Series 63 Exam #1

Front 1

Under the USA, all of the following are exempt transactions EXCEPT:

A) isolated nonissuer transactions.
B) a sale of a primary offering registered with the SEC.
C) transaction executed by a trustee in bankruptcy.
D) unsolicited customer orders.

Back 1

The correct answer was: a sale of a primary offering registered with the SEC.

In almost every instance, an issuer transaction-that is, one for the benefit of the issuer-will not be considered an exempt transaction. Exempt transactions include isolated nonissuer transaction; transactions between an issuer and an underwriter; transactions by an executor, Administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements.

Front 2

Under the Uniform Securities Act, it is legal for an agent to tell a customer that:

A) an exempt security is not required to be registered because it is generally regarded as being safer than nonexempt securities.
B) her qualifications have been found satisfactory by the Administrator.
C) a registered security may lawfully be sold in the state.
D) a registered security has been approved for sale in the state by the Administrator.

Back 2

The correct answer was: a registered security may lawfully be sold in the state.

The fact that a security is either registered or exempt from registration has no bearing on the quality, safety, or merits of that security, and it is illegal to make any statement or implication to the contrary. A similar principle applies to persons registered or exempt from registration. Also, remember that registration does not involve verification by the Administrator of any information included in a registration statement or application. When a registration becomes effective, it means only that certain legal requirements have been met in regard to that security or person.

Front 3

An agent of a broker/dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following?

A) If the agent is a partner, officer, or director and held that position at the time the broker/dealer was registered in that state, the individual need not register separately.
B) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities.
C) Registration is required only if an offer is directed, accepted, and paid for in that state.
D) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly.

Back 3

The correct answer was: If the agent is a partner, officer, or director and held that position at the time the broker/dealer was registered in that state, the individual need not register separately.

Both the broker/dealer and the agent must be registered in the state where business is to be transacted, even if the securities or the transactions are exempt from registration. At the time the broker/dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents.

Front 4

An agent sells her customer $10,000 of 15-year U.S. Treasury bonds. If the agent tells the customer this is the best investment due to the absolute safety of Treasury securities, the agent has acted:

A) lawfully, because Treasury securities carry no default risk.
B) lawfully, because Treasury securities are the safest among all domestically available debt instruments.
C) unlawfully, because the term "absolute safety" implies that the customer cannot lose money.
D) unlawfully, because allocating the customer's entire $10,000 into bonds ignores the customer's need for diversification.

Back 4

The correct answer was: unlawfully, because the term "absolute safety" implies that the customer cannot lose money.

Implying or stating to customers that they cannot lose money when investing in a marketable security is prohibited. Although Treasury securities carry no default risk, the customer faces potential interest rate risk, particularly in light of the bonds' 15- year maturity.

Front 5

Which of the following items is NOT a security under the USA?

A) An interest in a cattle feeding program organized as a limited partnership.
B) An American depositary receipt (ADR).
C) Whiskey warehouse receipts.
D) A whole life insurance contract issued by an incorporated life insurance company having its shares trade on the New York Stock Exchange (NYSE).

Back 5

The correct answer was: A whole life insurance contract issued by an incorporated life insurance company having its shares trade on the New York Stock Exchange (NYSE).

Under the USA, a traditional life insurance contract is not a security. The manner in which the insurance company operates has no effect. Interests in farmland and animals (such as the cattle feeding program) are securities under the USA, as are certificates of deposit for a security such as ADRs. Whiskey warehouse receipts are part of the long list of items defined as securities. Remember the short list of items that are not securities.

Front 6

If a licensed agent believed that interest rates were about to fall and contacts all of her clients and suggests they purchase high quality debt securities with long-term maturities, this action:

A) is probably not in violation of any suitability standards as long as the bonds are of high quality.
B) may be acting on material inside information.
C) has probably violated the Uniform Securities Act's suitability standards.
D) is in error as a drop in interest rates will cause bond prices to fall, leading to a loss in the client's accounts.

Back 6

The correct answer was: has probably violated the Uniform Securities Act's suitability standards.

If interest rates fall as the agent guesses, debt securities with long-term maturities will increase in price. However, the agent is at fault for making the same recommendation to all of her clients, as the same product cannot be suitable for everyone. This may be referred to as a blanket recommendation on the exam. Even U.S. Treasury bonds, with the highest degree of safety available, are not always suitable based upon the specific objectives of the investor.

Front 7

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

A security issued by a bank.
A Canadian government bond.
A security listed on the American Stock Exchange.
A security issued by a charitable or other nonprofit organization.
A) I, II, III and IV.
B) II and IV.
C) I and III.
D) I only.

Back 7

The correct answer was: I, II, III and IV.

The securities exempt from the registration requirements of the Uniform Securities Act include securities issued by the U.S. or Canadian government or any state, province, or political subdivision; securities issued by any foreign government with which the U.S. has diplomatic relations; securities issued by banks, savings and loans, insurance companies, and credit unions; securities issued or guaranteed by common carriers and public utilities (e.g., railroads); securities listed on national exchanges (e.g., NYSE, AMEX, Nasdaq); securities issued by nonprofit, religious, or charitable organizations; commercial paper; investment contracts issued in connection with employee benefit plans; and any securities issued by cooperatives or associations.

Front 8

Which of the following are exempt transactions as defined in the Uniform Securities Act?

An agent sells a security issued by a foreign government with which the United States has diplomatic relations to an individual client.
An agent fills a buy order based upon an unsolicited request from an existing client to purchase a nonexempt security.
The sale of an unregistered nonexempt security in a private, nonpublicly advertised transaction to 14 noninstitutional investors over a period not exceeding 12 months.
The sale of unlisted securities by a trustee in bankruptcy.
A) III and IV.
B) I and II.
C) I and III.
D) II and IV

Back 8

The correct answer was: II and IV.

Unsolicited customer orders, regardless of the type of security involved, are always exempt transactions as are sales by fiduciaries. The private placement exemption is limited to 10-noninstitutional offerees, so 14 purchasers would certainly be over the limit. While a security issued by a foreign government with which we have diplomatic relations is an exempt security, a solicited sale by an agent to an individual client is not an exempt transaction.

Front 9

When a sale violates provisions of the Uniform Securities Act, which of the following statements regarding civil liabilities is(are) TRUE?

A buyer may not sue for compensation later than 3 years after the sale.
A rescission offer must include interest.
A rescission offer must be at the current market price.
A) II only.
B) I, II and III.
C) I only.
D) I and II.

Back 9

The correct answer was: I and II.

Rescission must occur by the earlier of 2 years after the discovery of the facts or 3 years after the occurrence. The offer of rescission is based on the price originally paid for the security plus interest at a rate determined by the Administrator (less any income received from that security).

Front 10

Which of the following is (are) primary transactions?

John inherited securities of the XYZ Corporation from his father who, as a founder of the company, received the shares directly from the company as a result of stock options.
John sold the securities he had inherited from his father to his neighbor Peter at the market price without charging a commission.
John's father, a founder of XYZ corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission.
John purchased shares in XYZ Corporation in a third market transaction.
A) I only.
B) I and II.
C) III only.
D) I, II, III and IV.

Back 10

The correct answer was: III only.

A primary transaction occurs when the issuer of the securities receives the proceeds of the sale. John's father, although a founder of the company, purchased shares directly from the company. This transaction is a primary transaction because the firm received the funds from the sale of the shares. In all the other instances, the firm, the original issuer of the securities, did not receive the proceeds of the transaction. These transactions are called non-issuer transactions.

Front 11

An agent terminates his association with broker/dealer A and begins to work for broker/dealer B. Under the Uniform Securities Act, which of the following must take place?

Broker/dealer A must notify the Administrator.
Broker/dealer B must notify the Administrator.
The agent must notify the Administrator.
The supervisor to which the agent reported must notify the Administrator.
A) I, III and IV.
B) I, II, III and IV.
C) I, II and III.
D) II, III and IV.

Back 11

The correct answer was: I, II and III.

In the event an agent transfers from one broker/dealer to another broker/dealer, all three (the former employer, the new employer, and the agent) must report the transfer to the Administrator.

Front 12

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?

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

Back 12

The correct answer was: II and IV.

The key to this question is that it deals with professionals qualifying for an exclusion. Lawyers, accountants, engineers, and teachers 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.

Front 13

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:

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

Back 13

The correct answer was: treat the crime as a nonfinancial misdemeanor.

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.

Front 14

Under the Uniform Securities Act, which of the following activities is an example of churning?

A) Bond swap.
B) A client engaging in day trading.
C) Frequent purchases one day and sales of the same stock the next day to make changes in a client's portfolio in order to align with a customer's investment objectives.
D) Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter.

Back 14

The correct answer was: Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter.

Churning is defined as excessive activity in a customer's account for the purpose of generating commissions. Because Class A mutual funds carry a front-end load and are considered long-term investment vehicles, frequent trades constitute churning. Frequent purchases one day and sales of the same stock the next day in order to align with a customer's investment objectives is not necessarily churning if it is done for the benefit of the customer. A bond swap is not churning; it is generally done for tax purposes. If the client is initiating the day trades, the agent is not the one doing the trading so no churning is taking place.

Front 15

Under the USA, the term "institutional investor" includes:

a depository institution.
an insurance company.
an investment company as defined in the Investment Company Act of 1940.
broker/dealer registered under the Securities Exchange Act of 1934.
A) II and III.
B) III and IV.
C) I and IV.
D) I, II, III and IV.

Back 15

The correct answer was: I, II, III and IV.

Under the USA, depository institutions, international banks, insurance companies, investment companies as defined in the Investment Company Act of 1940, and broker/dealers are all included in the definition of" institutional investor".

Front 16

An agent in Illinois, Missouri, and Iowa has a client move from Chicago to Detroit on July 1, 2002. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On August 1, 2003, the client discovered that the agent's firm never licensed him in Michigan and therefore, he is subject to civil liability to the purchaser. The statute of limitations for this sale runs out:

A) 9/1/2005.
B) 9/1/2004.
C) 8/1/2005.
D) 8/1/2006.

Back 16

The correct answer was: 8/1/2005.

The statute of limitations for civil liability is the earlier of three years after the date of the sale, or two years after discovery of the violation. In this case, the earliest date is two years after the discovery date of August 1, 2003.

Front 17

In response to high stock market volatility, if an investment adviser has all clients immediately sell their equity holdings and reallocate the proceeds to Treasury bills, under the Uniform Securities Act, this is:

A) unethical because the adviser may receive commissions when his customers sell their stock.
B) ethical because the adviser is responsive to current market conditions.
C) unethical because Treasury bills may not be appropriate for all the adviser's clients.
D) ethical because the adviser is recommending a lower-risk investment.

Back 17

The correct answer was: unethical because Treasury bills may not be appropriate for all the adviser's clients.

It is unlikely that Treasury bills, however conservative, are suitable for all clients. An adviser must always keep in mind each client's personal investment needs, risk tolerance, and investment objectives when trading the clients' securities. Blanket recommendations are not ethical.

Front 18

When it comes to borrowing and lending money, the Uniform Securities Act (USA) prohibits activity that would compromise the objectivity of securities professionals. Which of the following are NOT prohibited practices?

A broker/dealer lending money to a client to purchase additional securities.
An agent taking out a car loan from a bank whose branch manager is a client of that agent.
An investment adviser borrowing money from an affiliated broker/dealer.
An investment adviser lending money to a client to enable that client to maintain the minimum required asset level in the account.
A) II and IV.
B) I and III.
C) I, II, III and IV.
D) I, II and III.

Back 18

The correct answer was: I, II and III.

Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker/dealers are also in that business. When a client has a margin account, the broker/dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation as the loan is from the bank, not the manager. Loans are also permitted between affiliates.

Front 19

All of the following situations are exempt transactions complying with the requirements of the USA EXCEPT:

A) Mammoth Mutual Fund purchased 250,000 shares of common stock in a nonissuer transaction.
B) broker/dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days.
C) the executor of an estate liquidates 1,000 shares of IBM held by the estate.
D) broker/dealer A has put together a syndicate of 15 insurance companies and pension funds to purchase the entire issue of XYZ Corporation's preferred stock.

Back 19

The correct answer was: broker/dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days.

Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker/dealers. Transactions by executors, the sheriff, marshals, receivers, trustees, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.

Front 20

If XYZ is a registered broker/dealer with its lone office located in Texas, under which of the following circumstances must it also register in Louisiana?

XYZ's only dealings in Louisiana are directly with issuers of securities in Louisiana.
XYZ engages in extensive transactions with the largest insurance company in Louisiana.
XYZ routinely sells nonexempt securities to extremely high net-worth residents of Louisiana.
XYZ purchases exempt securities from extremely high net-worth residents of Louisiana for resale to residents of Texas.
A) I and II.
B) I only.
C) III and IV.
D) II, III and IV.

Back 20

The correct answer was: III and IV.

Under the Uniform Securities Act, broker/dealers must register in any state that they engage in securities transactions with individual investors. The net worth of the individual is irrelevant. Broker/dealers with no offices in the state who engage in transactions in the state with certain institutional investors, such as insurance companies or investment companies, need not register in that state. Transactions between the issuer and a broker/dealer are exempt transactions.

Front 21

A security that is exempt from the registration requirements of the USA is also exempt from which of the following concerning the act?

Civil liabilities provisions.
Antifraud provisions.
Requirements for filing advertising and sales literature.
A) I, II and III.
B) I and III.
C) III only.
D) I and II.

Back 21

The correct answer was: III only.

An exempt security is only exempt from the registration requirements and the requirements for filing advertising and sales literature. No security is exempt from the antifraud provisions of the act and the liabilities that arise from fraudulent practices.

Front 22

An investment adviser registered with the state is organized as a partnership. The IA may:

A) change its ownership structure without formally notifying its clients.
B) not change its ownership structure without formally notifying its clients.
C) assign their contracts without client notification.
D) not change its ownership structure under any circumstances.

Back 22

The correct answer was: not change its ownership structure without formally notifying its clients.

An investment adviser that is organized as a partnership, as opposed to a corporation, must notify its clients of changes in its ownership structure. An investment adviser organized as a corporation need not notify its clients of an organizational change. Investment advisers, whether partnerships or corporations, may not assign their advisory contracts to other advisers without the express written consent of the client.

Front 23

Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act?

A) Common stock issued by a public utility company whose rates are subject to state regulation.
B) Variable annuities issued by an insurance company authorized to do business in this state.
C) General obligation bonds issued by a city located in this state.
D) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3).

Back 23

The correct answer was: Variable annuities issued by an insurance company authorized to do business in this state.

Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.

Front 24

Under the Uniform Securities Act, all of the following are prohibited business practices EXCEPT:

A) engaging in wash sales and matched transactions to create the appearance of market activity.
B) ignoring an order to buy a stock immediately at the market price because the price of the stock is currently falling and the customer will likely get a better buy by waiting.
C) telling a customer that commissions, taxes, and other costs will be higher than normal when it is not known how much higher they will be.
D) using averages so as not to show fluctuations in market prices.

Back 24

The correct answer was: telling a customer that commissions, taxes, and other costs will be higher than normal when it is not known how much higher they will be.

It is appropriate to tell a customer that certain costs will be higher than normal, even if it is not known how much higher. In fact, it would be a breach of conduct not to inform the customer in such a case. The other choices are misleading or specifically prohibited.

Front 25

Which of the following are NOT included in the definition of an agent in the Uniform Securities Act?

A licensed broker/dealer.
An officer of an issuer who only represents the issuer in selling shares to a broker/dealer underwriting the company's securities.
A person who, in return for payment of commissions, represents an issuer in the sale of its securities to the public.
A nonregistered sales agent of a broker/dealer who sells securities to the public.
A) II and IV.
B) I and III.
C) III and IV.
D) I and II.

Back 25

The correct answer was: I and II.

An agent is an individual other than a broker/dealer who represents a broker/dealer or issuer in securities transactions. An officer of a company who represents his company in transactions with an underwriter is not included in the term "agent". However, if the officer receives commissions for the sale of shares to the underwriter or to the public, he would then be an agent per the USA. A nonregistered sales agent of a broker/dealer who sells securities to the public is an agent under the act. Unless exempt, a nonregistered agent must register with the state Administrator.

Front 26

The issuance of a stop order by a state securities Administrator requires:

A) an issuance of an injunction by a court with jurisdiction over such issues.
B) the subject to stop the activity without the opportunity for hearing.
C) the subject of the stop order be given an opportunity for a hearing.
D) an issuance of criminal charges.

Back 26

The correct answer was: the subject of the stop order be given an opportunity for a hearing.

The subject of a stop order must be given the opportunity for hearing. As long as the stop order is in effect, the security subject to the order may not be sold to the public or the proscribed activity may not continue. Stop orders do not require an injunction by a court and the Administrator does not have authority to issue criminal charges.

Front 27

Which of the following statements are TRUE?

A federal covered adviser sells federal covered securities only.
Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers.
A federal covered security is exempt from registration with the SEC.
Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.
A) I and II.
B) III and IV.
C) II and IV.
D) I and III.

Back 27

The correct answer was: II and IV.

A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.

Front 28

Which of the following regarding the registration of investment advisers and their representatives is TRUE?

A) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator.
B) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator.
C) An investment adviser representative, terminated his employment with ABC Advisers and, six months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event.
D) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly.

Back 28

The correct answer was: ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly.

Only state registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s) unless otherwise exempted. In the case of agents, not only the broker/dealers but also the agents must notify the Administrator.

Front 29

Under the USA, all of the following are securities EXCEPT a:

A) a trade confirmation for the purchase of 100 shares of a listed common stock.
B) a put or call traded on a national exchange relating to foreign currency.
C) a bank issued certificate representing an interest in a foreign security.
D) a real estate investment trust.

Back 29

The correct answer was: a trade confirmation for the purchase of 100 shares of a listed common stock.

A confirmation of a securities trade is not a security; it is merely a document that verifies trade information. Puts, calls, or other options traded on major exchanges that relate to foreign currency are securities under the act. A certificate issued by a bank representing ownership in a foreign security, better known as an American Depositary Receipt (ADR) is a security.

Front 30

If information filed with the Administrator by a broker/dealer as part of its registration changes in a material way, the registrant must:

A) submit an entirely new registration form within 30 days of the material change in information.
B) amend or update the information promptly regardless of the renewal date.
C) update the information on the registration on the next annual renewal date.
D) amend the registration statement within 60 days of the material change.

Back 30

The correct answer was: amend or update the information promptly regardless of the renewal date.

When material information changes, the registrant must promptly amend or update the information regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker/dealers, and securities. However, the Uniform Securities Act does not define the term "promptly".

Front 31

A stock listed on the American Stock Exchange would most likely be registered by:

A) notice filing.
B) coordination.
C) qualification.
D) registration.

Back 31

The correct answer was: notice filing.

Stocks listed on the AMEX are federal covered securities and, as such, are only required to engage in notice filing.

Front 32

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.
Preferred stock issued by an insurance company authorized to do business in this state.
Municipal bonds issued by Toronto, ON.
Private placements.
A) I and III.
B) II and III.
C) II, III and IV.
D) I and II.

Back 32

The correct answer was: II and III.

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. Private placements are exempt transactions, not exempt securities.

Front 33

Under the USA, all of the following issues would be exempt from registration EXCEPT:

A) stock issued by an insurance company not offering policies in this state.
B) stock issued by savings and loan association authorized to do business in this state.
C) bonds issued by the city of New Orleans.
D) an investment contract issued in connection with an employee stock purchase plan.

Back 33

The correct answer was: stock issued by an insurance company not offering policies in this state.

Had the insurance company been authorized to do business in this state, its securities offering would be exempt.

Front 34

Which of the following exemptions describes the sale of securities to institutions that are regarded as professional investors?

A) Manual exemption.
B) Exempt transaction.
C) Exempt security.
D) Blue-chip exemption.

Back 34

The correct answer was: Exempt transaction.

The Uniform Securities Act is designed to protect the general public, not to limit the activities of informed professional investors, such as banks, insurance companies, and pension or profit-sharing trusts. Transactions with institutions are exempt. Blue-chip and manual exemption applies to securities, not transactions.

Front 35

Under the Uniform Securities Act, which of the following regarding the registration of securities is TRUE?

A) The effectiveness of a registration statement ensures the adequacy of the information contained in the statement.
B) Registration by qualification becomes effective on a date ordered by the Administrator.
C) State registration by exemption is only available if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering.
D) The Administrator may require that a prospectus be delivered to every purchaser of a registered security no sooner than the time at which the security is delivered.

Back 35

The correct answer was: Registration by qualification becomes effective on a date ordered by the Administrator.

Registration by qualification becomes effective when the Administrator so orders. A prospectus must be delivered no later than when the security is delivered and may be delivered sooner. The act prohibits any statement or implication that registration involves approval or verification of facts by the Administrator. There is no such term as "registration by exemption".

Front 36

An agent may NOT share in the profits of a customer's account when the:

A) participation is proportional to the agent's investment in the account.
B) agent has written permission from the customer.
C) participation is proportional to the commission the agent receives.
D) agent has written permission from the broker/dealer.

Back 36

The correct answer was: participation is proportional to the commission the agent receives.

An agent may share in the profits if the broker/dealer and the customer agree in writing and if the sharing is proportionate to the agent's investment.

Front 37

A state Administrator may require an applicant for registration to do which of the following?

A) Pay a fee.
B) Place an advertisement in a local newspaper.
C) Pass an examination.
D) All of these.

Back 37

The correct answer was: All of these.

A state Administrator may require an applicant to pay a fee, pass an examination, or place an advertisement in a local newspaper before granting registration.

Front 38

If an agent has secured a signed statement from a customer that waives the customer's right to sue for a transaction in violation of the USA, the agreement is:

A) legal but only in a civil case.
B) null and void.
C) legal.
D) legal but only in a criminal case.

Back 38

The correct answer was: null and void.

The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not.

Front 39

Which of the following statements is NOT true regarding the authority of the Administrator under the Uniform Securities Act?

A) The Administrator may not examine the records of a broker/dealer without seeking a court order from a federal court.
B) The Administrator may require examinations for investment advisers.
C) The Administrator may require a broker/dealer to have a minimum net capital as a condition of registration.
D) The Administrator may require financial reports from broker/dealers.

Back 39

The correct answer was: The Administrator may not examine the records of a broker/dealer without seeking a court order from a federal court.

The Administrator has inspection power to view all records within or outside the state as is appropriate or necessary in the public interest, without seeking court approval Administrators may require minimum capitalization as a condition of registration. Many administrators require the passing of one or more examinations to demonstrate qualification of an applicant for registration. The Administrator is also given the authority by the act to require the filing of financial reports regarding the net worth of the firm.

Front 40

Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, requirements of advisory contracts include which of the following?

They must be renewed on an annual basis.
They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated.
They must prohibit assignment of the contract without the client's consent.
A) I, II and III.
B) I and II.
C) II and III.
D) I and III.

Back 40

The correct answer was: II and III.

There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent.

Front 41

Securities of a nonexempt corporate issuer that are not registered with the SEC may only be registered with the Administrator in which of the following ways?

A) Qualification.
B) Condemnation.
C) Coordination.
D) Notification.

Back 41

The correct answer was: Qualification.

Securities of a nonexempt corporate issuer that do not have a federal registration must be registered with the Administrator by qualifying with the Administrator. This process is called registration by qualification.

Front 42

n applicant for registration as an investment adviser discloses on Form ADV 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) is empowered to deny this application.
C) may deny applications only on the basis of the limitations of the law.
D) will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit.

Back 42

The correct answer was: may deny applications only on the basis of the limitations of the law.

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. Although disclosure of methods of analysis is required, the Administrator is not empowered to pass judgment on those methods.

Front 43

An investment adviser representative may share in the profits and losses of a customer's account provided:

A) the investment adviser representative deducts the advisory fee charged the customer from any profits earned.
B) a written contract is executed between the investment adviser and the client.
C) both the customer and the representative's employer agree and the sharing is done based on proportionate contributions to the account.
D) none of these.

Back 43

The correct answer was: none of these.

Investment adviser representatives are not allowed to share in the capital appreciation or depreciation of their customers' accounts in the same manner as are agents.

Front 44

Which of the following is included in the definition of a broker/dealer under the Uniform Securities Act?

A) Issuer of securities.
B) Out-of-state broker/dealer with no office in this state that services only other broker/dealers located in this state.
C) One who effects securities transactions for his own account or on behalf of others.
D) Agent.

Back 44

e correct answer was: One who effects securities transactions for his own account or on behalf of others.

Only one who is in the business of effecting transactions for his account or on behalf of others fits the definition of a broker/dealer. All of the other choices are specifically excluded from the definition.

Front 45

Which of the following is a prohibited business practice?

Executing a trade for a client on the orders of a client's attorney without third-party trading authority.
Executing a purchase order at market when the price of the security was falling.
Accepting a loan of securities from a customer.
A) I and II.
B) I, II and III.
C) I and III.
D) II and III.

Back 45

The correct answer was: I and III.

An agent can always execute an unsolicited market order but may never accept unwritten third-party orders or a loan of securities from a customer.

Front 46

ames Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is TRUE?

A) The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
B) As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act.
C) The antifraud provisions of the USA do not apply to Jones because he is not suitably trained nor does he have a securities license.
D) Jones's failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration.

Back 46

The correct answer was: The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.

The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.

Front 47

What is the smallest order that can be placed for an institutional account?

A) $100,000 or 5,000 shares.
B) $100,000 or 2,500 shares.
C) There is no limit on institutional order sizes.
D) $50,000 or 1,000 shares.

Back 47

he correct answer was: There is no limit on institutional order sizes.

There is no upper or lower limit on the size of an order executed in an institutional account, although institutional investors typically trade very large blocks of securities.

Front 48

Investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of:

A) $5,000.
B) $50,000.
C) $10,000.
D) $35,000.

Back 48

The correct answer was: $10,000.

NASAA rules under the Uniform Securities Act require an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000 or be bonded for $35,000.

Front 49

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:

unsuitable and unethical.
a securities felony.
grounds, in extreme cases, for suspension or revocation of the agent's license.
outside regulatory jurisdiction.
A) IV only.
B) II and III.
C) I only.
D) I and III.

Back 49

The correct answer was: I and III.

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.

Front 50

It is NOT necessary for an investment adviser to register when it:

A) is headquartered in a state where it conducts most of its business with broker/dealers only.
B) has no place of business in the state and deals with savings and loan associations only.
C) has a place of business in the state but deals exclusively with federal covered advisers.
D) has a place of business in the state but has conducted business with 3 individual investors during the preceding 12 consecutive months.

Back 50

The correct answer was: has no place of business in the state and deals with savings and loan associations only.

An adviser who has no place of business in the state and deals only with savings and loan associations is not required to register with the state securities Administrator. An adviser with a place of business in the state must register with the Administrator whether clients are exclusively broker/dealers or federal covered advisers and regardless of the number of clients.

Front 51

Under the Uniform Securities Act, which of the following are TRUE regarding the registration of a successor firm?

The successor firm need not be in existence when the application for registration is filed.
A filing fee is required with the application.
The successor firm's registration will be effective for the unexpired portion of the year.
A) I and II.
B) I, II and III.
C) I and III.
D) II and III.

Back 51

The correct answer was: I and III.

Application may be made to register a successor firm whether or not the firm is then in existence. The filing fee is waived. The successor firm's registration will be effective for the unexpired portion of the year.

Front 52

Which of the following would NOT be an example of market manipulation?

A) All of these.
B) A principal in a broker/dealer leaks a rumor that ABC is going to acquire LMN. After a few days, the broker/dealer sells short LMN for its own account.
C) Three market markers intentionally start buying and selling the same security simultaneously in their own accounts.
D) A specialist on the NYSE buys and sells stock for his own account.

Back 52

The correct answer was: A specialist on the NYSE buys and sells stock for his own account.

A specialist that buys or sells for its own account is not engaged in market manipulation. The function of a specialist is to act as a broker for orders that other members left with them, and to act as a dealer in buying and selling for their own account. Market makers who buy and sell the same security simultaneously in their own accounts are manipulating the market by creating false trading volume. A principal in a broker/dealer that trades on a rumor that he leaked is manipulating the market for personal gain.

Front 53

Under the Uniform Securities Act, an agent may not make which of the following statements to a customer?

A) This security is exempt from registration.
B) This security has been registered with the Administrator.
C) This security is registered with the state.
D) This security is approved for sale by the Administrator.

Back 53

The correct answer was: This security is approved for sale by the Administrator.

The state Administrator does not approve securities.

Front 54

Agent A with Firm Y and Agent B with Firm Z conduct a joint seminar. They agree to share the commissions on any resulting business. Under the Uniform Securities Act, which of the following statements regarding sharing commissions is CORRECT?

A) Sharing commissions that are a result of a joint seminar is never permitted.
B) In this instance, sharing of commissions could only be done with the approval of both firms.
C) Sharing of commissions by agents of two unrelated firms is prohibited.
D) Only an agent who makes a sale is eligible to earn a commission.

Back 54

The correct answer was: Sharing of commissions by agents of two unrelated firms is prohibited.

Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker/dealer.

Front 55

Joan, who has a PhD in economics, has been employed as an agent by Gibraltar Securities for the past 15 years. Missing academic life, she resigns from the broker/dealer and accepts a position as an economics professor at a state university. Which, if any party, is required to notify the state securities Administrator of this change?

A) Only the securities firm.
B) No party, because Joan's termination is voluntary and not for cause.
C) Both Joan and the firm.
D) Only Joan.

Back 55

The correct answer was: Both Joan and the firm.

The license of an agent expires when she ceases to be employed by the broker/dealer or issuer for whom she was previously licensed. Both the agent and the former broker/dealer are required to notify the Administrator promptly.

Front 56

An agent opening a wrap account for a wealthy client may tell the customer that:

A) wrap fees generally result in higher costs than separate charges for advice, management, and transactions.
B) wrap fees always result in lower costs than separate charges for advice, management, and transactions.
C) wrap account managers will generally outperform index funds.
D) wrap fees may result in higher costs than separate charges for advice, management, and transactions.

Back 56

The correct answer was: wrap fees may result in higher costs than separate charges for advice, management, and transactions.

When prospecting for new wrap accounts, agents are required to disclose to customers that wrap fees may result in higher costs than separate charges for advice, management, and transactions if the client is not able to use all of the services included. For those clients that are able to make use of all of the services provided, the costs will generally be lower than the cost of buying them piecemeal. Future performance of managed accounts may not be stated or implied.

Front 57

Under the Uniform Securities Act, which of the following are cause for disciplinary review action by the state securities Administrator?

Joe files an application for registration as an investment adviser and omits the fact that he was convicted of fraud 12 years ago.
Tom, a registered investment adviser, fails to disclose that he recently filed for bankruptcy protection.
The ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors.
Ed is suspended from conducting business in the securities industry for a period of 6 months by FINRA (NASD).
A) III and IV.
B) II and IV.
C) I and II.
D) I, II and IV.

Back 57

The correct answer was: I, II and IV.

Even though the Administrator's power to deny a registration is limited to convictions within the past 10 years, any conviction of a felony or securities-related misdemeanor must be disclosed. Failure to disclose a suspension by FINRA (NASD) or a bankruptcy filing is cause for disciplinary action on the part of the Administrator. Investment advisers may employ investment adviser representatives as independent contractors.

Front 58

A broker/dealer receives a written complaint from one of its customers. The most appropriate action to take is to:

A) immediately notify the Administrator.
B) immediately reply to the client in writing.
C) immediately notify NASAA.
D) immediately freeze the client's account.

Back 58

The correct answer was: immediately reply to the client in writing.

When a broker/dealer receives a written complaint from a customer, it must document that complaint and begin an investigation as to the complaint's merits. Part of that procedure would be sending a written acknowledgment to the client that the complaint has been received.

Front 59

Which of the following is NOT included in Form ADV Part II?

A) Types of investments made by the adviser.
B) States in which the investment adviser is registered or intends to register.
C) Investment policy of the adviser.
D) Educational background of the adviser.

Back 59

The correct answer was: States in which the investment adviser is registered or intends to register.

ADV Part II is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, educational background, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered in are not contained in ADV Part II.

Front 60

Which of the following would be prohibited practices under state securities law?

Soliciting orders for exempt securities.
Making recommendations on the basis of nonpublished analysts' reports.
Failing to inform a client of unusually high commissions because the client does not complain.
Failing to obtain prior written authority for orders from a third party.
A) I, II and III.
B) I and II.
C) III and IV.
D) I and III.

Back 60

The correct answer was: III and IV.

Failing to inform a client of unusually high commissions and not obtaining prior written approval for orders from a third party are prohibited practices. Soliciting orders for a security that is exempt from registration is a normal business practice. An agent may use the nonpublished reports of his firm's securities analysts as a basis for recommendations providing the nonpublished reports do not contain inside information.

Front 61

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT that they:

A) cannot allow for prepaid advisory fees.
B) must be in writing.
C) can only allow fees to be performance related under certain limited circumstances.
D) cannot be assigned without customer approval.

Back 61

The correct answer was: cannot allow for prepaid advisory fees.

Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $1.5 million, where performance-based fees are permitted.

Front 62

All of the following are exempt transactions EXCEPT:

A) commercial paper with a maturity of no longer than 270 days.
B) unsolicited, nonissuer transactions.
C) isolated, nonissuer transactions.
D) the sale of securities to a closed-end investment company.

Back 62

The correct answer was: commercial paper with a maturity of no longer than 270 days.

This question deals with transactions. While all of the items listed are exempt, commercial paper is an exempt security, not an exempt transaction.

Front 63

Under the Uniform Securities Act, which of the following is an investment adviser?

A) An investment adviser representative.
B) An individual who provides financial advice over the Internet with no recommendations based on specific investment situations of individual clients.
C) A firm with no office in the state that provides specific investment advice to ten noninstitutional clients within the state.
D) A broker/dealer who receives no compensation for investment recommendations.

Back 63

The correct answer was: A firm with no office in the state that provides specific investment advice to ten noninstitutional clients within the state.

A firm with no office in the state that provides investment advice is not an investment adviser if its clients are investment companies or other institutions, or if business communications or advice are directed to no more than five noninstitutional clients within the state in the past 12 months. A broker/dealer is not required to register as an investment adviser unless it receives special compensation for providing investment advice. Individuals who publish general advice (no specific recommendations to individual clients) in hard copy form, electronic communications, or otherwise are not required to register as investment advisers.

Front 64

Which of the following statements relating to termination of registration of a securities professional registered under the USA is TRUE?

A) None of these.
B) An Administrator may deny a registration of a securities professional based solely on a lack of experience.
C) An Administrator may revoke the registration of a securities professional who is declared mentally incompetent.
D) A registration, once in effect, may never be voluntarily withdrawn.

Back 64

The correct answer was: None of these.

A person may request a withdrawal of a registration. Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process. An Administrator may not deny a registration solely on the basis of an individual's lack of experience. An Administrator does not revoke the registration of a person who is declared mentally incompetent but cancels such registration; this is a nonpunitive administrative action.

Front 65

Which of the following are characteristics of both an investment adviser representative and an agent?

They are natural persons.
They are legal entities other than a natural person.
To be registered, they must pass an exam administered by the state and/or FINRA.
To be registered, they need be subject only to an audit of their books and records.
A) I and IV.
B) II and III.
C) I and III.
D) II and IV.

Back 65

The correct answer was: I and III.

Registered investment adviser representatives and agents are always natural persons and must pass an exam to prove their minimal proficiency of knowledge and understanding of both the securities and investment advisory industries.

Front 66

Which of the following are not specifically excluded from the definition of an investment adviser under the Uniform Securities Act?

An investment adviser representative of an advisory firm who makes securities recommendations on a regular basis for compensation.
A temporary employee hired to assist in administrative responsibilities of an advisory firm.
Any person who is a federal covered investment adviser.
A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities.
A) II and III.
B) IV only.
C) I and IV.
D) II and IV.

Back 66

The correct answer was: IV only.

Clerical and ministerial personnel, full-time or temporary, are not included in the definition of either investment adviser representatives (supervised persons) or investment advisers. Other persons associated with an investment adviser, including officers of the firm, are generally considered to be investment adviser representatives. An investment adviser representative is not an investment adviser in the same manner that an agent is not a broker/dealer. A federal covered adviser is not, for definitional purposes, considered an adviser under the USA to avoid duplicate regulation by both the state and the federal government.

Front 67

Under the Uniform Securities Act, which of the following is TRUE regarding civil liability of agents?

A) An agent may be sued up to five years after a sale is made.
B) The amount a customer may recover is limited to the amount paid for the security plus interest.
C) The Administrator may file a civil lawsuit to recover damages on behalf of wronged investors.
D) Persons who control a civilly liable person may also be sued to recover damages.

Back 67

The correct answer was: Persons who control a civilly liable person may also be sued to recover damages.

Not only the guilty party, but one controlling that person is also subject to civil liability. Persons may be sued only up to three years following the sale of a security. The investor who has been damaged, not the Administrator, files the lawsuit charging civil liability. A purchaser may recover costs and attorneys' fees in addition to the amount paid for the security plus interest, minus any amount received on tender.

Front 68

An Administrator has specific authority under the USA to:

suspend the registration of a security if the suspension is in the public interest and the offering has excessive commissions.
issue emergency injunctions to prevent a violation of the act.
enforce subpoenas in the state at request of an Administrator of another state for alleged violations that occurred in another state.
require that the proceeds from an offering be held in escrow until issuer receives a certain percentage of the sale of the securities offered.
A) I, III and IV.
B) II and III.
C) I only.
D) I, II and IV.

Back 68

The correct answer was: I, III and IV.

The Administrator may impound the proceeds of an offering in an escrow account until the issuer receives a specified amount. The Administrator may also suspend a security's registration if excessive commissions are charged as part of the offering. State Administrators have the authority to cooperate with each other in enforcing the provisions of USA by ensuring that the subpoenas from other states are enforced. Injunctions are judicial orders that can only be issued by a court of law, not by an administrative agency such as a state securities Administrator.

Front 69

In the Howey decision, the U.S. Supreme Court held that a security must represent:

A) an interest in a publicly traded corporation whose managers are engaged in a regulated business enterprise.
B) an investment of money in a common enterprise with the expectation of profit or tax deductible losses from the managerial efforts of others.
C) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.
D) an investment of money in a common enterprise with the expectation of profit from the efforts of the investor.

Back 69

The correct answer was: an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.

The Howey decision defined a security as (1) an investment of money (2) in a common enterprise (3) where there is an expectation of a profit (4) through the efforts of a third party and not the investor.

Front 70

Under the Uniform Securities Act, in which of the following circumstances may the Administrator take action against an advisory firm?

Nine years ago, the Administrator of another state found that the president of the firm violated the securities laws of that other state.
The firm has liabilities that exceed its assets.
A minority shareholder with no management role in an investment adviser organized as a corporation cannot meet his financial obligations as they come due.
A) I, II and III.
B) I only.
C) II and III.
D) I and II.

Back 70

The correct answer was: I and II.

Violation of another state's securities laws within the past ten years by the president of the firm might be cause for action against an investment adviser. So is insolvency, defined as having liabilities in excess of one's assets or the inability to meet financial obligations as they come due. However, the personal financial situation of a minority, nonmanaging shareholder does not have a bearing on the financial situation of a corporate firm.

Front 71

An agent has been recommending that customers buy common stock in XYZ Company. If on a visit to XYZ he overhears unreleased news that XYZ has just lost its biggest account, the agent should:

discuss the situation with his supervisory principal.
continue to recommend the security to customers and prospects.
stop recommending the security to customers and prospects.
sell the stock short in his brother's account.
A) I and III.
B) I, III and IV.
C) III only.
D) I only.

Back 71

The correct answer was: I and III.

Whenever an agent has concerns about matters involving the broker/dealer's customers, such concerns should be shared with the agent's supervising principal. It is appropriate that the agent stop recommending XYZ stock to customers and prospects.

Front 72

Which of the following securities must be registered by qualification under the Uniform Securities Act?

ABC, Inc., formed 2 years ago, previously made an offering of its stock in several states. An agent feels that ABC is suitable for several clients and wishes to offer it to them out of the broker/dealer's inventory, even though ABC's stock has never been registered in this state.
XYZ, Inc., plans to make an offering of its stock in only one state and so will not file a federal registration statement.
AAA, Inc., is 1 year old and an initial offering of its stock will be offered in several states at once.
A) I, II and III.
B) I and II.
C) II only.
D) I and III.

Back 72

The correct answer was: II only.

Any security may be registered by qualification, but that would only be required if another method of registration were unavailable. ABC, Inc., must be SEC-registered because its previous offering was in several states. Generally, the nonissuer sale of an SEC-registered security that has been outstanding at least 180 days is an exempt transaction and, therefore, does not require registration. Since XYZ, Inc., will not have a federal registration statement, registration by coordination will not be available. AAA, Inc., will require federal registration in connection with the same offering, registration by coordination will be available.

Front 73

Which of the following is a sale of a security by an agent?

A) Conveying, for value, precious metals to a jewelry distributor.
B) Donation of interests in rights, warrants, or options on a nonexempt security.
C) Sale of a large fixed annuity contract to a taxable institution.
D) Transfers, for value, of unit trusts to a nontaxable organization.

Back 73

The correct answer was: Transfers, for value, of unit trusts to a nontaxable organization.

For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

Front 74

An individual may NOT act as an agent for more than one broker/dealer

A) unless the broker/dealers are unrelated.
B) under any circumstances.
C) unless the broker/dealers are exchange members.
D) unless the Administrator, by rule or order, authorizes such employment.

Back 74

The correct answer was: unless the Administrator, by rule or order, authorizes such employment.

An individual may only act as an agent for multiple broker/dealers that are affiliated with each other. If the broker/dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment.

Front 75

Which of the following is NOT a prohibited practice under the Uniform Securities Act?

A) Failing to identify a customer's financial objectives.
B) Supplying funds to a client's account only when or if it declines below a pre-agreed-upon level.
C) Borrowing money or securities from the account of a former banker with express written permission.
D) Selling stock rights received in a client's account at the direction of the client.

Back 75

The correct answer was: Selling stock rights received in a client's account at the direction of the client.

It is permissible to sell rights, which are securities. Borrowing money or securities from other than a bank or broker/dealer in the business of lending, failing to identify a customer's financial objectives, and guaranteeing a customer's account against losses are prohibited practices.

Front 76

The United States Supreme Court ruled in the Howey decision that an instrument that represents the investment of money in a common enterprise with an expectation of profit solely through the managerial efforts of others is a security. In following the Howey decision, the USA would consider which of the following a security?

A) Investment in options to acquire a security.
B) Purchase of jewelry for speculative purposes as opposed to personal use.
C) Purchase of a house in a desirable real estate market with the expectation that the house will be resold at a profit within a few years.
D) Investment in commodities futures.

Back 76

The correct answer was: Investment in options to acquire a security.

The investment in options meets the definition of a security. It is an investment in a common enterprise with the expectation that the owner will profit as a result of the managerial efforts of others. The purchase of a house or jewelry is a purchase of a real asset or product that may result in a profit for the owner, but not as a result of the managerial efforts of a third party. Commodities futures contracts are specifically excluded from the definition of a security. Options on futures, however, are securities under the USA. Remember the list of items that are not securities.

Front 77

All of the following are exempt securities under the Uniform Securities Act EXCEPT:

A) securities issued by a bank holding company.
B) securities issued by a Canadian province.
C) securities issued by the Canadian government.
D) securities issued by a federal savings and loan association.

Back 77

The correct answer was: securities issued by a bank holding company.

Securities issued by a bank are exempt. However, this answer refers to a bank holding company that is considered to be an ordinary company subject to state registration if not otherwise exempt.

Front 78

State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act?

A) Investment adviser representatives.
B) Bank subsidiary offering investment advice.
C) Broker/dealers receiving special compensation.
D) Economists whose advice is strictly incidental to their professional activity.

Back 78

The correct answer was: Investment adviser representatives.

The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker/dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.

Front 79

A president of a bank sells shares of the bank and receives compensation in the form of a commission. Under the Uniform Securities Act, he or she is a(n):

A) none of these.
B) agent of the issuer.
C) investment adviser.
D) broker/dealer for the bank.

Back 79

The correct answer was: agent of the issuer.

Any individual selling securities on behalf of an issuer and receiving compensation for doing so must register as an agent under the USA. This is true even if the security sold is an exempt security or the sale is made in an exempt transaction.

Front 80

Under the Uniform Securities Act, the term agent would include an individual who:

sells securities on behalf of a broker/dealer in an exempt transaction without receiving compensation.
sells securities on behalf of a broker/dealer in an exempt transaction and receives compensation.
sells securities on behalf of an issuer in an exempt transaction without receiving compensation.
sells securities on behalf of an issuer in an exempt transaction and receives compensation.
A) I and II.
B) II and IV.
C) I, II and IV.
D) I and III.

Back 80

The correct answer was: I, II and IV.

Anyone who sells securities on behalf of a broker/dealer is defined as an agent. Those who sell on behalf of an issuer are excluded from the definition under certain circumstances, the most important of those being that the individual receives no sales-related compensation.

Front 81

The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state?

Agents.
Broker/dealers.
Investment Advisers.
A) I and III.
B) I, II and III.
C) II and III.
D) I and II.

Back 81

The correct answer was: II and III.

Only broker/dealers and investment advisers are required to maintain financial records. Agents must maintain sales records and but there are no financial inspections of agents or investment adviser representatives as there are with broker/dealers and advisers.

Front 82

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

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

Back 82

The correct answer was: issue an injunction when there is evidence of wrongdoing.

Injunctions may be issued by a court of competent jurisdiction only.

Front 83

An agent and a customer enter into a written agreement to share in the profits and losses of an account on a 50/50 basis. If the client invests $6,000 and the agent invests $4,000, this practice is:

A) a violation because the customer must receive 60% and the agent 40% of the profits or losses generated by the account.
B) a violation unless approved by a principal.
C) permitted.
D) a violation unless the practice is approved by the state Administrator.

Back 83

The correct answer was: a violation because the customer must receive 60% and the agent 40% of the profits or losses generated by the account.

Sharing profits and losses in a customer's account is permitted if the profit and losses are shared in proportion to the amount invested. Since the client invested 60%, the client must receive 60% of the gains and losses. A 50/50 split would not be allowed in this case because provisions of the act cannot be waived by virtue of an agreement by the client and the agent, or by the approval of a principal of the firm.

Front 84

Under the Uniform Securities Act, which of the following is NOT an exempt transaction?

A) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer.
B) The sale of a non-Nasdaq over the counter stock to a closed-end investment company.
C) A sale of securities by the executor of an estate.
D) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid.

Back 84

The correct answer was: The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer.

In the case of a U.S. government security, the security is exempt, but the transaction is not. All of the other choices are exempt transactions since they are either to an institutional investor, existing owners for no consideration, or by a fiduciary.

Front 85

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:

file an application for limited registration with the Administrator in the form required by the jurisdiction in which it has its head office.
file a consent to service of process.
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.
be a member of a recognized self-regulatory association or stock exchange in Canada.
A) I, II, III and IV.
B) I and III.
C) I, II and IV.
D) II, III and IV.

Back 85

The correct answer was: I, II, III and IV.

For a Canadian broker/dealer with no offices in this state to do business with Canadian residents who are temporarily in this state, it must apply for a special limited registration. Filing involves all of the choices listed. In essence, Canadian broker/dealers and agents have a limited form of the snowbird exemption.

Front 86

Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, the test of whether trading in a client's account is excessive depends on:

A) whether the trading is in line with the client's investment objectives, financial resources and the character of the client's account.
B) whether the adviser has discretionary authority over the account and how often the client is notified about account activity.
C) how much compensation the adviser is earning on the trades.
D) how frequent the trades are in relation to the accounts of the adviser's other clients.

Back 86

The correct answer was: whether the trading is in line with the client's investment objectives, financial resources and the character of the client's account.

Advisers must not induce trading in a client's account that is excessive in view of the client's financial resources and investment objectives and the character of the client's account. Other factors, such as whether the client makes money or approves each trade, are not relevant.

Front 87

Over which of the following would the investment adviser representative have discretionary authority?

A) An account in which the investment adviser representative chooses portfolio securities on behalf of the client.
B) An account in which a trustee has power of attorney over another individual's account.
C) An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative.
D) An account in which a customer has power of attorney over another individual's account.

Back 87

The correct answer was: An account in which the investment adviser representative chooses portfolio securities on behalf of the client.

An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.

Front 88

Which of the following statements best describes rights of rescission under the USA?

A) Any investor who loses money in a securities transaction can be made financially whole under the rights of rescission.
B) An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred.
C) Rights of rescission are not generally available to public customers under the USA, although such rights may be made available to institutional investors.
D) An agent who unknowingly violated the USA may be imprisoned for up to 5 years.

Back 88

The correct answer was: An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred.

An investor who believes he has been wronged in conjunction with an investment transaction may have recourse under rights of rescission to restore his original financial condition. Generally, an investor exercising rights of rescission is entitled to recover the amount of the initial investment, a reasonable rate of interest on that amount, and attorney's fees, if any, less any income received on the security. An agent may not be imprisoned for unknowingly violating the USA.

Front 89

Which of the following statements regarding the USA are TRUE?

State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption.
State securities Administrators may not deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption.
State securities Administrators may deny, by rule or order, an exemption to a federal covered security.
State securities Administrators may not deny, by rule or order, an exemption to a federal covered security.
A) III and IV.
B) I and IV.
C) II and III.
D) II and IV.

Back 89

The correct answer was: I and IV.

State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA unless the security involved is covered by a federal exemption. State securities Administrators may not, however, deny an exemption provided to a federal covered security. Federal covered securities are granted exemption from state registration by federal law, so the state Administrator has no authority to deny the exemption granted by the federal government.

Front 90

All of the following statements are consistent with the Uniform Securities Act EXCEPT:

A) state Administrators may require federal covered investment companies to file documents with the Administrator using a procedure known as notice filing.
B) a security for which a registration statement is filed under the Securities Act of 1933 may simultaneously register with the state by the procedure known as registration by coordination.
C) state Administrators do not require consent to service of process to be submitted with notice filings for covered securities.
D) any security may be registered with the state by the procedure known as registration by qualification.

Back 90

The correct answer was: state Administrators do not require consent to service of process to be submitted with notice filings for covered securities.

The Administrator will require the filing of a consent to service of process with any securities registration. Notice filing is the state registration procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states.

Front 91

An agent lives in Montana and is registered in Montana and Idaho. His broker/dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may:

A) only accept unsolicited orders.
B) not conduct any business with the client.
C) not deal with the client until the broker/dealer registers in Pennsylvania.
D) conduct business with the client as usual.

Back 91

The correct answer was: conduct business with the client as usual.

Even though the college program is referred to as a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.

Front 92

Lucy, an agent of XYZ Securities, works out of an office in Ohio. She calls her client Clark, an individual investor and a resident of Kansas, and recommends that Clark purchase 500 shares of Perfect Pasta, Inc. common stock. Lucy read a report that Perfect Pasta plans to introduce a low carbohydrate pasta into the marketplace. Perfect Pasta, Inc. common stock is neither exchange traded nor traded on Nasdaq. At the time Lucy makes the recommendation, the stock is not registered with the Securities Departments of Ohio or Kansas. Which of the following statements best reflects this transaction?

A) Lucy has violated the USA because Perfect Pasta, Inc. failed to register its stock with the Securities Department in Ohio.
B) Lucy has violated the USA because she solicited an order in an unregistered, nonexempt security.
C) Lucy has violated the USA because Perfect Pasta, Inc. failed to register its stock with the Securities Departments in both Kansas and Ohio.
D) Lucy has not violated the USA because the transaction with Clark is an exempt transaction.

Back 92

The correct answer was: Lucy has violated the USA because she solicited an order in an unregistered, nonexempt security.

The agent violated the USA by engaging in the prohibited practice of soliciting transactions in an unregistered, nonexempt security.

Front 93

All of the following are prohibited practices under the Uniform Securities Act EXCEPT:

A) spreading false rumors about an impending merger or acquisition after taking a long position in the subject security.
B) broker/dealers filling orders for proprietary accounts ahead of customer accounts.
C) an agent suggests that his client make payment for a securities purchase to the agent who will then obtain a cashier's check to bring to the broker/dealer.
D) a market maker of a broker/dealer buys and sells securities for the account of the firm acting as a principal in the trades.

Back 93

The correct answer was: a market maker of a broker/dealer buys and sells securities for the account of the firm acting as a principal in the trades.

Market makers act as principals, buying and selling stocks in which they make a market. However, should that market maker, or anyone else, place the firm's order ahead of a customer that would be prohibited.

Front 94

Which of the following statements regarding the Uniform Securities Act are TRUE?

Criminal penalties for violations of the USA are punishable by fines of up to $10,000, imprisonment for up to 5 years, or both.
If the sale of a security is in violation of the USA, the buyer may sue the selling broker/dealer to recover the money paid for the security.
If the seller of a security discovers that he made an illegal sale, he may offer to repurchase the security at the price paid less interest charges.
The buyer of securities may not sue if within 30 days of receipt, he failed to accept or reject a written offer from the seller to rescind the trade and to refund the money with interest added.
A) I and II.
B) II and III.
C) II and IV.
D) I and III.

Back 94

The correct answer was: II and IV.

If the sale of a security is in violation of the USA, the buyer may sue the seller to recover the money paid for the security. If the seller of a security discovers that he made an illegal sale, he may offer to repurchase the security at the price paid plus, not less, interest charges. This offer of rescission is held open for 30 days. The buyer of the securities may not sue if he failed to accept or reject the offer within that time period. Criminal penalties for violations of the USA are punishable by fines of up to $5,000, imprisonment for up to 3 years, or both.

Front 95

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

A cease and desist order may be issued prior to a hearing.
A cease and desist order may be issued after a hearing.
A cease and desist order is valid for a maximum of 30 days.
A) I and II.
B) II and III.
C) I only.
D) I, II and III.

Back 95

The correct answer was: I and II.

In issuing a cease and desist order, the Administrator may provide prior notice and hearing or may issue the order without prior notice or hearing (summarily). There is no time period associated with the order.

Front 96

Violations of the Uniform Securities Act carry a criminal penalty of imprisonment for up to how many years?

A) 1 year.
B) 3 years.
C) 5 years.
D) 10 years.

Back 96

The correct answer was: 3 years.

Conviction for willful violations of the act or for knowingly filing a fraudulent document under the act carries maximum penalties of 3 years in jail and/or $5,000 in fines.

Front 97

Under the Uniform Securities Act, which of the following is NOT an offer or a sale?

A) New shares received as a result of a merger.
B) A contract of sale for a security.
C) The sale of a warrant.
D) A gift of assessable stock.

Back 97

The correct answer was: New shares received as a result of a merger.

When an exchange takes place that does not involve any consideration, such as in the case of shares received as a result of a merger or reorganization, it is not considered an offer or a sale. Any contract of sale for a security is a sale. A warrant is a security, so the sale of a warrant is a sale. A gift is not a bona fide gift if the recipient will later be assessed for the value of the gift; therefore, gifts of assessable stock are considered to be sales.

Front 98

When a broker/dealer's registration under the Uniform Securities Act is revoked, which of the following occur?

A) Registrations of agents of that firm are no longer in effect.
B) The Administrator will choose a local broker/dealer to oversee activities of the agents until the broker/dealer's registration is reinstated.
C) The agent's registration is held in escrow until a hearing.
D) Registrations of agents of the firm are still in effect.

Back 98

The correct answer was: Registrations of agents of that firm are no longer in effect.

An agent's license is only effective as long as that agent is associated with a registered broker/dealer. The agent's registrations are neither held in escrow until a hearing nor does the Administrator choose a broker/dealer to oversee activities of the agents until the broker/dealer's registration is reinstated.

Front 99

Which of the following statements are TRUE?

When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator.
When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator.
When an agent of a broker/dealer leaves the firm, only the broker/dealer must notify the Administrator.
When an investment adviser representative or a registered agent of a broker/dealer terminates employment, notice must be given to the Securities and Exchange Commission.
A) I and III.
B) III and IV.
C) I and II.
D) II and IV.

Back 99

The correct answer was: I and II.

When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker/dealer begins or terminates employment, both the agent and the broker/dealer must promptly notify the Administrator. Notice to the SEC is not required.

Front 100

A state registered investment adviser must keep business records available for examination by the Administrator:

A) for a term specified by the Administrator.
B) for three years.
C) for five years.
D) indefinitely.

Back 100

The correct answer was: for five years.

Records must be preserved for five years. However, the Administrator may prescribe a different period for certain types of records.

Front 101

Under the USA, all of the following actions represent potential civil liability EXCEPT:

A) securities sold where the agent willfully violated a provision of the USA.
B) securities sold in violation of the registration provisions of the USA.
C) nonexempt securities sold by an agent, not registered in the state.
D) securities sold where the agent makes an untrue statement of fact.

Back 101

The correct answer was: securities sold where the agent willfully violated a provision of the USA.

A willful violation of the USA represents criminal liability, not civil liability. All of the other choices represent potential civil liability.

Front 102

If a person not registered in a state knowingly makes a misleading filing with the Administrator, that person may be:

A) fined $5,000.
B) fined $10,000.
C) none of these choices, because the person is not registered.
D) imprisoned for 5 years.

Back 102

The correct answer was: fined $5,000.

Willful violation is punishable by a fine of up to $5,000, imprisonment of up to three years, or both. A state Administrator has jurisdiction over any transaction conducted in that state and over all applications filed in the state.

Front 103

Under the Uniform Securities Act, an Administrator has which of the following powers?

The power to seek court orders for the payment of restitution against any violators of the act.
The power to issue a cease and desist order with or without prior hearings.
The power to impose fines for violations of the act up to $5,000.
A) I and II.
B) I, II and III.
C) I only.
D) II only.

Back 103

The correct answer was: I and II.

The Administrator may issue cease and desist orders to stop persons from violating the act, with or without a prior hearing, as long as notice is given that a hearing will be granted upon written request. The Administrator may apply to a court for a temporary or permanent injunction, restitution to investors, or to have the court appoint a receiver for a violator's assets; or refer charges to the state attorney general or district attorney for prosecution. The Administrator does not have the power to invoke criminal penalties (three years in jail and/or a $5,000 fine under the Uniform Securities Act); that power is reserved for the courts.

Front 104

Which of the following would be an agent under the terms of the Uniform Securities Act?

A sales representative of a licensed broker/dealer who sells secondary securities to the general public.
An assistant to the president of a broker/dealer who, for administrative purposes, accepts orders on behalf of senior partners.
A subsidiary of a major commercial bank registered as a broker/dealer that sells securities to the public.
An issuer of nonexempt securities that are registered in the state and sold to the general public.
A) II and IV.
B) II and III.
C) I and IV.
D) I and II.

Back 104

The correct answer was: I and II.

Under the USA, only an individual can be an agent (a person who sells securities for a broker/dealer). An administrative person, such as the assistant to the president of a broker/dealer, is considered an agent if that individual takes securities orders from the public. Corporate entities, broker/dealers, and issuers are all excluded from the definition of an agent.

Front 105

With regard to the powers of the Administrator, which of the following statements are NOT correct?

The Administrator must seek an injunction to issue a cease and desist order.
The USA requires an Administrator conduct a full hearing, public or private, prior to issuing a cease and desist order.
The USA grants the Administrator the power to issue injunctions to force compliance with the provisions of the act.
A) I and II.
B) I, II and III.
C) II and III.
D) I and III.

Back 105

The correct answer was: I, II and III.

The Administrator need not seek an injunction to issue a cease and desist order. The Administrator can seek an injunction from a court. The USA does not require that an Administrator conduct a public or private hearing prior to issuing a cease and desist order. When time does not permit, the Administrator may issue a cease and desist prior to a hearing to prevent a pending violation. The USA does not grant the Administrator the power to issue injunctions to force compliance with the act. The act permits the Administrator to issue cease and desist orders and, if they do not work, to seek an injunction from a court of competent jurisdiction. A cease and desist order is an administrative order whereas an injunction is a judicial order.

Front 106

According to the Uniform Securities Act, an offer or a sale does not exist if it is a(n):

reclassification of the issuer's securities.
bona fide pledge or loan.
act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares.
stock dividend of stock other than the issuer's for which nothing of value was given.
A) I and II.
B) II and IV.
C) II and III.
D) I, II, III and IV.

Back 106

The correct answer was: I, II, III and IV.

The Uniform Securities Act specifically excludes these four choices from the definition of offer and sale.

Front 107

A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Capital Market. To qualify their shares for sale in the state, they would probably use:

A) qualification.
B) coordination.
C) supplementation.
D) notice filing.

Back 107

The correct answer was: notice filing.

Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.

Front 108

Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, an investment adviser's fee:

A) may not be based on a percentage of the client's assets under management.
B) must reflect the amount of time the adviser spends managing a client's account.
C) may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services.
D) is not subject to regulatory oversight by the Administrator if the client may be considered financially sophisticated.

Back 108

The correct answer was: may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services.

A fee could be considered excessive if it were substantially higher than that charged by other advisers for performing similar services. The Administrator may research fees charged by various investment advisers for purposes of comparison. Whether clients have agreed to the fee or done their own price-shopping is irrelevant in determining if an adviser's fee is unreasonable.

Front 109

Under the USA, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective?

Coordination.
Qualification.
Notice filing.
Application.
A) III and IV.
B) I and II.
C) II and IV.
D) I and III.

Back 109

The correct answer was: I and III.

Under the NSMIA, the Administrator may request copies of the documents filed with the SEC, but does not review them because of lack of jurisdiction. There is some review of the information filed in a registration by coordination, but, since the primary responsibility falls upon the SEC, the states generally just spot check the documents. However, registration by qualification or application for professional licensing becomes effective only after an active review of registration information and upon order of the Administrator.

Front 110

Which of the following would be considered fraud under the Uniform Securities Act?

A) Using a private subscription to an online Internet legal records service, an agent discovers that a company is about to file for bankruptcy and immediately calls her clients recommending they liquidate their holdings.
B) An agent knowingly sells securities in a publicly traded company in which his family has a beneficial ownership.
C) An agent has a large number of clients in a security in which she trades frequently for her own account with no attempt to create an inaccurate impression of trading volume.
D) An agent knowingly sold a nonregistered security because he thought it would eventually become registered.

Back 110

The correct answer was: An agent knowingly sold a nonregistered security because he thought it would eventually become registered.

Fraud occurs when a person covered under the USA knowingly violates a provision of the law; the agent knew the security was not registered and fraudulently sold it.

Front 111

Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT:

A) investment adviser representatives.
B) publishers of financial publications that are not addressed to clients' specific individual investment situations.
C) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million.
D) financial planners who provide fee-based investment advisory services to clients.

Back 111

The correct answer was: financial planners who provide fee-based investment advisory services to clients.

Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator as long as their total assets under management are less than $25 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration.

Front 112

An interest in which of the following is a security under the Uniform Securities Act?

Merchandising marketing scheme.
Multilevel distributorship arrangement.
Oil and gas drilling program
Cattle feeding program.
A) II and III.
B) III only.
C) I only.
D) I, II, III and IV.

Back 112

The correct answer was: I, II, III and IV.

The USA considers interests in merchandising marketing schemes, multilevel distributorship arrangements, oil and gas drilling programs, and farm animals, whether it is a feeding or a breeding program, to be investment contracts and, therefore, securities. The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are.

Front 113

Which of the following would subject an agent to a denial of registration?

An arrest for fraudulent behavior in selling securities to an insurance company 2 years ago.
Conviction of a securities-related misdemeanor eight years ago.
Losing a civil lawsuit three years ago that related to the agent's actions as a landlord.
Failure to pay filing fees.
A) II, III and IV.
B) I and IV.
C) II and IV.
D) I, II and III.

Back 113

The correct answer was: II and IV.

Conviction, not merely an arrest, for a misdemeanor involving securities within the past ten years, and failure to pay filing fees are grounds for denial. Loss of a civil suit not related to the securities industry is not a cause for denial to an agent or IAR.

Front 114

If an elderly widow with no independent income other than Social Security payments wishes to invest the proceeds from her recently deceased husband's life insurance, which of the following would be the most suitable recommendation?

A) High quality dividend paying preferred stocks.
B) Oil and gas exploration program that is going to strike.
C) Municipal bonds with short-term maturities.
D) Purchasing call options.

Back 114

The correct answer was: High quality dividend paying preferred stocks.

High quality dividend paying preferred stocks will give her a reasonable income without great risk. Options are not income vehicles and are not income producing. Municipal bonds are not generally appropriate for low income clients because there would be little after-tax benefits. Oil and gas programs are speculative and not appropriate.

Front 115

An investment adviser representative engages in a prohibited practice by:

borrowing money from a client and making full disclosure to the employing investment adviser .
sharing in profits and losses with clients in proportion to their investment in the account and making full disclosure of this arrangement to the employing investment adviser.
not disclosing risks of a transaction to an unsophisticated client who would not understand the explanation.
not recording small transactions on the books of the employing investment adviser.
A) I only.
B) I and II.
C) III and IV.
D) I, II, III and IV.

Back 115

The correct answer was: I, II, III and IV.

All of the choices are prohibited business practices. Borrowing money from a client is a prohibited practice unless the client is in the business of lending money, whether disclosure is made to the employer or not. Sharing in profits and losses with clients in proportion to investment in the account is not allowed for investment adviser representatives, even with disclosure to the employer. The rules for investment adviser representatives are different than the rules for agents. An adviser representative must always disclose risks of a transaction. If the client would not understand the risks, then, in all probability, the recommendation is unsuitable. All transactions must be recorded on the books of the employer, regardless of size.

Front 116

Which of the following meets the definition of churning?

Encouraging customer's to make frequent changes in their holdings without regard for their best interest.
Excessive activity in a customer's discretionary account.
Transactions that are excessively large considering the customer's financial situation.
A) I and II.
B) I and III.
C) II and III.
D) I, II and III.

Back 116

The correct answer was: I, II and III.

All three options describe churning.

Front 117

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within:

A) 45 days.
B) 15 days.
C) 30 days.
D) 60 days.

Back 117

The correct answer was: 15 days.

When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day and an appeal for review of an Administrator's order must be filed within 60 days.

Front 118

Under the USA, all of the following statements regarding private placements are true EXCEPT:

A) offers can be made to an unlimited number of institutional buyers.
B) no payment is received from noninstitutional clients.
C) commissions cannot be paid for soliciting noninstitutional buyers.
D) offers can be made to no more than 10 noninstitutional clients during any 12-month period.

Back 118

The correct answer was: no payment is received from noninstitutional clients.

A private placement is an exempt transaction under the USA as long as offers are directed to no more than 10 noninstitutional persons during any 12-month period. Although, just as with any other purchase, payment must be made for the securities, no commissions are paid in connection with noninstitutional sales. Furthermore, offers can be made to any number of institutional buyers.

Front 119

An investor who trades for her own account is a(n):

A) broker/dealer and must register with the state.
B) broker/dealer who does not need to be registered at the state level.
C) agent for a broker/dealer and must register in each state doing business.
D) public customer who does not need to register.

Back 119

The correct answer was: public customer who does not need to register.

Investors who trade solely for their own accounts are public customers who do not need to register.

Front 120

Foster Advisers, based in New Jersey, manages $35 million in funds for New Jersey- based clients. As a result of the NSMIA, which of the following statements best describes the registration requirement for Foster Advisers?

A) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities.
B) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.
C) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities.
D) Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities.

Back 120

The correct answer was: Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

Since the enactment of the National Securities Markets Improvement Act of 1996 (NSMIA), investment advisers with $30 million or in assets under management more must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $25 million must register with the state Administrator. Advisers with at least $25 million but less than $30 million of assets under management have the option to register with either their state Administrator or with the SEC. With $35 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.

Front 121

The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state?

An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only.
An adviser with a place of business in the state whose total fee income in the state amounts to $150.
An adviser with no place of business in a state who only provides advice on fixed annuities.
An adviser with a place of business in the state who only provides advice on mutual funds.
A) I, II and IV.
B) I, II, III and IV.
C) I only.
D) I and II.

Back 121

The correct answer was: I, II and IV.

Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional type clients, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration.