the bank and the broker-dealer will be compensated. The agreement must also state the duties and responsibilities of both the broker-dealer and the bank, and must provide that the broker's supervisory personnel and state regulators will have access to the bank to examine the records maintained there.


An investment adviser is managing a trust that is scheduled to terminate in 50 years. The beneficiaries will receive the income that the trust generates until that time. Once the trust terminates, the corpus will be distributed among the remaining beneficiaries. According to the Uniform Prudent Investor Act, which of the following investment strategies is NOT suitable for this trust?

1. Reallocating the portfolio on an annual basis

3.


The question states that the trust will be in existence for 50 years, which is a very long time. Inflation could significantly erode the trust assets over this period. According to the commission that drafted the Uniform Prudent Investor Act, "By far the most insidious damage to trust assets comes from inflation." This is the reason why choice (c) represents an inappropriate strategy for this trust. The real value of a portfolio invested solely in these securities is likely to decline over the long term. However, if the trust is going to be in existence for only a short time, a year or two, for example, then choice (c) would be a suitable investment strategy. (75858)