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65 Cards in this Set

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1. An investment adviser places large block trades for securities positions that are being purchased for its customers' accounts in order to lower its commission costs. The trades are often executed piecemeal, at different prices. The adviser, after being confirmed that the entire block has been filled, allocates the shares to its accounts. As a favor to its most valuable employees., the adviser allocates the shares purchased at the lowest prices to its employees' accounts; and then allocates the remaining shares to its customer accounts pro-rata.. The adviser. has disclosed its allocation method only to its employees. Which statement is true?
a. The investment adviser has breached its fiduciary duty to its customers because the block order must be executed at one price, not in pieces at differing prices
b. The investment adviser has breached its fiduciary duty
because it has not disclosed its method of allocating shares to its customers
c. The investment adviser has not breached its fiduciary duty
because it has disclosed its method of allocating shares to its employees
d. The investment adviser has not breached its fiduciary duty to customers because it has
obtained trade executions for customers at lower commission costs
B There really are 2 issues going on here. First, the adviser has
not told its customers of its method of allocating shares (it has told its employees how the allocation method works, but that has no relevance). The customers must be informed of the allocation method - making Choice b the best answer. The second issue is that the adviser is favoring his employees over his customers in the allocation - and this would be a prohibited practice (note, however, that this is not one of the choices offered).
2. A Registered Investment Adviser has established an enviable track record and decides that it should increase its asset management fee to reflect the increased value of its services. The Adviser amends its contract to include a fee equal to 5% of assets under management, charged each month to the client. This fee structure is disclosed in the Form ADV Part II filed with the Administrator and each customer signs a new advisory contract. Which statement is true?
a. This action can be taken because the Administrator was notified of the increased fee
b. This action can be taken because each customer signed a new contract that disclosed the increased fee
c. This action cannot be taken because advisory fees cannot be charged monthly
d. This action cannot be taken because the compensation to the Adviser is excessive
d Charging excessive fees is prohibited and a fee of 5% of assets per month is a 60% annual fee - clearly an unbelievably high fee! The ridiculous fee cannot be justified by including it in an amended Form ADV Part II filed with the Administrator (Administrators do not examine the filing information routinely - they just have it on file if they need access to it - so it would likely not be picked up by the Administrator unless there was a customer complaint). The ridiculous fee cannot be justified because the customer signed an advisory contract - he or she may not have known what was being signed. Finally, the adviser can charge fees monthly, quarterly, yearly - the frequency of the payment makes no difference. Rather, it is the amount being paid for the service that is the issue.
3.
Civil liability arises for an investment adviser under the Uniform Securities Act for all of the following reasons EXCEPT:
a. the investment adviser fails to
supervise its employees
b. the investment adviser fails to disclose to a customer that it acted as principal, selling a security from the adviser's proprietary account to the customer
c. the investment adviser omits a material fact when making a sales presentation to a client
d. the investment adviser recommends the purchase of registered non-exempt securities to a client
d. Civil liability under the Uniform Securities Act means that person violated the Act without malice or willful intent. Violations of the Act include failure to supervise employees; failing to disclose conflicts of interest; and making misrepresentations or omitting material facts when offering securities to customers. Since non-exempt securities are required to be registered in the State, recommending the purchase of registered non-exempt securities is just fine. Recommending the purchase of unregistered non-exempt securities would be a violation, however
4.
An agent of a broker-dealer conducts a seminar for the general public about investing in different types of securities. At this seminar, it would be unethical for the agent to:
a. discuss the merits of allocating investment funds across different asset classes
b. distribute his or her business card to the attendees of the seminar
c. distribute the prospectuses of any specific mutual fund investments that were discussed during the seminar
d. recommend the purchase of specific mutual fund investments to the attendees of the seminar
d. Since the making of a recommendation to a customer requires a suitability determination, making a recommendation of a specific security in a speech or advertisement is prohibited (because there is no way to determine the suitability of that recommendation for each person in the audience).
5.
Under the NASAA Statement of Policy, discretion may be exercised in a customer account without first receiving a written power of attorney from that customer:
a. under no circumstances
b. if it relates only to the size of the
trade or the security to be traded
c. if it relates only to the price of the
trade or the time of the trade
d. if the trade is for an institutional customer or another broker dealer
c. The definition of "discretion," where a written power of
attorney is needed from the customer, is if the agent is selecting either the security to be traded or the size of the trade. No written power of attorney is needed for an agent to select either price of execution or time of execution in a transaction. For example, if a customer says "Buy me 100 shares of ABCD when you think the time is right," the agent can choose the price and time of that trade execution without needing a written power of attorney.
6. The financial officer of a local not¬ for-profit religious organization calls an agent of a broker-dealer and says that: "If you split your commission and rebate 1/2 of it back to our church, I will tell all of our congregants to do business with you." Which statement is true?
a. The agent can accept the offer because the church is a not-for¬ profit organization
b. The agent can accept the offer because the portion of the commission rebated to the
church is a charitable contribution
c. The agent cannot accept the offer because commissions can only be split with other agents that work at the same broker-dealer
d. The agent cannot accept the offer because a church can only receive funds through voluntary charitable contributions
C. NASAA's rule on sharing of commissions is quite clear commissions can only be split or shared with registered agents that work at the same firm. Therefore, the agent could not split his commissions with the church.
7. An Investment Adviser uses a third party money manager to manage the accounts of his more sophisticated clients. These customers are older and are conservative in their objective, seeking current income and moderate growth. The third-party money manager has not achieved acceptable investment returns this year and changes its investment strategy the following year to aggressively trade speculative stocks, in an effort to improve performance. During the first quarter, using the new strategy, the customers' portfolios drop 15% in value and many of them write complaint letters to the Adviser. Which statement is true?
a. The Investment Adviser has failed to monitor the actions of the third party money manager and is liable for not determining the suitability of recommendations to customers
b. The Investment Adviser is not responsible for the actions of the third party money manager and the customer complaint letters should be forwarded to that firm for response and resolution
c. The Investment Adviser is liable to its customers for the 15% drop in the value of their accounts because it chose the money manager that was responsible for the loss
d. The Investment Adviser has no liability for the 15% drop in value of the customers' accounts because the adviser cannot guarantee that profits will be achieved or that losses will be avoided
a. There is no prohibition on the use of a "third party money
manager" by an investment adviser, as long as this has been disclosed to the customer and approved by the customer, as evidenced by the customer signing the advisory contract that includes the disclosure. However, the investment adviser has breached his fiduciary duty to his customers when he was unaware that the third party manager had changed its strategy from conservative investing to "aggressively trading speculative stocks" - and the adviser's customer base is older and conservative! He has failed to monitor the actions of the third party money manager, and because of this, his customers were placed in unsuitable investments. He has civil liability under the Uniform Securities Act because of these failures.
8.
Under NASAA rules, it is prohibited for an agent to:
a. place an order in a customer account after receiving verbal authorization from the customer
b. place an order in a customer account from that customer's attorney after receiving a written authorization from the customer
c. make a recommendation to a customer without first inquiring about the customer's investment objectives and needs
d. accept an unsolicited trade from a customer without first inquiring about the customer's investment objectives and needs
c. Agents can accept verbal orders from customers - that is the normal way that orders are placed! To accept an order from a person other than the customer, a written authorization must be given by the customer (a so-called "third party" power of attorney). Recommendations cannot be made unless a suitability determination is performed. However, unsolicited trades from customers can be accepted without condition.
9. A willful violation of the Uniform Securities Act would occur if an agent of a broker-dealer recommends the purchase of a(n):
a. non-exempt security to a customer that the agent knows is not registered, however the customer does not buy that security
b. security to a customer that the agent believes to be exempt and is not registered, however the agent later discovers that the Administrator has denied the issue's exemption
c. exempt security to a customer that the agent knows is not registered and the customer makes a purchase of the recommended security
d. non-exempt security to a customer that the agent believes to be registered and the customer does not buy that security
a. Willful violations are intentional acts that violate that Uniform Securities Act (as opposed to. an unintentional violation). If an agent knows that a non¬exempt security is not registered and recommends it to a customer, there is a "willful" violation of the Act. Whether or not a sale actually resulted from the recommendation is irrelevant. Making a recommendation of an exempt security that is not registered is perfectly legal and is not a violation. Recommending a non-exempt security to a customer that the agent believes to be registered is an "unknowing" violation of the Act - there is no willful intent.
10.
Under the Uniform Securities Act, an Investment Adviser CANNOT be required by the Administrator to:
a. post a surety bond, if the Adviser will not take custody of customer funds or securities
b. furnish information to the Administrator, if this is in the public interest and for the protection of investors
c. file an amended Form ADV Part II promptly if the filing becomes incomplete or inaccurate in any material respect
d. retain customer records in the format required by the Administrator
a. The Administrator has the power to require an investment adviser to furnish information; retain records; and amend its Form ADV promptly (defined as within 30 days in most States) if any information in it becomes materially inaccurate. If an adviser takes custody, the Administrator can require the posting of a surety bond. If the Adviser does not take custody, the Administrator will not require the posting of a surety bond.
11.
Under the provisions of the Uniform Securities Act, required records for broker-dealers must be kept in accordance with the provisions of the:
a. Securities Act of 1933
b. Securities Exchange Act of 1934
c. Investment Advisers Act of 1940
d. Uniform Securities Act as adopted
in that State
b. Part of NSMIA is that federal law has supremacy over state law when it comes to recordkeeping rules, capital requirements and custody rules. Since the SEC sets broker-dealer recordkeeping rules under the Securities Exchange Act of 1934, the State can only have a rule requiring that records be kept in conformity with the Act of 1934' s requirements.
12. In order to revoke a registration, Administrator must do the all of the following EXCEPT:
a. find that the action is in the public interest
b. cite a cause for the action found
in the Uniform Securities Act
c. obtain a court order revoking registration
d. provide an opportunity for the aggrieved person to have the order reviewed
c. The Administrator has the power t~ summarily suspend or revoke a registration. The action must be in the public interest and a cause for the action must be cited from the Uniform Securities Act. There is no court order required for the Administrator to issue the order. Note, however, that the person that is the subject of the order can make an appeal in State Court to have the order revoked
13. The Administrator will summarily cancel a broker-dealer's registration for all of the following reasons EXCEPT:
a. the licensee is no longer in
existence
b. the licensee has ceased to do
business as a broker-dealer
c. the licensee is subject to an
adjudication of mental
incompetence
d. the licensee has engaged in an
unethical business practice
d... The Administrator will cancel a broker-dealer's or investment adviser's registration if the firm is no longer in existence; has ceased doing business; or if the owner of the firm has become incompetent (as determined by a court of law). Remember that an unethical business practice might involve something that is not a very serious offense, such as failing to properly maintain records. For such a violation, the Administrator might fine the firm and make them take corrective action, but their registration would not be canceled.
14.
A willful and fraudulent violation of the Uniform Securities Act occurs if a(n) :
a. deceptive sales presentation is made to a client, but no sale results
b. omission of fact is made that is not important to understanding the risks and merits of the investment
c. security that is not properly registered is recommended to a customer and the agent was unaware of this
d. investment recommendation is made to a customer of the stock of a company that is in a precarious financial condition
a. If one is being "deceptive," that implies that the person knew about a fact that he or she distorted or omitted in order to attempt to get the customer to do a securities trade - and willful intent to deceive is fraudulent. It makes no difference if the trade actually occurred for there to be a violation of the Act. If the agent did not know about important information that was not presented to the customer, then there is no "willful intent." A recommendation of a company that is in a precarious financial
15.
During an investigation undertaken under the provisions of the Uniform Securities Act, the Administrator has the power to:
I Administer oaths and affirmations
II Subpoena witnesses and compel their attendance
III Require the production of books and records
IV Publish information concerning any violation of
a rule or an order
a. I and II only
b. III and IV only
c. I, II, III
d. I, II, III, IV
d.. During an investigation, the Administrator can administer oaths and affirmations (e.g., take a statement from an individual, who swears under oath, that the statement is truthful); can subpoena witnesses; can require the production of books and records; and can make public any information about resulting actions taken by the Administrator (e.g., hold a press conference).
16.
Surety bond coverage can be required by the Administrator as a condition of registration for all of the following EXCEPT:
a. broker-dealers
b. investment advisers
c. agents
d. issuers
d. A surety bond can be required as a condition of registration for the State registration of broker-dealers, investment advisers who take custody, and for their agents. There is no surety bond requirement for issuers to register their securities in a State.
17.
In connection with the sale of an issue to a customer, the agent of a broker-dealer must disclose any material public facts about the issuer if:
I by not disclosing the information, the
presentation to the customer would be misleading in any material respect
II the customer is not an employee or officer of the issuer and therefore is not in a position to have knowledge of these material public facts
III the information was disclosed to the agent by the broker¬dealer, regardless of the broker-dealer's policies and procedures covering disclosure of information to customers
a. I only
b. I and II
c. II and III
d. I, II, III
d.. Omissions or misstatements of material fact, when making a sales presentation to a customer, are prohibited. If the customer is not an officer or employee of the company that is the subject of the sales presentation, then that customer is not in a position to know that much about the company and must be told the material public facts that are relevant to the sales presentation. Finally, regardless of the broker-dealer's internal policies and procedures on disclosure of information, all material information about that issuer necessary for the customer to form an opinion as to whether to trade that security, must be disclosed.
18.
All of the following are violations of the Uniform Securities Act EXCEPT:
a. an agent of a broker-dealer
telling a customer that by purchasing a bond with a 5% coupon, the customer will earn a 5% yield
b. an agent splitting profits evenly in a customer account where the customer has contributed all of the capital in the account
c . an agent backdating a trade confirmation so that the customer will get a better execution price
d. an agent refunding a customer's money for a transaction that violated the registration
provisions of the Uniform Securities Act
d. Since a bond is not necessarily purchased at par, telling a customer that a 5% coupon rate on a bond means that the customer will get a 5% yield is deceptive. Splitting profits in a customer account between an agent and a customer is prohibited unless each contributes capital to the account; sharing is in proportion to capital contributed; and the firm approves of the arrangement in writing. Trade records must be accurate and backdating of trades is prohibited. Finally, refunding a customer's money (plus interest and attorney's fees) is the basic remedy for having committed a violation of State law, so that is a good thing - not a violation!
19.
All of the following are examples of market manipulation EXCEPT:
a. disseminating rumors
b. churning
c. painting the tape
d. wash trades
b. Market manipulation means that the price of a security is being manipulated in the market away from the true market value. Disseminating rumors to get people to buy or sell that stock, especially if it is thinly traded, will certainly get the price moving! "Painting the tape" is a term for doing rapid-fire buy/sell trades in that security to show action on the tape, without an actual ownership change. This activity will attract other market participants to trade, again moving the stock's price. Wash trading is another term for "painting the tape." Churning a customer's account is illegal, but it is not market manipulation. Churning is executing trades in a customer account that are excessive in frequency or size, just to generate commission income for that agent.
20.
Making an intentional omission of material fact when recommending a security to a customer would be considered fraudulent if:
a. a reasonable man would attach decision making importance to the omitted information
b. the information was not available to the general public at the time that the recommendation was made
c. the maker of the recommendation did not perform due diligence to determine the relevancy of the omitted information
d. under the circumstances, the maker of the recommendation did not, and could not, have known of the importance of the omitted information to the buyer of the securities
a. The "reasonable man" test is used by courts in determining if an offer of a security was made fraudulently. Since a fraud is deemed to occur if there was an omission or misstatement of material fact when the offer of the securities was made, the court looks to see if a "reasonable man" would attach decision making importance to the omitted or misstated information. If the answer is yes, then a securities fraud has occurred.
21.
The Administrator may summarily deny or revoke the exemption of which type of security?
a. Non-Profit Charitable
Organization Issues
b. Securities guaranteed by a
Canadian province
c. Federal Credit Union Issues
d. Insurance Company Issues
a. Affinity fraud is a "hot button" issue for State Administrators. "Church" bond offerings are typically bought by members of that church who are usually quite trusting individuals, and there have been some big frauds that have occurred because they trusted another member of the church who offered them securities that turned out to be worthless. Therefore, the Administrator has the power to deny or revoke the exemption from registration given these issues under State law. On the other hand, Canadian Government securities, Federal Credit Union issues and Insurance Company issues are all exempt securities under State law where the exemption cannot be summarily denied by the Administrator (either because the issuer is "trusted," like the Canadian Government; or the issuer is regulated under other Federal or State laws, such as insurance companies, credit unions and banking institutions).
22.
Under Uniform State Law, all of the following statements about an Administrative order denying or revoking registration of securities are true EXCEPT:
a. the burden of proof of showing that a security is exempt is on the person claiming the exemption if the issue is registered by qualification
b. an order revoking registration usually cannot be made
retroactive by the Administrator
c. a summary order issued by the Administrator is final and cannot be appealed
d. a person cannot be found in violation of a summary order if he did not know, and in the exercise of reasonable care, could not have known, about the order
c. An order issued by the Administrator revoking a securities registration, can be appealed to that State's court. These orders cannot be made retroactive (with one minor technical exception involving registration by coordination). If the person who is the subject of the order never receives the order from the Administrator, then that person cannot be found in violation of the order. So if the order is mailed by the Administrator by certified mail, and the post office loses it and it is never delivered, then that person cannot be found in violation. Finally, to get the order reversed, the burden of proof is on the person claiming the exemption, not on the Administrator. (A minor note: If the Administrator wishes to deny or revoke an exemption from State registration to an issue registered by coordination, then the burden of proof shifts to the Administrator - supremacy of Federal law again, since the State accepts the SEC registration as the State filing document.)
23.
Which of the following individuals is required to register as an Investment Adviser under the provisions of the Uniform Securities Act?
a. The publisher of a financial newsletter that covers the relative merits of different insurance policies
b. An accountant that offers advice on investing in fixed annuity contracts for an additional charge
c. A lawyer that offers advice about investments in corporate stocks and bonds for an additional charge
d. The publisher of research reports about corporate stocks that are distributed only to institutional investors
c. For a lawyer or accountant to be excluded from the definition of an investment adviser, he or she must only give incidental advice about investing in securities and cannot charge separately for the advice. Choices a and b are not required to register as investment advisers in the State because they are giving advice about insurance products, not about securities. Choice d does not have to register because advisers with no place of business in the State, whose only customers are institutions, are exempted from registration as well. While Choice d makes no mention of whether the adviser has an office in the State, Choice c is still clearly the better answer.
24.
To register a successor firm with the State Administrator for the unexpired portion of the current license year, which statement is NOT true?
a. The predecessor firm must have ceased business operations and can only conduct winding down transactions
b. The successor firm must continue business operations through the end of that license year
c. The successor firm must file a Form BD or ADV amendment with the Administrator
d. The filing becomes effective on the date designated by the licensee
b. Uniform State law does not require the filing of a new registration application for a successor firm. The successor firm files a registration amendment with the State, that takes its registration through the end of that year, without having to pay a new filing fee. The effective date of the successor firm's registration is the date indicated on the amendment. The "old" firm must have ceased business operations for the "new" firm to be registered in the State. Whether or not the successor firm continues in operation through the rest of that year is irrelevant.
25.
An insurance agent also prepares financial plans for customers for a fee as a sideline. The agent is registered as an investment adviser representative in the State. Which statement is true?
a. The insurance agent may say that he is registered with the SEC
b. The insurance agent may say that he or she is an investment
counsel
c. The insurance agent may say that his qualifications as a planner
have been certified by the State
d. The insurance agent may say that he is registered in the State
d. Since this agent is registered in the State (and not with the SEC) as an investment adviser representative, he can say that. He cannot say that he is registered with the SEC, since this is not true. In order to call oneself an "investment counsel," giving advice about securities must be the principal business of the adviser not a sideline. It cannot be stated that the Administrator or State has certified the representative's qualifications, since this is not the case.
26.
Which statement is NOT true about rules issued by the Administrator?
a. The issuance of the rule must be consistent with the public interest and protection of investors
b. The rule cannot contravene provisions of federal law that are preemptive
c. The rule can be coordinated with rules issued by the SEC
d. The Administrator must update the rules every 3 years to insure their compliance with federal statutes
d. Rules are written by the Administrator to interpret the provisions of the Uniform Securities Act. The basis for the issuance of the rule is to protect investors. These rules cannot contravene federal law, which has supremacy. The rule can be coordinated with the SEC's version of that rule. There is no requirement for 3-year updating of Administrative rules.
27.
The Administrator will revoke the registration of an investment adviser if:
a. a representative of the adviser becomes insolvent, meaning that he cannot pay his bills as they come due
b. an officer of the adviser becomes insolvent, meaning that he
cannot pay his bills as they come due
c. the adviser becomes insolvent, meaning that the firm cannot pay its bills as they come due
d. any of the above
c. If an employee or officer of an advisory firm goes broke, this has no effect on the firm's registration in that State. However, if the firm goes broke (cannot pay its bills as they come due), then the adviser's registration will be revoked in that State.
28.
A person with no office in a State would be required to register as an investment adviser in that State if that individual:
a. has been qualified as a Chartered
Financial Analyst and sells securities analyses to customers in the State
b. only deals with other investment advisers in that State
c. only deals with existing customers that are briefly vacationing in that State
d. makes solicitations to no more than 5 clients in that State in any
12 month period
a. If an investment adviser with no office in a State only deals with institutional investors, broker-dealers, or other investment advisers, then it is not required to register in that State (it would be required to register in the State where it did have an office, however). If an adviser with no office in the State only deals with customers who are vacationing in that State; or solicits fewer than 6 clients in that State; then it is exempt from registration. Just because a person has a CFA certification does not exempt him or her from registration if advisory services are offered to customers in that State
29.
A person with no office in the State IS solely engaged in the business of giving investment advice to insurance companies for compensation. Under the Uniform Securities Act, this person would be EXEMPT from the Act's:
a. registration provisions
b. anti-fraud provisions
c. advertising filing provisions
d. common law deceit provisions
a. The Uniform Securities Act exempts advisers with no office in the State from registration if they only deal with institutions (such as an insurance company). However, everyone and everything is subject to the anti-fraud provisions of the Uniform Securities Act. Everyone and everything is subject to common law deceit provisions. Finally, the advertising and filing provisions of Uniform State law do not apply to exempt securities or to exempt transactions. They do apply to broker-dealers, investment advisers and their agents, regardless of whether they are registered or exempt from registration.
30.
Under the Uniform Securities Act, an investment adviser is any person who is compensated for rendering advice about which of the following?
a. Investment contracts
b. Endowment policies
c. Annuity contracts that periodically pay a fixed amount
d. Bank issued certificates of deposit
a. To be an investment adviser,' advice must be given about securities - and an investment contract is a security (e.g., a contractual monthly investment plan that requires a fixed payment amount monthly for a minimum time period to buy a designated mutual fund). Endowment policies and fixed annuities are insurance products, not securities. A bank issued certificate of deposit is a bank product and is not a security.
31.
The determinant of. whether that State's Administrator would initiate a proceeding against an investment adviser for violations of the Uniform Securities Act is if the:
a. adviser has an office located in
that State
b. violation involved securities
registered in that State
c. illegal conduct occurred in that
State
d. customer of the adviser filed a
complaint in that State
c. The Administrator will take action in that State if the illegal conduct occurred in that State.
32. If an agent is the subject of a determination that he or she willfully violated the securities laws by an Administrator of another State within the past 10 years:
a. registration may be denied or that person may be barred from employment by a broker-dealer or investment adviser by the Administrator of that State
b. registration cannot be denied in that State but the Administrator can require the retaking of the State licensing exam for that individual with a minimum passing grade of 80%
c. registration cannot be denied by the Administrator of that State because disciplinary actions taken by another State Administrator have no standing outside of that State
d. registration cannot be denied by that State but the Administrator can require the posting of a higher surety bond as a condition of registration in that State
a. If the Administrator of another State kicks you out of the securities business and revokes your registration, you cannot attempt to re-enter the business by registering in another State - because that State will deny your registration based on the fact that another State revoked your license! However, note that after being exiled for 10 years, all is forgiven and you can re-enter the business.
33.
In which of the following situations has there been NO violation of NASAA rules?
a. An agent omits mentioning a material fact necessary to make a presentation about a security not misleading, but the customer decides not to buy the security
b. An agent misstates a material fact to a customer when recommending a security and the customer buys that security and enjoys a profit
c. An agent makes a recommendation to a customer, disclosing all relevant information about the issue known to that agent and the customer buys that security and suffers a loss
d. Any of the above
c. Omissions or misstatements of material fact necessary to make a sales presentation about a security not misleading, are fraudulent. It makes no difference if the customer decides to buy that security or not, based on that presentation. If all known relevant information is presented and the customer lost money, well, it's a shame that the customer lost money, but that does not make the offer fraudulent. Customers who buy securities are expected to understand that they might have losses instead of having the much more desired gains.
34.
An investment adviser can borrow money from which of the following customers?
a. Unaffiliated investment adviser
b. In vestment company
c. Accredited investor
d. Broker-dealer
d. An investment adviser can only borrow money from a customer that is an affiliate; or a customer that is a financial institution that is in the business of making loans such as a bank or broker-dealer. Thus, an investment adviser could not borrow from a customer that is another unaffiliated investment adviser; could not borrow from a customer that is an investment company; and cannot borrow from a wealthy customer that is an accredited investor. However, the adviser would be permitted to borrow from a customer that is a broker-dealer. In this case, it makes no difference if the broker-dealer is affiliated or unaffiliated.
35.
Which of the following is prohibited in an advisory contract under NASAA rules?
a. Custody Provision
b. Liquidated Damages Provision
c. Non-Assignment Provision
d. Discretionary Authority Provision
b. A "liquidated damages provision" in an advisory contract would state that if the customer suffers a loss, the adviser is responsible. This is no different than a prohibited guarantee against loss and thus is not permitted. Advisory contracts can permit the adviser to take custody (unless that State prohibits this); must have a non-assignment provision, which means that the contract cannot be assigned to another investment adviser without customer consent; and can give the adviser discretion over the customer's account.
36.
Which order for a customer's account can be accepted by an agent of a broker-dealer?
a. The order is placed by the customer's attorney, who assures the agent that the customer has given him trading authority
b. The order is placed by the customer's accountant, who recommended the security to the customer
c. The order is placed by the customer's attorney in an account where the customer is deceased, and the attorney provides a written power of attorney signed by the deceased customer
d. The order is placed by the customer's attorney in an account where the customer is deceased, and the attorney provides a written copy of the will appointing the attorney as executor over the estate
d. To accept trading orders in a customer account from anyone other than the customer, there must be a written trading authorization signed by that customer. In Choices a and b, there is no written authorization, so orders cannot be taken. Choice c is more subtle - the written power of attorney from the customer becomes void if the customer dies (it dies with the customer), so the attorney could not place the order. In Choice d, the written copy of the will signed by the customer and witnessed, where the attorney is appointed as executor, is the written authorization for that attorney to trade the deceased's account.
37.
Which statement is true regarding advisory fees under NASAA rules?
a. Advisory fees must be tied to account performance so that the adviser's fee will decline if the customer's assets under management fall in value
b. Advisory fees must be competitive with those charged by other advisers that provide similar services and cannot be unreasonable
c. Advisory fees are determined by free market competition among advisory firms and are not subject to NASAA rules
d. Advisory fees for investment advisers that are also registered as broker-dealers in the State are determined by the FINRA/NASD 5% Policy
b. NASAA requires that advisory fees be comparable to those charged by other advisers that provide similar services. And, of course, all charges must be "fair and reasonable." Also note that FINRA/NASD rules only apply to broker-dealers, not to investment advisers, so the FINRA/NASD 5% Policy has no applicability.
38.
Under NASAA rules, any recommendation made to a client by a broker-dealer is permitted only if the:
a. broker-dealer's research department, or an outside third party research firm, is the source of the recommendation
b. recommendation is based upon
the client's investment objectives, investment experience, financial situation and financial needs
c. broker-dealer does not sell the customer the recommended security in a principal transaction
d. broker-dealer does not have a control relationship with the issuer whose security is being recommended to the customer
b. In order to made a recommendation to a customer, it must be determined that the investment is suitable for the customer, based on investment objectives, investment experience, financial situation and financial needs. Because a broker-dealer is not a fiduciary, unlike an investment adviser, it is permitted to sell securities out of its inventory to customers that wish to buy that security. If a broker¬dealer has a control relationship with an issuer whose securities it is recommending, this fact must be disclosed to the customer. There is no rule requiring that recommendations come from a broker-dealer's research department or a third party research firm.
39. An investment adviser would be allowed to lend money to a customer in which of the following situations?
a. The customer informs the adviser that he has been fired from his job and needs the funds on an emergency basis to meet his monthly living expenses until he finds a new job
b. The customer is an old college buddy of the adviser and is going through a nasty divorce and he needs the funds to pay for court¬ ordered child support
c. The customer has received a margin call in his brokerage account maintained at an unaffiliated broker-dealer and does not wish to sell those securities since they are likely to appreciate in the near future
d. The customer is a partner in the advisory firm who needs a cash distribution from the firm to meet required minimum tax payments due
d. Under NASAA rules, the prohibition on borrowing money from customers or lending money to customers is completely straightforward. If a customer is in "financial hardship" or the customer is an "old friend" or the customer "needs money," these are not reasons that allow the rule to be ignored. However, a partner of an advisory firm could borrow money from the firm - this is done all the time. Firms lend money routinely to their officers and partners (and often to their employees too). An officer or partner is not a "customer" for purposes of this rule. These are owners of the advisory firm, not customers.
40. In which situation is the investment adviser NOT exceeding the authority granted by the customer over the account, assuming that the adviser does not have discretionary authority?
a. Upon seeing that the price of a security that the adviser has purchased in 25 client accounts has started to drop precipitously, the adviser liquidates the position so that there is no loss to his clients
b. A customer has asked the adviser for a good recommendation and the adviser tells the customer that he will do some research and get back to him. When the adviser calls back the customer with the recommendation, the customer's wife answers the phone and says it is OK to buy that stock, so the adviser follows the wife's instructions
c. The adviser has received a note from the customer saying that he will be out of town for I week, and that he should take instructions during that time from the customer's attorney. The customer's attorney calls and says that he wants a position sold out of the account and the adviser follows the attorney's instructions
d. The manager of a mutual fund in which the adviser has placed all of his clients, is convicted of insider trading and is replaced by a new manager that the adviser does not like. The adviser sells the mutual fund holding and places his clients in another fund that has a similar investment objective
c. In Choice c, the customer has given previous written authorization, so the adviser can take orders from the customer's attorney. In the other choices, the adviser has not received either verbal or written authorization from the customer to effect the trade.
41.
If an investment adviser is also a registered broker-dealer and will effect recommended trades to customers through that broker¬dealer:
a. a violation of NASAA rules will occur
b. the relationship between the investment adviser and the executing broker-dealer must be disclosed on each trade confirmation
c. the relationship must be disclosed to the client, at, or prior to, the signing of the advisory contract
d. no conflict of interest exists because the investment adviser has a fiduciary relationship with the client
c. If an investment adviser will effect its recommended portfolio transactions though an affiliated broker-dealer that will charge commissions for each trade, this is a conflict of interest that must be disclosed, in writing, to the client at the time that the advisory contract is signed.
42. An investment adviser has determined that ABCD stock would be an appropriate investment for his client, but only if the price falls from the current level of $50 per share to $35 per share. What must the adviser do prior to placing an order to buy ABCD stock for the client's account?
a. Obtain verbal authority for that specific transaction
b. Obtain verbal authority to exercise discretion over the account
c. Obtain verbal authority to exercise discretion only over price and time of execution in the account
d. Secure an appointment as trustee over the account to formalize the fiduciary relationship
a. If an adviser wishes to recommend a transaction to a customer, the customer must agree to do the transaction prior to execution (this assumes that the adviser does not have discretion). This is usually done verbally. Written authorization is needed only to take account instructions from someone other than that customer.
43.
Which statement is T RUE about registration of broker-dealers, investment advisers and their agents in a State?
a. Registration as a broker-dealer or investment adviser expires 1 year from its effective date of January
1st
b. A firm that has both broker¬dealer and investment adviser entities, when registering one entity, automatically registers the other entity in the State
c. When a broker-dealer's registration is renewed in the State, this automatically renews the registration of its agents
d. When an agent is terminated by a broker-dealer, only the broker¬dealer is obligated to notify the State
a. Registration of broker-dealers, investment advisers and their agents expires on December 31 st of each year unless renewed. If a firm has both a broker-dealer entity and an investment adviser entity. each must register separately in the State. Registration renewal by the broker-dealer or adviser does not automatically renew the registration of the firm's agents. A registration renewal is filed by the firm on each agent's behalf at the end of each year. When an agent is terminated, both the agent and the firm (broker-dealer or investment adviser) are obligated to notify the State under the Uniform Securities Act. Note, however, that many States are changing this to only require notice by the firm under a newer version of this Act, but this is still the minority of States, and thus, is not tested.
44.
An agent of a broker-dealer is told, in confidence, by the President of a publicly held corporation, that this quarter's sales have fallen drastically. Which action should the agent take?
a. The agent should immediately disclose this information to the financial news media
b. The agent should immediately disclose this information to the firm's proprietary trading desk
c. The agent should consider the information to be "confidential" and not disclose it to anyone
d. The agent should execute solicited customer orders to sell based on the information disclosed
c. The agent has received "inside information" and cannot tell it to anyone until the news is publicly released by the issuer. If the agent or the firm traded on this information, or tells customers to trade based on this information, the insider trading rules are violated.
45.
Prior to the effective date of a securities offering made pursuant to an underwriting whose registration is pending in a State, an agent may sell the issue:
a. only to accredited investors
b. only to investors if the agent discloses that the securities are not yet registered
c. only if the purchaser signs an acknowledgment of the unregistered status of the securities
d. under no circumstances
d. Prior to the effective date of registration of a non-exempt security in that State, the issue cannot be offered or sold to investors. Remember that agents are prohibited from offering or selling unregistered non-exempt securities in a State. It makes no difference if the purchaser signs a statement that he knows that the securities are unregistered; nor if the purchasers are accredited investors.
46.
Under Uniform State Law, an agent is permitted to sell securities for more than I broker-dealer:
a. only if the types of securities offered by each broker-dealer are mutually exclusive
b. only if the agent is separately registered with each broker¬dealer
c. only if one broker-dealer solely offers exempt securities and the other broker-dealer solely offers non-exempt securities
d. under no circumstances
b. The typical arrangement is that an agent is only registered with one broker-dealer, both at the Federal and State level. However, in rare cases, an agent may be "dual registered." This occurs most often if one broker-dealer sells a very limited product range (say limited partnerships only) and the individual wants to be licensed to sell another type of product (say mutual funds) to his customers. He or she can associate with another broker-dealer that only sells mutual funds. To do so, the dual affiliation is disclosed on both the Federal and State registration applications submitted by each of the broker-dealers to register that agent.
47.
A registered agent of a broker-dealer solicits a customer to buy ABCD stock. The customer is resistant to the sales offer. The agent would be permitted to:
a. assure the customer that, if the price of the security does not increase, he will buy back that security at the breakeven price plus interest
b. determine the customer's suitability for the investment and inform the customer that the security meets the customer's financial objectives and needs
c. offer to perform the transaction for the customer and refund any commission paid if the price of the security does not appreciate within a stated time frame
d. guarantee that if the customer buys this security, the agent will put him at the top of the list for the next "hot" issue that comes along
b. Guarantees against loss by an agent to a customer are prohibited. Offering to refund commissions if the security does not appreciate is another, more limited, form of a prohibited guarantee. Of course, if the customer is resistant to a sales pitch. the agent can explain, one more time and with feeling, why the investment is appropriate for that customer!
48.
An investment adviser may be compensated with all of the following EXCEPT:
a wrap fees
b. soft doIlars
c. bid-ask spreads
d. commissions
c. Investment advisers can collect wrap fees, "soft dollar" compensation and commissions. If these are being paid by another firm in return for directed business, this must be disclosed to the customer. Bid-ask spreads are earned by securities dealers that buy securities into their inventory and sell securities out of their inventory. Broker-dealers earn these; investment advisers do not.
49.
Regarding the Administrator's ability
to inspect the books and records of a broker-dealer, which statement is true?
a. The Administrator can only inspect the books and records of a broker-dealer if a customer complaint has been filed against that firm
b. Customer records held by the broker-dealer can only be inspected by the Administrator if a court so orders
c. Broker-dealer records may be examined in any State in which the firm does business
d. An examination cannot be conducted by the Administrator if it would duplicate an examination already conducted by a self¬regulatory organization or the SEC
c. The Administrator is empowered to inspect the books and records of an investment adviser or broker-dealer that is doing business in that State In any location (either inside or outside that State) and without giving prior notice.
50.
If the Administrator prohibits investment advisers in that State from taking custody of customer funds or securities, then the investment adviser would NOT be permitted to:
a. accept a check from the customer in payment of the adviser's fee
b. accept cash from the customer in payment of the adviser's fee
c. accept securities from a customer if the adviser is also a registered broker-dealer in that State
d. accept securities from a customer that are registered in customer name
d. A customer giving an adviser a check or cash to pay the advisory fee is not "taking custody." Those funds belong to the adviser, not to the customer. Broker-dealers are permitted to take custody of funds and securities - it is part of their regular business operations. Regarding investment advisers, if the Administrator, by rule, prohibits the taking of custody, then the adviser could not accept funds or securities from customers to be held by the adviser for that customer.
51.
The Administrator is empowered to require the registration of a:
a. municipal bond of another State
sold in that State
b. U.S. Government bond sold in
that State
c. Federal covered security sold in
that State
d. security sold in an exempt
transaction in that State
d As a general rule, the Administrator cannot revoke the exemption from registration granted to the specific "exempt" securities listed in the Uniform Securities Act, such as U.S. Governments, Agencies, or Municipals. In addition, the State Administrator cannot require the registration of "federal covered" securities in the State (but can require a "notice" filing). However, the Administrator can deny the claim of an exempt transaction and make that security be registered. (Also note that the Administrator does have the power to compel registration of non-profit issues, such as Church Bonds, due to major abuses that have occurred with these.)
52. Which of the following are investment adviser conflicts of interest that must be disclosed to a client?
I The adviser is a general partner in a limited partnership investment that he is recommending to his customers
II The adviser is compensated by the broker-dealer to whom he directs the customers' portfolio trades
III The adviser owns a stock that he is recommending to customers in his personal account
IV The adviser will only take customers that have been referred to it by broker¬dealers to whom he pays a referral fee
a. I and II only
b. III and IV only
c. I, II, III
d. I, II, III, IV
d. When it comes to conflicts of interest, disclosure is the key. All of the choices listed are investment adviser conflicts. The adviser being the general partner in a limited partnership that he is recommending to his customers is a conflict. Is the adviser recommending it because it is the best investment for the customer or because the investment adviser will get management fees for being the general partner? The adviser directing its customers' portfolio trades to a broker who will pay a fee to the adviser for those trades is another conflict. Is the adviser sending the trades to that broker because he gets the best trade executions or is he sending the trades to that broker for the referral fee? If an adviser owns a stock personally that he is recommending to a customer, is he doing this in order to drive up the price of the stock to have a gain on his personal portfolio or is he doing it because it is the best recommendation for the customer? Finally, an adviser that only takes customers that have been referred to it by a broker to whom he pays a referral fee is another conflict. Was the customer referred by the broker because it was best for the customer or did the broker do it just to get the adviser's referral fee?
53.
An investment adviser personally owns the stock of a company that he or she wants to recommend to customers. Which statement is true?
a. The adviser is prohibited from recommending the stock to his or her customers
b. The adviser must disclose his or her personal ownership position to the customer
c. The adviser must sell that position to his or her customers
d. The adviser's interests are aligned with those of the customer and the adviser can make the recommendation without taking any additional action
b This is a conflict of interest that must be disclosed to the customer. The issue boils down to this - if an adviser owns a stock personally that he is recommending to a customer, is he doing this in order to drive up the price of the stock to have a gain on his personal portfolio? Or, is he doing it because it is the best recommendation for the customer?
54.
Which statement is T RUE regarding the Administrator's ability to deny or revoke an exemption?
a. An exemption from registration for a non-profit issuer may not be revoked by the Administrator
b. The revocation order can cover
a period of time prior to the date that the order was issued
c. The order can be issued without giving prior notice to the affected parties
d. If the order is appealed, the Administrator has the burden of proving that the exemption should have been revoked
c. Since "affinity fraud" is a hot button topic for Administrators, they do have the right to reject the exemption of a not-for-profit issue such as a church bond, so Choice a is false. An exemption cannot be revoked retroactively, so Choice b is false. A revocation order can be issued without giving prior notice, so Choice c is true. Finally, if the Administrator's revocation order is appealed, the burden of proof to show that the exemption should be permitted is on the issuer - not the Administrator, making Choice d false.
55.
All of the following are unethical practices under NASAA rules EXCEPT:
a. an agent makes a blanket recommendation of the same security to all of his clients on a regular basis
b. an agent's assistant accepts a sell order from a customer without notifying the agent
c . an agent effects trades in customer discretionary accounts that are excessive in size, but not in frequency
d. an agent accepts a buy order in a customer account from another person that does not have a power of attorney from the customer
b. Choice a is a violation because there must be a suitability determination for each recommendation to a customer. Choice c is churning, which is a violation. Choice d is the violation of exceeding granted authority in a customer account - to accept orders from someone other than the customer, there must be a written power of attorney granted by that" customer. Choice b is OK - the assistant can accept a sell order from a customer without notifying the agent (we must assume that the assistant is registered, otherwise he or she could not take customer orders).
56. An investment adviser representative that prepares financial plans for customers is also a registered life insurance agent in that State. If the agent recommends that a customer sell a mutual fund holding and use the proceeds to buy life insurance, all of the following should be disclosed to the customer EXCEPT:
a. the fact that the recommendation to purchase life insurance is in no way connected to the services offered by the advisory firm
b. the fact that the agent will earn a commission on the life insurance purchased by the customer
c. the fact that the sale of the mutual funds may result in a taxable event to the customer
d. the fact that the recommendation to buy life insurance does not make the investment advice any less objective
d. Here, the agent is registered to sell financial plans and insurance and there are potential conflicts of interest that must be disclosed. The customer must be informed that the sale of insurance products is in no way connected to the sale of advisory services. The customer must be informed that the agent will earn commissions on the sale of recommended insurance. The customer must be informed that if he sells a mutual fund to buy life insurance, he may have a taxable gain on the mutual funds. Choice d just sort of makes no sense - why would one disclose that the recommendation to buy life insurance will not make the adviser's investment advice any less objective? This is assumed to be the case.
57. John is a registered agent with ABC Brokerage, a registered securities broker-dealer in the State. Mike is a registered agent of XYZ Insurance Brokerage, a registered insurance agency in the State. John is not registered with the State to sell insurance and Mike is not registered with the State to sell securities. Mike verbally agrees with John that Mike will tell his insurance clients to do
their securities trades with John, "for which John will pay Mike 25% of the commission charged to the customer. This is a violation known as:
a. Selling away
b. Splitting commissions
c. Sharing in a customer account
d. Engaging in an unregistered activity
b. Commissions are only permitted to be split or shared with other registered persons at the same firm.
58.
Which of the following would NOT be considered to be fraudulent under the Uniform Securities Act?
a. A seller of a security misstates a material fact about that issue to the potential buyer, but a trade does not result
b. A seller of a security misstates a material fact about that issue to the potential buyer, and a trade results
c. An uninterested third party, in connection with the sale of a security, misstates a material fact to the potential buyer, but a trade does not result
d. An interested third party, in connection with the sale of a security, misstates a material fact to the potential buyer, and a trade results
c. Misstatements of material fact, made in connection with an offer to sell a security, are fraud. It makes no difference if.a. trade resulted from the offer. An uninterested third party has no financial incentive to make a misstatement of material fact in connection with the sale of a security, so this is not fraudulent. However, an "interested" third party does have a financial incentive to sell that security, so a misstatement of material fact made by that person in connection with the offer or sale of that security is fraudulent.
59.
The purpose of the Uniform Securities Act is to protect investors from:
a. investment fraud
b. aggressive sales pitches
c. financial loss
d. moral turpitude
A. The purpose of the Uniform Securities Act is to protect the public from investment fraud. (By the way, moral turpitude is a gross violation of the standards of moral conduct - it has nothing to do with offering securities!)
60.
Annual audited reports are required to be sent by investment advisers to their clients if the adviser:
I holds customer funds
II has discretionary control over customer accounts
III has solicited the customer for advisory business
IV has a conflict of interest that has been disclosed to the customer
a. I and II
b. III and IV
c. I, II, III
d. I, II, III, IV
a. If an investment adviser takes custody of customer funds or securities, it must be audited annually and provide a copy of the audit opinion to its customers. The definition of "custody" also includes "any arrangement, including a general power of attorney under which the adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian." Under this definition, an adviser that has discretion under a full power of attorney (which allows withdrawal of funds) would come under the custody rule requirements. Customers who are solicited for advisory business must be provided with a copy of the "brochure" (Form ADV Part II), not an audited financial statement of the adviser. All material adviser conflicts of interest must also be disclosed in Form ADV Part II.
61.
Which of the following would most likely be an investment adviser that is State registered?
a. Certified Financial Planner
b. Adviser with assets of $25 million
c. Investment Company
d. Trust Company
a. A Certified Financial Planner is the type of "smaller" investment adviser that is likely to be State registered. Remember that it is only the "big guys" that are Federal covered advisers - these are advisers with $25 million or more under management and advisers to investment companies. Trust companies are excluded from the definition of an investment adviser at both the Federal and State level, since they are already regulated as depository institutions under both Federal and State law.
62.
A stock in a customer account has been dropping rapidly in value. The investment adviser has attempted to contact the customer to advise her to sell the security, but the adviser is unable to reach that customer. The investment adviser is prohibited from placing the sell order unless the:
a. adviser contacts the customer's spouse and gets permission to sell the stock
b. adviser believes that selling the stock is in the customer's best interests
c. customer approves the execution of the sell order after she can be reached
d. customer had placed an existing
sell order 1 year ago
d. There is no mention of the customer having given the adviser discretion to trade the account, so choices band c are incorrect. There is no mention of the customer giving the spouse a trading authorization over the account, so choice a is incorrect. However, if the customer had previously placed a sell order (this would be a stop loss order) in the account, then the sell order would be filled once the stock falls to the stop price. Note that this would be a "GTC" - "Good- Til-Canceled" order. The order sits waiting to be executed. Note that the length of time is open-ended and that the order might have been placed I month ago, 6 months ago, I year ago, etc.
63.
A customer that buys a non-exempt new issue must be delivered a prospectus at, or prior to, the time of:
a. being solicited to purchase the new issue
b. entering into the contract to purchase the new issue
c. completion of the purchase of the new issue
d. settlement of the purchase of the new issue
b. The rule for prospectuses is that they must be delivered at, or prior to, confirmation of sale. The generation of the confirm is the time that the customer is legally entering into the "contract" to buy the security, so this is the best answer. Settlement is the date (typically 3 business days after the confirm is generated) when the customer actually makes the payment for the purchase. This is when the transaction is legally "complete."
64.
An investment adviser has been asked by many of his customers to help with preparation of their tax returns. The adviser does not have much experience with tax preparation. The adviser:
a. can take on the tax preparation work if he discloses his lack of competence to the client
b. can take on the tax preparation work if he educates himself in the applicable tax laws
c. should refer the client to a qualified tax preparer
d. can take on the tax reparation work if he includes this service in his advertising
c. This adviser is not qualified to do tax returns. He should refer the clients to a qualified tax preparer. He or she can accept referral fees from the tax preparer for this, as long as this is disclosed to the clients. The wording in Choice b makes it almost a good choice, but "educating" yourself about the tax laws is not the same as being qualified. If Choice b said instead that this adviser studied and passed the CPA exam, then this would be a good choice.
65.
A registered investment adviser lives in State X. The adviser does business with I client in State A and I client in State B. The adviser gives seminars about investing to groups of potential customers in State C. The adviser is required to register in:
a. State X only
b. States X and C only
c. States X, A, and C
d. States, X, A, B, and C
b. This adviser is physically located in State X, so the adviser must register in State X. Because the adviser has no location in States A and B, and only has I client in each of these States, the adviser qualifies for a "de minimis" exemption and does not have to register in those States. The adviser is giving investment seminars to "groups" of potential customers in State C. This activity requires the adviser to be registered in State C.