Series 63

Front 1

Creation of the SEC was the result of which act?

Back 1

Securities Exchange Act of 1934

Front 2

Which act was developed in order to 'Prohibit fraudulent practices in the sale of new issues of securities'?

Back 2

Securities Act of 1933

Front 3

Which act 'Requires registration of all broker-dealers'?

Back 3

Securities Exchange Act of 1934

Front 4

Which act is responsible for Regulating primary transactions?

Back 4

Securities Act of 1933

Front 5

Which act is responsible for Requiring issuers to file registration statements and prospectuses?

Back 5

Securities Act of 1933

Front 6

Which act is responsible for Requiring protection of customer securities?

Back 6

Securities Exchange Act of 1934

Front 7

Which act was developed to Prohibits fraudulent trading practices?

Back 7

Securities Exchange Act of 1934

Front 8

Which act is responsible for Regulating the secondary marketplace?

Back 8

Securities Exchange Act of 1934

Front 9

Define The Securities Act of 1933

Back 9

The Securities Act of 1933, also known as the Paper Act, requires companies that intend to sell their securities to the public through interstate commerce or the mails to register the securities with the Securities and Exchange Commission by "filing a prospectus and a registration statement. The act requires the full and-fair disclosure of relevant information in the prospectus in order for investors to obtain information necessary to make informed decisions. Its purpose is fu prevent fraud in the sale of new issues. The Securities and Exchange Commission does not review or pass on the investment merit of securities or companies issuing securities.
./ Take Note: Certain issuers of securities are not subject to the registration
and filing requirements of the act of 1933. These exempt issuers include the U.S. government, municipalities, nonprofit organizations and banks.

Front 10

Define The Securities Exchange Act of 1934

Back 10

The 1934 act created the Securities and Exchange Commission, which, under the act, was given responsibility and authority to regulate the securities mar¬kets. The SEC is made up of five commissioners appointed by the President of the United States and approved by the Senate. The SEC's primary responsibility is to enforce the 1934 act, the major provisions of which address:
• registration and regulation of the exchanges;
• regulation of credit and margin requirements (currently 50 percent) set by the Federal Reserve Board (FRB) through Regulation T (Reg T);
• registration of broker-dealers that trade securities on national
exchanges or over the counter (OTC);
• registration of persons effecting securities transactions with the public;
• regulation of insider transactions, short sales and proxies;
• regulation of trading activities;
• regulation of client accounts;
• the customer protection rule;
• regulation of the self-regulatory organizations, such as the National
Association of Securities Dealers and the Municipal Securities Rule
making Board (MSRB);
• regulation of the OTC market; and
• net capital requirements for broker-dealers.

Front 11

Define Public Utility Holding Company Act of 1935

Back 11

The Public Holding Company Act requires the registration of all public holding companies engaged in the electric utility business or in the retail distribution of gas unless exempted by rule or order.

Front 12

Define Maloney Act of 1938

Back 12

The Maloney Act, an amendment to the Securities Exchange Act of 1934, authorized the establishment and registration of national self-regulatory organizations such as the NASD. Broker-dealers must be members of such organizations to transact securities business.

Front 13

Define Trust Indenture Act of 1939

Back 13

This act of 1939 requires that each public issue of debt securities exceeding $5 million in a 12-month period be issued under a trust indenture. A trustee must ensure that the indenture includes specific provisions for the protection of the bondholders.

Front 14

Define Investment Advisers Act of 1940

Back 14

The Investment Advisers Act of 1940 provides for the registration and regulation of investment advisers. It prohibits deceptive practices between advisers and their clients and requires that advisers make certain disclosures to prospective clients, including their fees, backgrounds and methods of transacting business.

Front 15

Define Investment Company Act of 1940

Back 15

The Investment Company Act of 1940 provides for SEC registration and regulation of investment companies which include open-end investment companies (mutual funds), closed-end investment companies, unit investment trusts (UITs) and insurance company separate accounts.

Front 16

Define Securities Investor Protection Act of 1970

Back 16

The Securities Investor Protection Corporation (SIPC) was established in 1970 with the passage of the Securities Investor Protection Act. The purpose of the act is to protect customers of securities firms that go bankrupt.
SIPC oversees the liquidation of bankrupt firms and provides coverage of up to $500,000 in cash and securities to each customer of the firms.

Front 17

Define Insider Trading and Securities Fraud Enforcement Act of 1988

Back 17

The Insider Trading and Securities Fraud Enforcement Act of 1988 expanded the definition of, and the liabilities and penalties for, the unlawful use of nonpublic information prohibited by the Securities Exchange Act of 1934. An insider is any person who has access to nonpublic information about a corporation. Insiders may not use inside information as a basis for personal trading or benefit until that information has. been made public.Written Supervisory Procedures. All broker-dealers must establish, maintain and enforce written supervisory procedures specifically prohibiting the use of material nonpublic information by all persons interested in, affiliated with or in any way engaged in the broker-dealers' securities-related

Front 18

Criminal Penalties.

Back 18

The criminal penalties for violations of securities laws were increased through the 1988 Insider Trading and Securities Fraud Enforcement Act. Persons convicted of violating the act can be fined the greater of $1 million or 300 percent of profits received or losses avoided, sentenced to prison for up to 10 years, or both.

Front 19

Define Telephone Consumer Protection Act of 1991

Back 19

The Telephone Consumer Protection Act of 1991 (TCPA), administered by the Federal Communications Commission (FCC), was enacted to protect consumers from unwanted telephone solicitations, including recorded auto dialer solicitations and facsimile machine and modem (e-mail) solicitations. The act requires any organization that performs telemarketing (in particular, cold calling)-including a broker-dealer-to:
• maintain a "do-not-call list" of customers who do not want to be called and keep a prospective customer's name on the list for 10 years from the time the request is made;
• institute a written policy, available on demand, regarding maintenance procedures for the do-not-call list; . train reps to use the list;
• ensure that reps acknowledge and immediately record the names and telephone numbers of customers who ask not to be called again; and
• call the homes of prospective customers only between the hours of 8 a.m. and 9 p.m. in the prospective customers' time zones.

Front 20

Define National Securities Markets Improvement Ad of 1996

Back 20

The National Securities Markets Improvement Act of 1996 (NSMIA) expanded the SEC's role to include improvement and oversight of:
• market efficiency
• competition in the securities industry
• capital formation
• elimination of regulations that no longer serve the public interest
Because of its role in coordinating the activities of the various securities regulators, this act sometimes is referred to as the Coordination Act.

Front 21

Define State Securities Law: Uniform Securities Act

Back 21

In addition to federal securities regulations, each state has laws that pertain to the trading of securities in the secondary market. Through the years many attempts were made to devise a uniform act to regulate the sale of securities.
1954, the National Conference of Commissioners on Uniform State Laws commissioned an examination of the problem and requested a detailed analysis of the existing laws and judicial decisions. The result, after two years of intensive study, was the Uniform Securities Act (USA). State securities laws are known as blue-sky laws. The term blue sky was used by a Kansas Supreme Court justice, who referred to "speculative schemes that have no more basis than so many feet of blue sky."
The Uniform Securities Act serves as model legislation that each state may adapt to its own needs.

Front 22

Define State Securities Law: Uniform Securities Act Scope of the Act

Back 22

The Uniform Securities Act sets forth the requirements for appointing state securities administrators. The act provides for minimum official behavior and conduct requirements, such as prohibitions against an administrator using his or her position for personal benefit, disclosing confidential information and other unlawful practices.
The act gives the administrator the power to enforce the USA within the state. The administrator has jurisdiction over any offer to buy or sell, as well as any acceptance of an offer to buy or sell, if the offer was
• originated in the administrator's state • directed to that state
• accepted in that state

Front 23

Define State Securities Law: Uniform Securities Act Scope of the Act Part II

Back 23

Administrators can establish broker-dealer, agent and certain investment adviser registration, testing, filing and fee regulations appropriate to their states' requirements.
In addition to mandating the registration of firms and associated persons, most states require that securities be registered in tho~e states before they can be sold to the public. The Uniform Securities Act gives administrators the right to deny, suspend or revoke the registrations of broker-dealers, agents, investment advisers and securities if the administrators have valid reason' to do so under the rules of the act.
The USA also provides for criminal penalties and civil liabilities for persons involved in illegal securities transactions and prescribes the limits of a state's jurisdiction.

Front 24

Which act Requires registration of persons charging fees for investment advice?

Back 24

Investment Advisers Act of 1940

Front 25

Which act is a result of Criminal penalties of up to the greater of $1 million or 300 % of
profits made or losses avoided?

Back 25

Insider Trading and Securities Fraud Enforcement Act of 1988

Front 26

Which act Provides customer protection in the event of broker-dealer default?

Back 26

Securities Investor Protection Act of 1970

Front 27

Which act Expanded the role of the SEC's oversight of marketing efficiency and capital formation?

Back 27

National Securities Markets Improvement Act of 1996

Front 28

Which act Established the NASD as the SRO of the over-the-counter market?

Back 28

Maloney Act

Front 29

A. It regulates securities listed on recognized exchanges but not those securities traded interstate over the counter:"
B. It does not regulate foreign distribution of exchange-listed securities or securities sold entirely within a single state.
C. It regulates recognized exchanges and the OTC market, their members and trade practices to prevent unfair practices.
D. It allows the Securities and Exchange Commission to reduce its regulatory supervision by transferring its regulatory authority to such self regulatory organizations as the NASD.

Back 29

c. The 1934 act specifically provides for the regulation of securities exchanges and over-the-counter markets operating in interstate and foreign commerce and through the mails. The SEC oversees the registration of securities sold interstate under the 1933 act and the securities practices of exchanges and their members under the 1934 act. Although theNASD has rulemaking authority over its member firms, the SEC retains supervision and authority over such SROs and, therefore, the SEC's oversight responsibilities are not reduced.

Front 30

For what purpose does the Securities Act of 1933 require the full and fair disclosure of financial information?
A. To prevent unsophisticated investors from making unsuitable investment decisions
B. To provide all potential investors with equal protection of the law.
C. To prevent fraud in the sale of securities to the public through public disclosure.
D. To ensure that all state regulatory authorities have sufficient and unbiased information with which to enforce their regulations.

Back 30

C. The 1933 Securities Act was enacted to ensure the full and fair disclosure of information on securities traded among the states, in foreign commerce and through the mails. Securities offered within a single state are subject to the securities regulation of that state only (intrastate regulation). Interstate sale of securities is the SECs responsibility. The SEC does not pass judgment on the investment merits of registered securities.

Front 31

The National Securities Markets Improvement Act of 1996 affected federal and state legislation in which of the following ways?
A. The Uniform Securities Act supersedes the Investment Advisors Act of 1940.
B. The NSMIA amended federal securities law including the Investment Advisors Act of 1940 by substantially eliminating the dual registration of investment advisors.
C. State law preempts federal law in the regulation of fraudulent investment company activities within the state.
D/ Federal and state law remain the same except that investment advisers need not register with the SEC.

Back 31

B. The NSMIA amended, not superseded, the 1940 Investment Advisers Act by eliminating dual federal-state registration. The state governments, like the federal government, are obligated to prosecute fraud.

Front 32

Securities Act of 1933

Back 32

• Paper Act
• Requires SEC registration of new issues
. Requires prospectus delivery for disclosure

Front 33

Securities Act of 1934

Back 33

• People Act
• Regulates exchanges and OTC market
• Prohibits market manipulation
• No securities are exempt from its antifraud provisions.

Front 34

Maloney Act of 1938

Back 34

. Authorized establishment of SROs like the NASD

Front 35

Public Utility Holding Company Act of 1935

Back 35

. Requires registration of holding companies of distributors of gas and
electricity

Front 36

Investment Company Act of 1940

Back 36

Defines and regulates investment companies like mutual funds

Front 37

Investment Advisers Act of 1940 regulates who and what?

Back 37

Requires SEC regulation of investment advisers and disclosure of fees and qualifications

Front 38

Why was the Securities Investor Protection Act of 1970 developed?

Back 38

Established SIPC to protect up to $500,000 per customer from broker-dealer default

Front 39

Insider Trading and Securities Fraud Enforcement Act of 1988

Back 39

Expanded definitions of and liabilities for misuse of material non public information

Front 40

Telephone Consumer Protection Act of 1991

Back 40

Call non customers at home between 8:00 a.m. and 9:00 p.m. . Broker-dealers must maintain do-not-call lists

Front 41

National Securities Markets Improvement Act of 1996 (NSMIA) was created for what purpose?

Back 41

Expanded SEC's role to include: -oversight of market efficiency -elimination of unnecessary regulation

Front 42

Security Under the USA and federal securities law, a security is any evidence of interest in a common enterprise in which the investor expects profits from the promoter's managerial efforts. Under the USA, the following are considered securities:

Back 42

note, stock, treasury stock, bond
investment contract, debenture
evidence of indebtedness,
certificate of interest in a profit-sharing or partnership agreement, certificate of deposit for a security
collateral trust certificate
preorganization certificate or subscription
transferable share
voting trust certificate
warrant, right or option for a security
variable annuity or variable life insurance policy
certificate of interest or participation in an oil, gas, mining title another instrument of investment

Front 43

The term security also includes interests in:

Back 43

. real estate condominiums and cooperatives
• farmland or animals
. commodity option contracts (but not the underlying futures contracts)
. whiskey warehouse receipts
. insurance company separate accounts
. multilevel distributorship arrangements
. merchandise marketing programs

Front 44

The following, however, are not considered securities:

Back 44

. futures contracts, commodities and commodity contracts
• precious metals
. life insurance or annuity contracts that have fixed payouts
• antiques
. checking, savings and passbook accounts
• collectibles
. retirement plans like lRAs and Keoghs
• written confirmations of trades
• real estate

Front 45

According to the USA, all of the following are securities EXCEPT
A. variable annuities
B. interests in multilevel distributorship arrangements
C. commodity futures contracts
D. home mortgages

Back 45

c. Commodity futures contracts are not securities; however, if the choice read "commodity option contracts," they would be securities. Options
are securities under the USA; commodities, like precious metals and pork bellies, are not. Futures contracts are also not securities under the USA. Home mortgages are considered securities because they represent evidence of indebtedness.

Front 46

Is or is not a security

U.S. Treasury bond

Back 46

Yes U.S. government issues are securities.

Front 47

Is or is not a security

Annuity that pays the same amount of money each month

Back 47

No. Fixed annuities (those that pay guaranteed, unchangeable amounts each

Front 48

Is or is not a security

Annuity that pays a varying amount of money each month

Back 48

Y. The return on a variable annuity is tied to the return on an underlying
separate account that is invested in securities.

Front 49

Certificate of interest in a profit-sharing agreement

Back 49

Y. Certificates representing interest in pension and profit-sharing plans are
included in the definition of securities.

Front 50

Is it a security?

Keogh (HR-1 0) plan

Back 50

N. A Keogh plan is a retirement plan in which securities can be purchased or placed, but it is not a security.

Front 51

Is it a security?

Collateral trust certificates

Back 51

Y Collateral trust certificates are included in the definition of securities.

Front 52

Is it a security?

Preorganization certificate

Back 52

Y Preorganization certificates are included in the definition of securities.

Front 53

Is it a security?

Savings and loan account passbook

Back 53

N A passbook is not transferable and is not a security. Withdrawals may be made only by a person whose signature is on file for that specific account.

Front 54

Is it a security?

Interest in an oil and gas drilling program

Back 54

Y. Interests in oil and gas drilling programs are included in the definition of securities.

Front 55

Is it a security?

Interest in a real estate condominium

Back 55

Y. Interests in real estate condominiums are included in the definition of securities.

Front 56

Is it a security?

Term insurance policy

Back 56

N. Term policies are specifically exempted from the definition of securities.

Front 57

Is it a security?

Interest in farmland and animals

Back 57

N. A prospectus is a document that constitutes an offer to sell specific securities. The prospectus itself has no monetary value and is not transferable.

Hint 57

Check

Front 58

Is it a security?

Final prospectus for an oil and gas corporation

Back 58

N. A prospectus is a document that constitutes an offer to sell specific securities. The prospectus itself has no monetary value and is not transfer¬able.

Front 59

Is it a security?

Option contract for wheat

Back 59

Y. Option contracts for wheat and other commodities, such as corn, natural gas and currencies, are included in the definition of securities.

Front 60

Is it a security?

Interest in a whiskey warehouse receipt

Back 60

Y. Whiskey warehouse receipts represent interests in securities and are included in the definition of securities.

Front 61

Is it a security?

Evidence of indebtedness, such as an interest in a condominium pool

Back 61

Y. Evidences of indebtedness, such as an interest in a condominium pool or another type of collateralized note, are included in the definition of securities.

Front 62

Is it a security?

American Express money order

Back 62

N. A money order has a set value and is not an investment that can be transferred for a profit to a third party.

Front 63

Is it a security?

Written confirmation of a sale of AT&T common

Back 63

N. A confirmation of a securities transaction confirms the particulars of the transaction (for example, the name of the security, the number of shares and so on), but it is not itself a security.

Front 64

Is it a security?

Stock Interest in a multilevel distributorship

Back 64

Y. Certificates representing interests in multilevel distributorship or marketing plans are included in the definition of securities.

Front 65

Is it a security?

Interest in a merchandise marketing plan

Back 65

Y. Certificates representing interests in merchandise marketing plans are
included in the definition of securities.

Front 66

Is it a security?

Interest in an oil, a gas or a mining title or lease or interest in payments

Back 66

Y. Certificates representing interests in oil, gas and mining titles and leases
are included in the definition of securities.

Front 67

Definition

Issuer

Back 67

Any person who issues or proposes to issue a security is an issuer under the USA. An issuer is almost always a company, the federal government or its agencies, or a municipal government or subdivision.

Front 68

Issuer or nonissuer transaction?

Primary transaction

Back 68

Issuer.
Any transaction involving the primary offering of securities is considered an issuer transaction.

Front 69

Any transactions in the secondary market, such as trades on an exchange, are considered a/an Issuer or nonissuer transaction?

Back 69

Non-issuer

Front 70

An initial offering of stock from a corporation is considered Issuer or nonissuer transaction?

Back 70

Issuer

Front 71

Any transactions in the secondary market, such as trades between over-the-counter broker-dealers or market makers, are considered to be Issuer or nonissuer transaction?

Back 71

Non-issuer

Front 72

Broker-Dealer

Back 72

A broker-dealer is any person (that is, securities firm) with an established place of business (an office) that is in the business of buying and selling securities for customer accounts or for its own account. In general, broker-dealers
must be licensed (registered) in a state to transact business in that state.

Front 73

Under the USA, the definition of a broker-dealer does not include:

Back 73

• an agent;
• an issuer;
• a bank or savings institution;
• a person with no place of business in the state if that person effects transactions in the state exclusively with:
- the issuers of the securities involved in the transactions;
- other broker-dealers;
- banks, savings institutions or trust companies;
- insurance companies; or
- investment companies; and
• a person licensed under the securities act of a state in which the person maintains a place of business who offers and sells in this state to an existing customer who is not a resident of this state.
This last exclusion allows a broker-dealer to effect transactions for existing customers who are traveling through or residing temporarily (that is, less than 30 days) in other states.

Front 74

Take Note:

Back 74

Although exam questions may refer to a broker-dealer as a per¬
son, remember that as defined by the USA, a broker-dealer is a firm in the business of executing securities transactions for its customers or its own trading account.

Front 75

Under the USA, which of the following is NOT a broker-dealer?
A. Firm located in the state that transacts business only with issuers of securities
B. Firm located in the state that transacts business only with insurance companies
C. Firm engaged in the business of executing securities transactions for its own account or for customer accounts
D. Out-of-state firm that transacts business with an established customer who has been vacationing in the state for the past two weeks

Back 75

D. Firms within a state that transact business tor their own accounts or the accounts of customers must be registered as broker-dealers in that state, even if their customers are other broker-dealers, issuers or financial institutions. Out-of-state firms that transact business with other broker dealers, issuers or financial institutions need not register. A firm with an out-of-state registration is not required to register as a broker-dealer in the state if transacting business with a customer who is passing though the state on vacation.
The exam also uses the language excluded from the definition of when talking about persons who need not register. For example, the question above could have been stated as follows:
Under the USA, which of the following would be excluded from the definition of a broker-dealer?

Front 76

Take Note:

Back 76

One peculiarity about the broker-dealer definition should be mentioned. An officer of a securities firm may be considered a broker-dealer when acting in an official capacity on behalf of the firm; however, if the officer is effecting a securities transaction with a customer, he or she is not a broker-dealer. In this particular circumstance, an individual can be a broker dealer.

Front 77

Which of the following is considered a broker-dealer under the USA?
A. Broker-dealer's vice-president, who sells 100 shares of IBM to a new customer
B. President of a broker-dealer, who files financial reports with the state securities administrator 0/' behalf of the firm

Back 77

B. The president acts in an official capacity, so he or she is considered a broker-dealer under the USA. The vice-president involved in a securities transaction with a customer does not act as a broker-dealer.

Front 78

Agent

Back 78

An agent, also called a sales representative or registered representative, is an individual who represents a broker-dealer or an issuer in the purchase or sale-or the attempted purchase or sale-of securities to the investing public.

Front 79

Registered rep's salaried secretary who takes orders

Back 79

A. A secretary effecting transactions on behalf of a broker-dealer must be
registered whether or not, he or she receives a commission.

Front 80

Insurance agent who advertises as a financial planner, charges a fee to prepare financial plans for customers and sells variable products for a commission

Back 80

A. An insurance agent must register as an investment adviser when the
agent charges a fee for advice on security products.

Front 81

President of a bank who receives a commission for selling the bank's

Back 81

B. A person who represents a bank in selling bank securities need not register as an agent, even if he or she receives commissions.

Front 82

Individual who represents his or her employer in the sale of securities to
existing employees for a commission

Back 82

A. A person who represents his or her employer in selling securities to employees must register as an agent if the person receives a commission. If no commission is paid, registration is not necessary.

Front 83

Person who represents an issuer in effecting transactions with underwriters

Back 83

B. Persons who represent the issuers in securities transactions with under writers need not register as agents.

Front 84

Investment Adviser

Back 84

An investment adviser is any person who, for compensation:
• engages in the business of advising others as to the value of securities or as to the advisability of investing in or selling securities;
• issues or promulgates reports or analysis concerning securities' values as a part of a regular business; or
• provides investment advisory services as an integral part of other
financially related services, and who claims to provide such services to others, such as financial planners.

Front 85

The following are not considered investment advisers under the USA:

Back 85

• investment adviser representative (the firm is the adviser; its registered employees are investment adviser representatives); • bank, savings institution or trust company; • lawyer, accountant, engineer or teacher whose performance of advisory services is incidental to the practice of his or her profession;
• broker-dealer, or its agent, whose performance of these services is incidental to the conduct of its business and that receives no special compensation for such services; .
• publisher of a newspaper, news column, newsletter, magazine or business or financial publication of a general nature;
• any person that is a federal covered adviser with more than $25 million under management required to register with the SEC; and
• any other person the administrator designates.

Front 86

Choose "A" if the phrase describes an investment adviser that must register under the USA and "B"
If it does not.
Publisher of a news column that renders general financial advice

Back 86

B. Publishers that render general financial advice need not register as
investment advisers.

Front 87

Choose "A" if the phrase describes an investment adviser that must register under the USA and "B"
If it does not.
Person who sells investment advice on fixed annuity contracts only

Back 87

B. A specific exclusion exists for persons who sell advice on fixed annuity contracts or other non-security investments.

Front 88

Choose "A" if the phrase describes an investment adviser that must register under the USA and "B"
If it does not.
Insurance agent who advertises as a financial planner, prepares financial plans for customers and sells variable products for a commission

Back 88

A. An insurance agent who charges for advice on security products must
register as an investment adviser.

Front 89

Choose "A" if the phrase describes an investment adviser that must register under the USA and "B"
If it does not.
Broker-dealer that charges a fee for providing investment advice over
and above commissions from securities transactions

Back 89

A. Broker-dealers must register as investment advisers if they receive special compensation for giving investment advice.

Front 90

Choose "A" if the phrase describes an investment adviser that must register under the USA and "B"
If it does not.
Advisory firm that manages $10 million in assets

Back 90

A. An advisory firm that manages less than $25 million in assets must register as an investment adviser under the USA.

Front 91

Investment Adviser Representative
(Supervised Person)

Back 91

An investment adviser representative is any partner, officer, director or other individual directly or indirectly controlled by an investment adviser. The term includes investment adviser employees and associates who make investment recommendations, manage customer accounts, solicit investment advisory services or supervise the employees who perform any of these duties. Clerical and ministerial personnel are not considered investment adviser reps.

Front 92

Under the USA, which of the following is excluded from the definition of investment adviser?
I. Ralph, who issues general reports on securities to clients, but includes in each report a recommendation as to whether the securities included in the report would be suitable for that particular client's portfolio
II. Lisa, who is an investment adviser representative for Best Advisory Services
III. Chris, who works for First National Bank and charges clients for investment advice
IV. Frank, a broker who represents XYZ Brokerage Firm and charges a fee to create financial plans for his clients
A. I and II only
B. II and III only
C. III and IV only
D. I, II, III and IV

Back 92

B. Investment adviser representatives and banks that give investment advice (even if they charge a fee) are specifically excluded from the USA definition of an investment adviser.

Front 93

The term broker-dealer, as used in the USA and in federal securities law, includes which of the following?
A. Agent who conducts numerous transactions from a state in which he or she is registered, but who deal; exclusively in foreign securities
B. Person licensed under the securities act of a state in which the person maintains a place of business who conducts primarily brokerage transactions with U.S. clients not residing in the state
C. Person with no place of business in a state who conducts securities transactions with an existing client who is not a resident of that state
D. Investment company as defined by the Investment Company Act of 1940 whose shares are sold by registered reps in all 50 states

Back 93

B. A person who conducts securities transactions within a state for his or her account or for the accounts of others is defined as a broker-dealer. An agent is not a broker-dealer regardless of the number of transactions he or she performs and whether they are domestic or international. A person with a place of business out of state is not considered a broker¬ dealer if he or she conducts business solely with an existing client who now is a resident of the state. The Investment Company Act of 1940, as amended, specifically excludes investment companies from the definition of a broker-dealer.

Front 94

Under the USA, the term agent includes all of the following EXCEPT a person who
A. represents a broker-dealer or an issuer, but is unsuccessful in effecting any purchases or sales in the state
B. successfully conducts purchases or sales of an issuer whose securities are sold only within the state from which the agent conducts business
C. represents an issuer in the sale of securities only in an initial public
offering
D. on behalf of an issuer, effects transactions in securities specifically exempted by the Securities Act of 1933

Back 94

D. A person other than a broker-dealer who conducts securities transactions only in securities exempted by the 1933 act is not considered an agent under the USA. A person who represents a broker-dealer in the sale of securities is an agent under the law whether or not that person completes purchases or sales successfully. A person, not a broker-dealer, who sells securities that are not exempt is an agent whether or not those securities are confined to the state or whether the securities are an initial public offering.

Front 95

According to the Uniform Securities Act, an example of an investment adviser is a
A. lawyer
B. publisher of a magazine
C. person paid a fee to advise customers on securities
D. person paid commissions for selling securities to customers

Back 95

C. The term investment adviser includes any person in the business of selling investment advice as to the value of securities or as to their advisability for investment. The term also includes those who, for compensation and as a regular part of their business, promulgate advice concerning the value of securities.

Front 96

Define


Administrator

Back 96

The administrator is the official or agency a state designates to administer the provisions of the USA and other securities regulations.
In some states, administrators also are called commissioners, directors or superintendents.

Front 97

Define

Offer and Offer to Sell

Back 97

An offer or offer to sell includes every attempt or offer to dispose of -or the solicitation of any offer to buy-a security or an interest in a security for value.
An offer to buy or sell is considered to have been made in a state if:
• the offer originated in the state or • is directed into that state.
An offer is not considered to have been made in a state if it was received through a:
• television or radio broadcast that originated outside of the state;
• newspaper or periodical of paid circulation that was published outside of the state; or
• newspaper or periodical of paid circulation that was published inside of the state, but has more than two-thirds of its circulation in other states.

Front 98

Sale and Sell

Back 98

Under the USA, the term sell means the act of conveying ownership of a security or other property for money or other value. A sale occurs when there is a contract or disposition of a security for value. Sales also include the following:
• Any security given or delivered with, or as a bonus for, any purchase of securities is considered to have been offered and sold for value.
• A purported gift of assessable stock is considered to involve an offer and a sale. Assessable stock is stock that may require the holder to pay some fee to maintain ownership at a later date. Because it is not completely "free," it is regarded to be a sale involving consideration.
• Every sale or offer of a warrant or right to purchase or subscribe to
another security is considered to include an offer of the other security.
The definition of sale does not include a stock dividend if stockholders give nothing of value for the dividend, nor does it include a bona fide pledge or loan, such as a broker-dealer's loan of securities to a customer.
A sale does not occur unless a contract with consideration exists.

Front 99

Define the term

Guaranteed

Back 99

Under the USA, the term guaranteed means that payment of a security's principal, interest or dividends is guaranteed by a specified entity, such as the U.S. government.

Front 100

Define the term

Institutional Investor

Back 100

An institutional investor is a person or an organization that trades for itself or for others in a fiduciary capacity, with transactions large enough to qualify it for trade execution services generally not available to the individual investor. Institutional investors are covered by fewer protective regulations than individual investors because they are considered knowledgeable and better able to protect themselves.
Institutional investors include the following:
• investment companies
• insurance companies
• investment advisers
. broker-dealers
• banks
• trust companies
• savings and loan associations
. employee benefits programs with assets of at least $1 million
. government agencies
Although institutions generally deal in large transactions, no
minimum transaction size or account size differentiates an institutional client from a non institutional investor.

Front 101

Private Investment Company.

Back 101

A private investment company is an unregistered investment company whose investment objective is to raise capital for business ventures. Investors such a company are known as qualified purchasers.

Front 102

Qualified Purchaser.

Back 102

A qualified purchaser is a(n):
• individual who owns $5 million or more in investments, including
investments held jointly with a spouse;
. family-held business that owns $5 million or more in investments;
. business that has discretion over $25 million or more in investments; or
trust sponsored by qualified purchasers.
Qualified purchasers are differentiated from other investors
under the USA because of their large investment holdings. Qualified purchasers are allowed to buy certain private investment company securities that are not offered to the general public. In general, the USA and other securities regulations assume that such high-net-worth investors are sophisticated enough to make investment decisions with less protection from the regulatory bodies.

Front 103

Federal Covered Adviser.

Back 103

A person who is registered (or required to be registered) under the Investment Adviser's Act of 1940 or excluded from definition of "investment adviser."

Front 104

Federal Covered Security.

Back 104

A security that has a federally imposed exemption from state securities registration. Issuers of such securities, however, may be required to pay filing fees to the state. Covered securities include those:
• listed or authorized for listing on national stock exchanges (New York Stock Exchange, American Stock Exchange) and those listed on the Nasdaq National Market (NNM) of the Nasdaq stock market;
• sold to qualified purchasers, as defined by the relevant securities legislation; and
• issued by investment companies or registered under the Investment
Company Act of 1940.

Front 105

Take Note:

Back 105

For the Series 63 exam, think of covered securities as being exempt from state registration under the USA. The three basic groups of covered securities are exchange-listed and NNM securities, securities sold to qualified purchasers and securities issued by investment companies, like mutual funds.

Front 106

Contumacy

Back 106

Under the USA, the term contumacy means to stand in contempt of an order of the administrator.

Front 107

Security
.

Back 107

Does not include commodities, futures, fixed life insurance or annuities, confirmations, prospectuses, real estate, antiques

Front 108

Person

Back 108

• Individual, company or government
. Not a minor, mentally incompetent or deceased person

Front 109

Issuer

Back 109

. Company, government or government subdivision that offers or proposes to offer securities to the public
. Issuer transaction = primary transaction (sale proceeds go to the issuer)

Front 110

Nonissuer

Back 110

. Secondary market transaction

Front 111

Broker-Dealer

Back 111

. Firm in the business of effecting securities transactions for its customers or its own account
. Not agents, issuers, banks or out-of-state firms that do business with institutions only
. Registration as a broker-dealer not required if transaction is with existing customer traveling through another state (if less than 30 days)

Front 112

Agent

Back 112

• Represents a broker-dealer or an issuer in sales of securities
• Always must register as an agent if representing a broker-dealer, even
when selling exempt securities
• Must register as an agent of the issuer if selling nonexempt securities

Front 113

Investment Adviser

Back 113

• Must register if in the business of providing advice for a fee
• Not banks, IA representatives, professionals providing incidental services, publishers of impersonal advice
• Broker-dealers are IAs if they charge a separate fee

Front 114

Administrator

Back 114

• Official that oversees administration of USA within a state

Front 115

Offer

Back 115

• Attempt to sell or solicitation

Front 116

Sale

Back 116

• Contract to convey ownership for value
• Includes gifts or assessable stock, bonuses of securities, sales of rights or warrants
• Excludes stock dividends, pledges of loans or securities

Front 117

Guaranteed

Back 117

• Payment backed by a third party

Front 118

Institutional Investor

Back 118

• Sophisticated investor protected by fewer securities regulations
• Includes mutual funds, pension funds, banks and trust companies,
broker-dealers

Front 119

Federal Covered Security

Back 119

• Not subject to state regulation
• Includes securities listed on U.S. exchanges, issued by investment
companies or sold to qualified purchasers

Front 120

Under the Uniform Securities Act, all of the following are excluded from the definition
of a broker-dealer EXCEPT a(n)
I. investment adviser
II. bank
III. issuer.
IV. financial planner
I and III
I and IV
II and III
IV

Back 120

B. The USA excludes issuers and banks from the definition of broker-dealer, as well as agents. Investment advisers and financial planners are not granted exclusions from the definition. (Page 18) [18046]

Front 121

Which of the following is included under the definition of a broker-dealer according to the Uniform Securities Act?
A One who effects securities transactions solely for his or her own account
B. Agent
C. Out-of-state broker-dealer that services other broker-dealers only
D. Issuer of securities

Back 121

A. Answer A is part of the definition of broker-dealer. The other answers are specifically excluded from the definition. (Page 18) [11107]

Front 122

Under the Uniform Securities Act, all of the following persons may provide investment advice incidental to their normal business
without requiring registration as an investment adviser EXCEPT a(n)
A. teacher
B. economist
C. lawyer
D engineer

Back 122

B. The Uniform Securities Act exempts from registration teachers, engineers, lawyers and accountants providing investment advice that is incidental to the performance of their normal business. Economists are not granted an exemption under the act. (Page 22) [18047]

Front 123

What is the smallest order that can be placed for an institutional account?
A. $50,000 or 1,000 shares
B. $100,000 or 2,500 shares
C. $100,000 or 5,000 shares
D Institutional order sizes are not limited.

Back 123

D. Although institutional investors typically trade very large blocks of securities, no upper or lower limit is placed on the size of their trades. (Page 27) [18009]

Front 124

In which of the following transactions does the issuer receive no benefit?
A. Primary
B. Nonprofit
C. Issuer
D Nonissuer

Back 124

D. Nonissuer transactions are any transactions that do not benefit an issuer directly.
(Page 17) [18010]

Front 125

What is the official designation of the per¬son or agency that enforces the Uniform Securities Act in each state?
A. Transfer agent
B. Registrar
C. Issuer
D Administrator

Back 125

D. The Uniform Securities Act specifies that a state's administrator (also called the commissioner or secretary) has the authority to enforce the act in that state. (Page 26) [18011]

Front 126

What does the term guaranteed mean when used to describe a security?
A. The broker-dealer will buy the security back at the same price or higher.
B. The security has been cleared and is A backed by the SEC.
C The security has a backer that guarantees the payment of principal and interest.
D. The security is an annuity product that guarantees a retirement income.

Back 126

C. The security has a backer (such as an insurance company or a parent company) that has guaranteed the payment of principal, interest or dividends. (Page 27) [18012]

Front 127

What is the difference between an offer and a sale?

A. An offer is the attempt to sell, and a sale is a binding contract to transfer a security for value.
B. An offer is a nonbinding proposal to sell, and a sale is a binding proposal to sell.
C. An offer can be made only by a customer, and a sale can be made only by a broker-dealer.
D. An offer must be approved by a branch manager, and a sale needs no approval.

Back 127

A. An offer is made in an attempt to sell. A sale is the binding contract to sell.
(Page 26) [18013]

Front 128

As defined in the Uniform Securities Act, which of the following is NOT considered a security?
A. Fixed annuity
B. Stock option
C. Limited partnership unit
D. Commodity option

Back 128

A. A fixed annuity is an insurance contract that cannot be traded for value. Commodity options (although not the underlying futures contracts) and stock options are considered securities, as are interests purchased in a limited partnership enterprise. (Page 12) [18048]

Front 129

The USA does not require registration as an agent in the following situations, even if a commission is paid:

Back 129

• A person represents the issuer in transactions with the underwriter.
• A person represents the broker-dealer in transactions between the
issuer and an underwriter.
• A person represents issuers of bank or other U.S. savings institution securities.
Persons representing issuers who effect transactions with existing employees, partners or directors of the issuers need not register as agents if no com¬missions are paid. If compensation is paid, agent registration is required.

Front 130

Individuals need not register as agents if they represent the issuers in effecting transactions in the following issues, which are exempt securities under the USA:

Back 130

• U.S. government securities;
• municipal securities;
• Canadian government issues or issues by any province or political
subdivision;
• issues of foreign governments with which the United States maintains diplomatic relations;
• commercial paper in denominations of $50,000 or more with maturities of nine months or less; and
• investment contracts issued in connection with an employee's stock purchase, savings, pension, profit-sharing or similar type of plan.

Front 131

Agent can be:

Back 131

Individual Only

Front 132

Broker-Dealer can be:

Back 132

Business or Individual

Front 133

Remember the following about agents:

Back 133

-Agents are always individuals.
-An agent who represents a broker-dealer in selling securities must be registered no matter what he or she sells.
-An agent who represents an issuer must be registered if he or she sells nonexempt securities.
-An agent who represents an issuer need not register if he or she sells exempt securities.

Front 134

"A" if the person is an agent under the USA and "B" if the person is not.

Person who effects transactions in municipal securities on behalf of a
broker -dealer

Back 134

A. Persons must be registered as agents when they effect transactions on behalf of broker-dealers, whether the securities are exempt, like munis, or nonexempt.

Front 135

"A" if the person is an agent under the USA and "B" if the person is not.

Registered rep's salaried secretary who takes orders

Back 135

A. A secretary effecting transactions on behalf of a broker-dealer must be
registered whether or not, he or she receives a commission.

Front 136

"A" if the person is an agent under the USA and "B" if the person is not.

Insurance agent who advertises as a financial planner, charges a fee to prepare financial plans for customers and sells variable products for a commission

Back 136

A. An insurance agent must register as an investment adviser when the
agent charges a fee for advice on security products.

Front 137

"A" if the person is an agent under the USA and "B" if the person is not.

President of a bank who receives a commission for selling the bank's
securities

Back 137

B. A person who represents a bank in selling bank securities need not register as an agent, even if he or she receives commissions.

Front 138

"A" if the person is an agent under the USA and "B" if the person is not.

Individual who represents his or her employer in the sale of securities to
existing employees for a commission

Back 138

A. A person who represents his or her employer in selling securities to employees must register as an agent if the person receives a commission. If no commission is paid, registration is not necessary.

Front 139

Under the USA, which of the following is considered a broker-dealer in a state?
A. First Federal Bank and Trust
B Broker-dealer with an office in the state that does business only with insurance companies
C. Agent effecting transactions for a broker-dealer
D. Broker-dealer with no place of business in the state that does business only with 6other broker-dealers

Back 139

B. A broker-dealer with an office in a state must be registered with the state administrator even if it does business only with other broker dealers or institutions. Agents, banks and out-of state broker-dealers doing business with institutional investors are not broker-dealers under the
USA. (Page 18) [18049]

Front 140

Exemptions from Broker-Dealer Registration under the USA.

Back 140

Agents, issuers, banks, savings institutions and trust companies are exempt from registering as broker-dealers in the states where they conduct business. The USA also exempts out-of-state persons who transact business exclusively with issuers, depository institutions, trust companies, insurance companies, investment companies, pension or profit-sharing plans, financial institutions or institutional buyers.
A broker-dealer is not subject to state registration requirements if it conducts business in a state with an existing client who has less than 30 days' temporary residence in the state. The exemption allows a broker-dealer to deal with an existing client vacationing in a state where the broker-dealer is not
registered.

Front 141

Take Note:

Back 141

If a firm is located out of state, it need not register as a broker
dealer in the state if it deals with institutions or current customers who just happen to be traveling through the state.
If a broker-dealer has an office in the state, it must register as a broker-dealer, regardless of with whom it transacts business.
Institutions are treated like qualified purchasers. They are expected to be sophisticated enough to function without the same protection the securities regulations provide for average investors. This is why out-of-state broker dealers that deal only with institutions need not register under the USA.

Front 142

Agent Registration

Back 142

A broker-dealer may not employ an agent unless that person is registered under the Uniform Securities Act. The person must be registered as an agent even if the securities or the transactions involved are exempt from registration requirements.

Front 143

Take Note:

Back 143

Any individual who represents a broker-dealer in the sale or
offer of securities must be registered; the broker-dealer also must be registered in the state where the sale or offer is made. Also, an agent's license is no longer effective when he or she is not associated with a broker-dealer.
Registration as an agent is required in the state of the agent's residence where securities are sold, in the state where securities are offered for sale and in each state where securities actually are sold. An agent who solicits or advertises securities for sale in another state must be registered in that state.
It is unlawful for an agent to sell securities in a state where the agent is not registered even though the broker-dealer is registered in the state.

Front 144

Take Note:

Back 144

If an agent lives in the state of California, but directs advertising into the state of Oregon and transacts business in the state of Nevada, the agent must be registered in all three states.

Front 145

An agent, residing in Texas, works for a broker-dealer that is registered in all 50 states. The agent wishes to advertise in the state of Oklahoma and recently has been referred to 'Several potential clients in New Mexico with whom he hopes to transact business. In which of the following states must the agent be registered?
A. Texas only because the broker-dealer is registered in all 50 states
B. Texas and New Mexico only if a sale actually takes place
C. Texas and Oklahoma only
D. Texas, New Mexico and Oklahoma

Back 145

D. An agent must register in the state in which he or she lives and in all states where the agent offers or transacts business. An advertisement is an offer to sell securities, so an agent must be registered in any state where he or she advertises. An agent is not exempt from registration in a state because the broker-dealer is registered in that state.

Front 146

Exemptions from State Registration as Agents.

Back 146

An agent is exempt from registration if he or she represents the following exempt issuers:
• U.S. government;
• municipality;
• Canadian government, province or municipality (but not a Canadian
corporation);
• any foreign government with which the United States maintains diplomatic relations; or
• depository institution, savings institution or trust company.
An agent is exempt from registration if he or she represents issuers in the sale of the following exempt securities:
• promissory note, draft or banker's acceptance with a maturity of nine
months (270 days) or less; or
• investment contract issued in connection with an employee's stock purchase, savings, pension, profit-sharing or similar benefit plan.

Front 147

An agent also is exempt from registration if he or she:

Back 147

• represents an issuer in an exempt transaction; or
• as a partner, an officer or a director of a brokerage firm, limits his or her activities to managerial functions and does not attempt to effect purchases or sales.

Front 148

Take Note:

Back 148

To determine whether an agent must be registered, consider whether he or she represents a broker-dealer or an issuer in the sale of securities. An agent representing a broker-dealer always must be registered, no matter what the agent sells. An agent representing an issuer must register only if the securities are nonexempt.

Front 149

Length of Registration

Back 149

Every registration of a broker-dealer or an agent expires annually on December 31 unless renewed.

Front 150

State Registration Procedures

Application.

Back 150

A broker-dealer or an agent may obtain an initial or a renewal registration by:
• filing an application
• paying the appropriate filing fee, as set by each state
• filing a consent to service of process with the administrator
consent to service of process gives the administrator the irrevocable right to receive and process, as the applicant's attorney, any legal complaint that may arise in regard to an applicant's conduct as an agent or a broker-dealer.
That is, any complaint presented to the administrator has the same effect as if it had been served personally on the applicant.

Front 151

An application for registration must contain information concerning the applicant's:

Back 151

• form and place of business;
• proposed method of doing business;
• qualifications and business history, including those of any partner, director or similar person of a broker-dealer;
• history of injunctions, conviction of any felony or conviction of any misdemeanor involving any aspect of the securities business; and
• financial condition and history.

Front 152

A firm with an office in a state that transacts business only with banks is
exempt from registration as a broker-dealer.

Back 152

F. Broker-dealers with offices in a state must be registered in that state
even if they transact business only with institutions.

Front 153

A broker-dealer may employ unregistered agents provided they sell only U.S. government and other exempt securities.

Back 153

F. All agents employed by broker-dealers must be registered, regardless of what they sell.

Front 154

An agent may be required to meet a minimum net capital requirement
as established by the administrator, for registration.

Back 154

F. Broker-dealers, not agents, may be required to meet certain minimum
net capital requirements for registration.

Front 155

If not denied, registration as an agent or a broker-dealer becomes effective at noon on the 30th day after it has been filed.

Back 155

T; Registration, however, could be granted sooner by notification from the
administrator.

Front 156

Surety bonds of $35,000 may be necessary for registration of both agents and broker-dealers that take custody of or have discretionary authority over customer funds or securities.

Back 156

T. These bonds protect against employee loss or theft. Cash is an acceptable substitute for a surety bond.

Front 157

As long as all other registration requirements have been met, an agent's registration becomes effective when he or she passes the Series 63 exam.

Back 157

F. Even if an agent completes the Series 63 exam successfully and meets all other requirements, agent registration is effective only when the administrator grants it officially.

Front 158

According to the Uniform Securities Act, which of the following may an administrator require before issuing an agent's license?
A. Oral or written examination or both
B. Completed application or evidence of a completed and current registration with the SEC or an SRO
C. Consent to service of process
D All of the above

Back 158

D. As a condition of registration, a state administrator may require that an agent pass a written or an oral examination or both. Most states also may require applicants, their firms or both to provide completed applications and consents to service of process.

Front 159

An investment adviser managing assets of $50 million must register with the SEC.

Back 159

T. An investment adviser managing assets of more than $30 million must
register with the SEC.

Front 160

A customer must have 10 days to request return of all fees if the investment adviser brochure is delivered at the time the contract is signed.

Back 160

F. A free-look period of five days applies when the brochure is delivered at the time of contract.

Front 161

An adviser with discretionary authority over but not custody of customer
funds must maintain minimum capital of $35,000.

Back 161

F. Minimum capital of $10,000 is required in this case; $35,000 is required if the investment adviser has custody.

Front 162

If not denied, registration as an investment adviser becomes effective at
noon on the 30th day after the registration has been filed.

Back 162

T. Registration could be granted sooner, however, by notification from the administrator.

Front 163

An investment adviser with an office in a state that effects only two transactions within a year with clients is excluded from registration in that state.

Back 163

F. Investment advisers with offices in a state must be registered in that
state even if they transact business with only a few clients.

Front 164

Investment advisers must file their balance sheets with the administrator within 90 days of year end.

Back 164

T. An audited balance sheet is required if an investment adviser takes custody of customer funds or securities.

Front 165

Which of the following statements is true if a person is not registered and his clientele is limited to banks and individuals?
A He may conduct business as-an investment adviser.
B He may not conduct business as an investment adviser.

Back 165

B. A person whose clients are individuals must register as an investment adviser in that state before transacting business.

Front 166

. Which of the following statements is true if a person is registered as a broker dealer only and gives investment advice for special compensation beyond the scope of her broker-dealer practice?
A She may conduct business as an investment adviser.
B She may not conduct business as an investment adviser.

Back 166

B. If a broker-dealer receives special compensation for investment advice,
the broker-dealer must register as an investment adviser.

Front 167

Persons managing between $25 million and $30 million in assets have the option of either state or federal registration.
A True
B False

Back 167

A. A person who manages between $25 million and $30 million in assets may register with the SEC. If he or she manages less than $25 million, that person must register with the state in which he or she conducts business.

Front 168

Under the Uniform Securities Act, all of the following persons may provide investment advice incidental to their normal business without requiring registration as an investment adviser EXCEPT a(n)
A. teacher
B. economist
C. lawyer
D. engineer
L
, ,

Back 168

B. The Uniform Securities Act exempts from registration teachers, engineers, lawyers and accountants who provide investment advice that is incidental to the performance of their normal business. Economists are not granted an exemption under the act.

Front 169

Broker-Dealer Registration

Back 169

. Must register in state where business is done unless exempt
. Effective after administrator notification; expires December 31

Front 170

Exempt from State Registration as a Broker-Dealer

Back 170

• Banks, savings institutions, other financial institutions, agents, issuers
• Broker-dealers with no office in a state doing business with
institution's only
• Broker-dealers registered in another state transacting business with a current client passing through a different state

Front 171

Agent Registration

Back 171

• Broker-dealers can employ only registered agents
• Agents must be registered in state of residence, where securities are offered and where securities are sold
• Agents who represent broker-dealers must be registered if they sell exempt or nonexempt securities
• Agents who represent issuers must be registered if they sell nonexempt securities
• Effective after administrator notification; expires December 31
• Notification by agent, old and new employer for change of employment
• Automatic registration of partners, officers and directors when new
broker-dealer registers

Front 172

Exemptions from Agent Registration

Back 172

• Represents issuer in exempt transaction
• Represents issuer in bankers' acceptances, commercial paper (270 days or less)
• Represents issuer in sale of employee benefits plans

Front 173

Successor Firms

Back 173

• Registration for successor firm must be filed even if not yet in existence
• New registration begins when old firm ceases to do business
• Filing fee waived
• Effective for remainder of year

Front 174

Investment Adviser Registration

Back 174

• Federally registered if adviser manages more than $30 million • State registered if adviser manages less than $25 million
• Choice if adviser manages between $25 million and $30 million • Investment company advisers always federally registered
• File Form ADV and fees
• Audited balance sheet if custody; unaudited balance sheet if no
custody
• Effective after administrator notification; expires December 31 • $35,000 minimum net worth for custody
• $10,000 minimum net worth for discretion, no custody

Front 175

Investment Adviser Exemptions

Back 175

• No office in state and communications directed to fewer than six clients in 12 months
• No office in state and clients are institutions, broker-dealers or investment advisers only

Front 176

Investment Adviser Recordkeeping

Back 176

• All specific customer and investment adviser records kept for five years, first two years in investment adviser's office

Front 177

Investment Adviser Brochures

Back 177

• Typically use ADV Part II
• Delivered 48 hours before contract or at time of contract with five days'
grace
• Special disclosure required for wrap fees, at least as complete as ADV Part II

Front 178

Which of the following statements regarding the consent to service of process are true under the provisions of the Uniform Securities Act?
I. Only out-of-state applicants must file a consent to service of process.
II. Investment advisers must file a consent to service of process to become registered.
III. A consent to service of process makes legal process served on the administrator as legally binding as a process served on the adviser personally.
A. I and II only
B. I and III only
C II and III only
D. I, II and III

Back 178

C. All applicants for registration must file a consent to service of process, regardless of whether they are in-state or out-of-state advisers.
(Page 39) [18043]

Front 179

Which of the following statements are true regarding the registration of a successor firm under the Uniform Securities Act?
I. A filing fee is required with the application.
II. The successor firm's registration is effective for the unexpired portion of the year.
III. The successor firm need not exist when the application for registration is filed.
A. I and II only
B I and III only
C. II and III only
D. I, II and III

Back 179

C. The filing fee for a successor firm is waived. The successor firm's registration is effective for the unexpired portion of the year. Application may be made to register a successor firm whether or not the firm is then in existence.
(Page 41) [18042

Front 180

Which of the following requirements are common to the registration of agents, state registered investment advisers and broker dealers under the Uniform Securities Act?
I. All must file, along with their applications, consents to service of process.
II The registration for all is two years in length.
III. All may be required to pass a written exam.
IV. All may be required to post surety bonds.
A I and III only
B. I, III and IV only
C. II and IV only
D. I, II, III and IV

Back 180

B. Broker-dealers, agents and state registered investment advisers must file consent to service of process forms with initial applications for registration. The consent to service gives the administrator rights over an applicant. Each applicant may be required to pass an exam and post a surety bond. Federally registered investment advisers must give notice and pay a filing fee in any state in which they conduct business.
(Page 39) [11049]

Front 181

According to the Uniform Securities Act, which of the following is responsible for notifying the administrator when an agent changes his or her place of employment?
A. Agent
B. Former employer
C. New employer
D All of the above

Back 181

D. All three parties must notify the administrator. (Page 40

Front 182

Under current law, a person must register as an investment adviser in a state under which of the following circumstances?
I The person effects transactions exclusively with issuers of securities in that state while maintaining no office in the state.
II The person has directed offers to six individuals in that state within the past 12 months, even though he or she has no place of business within the state.
III. The person manages less than $25 million in assets.
IV. The person deals exclusively with broker-dealers in that state, but maintains no place of business within state boundaries.
A I and IV only
B II and Ill only
C. II, III and IV only
D. I, II, Ill and IV

Back 182

B. Persons having no place of business in a state generally are limited to directing fewer than six offers to residents of that state before being required to register. All investment advisers having a primary place of business in the state and managing less than $25 million in assets must register. (Page 45) [11291]

Front 183

Which of the following statements are true of a broker-dealer as defined in the Uni¬form Securities Act?
I. A broker-dealer may not also be registered as an investment adviser.
II. A broker-dealer may be either a firm or an individual.
III. A broker-dealer's primary business is effecting securities transactions for clients or for the broker-dealer's own account.
A I and II only
B. I and III only
C. II and III only
D. I, II and III

Back 183

C. Choices II and III together make up the definition of a broker-dealer (the definition refers to a person, which may be either an individual or a firm). However, a person may be registered as both a broker-dealer and an investment adviser at
the same time. (Page 18) [11181]

Front 184

Unless renewed, registrations of a broker dealer's associated persons under the Uniform Securities Act expire
A. one year from their effective date
B. two years from their effective date
C. every December 31
D. Registrations need not be renewed.

Back 184

C. Registrations under the Uniform Securities Act expire every December 31 unless they are renewed. (Page 39) [11189]

Front 185

Under current law, for how long must a state-registered investment adviser generally keep business records available for examination by the administrator?
A. Indefinitely
B. A term specified by the administrator
C. Three years
D. Five years

Back 185

D. Records must be preserved for five years; however, the administrator may prescribe a different period for certain types of records.
(Page 50)

Front 186

Which of the following must register in a state as an investment adviser?
I. Lotta Leveridge, author of the Gracious Adviser Investment Newsletter, mailed to 1,000 monthly subscribers nationwide
II. Gwinneth Stout, whose only clients are investment companies and banks in the state
III. An investment advisory firm that opens an office in the state with less than $25 million in assets under management
IV. Best Advisers, a newly formed investment advisory firm that has $25 million in assets under management
A. I and II only
B. I and III only
C III only
D. I, II, III and IV

Back 186

C. An investment adviser must register in a state if it manages less than $25 million in assets. The registration exemption for few solicitations applies only to firms having no place of business in the state. Publishers of financial publications with paid subscribers also are exempt, as are advisers whose clients are institutions such as banks or trust companies. (Page 45) [1128

Front 187

Which of the following is a type of security registration that allows the administrator to require any information it deems is necessary?
A. Coordination
B. Filing
C. Qualification
D. Modulation

Back 187

C. To register a security by qualification, the issuer must file with the state administrator any registration documents and other information the administrator requires.

Front 188

Which of the following is a type of state security registration used when an issue is registered simultaneously with the SEC under the Securities Act of 1933? ,

A. Coordination
B. Qualification
C. Implementation
D. Integration

Back 188

A. Registration by coordination is used when an issuer registers its offering with the SEC at the same time it regulates with the state. Copies of the registration documents filed with the SEC also are filed with the state administrator.

Front 189

Which of the following are covered securities under the 1933 act, as
amended by the NSMIA in 1996?
I. Shares of registered investment companies II. Shares sold over the counter
III. Shares sold to qualified purchasers
IV. Shares sold on the New York Stock Exchange
A. I only
B. II, IV only
C. II, III, IV only
D. I, II, III and IV

Back 189

D. All of the securities listed are defined as covered securities.

Front 190

Which of the following securities is NOT exempt from the registration and advertising requirements under the USA ?
A. Stock in a public utility company
B. Security issued by a religious or charitable organization
C. Security of a publicly traded Canadian financial institution
D. Variable annuity issued by an insurance company

Back 190

D. All of the securities listed are designated specifically as covered. Variable annuities, which depend on the performance of securities in a segregated fund, are nonexempt.

Front 191

All of the following transactions are exempt from the USA registration
requirements EXCEPT
A. isolated nonissuer transactions
B. non issuer transactions in outstanding securities that have been subject to reporting under Section 12h for the last two years
C. a securities transaction effected by a fiduciary
D. securities of a local manufacturing company that are traded intrastate without recourse to the mails

Back 191

D. Securities of a local manufacturing company are subject to the regulation of the state administrator, not the SEC, because the transaction affects only the financial well-being of state residents and, therefore, does not involve interstate commerce concerns of the federal government.

Front 192

Nonexempt Securities

Back 192

• Must be registered in state to be sold
• Registration is effective for one year from effective date
• Issuers may be required to file reports no more than quarterly with
administrator

Front 193

Exempt Securities

Back 193

• No registration required under USA
• Still subject to anti fraud provisions
• Include: federal government and municipal securities, financial institution securities, public utility securities, foreign national government securities, Canadian political subdivision securities, nonprofit company securities, commercial paper and bankers' acceptances (maturity of 270 days or less), employee Benefits plan securities

Front 194

Blue Chip Exemption

Back 194

• Securities listed on national stock exchanges or certain regional stock
exchanges exempt from USA registration

Front 195

Exempt Transactions

Back 195

. No registration required because of how securities are sold
• Unsolicited orders are exempt
• Transactions with financial institutions, fiduciaries, underwriters are
exempt

Front 196

Private Placement

Back 196

• Exempt transaction with no more than 10 offers to general public in 12 month period
• No commission paid on sales to general public
• Buyers must hold for one year before resale

Front 197

Preorganization Certificates

Back 197

• Exempt transaction involving agreement to buy shares of company not
yet in existence
• No commission paid for solicitation
• No more than 10 subscribers
• Subscribers make no payment

Front 198

Which of the following statements are true regarding registration of securities by coordination?
I. The cooling-off period for the SEC is 20 days.
II. The registration statement must be on file with the state administrator for 10 days.
Ill. The registration becomes effective in the state only after the state's cooling-off period.
IV. The registration becomes effective at the state level in conjunction with the SEC's
approval if the administrator has not
entered an order to deny it.
A. I, II and IV only
B. II and ill only
C. Ill and IV only
D. I, II, III and IV

Back 198

A. The federal 1933 securities act requires that securities offered to the public be registered with the SEC. The registration statement becomes effective on the 20th calendar day following the date the SEC receives the statement (assuming the SEC finds no deficiencies or misrepresentations). During the 20-day cooling-off period between the filing date and the effective date, indications of interest from the public for shares may be taken. When the registration becomes effective, shares in the new issue may be reconfirmed and actual orders taken. Note that on the federal level, the registration must be on file with the SEC for 20 days, while on the state level it must be on file with the administrator for 10 days.

Front 199

All of the following are exempt securities EXCEPT
I. U.S. government securities
II. unsolicited transactions
III. transactions between issuers and underwriters
IV. securities of credit unions
A. I, II and IV
B. I and IV
C. II and ill
D. IV

Back 199

C. Take care to distinguish between an exempt security and an exempt transaction.
(Page 65)

Front 200

All of the following must be included in a security's state registration statement EXCEPT

A. A stop order from another state that affects the offering of the security within that state
B. The total amount of the security that will be offered in all states
C. An offering circular or a prospectus
D. All other states where the security currently is registered or will be registered

Back 200

B. All items listed here must be included for registration of a security within a state except for the total amount of the security to be offered in all states. The amount of the security to be offered in the state of registration is, however, required.
(Page 60

Front 201

Under the USA, which of the following are exempt transactions?
I. A nonissuer sale of an outstanding security subject to reporting and registration requirements under the Securities Exchange Act of 1934 for the past four months.
II. A customer contacts a registered representative and places an order for 500 shares of a stock the rep has never heard of. The rep finds the stock and fills the order.
III. XYZ brokerage firm agrees to underwrite the sale of 1 million shares of ABC on behalf of ABC Company.
IV. A broker-dealer places an entire new issue of securities among 15 different insurance companies.
A. I and III only
B. II, III and IV
C. Rand IV
D. I, II, III and IV

Back 201

B. Items II, ill and IV are exempt transactions. Unsolicited secondary market transactions are exempt as are transactions between issuers and underwriters and transactions between broker-dealers and institutional investors. A non issuer sale of an outstanding security subject to certain reporting and registration requirements under the act of 1934 is exempt only if it has been subject to these requirements for 180 days (six
months). (Page 67) [18018

Front 202

A security that is exempt from the registration requirements of the Uniform Securities Act also is exempt from the
I. civil liabilities provisions
II. antifraud provisions
III. requirements for filing advertising and sales literature
A. I and II only
B. I and III only
C III only
D. I, II and III

Back 202

C. An exempt security is exempt from only the registration requirements and the requirements for filing advertising and sales literature. Civil liability arises any time a security is sold or advice is rendered in violation of the act, regardless of whether the security is registered or exempt. There are no exemptions from the anti fraud provisions. (Page 65) [11195]

Front 203

Registration statements remain effective
A. for a period of time determined by the administrator for each issue
B. for one year from the effective date
C. for one year from the date of issue
D. until the next registration statement is filed

Back 203

B. A registration statement remains effective for one year from the effective date.
(Page 64)

Front 204

Which of the following statements is true regarding the antifraud provisions of the Uniform Securities Act?
A. The only securities exempt from the provisions are those regulated by federal authority.
B. The only exempt securities are those issued by national governments or political subdivisions of countries that maintain diplomatic relations with the United States.
C. The only exempt securities are those that are registered properly under blue sky laws.
D. No securities are exempt from the act's antifraud provisions.

Back 204

D. Neither exempt securities nor exempt transactions are exempt from the USA's anti fraud provisions. (Page 65)

Front 205

Enter "U" for Unlawful, "L" for Lawful.

An agent explains to a mutual fund client that because the fund is
invested in government securities, the client will not lose principal.

Back 205

U. It is unlawful to guarantee performance of any security. Even government bonds may lose principal value.

Front 206

Enter "U" for Unlawful, "L" for Lawful.

A customer calls his representative and informs him to buy 1,000 shares of a top Internet company immediately. The representative enters an order for 1,000 shares of XYZ, which has been a market leader all week.

Back 206

U. It is unlawful to enter a discretionary order without written authorization. This order is discretionary because the agent selected the company.

Front 207

Enter "U" for Unlawful, "L" for Lawful.

An agent receives a call from his client's spouse, advising him to sell his XYZ stock. The agent refuses the order.

Back 207

L. An agent must refuse to enter an order from someone other than the customer without proper written authorization.

Front 208

Enter "U" for Unlawful, "L" for Lawful.
A client writes a scathing"'letter to his agent regarding stocks the agent had recommended that subsequently performed very poorly. The agent calls the client and disposes of the letter after the client is calmed.

Back 208

U. All written customer complaints must be forwarded to the principal.

Front 209

"U" for Unlawful, “L" for Lawful.

A representative borrows $10,000 from her client, First Federal Bank of Oconomoc, Wisconsin.

Back 209

L. Agents may borrow money from customers that are recognized financial institutions only.

Front 210

"U" for Unlawful, “L" for Lawful.

An agent explains that because she is so convinced of the value of ABC Company stock, she will buy it back from her client if it is not up 10 percent in three months.

Back 210

U. This agent is guaranteeing protection against loss, a prohibited activity.

Front 211

"U" for Unlawful, “L" for Lawful.

An agent receives an unsolicited order from a client to purchase shares in an obscure foreign bank. After numerous calls, the agent finds the shares, but informs the client that there will be a charge in addition to the normal commission due to the extra service provided.

Back 211

L. It is lawful to charge extra transaction fees when justified as long as the customer is informed.

Front 212

"U" for Unlawful, “L" for Lawful.

An agent promises to call his client every Friday to update her on the status of her account.

Back 212

U. It is unlawful to promise certain services when it is unlikely that the agent can keep the promise.

Front 213

"U" for Unlawful, “L" for Lawful.

An agent contacts his client and tells him to buy XYZ stock, which is an IPO that currently is not registered in the state.

Back 213

U. It is unlawful to solicit unregistered nonexempt securities, except in a private placement.

Front 214

"U" for Unlawful, “L" for Lawful.

An agent contacts his client and suggests that he buy a total of 1,000 shares of ABC stock, but that he buy 100 shares on 10 different days to try and time the market

Back 214

U. The agent is churning the account when he makes excessive transactions
for the purpose of generating extra commissions.

Front 215

True or false?

A broker-dealer acting as an investment adviser is exempt from revealing its capacity as a principal if the broker-dealer distributes impersonal investment advice.

Back 215

T. A broker-dealer acting as an investment adviser is exempt from disclosure of capacity if he offers impersonal advisory services.

Front 216

True or false?

The USA considers a legal or disciplinary action to be material if it
occurred less than 10 years ago and involved a person associated with a firm or who has power to influence the firm

Back 216

T. Under the USA, a legal or disciplinary action that occurred within 10 years of a registration application must be reported by anyone who has power to influence a firm's policy or is associated with the firm.

Front 217

True or false?

. Under the USA, the criminal conviction for a securities law violation of an investment adviser's brother not associated professionally with the adviser or her firm is not considered material even if it occurred within the last year.

Back 217

T. Unless a person convicted of a securities violation is associated with a firm or has control over the firm, the actions are not material under the USA. The agent's or adviser's securities violations that occurred within the past 10 years are considered material.

Front 218

True or false?

An agent deliberately failed to follow a client's instructions because he believed the requested transaction to be unwise. The agent acted in an ethical or acceptable manner.

Back 218

F. While the agent intended to protect his client from an unwise securities transaction, he is ethically bound to accept the order. The agent must mark the order "unsolicited" and document the fact that he counseled against the transaction.

Front 219

An investment adviser must make reasonable inquiry into a client's investment experience and objectives before making recommendations to determine an investment's suitability. All of the following meet the suitability standards EXCEPT
A an investment adviser updates his information on his client's occupation, objectives and financial status once each year
B. in evaluating the suitability of an investment, an investment adviser's primary focus should be on the client's entire portfolio, which, in some cases, would allow the adviser to invest in assets not generally associated with income-oriented investors if those assets would reduce the volatility of the portfolio
C. an investment adviser considers how his growth-oriented client's large inheritance changes the client's suitability requirements
D. an investment adviser invests a newly acquired client's cash in U.S. Treasury bills before determining the client's investment objective in order for the client to receive a riskless return rather than none at all

Back 219

D. An adviser cannot invest the cash portion of a client's funds in Treasury bills before establishing the client's objectives. The investment may not be suitable to the client's interests. Normally, an adviser need only
update his or her client information and objectives yearly. When deter¬mining the suitability of an investment, an adviser must look to the characteristics of a client's entire portfolio and not weigh each investment separately.

Front 220

All of the following are considered ethical business practices under current securities regulation EXCEPT
A. an investment adviser borrows funds from a regional commercial bank that had a discretionary account with the adviser
B. an adviser's agent accepts a trading order from a client's lawyer (who acts as trustee for most of the client's financial affairs) as an accommodation for the client, who cannot issue the order himself because he is away on vacation
C. a customer complains to an agent that an account fee is too high and unethical in lieu of the fact that the adviser has made no transactions in the last year and a half; the agent responds that the fee is consistent with industry practice and continues the fee at the current level
D both a client and an investment adviser agree that transaction fees can be reduced by commingling the client's funds with those of the adviser;the adviser refuses to do so and passes on the higher charges to the client

Back 220

B. Unauthorized third-party trading in a client account is strictly prohibited and an unethical business practice. An investment adviser or its agent can borrow funds from a regional commercial bank that has an account with the adviser because a bank is in the business of lending. An agent may not borrow funds from a client account, even if the client signs a written waiver. The agent who conducted no trades in a client account acted ethically despite the fact that the fees remained constant during the period of inactivity. Advisers' fees must be reasonable and consistent with industry standards. The adviser who refused to commingle a client's funds with those of the firm acted ethically because client funds cannot be commingled with those of a firm.

Front 221

Practices Prohibited of All Securities Professionals

Back 221

• Misleading or untrue statements
• Failure to state material facts
• Use of insider information
• Unsuitable transactions
• Market manipulation (pegging, capping, front running, wash sales,
matched purchases)

Front 222

Other Prohibited Business Practices

Back 222

• Unauthorized third-party trading
• Borrowing money from customers
. Commingling client funds
• Failing to follow client instructions
• Exercising discretion without authority
. Effecting transactions not on the books
• Failing to report written complaints
• Guaranteeing against loss
• Failing to inform clients of higher than normal charges
• Misrepresenting customer account status
• Creating misleading trading activity
• Promising undeliverable services
• Unauthorized sharing in customer accounts
• Solicitation of unregistered, nonexempt securities
• Misrepresenting administrator approval

Front 223

Unlawful or Unethical Investment Advisory Practices

Back 223

• Unsuitable investments
• Unauthorized discretion
• Unauthorized third-party transactions
• Excessive trading
• Commingling funds
• Misrepresentation of material facts
• Nondisclosure of information sources
• Excessive fees
• Conflicts of interest
• Unauthorized custody of customer funds
• Operating without advisory contracts
• Performance-based compensation, except under unique circumstances
• Failing to disclose material legal action in past 10 years 48 hours before
contracting with client
• Failing to disclose principal or agent capacity

Front 224

An investment adviser owns a large block of Kelptek stock. A customer places an order for 100 shares of Kelptek. In compliance with the anti fraud provisions of the Uniform Securities Act, the adviser should do which of the following?
A. Disclose that it will act as a principal in the transaction
B. Act as an agent in the transaction because it must maintain its stock position
C. Refuse the order because there is a conflict of interest
D. Execute the transaction without taking further action

Back 224

A. The antifraud provisions of the USA require an investment adviser to disclose before the completion of a transaction whether it will act as a principal or an agent. The customer then must give written consent. The adviser is not required
to refuse the order. (Page 85

Front 225

All of the following are examples of prohibited sales practices EXCEPT
A. buying on one exchange and selling on another
B. withholding a material fact from the buyer
C. buying and selling intentionally to
show market activity
D. giving a phony quote

Back 225

A. Buying on one exchange and selling on another is a perfectly acceptable market arbitrage.
(Page 81) [18028]

Front 226

To get a sale of $10,000 worth of bonds, an agent promises to balance a customer's checkbook each month for as long as the
customer remains an account of his, even though the agent is in line for a promotion and an office transfer. This is considered a(n)
A. acceptable practice
B. unacceptable practice
C. practice that is not a violation; however, it is not a wise practice
D. acceptable practice if it is in accordance with house rules

Back 226

B. An agent may not make promises that he or she probably cannot keep. (Page 82) [18026]

Front 227

Which of the following would NOT be considered a market manipulation?
A. Three market markers intentionally start buying and selling the same security simultaneously in their own accounts.
B. A specialist buys and sells stock for her own account.
C. A principal in a broker-dealer allows a rumor to leak out that Kelptek will acquire Consolidated Codfish. After a few days, the broker-dealer sells short Consolidated Codfish for its own account.
D. All of the above are examples of market manipulation.

Back 227

B. The function of a specialist normally is to act as a broker for orders other members leave with him or her and to act as a dealer in buying and selling for his or her own account.

Front 228

A customer, upset with her agent for not servicing her account properly, sends him a complaint letter about his actions. The agent should do which of the following in response?
A. Call the customer and apologize, promising to do a better job
B. Tell the customer he will make rescission
C. Do nothing and hope that he doesn't hear any more about it
D. Bring the customer complaint to his employer immediately

Back 228

D. Failure to bring customers' written complaints to the attention of an agent's broker-dealer
is prohibited. (Page 82) [18024

Front 229

All of the following are examples of prohibited sales practices EXCEPT
A. buying on one exchange and selling on another
B. withholding a material fact from the buyer
C. buying and selling intentionally to
show market activity
D. giving a phony quote

Back 229

A. Buying on one exchange and selling on another is a perfectly acceptable market arbitrage.
(Page 81) [18028]

Front 230

To get a sale of $10,000 worth of bonds, an agent promises to balance a customer' s checkbook each month for as long as the
customer remains an account of his, even though the agent is in line for a promotion and an office transfer. This is considered a(n)
A. acceptable practice
B. unacceptable practice
C. practice that is not a violation; however, it is not a wise practice
D. acceptable practice if it is in accordance with house rules

Back 230

B. An agent may not make promises that he or she probably cannot keep. (Page 82) [18026

Front 231

Which of the following would NOT be considered a market manipulation?
A. Three market markers intentionally start buying and selling the same security simultaneously in their own accounts.
B. A specialist buys and sells stock for her own account.
C. A principal in a broker-dealer allows a rumor to leak out that Kelptek will acquire Consolidated Codfish. After a few days, the broker-dealer sells short Consolidated Codfish for its own account.
D. All of the above are examples of market manipulation.

Back 231

B. The function of a specialist normally is to act as a broker for orders other members leave with him or her and to act as a dealer in buying and selling for his or her own account.
(Page 81)

Front 232

A customer, upset with her agent for not servicing her account properly, sends him a complaint letter about his actions. The agent should do which of the following in response?
A. Call the customer and apologize, promising to do a better job
B. Tell the customer he will make rescission
C. Do nothing and hope that he doesn't hear any more about it
D. Bring the customer complaint to his employer immediately

Back 232

D. Failure to bring customers' written complaints to the attention of an agent's broker-dealer is prohibited. (Page 82) [

Front 233

The net asset value in NavCo Mutual Fund is $9 per share. Currently, the fund pays $.60 per share in annual dividends and $2 in capital gains distributions. The projections for the next year are $.75 per share in annual dividends and $2.50 per share in capital gains distributions. Based on this information, an agent could state which of the following to a customer?
A. "Currently, NavCo Mutual Fund has paid $.60 per share in dividends and guarantees it will pay $.75 per share this year ."
B. "The current yield in NavCo Mutual Fund is 6.7 percent; however, the research report on the fund projects the possibility of a higher current yield next year."
C. "NavCo Mutual Fund is yielding 29 percent currently, and the expectation is for a higher rate of return next year."
D. "The projected yield on NavCo Mutual Fund this year would be in the neighborhood of 36 percent."

Back 233

B. Misrepresenting yields clearly is fraudulent. (Page 87) [18023

Front 234

A customer asks an agent for advice in choosing a balanced mutual fund for an IRA. The agent may state which of the fol¬lowing?
A. "Last year, ArGood Mutual Fund was up 40 percent. Based on this past performance, I expect the trend to continue, thus making it suitable for an IRA."
B. "1 guarantee that you will make money in ArGood Mutual Fund over a long period of time based on past performance, making it a good investment for an IRA."
C. "Last year, ArGood Mutual Fund was up 40 percent. However, over the last 10 years, ArGood had both up and down periods. The potential for gain does exist, but there is no guarantee as to how much gain or loss will take place."
D. "ArGood Mutual Fund is such a good buy that I will guarantee against any losses personally."

Back 234

C. The agent has the responsibility to describe sufficiently the risks inherent in a mutual fund and to state all important facts. Offering a guarantee obviously is misleading.
(Page 81

Front 235

A customer has a discretionary account with an objective of current income. Her agent purchases a speculative growth stock. This is considered a(n)
A. wash sale
B. unauthorized transaction
C. acceptable transaction
D. matching activity

Back 235

B. The customer authorized the agent to buy income-producing securities only. The terms wash sale and matching activity refer to creating the impression of activity in a stock by buying and selling the same stock at the same price without a change in beneficial ownership. These activities may cause others to buy or sell the security.

Front 236

An agent and his sister open a special cash account at the agent's broker-dealer. Both parties contribute $5,000 to the account and purchase $10,000 worth of securities. In this case, which of the following statements is true?
A. The agent can open the account, but cannot share in any profits.
B. With written employer and customer consent, the agent can share in the profits to the extent of his proportional contribution.
C. The agent needs only the employer's consent to open the account and share in the profits.
D. The agent cannot share in any profits.

Back 236

B. The agent may share in proportion to his contribution, assuming he has written consent from the broker-dealer and the customer.

Front 237

An agent hears a rumor concerning an investment and uses the information to influence a customer who has hesitated to make the purchase. According to the NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is true?
A. Because the agent made it clear that it was a rumor, this is not a violation.
B. Because the customer knew it was a rumor and therefore could not be reliable, this is not a violation.
C. Because rumors are not considered to be inside information, this is not a violation.
D. Under no circumstances would this be allowed.

Back 237

D. The use of information that has no basis in fact is strictly prohibited. The use of rumors is misrepresentation and a violation of the Uniform
Securities Act. (Page 83)

Front 238

An agent has a good customer with a margin account. The customer informs the agent that he is taking a business trip for a month and asks the agent to handle the account during this time. While the customer is gone, the stock market goes down and the customer receives a margin call for $1,000. The agent should do which of the following?
A.. Pay the $1,000 on behalf of his good customer and collect at a later date
B. Arrange a loan from a local bank to cover the margin call
C. Sell some securities in the account and use the proceeds to cover the margin call
D. Try to make contact with the customer and, failing that, inform his principal and do nothing until instructed

Back 238

D. When the margin account falls below the minimum maintenance amount required, and if
the customer cannot be reached, the agent should inform his principal, who then determines which and how many securities must be sold to maintain the margin requirement as set by Regulation T. The agent may not take further action or execute any transactions without a written trading authorization. (Page 81) [18019]

Front 239

June Polar puts together a recommendation for a customer. She is called out of town
unexpectedly and asks another agent at her firm to meet with the customer and present the recommendation. When the other agent makes the presentation, he omits some material facts. According to the Uniform Securities Act, which of the following statements is true?
A. This is permitted if the recommendation pertains to an exempt security.
B. This is permitted if the second agent was unaware of the omission.
C. This is permitted if the second agent receives no compensation for presenting the recommendation.
D. This is not permitted under any circumstances.

Back 239

D. An agent making a recommendation to a customer is responsible for presenting all of the material facts. The responsibility is not affected by the type of security being discussed or the agent's
compensation. (Page 79)

Front 240

Which of the following advisory fee structures may NOT be charged under the Uniform Securities Act?
A. Fees based on a percentage of the change in value of funds from year to year
B. Fees based on a fixed-dollar schedule for funds under management, with payment tied to account performance
C. Fees based on a fixed-dollar schedule tied to the value of funds under management
D. Fees based on a percentage of the aggregate value of funds under management

Back 240

A. Fees based on a share of capital gains or appreciation in an account are prohibited. Fees based on the value of assets under management
are acceptable. (Page 88)

Front 241

It is legal under the Uniform Securities Act for a registered investment adviser to tell a client that
A. a registered security may be sold lawfully in that state
B. an exempt security need not be registered because it generally is regarded as being safer than a nonexempt security
C. the administrator has found the
adviser's qualifications to be satisfactory
D. the administrator has approved a registered security for sale in the state

Back 241

A. The fact that a security is registered or is exempt from registration has no bearing on its quality, safety or merits, and it is illegal to make any statement or implication to the contrary, as is implied in answers Band D. A similar principle applies to a person being registered or exempt from registration (answer C). Registration does not involve the administrator's verification 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. The information in answer A can be stated legally. (Page 87)

Front 242

Under the Investment Advisers Act of 1940, which of the following investment advisers are in violation of the act?
I. Barry Kodiak persuades a client to cosign for a loan without disclosing that he is facing financial difficulties.
II. Sadie Longhorn's customer instructs her to buy shares in Dohspils Pharmaceuticals. DOH is experiencing financial troubles, so Sadie buys shares in Flibinite Health Care instead.
III. June Polar purchases shares of a new issue and hopes to cause the price of the shares to rise by recommending that all her clients purchase the stock. She does not tell clients that she owns the stock.
A. I and II only
B I and III only
C II and III only
D. I, II and III

Back 242

D. The antifraud provisions prohibit any deceptive act by an adviser in the course of business with a client. Although the violation in choice I does not involve a securities transaction, it still
represents an abuse of the adviser-client relationship and therefore is covered by the antifraud provisions. Regarding choice II, deliberately failing to follow a customer's instruction is a violation.
Advisers must disclose trades made for their own accounts that are designed to profit from the market impact of recommendations (choice III).
(Page 86)

Front 243

Which of the following activities is (are) prohibited under the Uniform Securities Act?
I. Engaging in a practice not expressly forbidden by the act, but defined as unethical by the administrator in a rule
II. Omitting a material fact when soliciting a client
III. Selling recommended securities to a client from an adviser's own account without disclosing this fact to the client
A. I and II only
B. I and III only
C. II only
D. I, II and III

Back 243

D. The antifraud provisions apply to soliciting clients as well as to providing investment advice. They require disclosures to a client if an adviser will act as a principal for his own account or as a broker for another party in effecting a recommended transaction. The act gives the administrator the power to define certain practices as unethical and prohibits these practices with the same force as those spelled out in the act.
(Page 78)

Front 244

An agent gets a phone call from a customer's wife who wants to sell $25,000 worth of securities and use the proceeds as a down payment on a house. The account is in her husband's name, but she says he told her to sell the securities. The agent knows
the couple to be happily married. Under the circumstances, the agent should do which of the following?
A. Call the husband immediately and confirm the order
B. Sell as instructed
C. Get permission from his principal
D. Tell the couple that the purchase of a house is a bad investment

Back 244

A. The agent may accept orders only from the customer unless he has obtained third-party trading authorization. (Page 81

Front 245

Which of the following are examples of fraudulent practices?
I. Matched orders
II. Phony quotes
III. Material misrepresentations
IV. Wash sales
A. I and II only
B. I, II and III only
C. III and IV only
D. I, II, III and IV

Back 245

D. All of the practices listed are fraudulent. (Page 82)

Front 246

Which of the following is an example of market manipulation?
A. Creating the illusion of active trading
B. Buying on one exchange and selling on another
C. Fictitious quotes to customers
D. Transactions exceeding customers financial capabilities

Back 246

A. Creating the illusion of trading activity manipulates the market. Arbitrage (answer B) is not market manipulation. Giving fictitious quotes is prohibited because they are untrue statements;

Front 247

If an agent fails to state facts in which a prudent investor would be interested, which of the following statements is true?
A. This action is fraudulent under the USA for nonexempt securities only.
B. This action is fraudulent under the USA for exempt securities only.
C. This action is fraudulent under the USA for both exempt and nonexempt securities.
D. This action does not constitute fraud if there was no willful intent to omit the information.

Back 247

C. The omission of a material fact in the sale, purchase or offer of a security is fraudulent. This applies whether the security being offered is
exempt or nonexempt. (Page 79)

Front 248

Under the Uniform Securities Act, an investment adviser may legally have custody of money or securities belonging to a client if the
I. adviser is registered under the 1940 act
II. administrator has not prohibited custodial arrangements
III. adviser does not have discretionary authority over the account as well
IV. adviser has notified the administrator that she has custody
A. I and III
B. II
C. II and IV
D. IV

Back 248

C. The administrator may prohibit advisers from having custody of client funds or securities.
If no such prohibition applies, the administrator must be notified in writing if an adviser has custody. Discretionary authority and federal registration do not affect an adviser's ability to have
custody. (Page 87)

Front 249

Under the Uniform Securities Act, if an investment adviser has custody of customer funds and securities, how often must the adviser send the customer a statement of account activity?
A. Annually
B. Quarterly
C. Monthly
D. With every transaction

Back 249

B. An investment adviser in possession of customer assets must send a statement to the customer every three months. The statement must list the securities the adviser holds and must show all transactions in the account since the last statement
date. (Page 88

Front 250

Although the broker-dealer with which he is registered is not aware of his actions, an agent has raised capital from his customers with which he and his brother-in-law will build a small shopping center. The customers who contributed the capital received certificates of ownership in the shopping center as well as full disclosure of their risks and participation in income from renting mall space to retail businesses. In this situation, the agent has acted
A. lawfully because he disclosed the risks of the transaction to the customers in writing
B. lawfully because interests in a shopping mall are not securities
C. unlawfully because the agent gave his
broker-dealer no opportunity to supervise his activities relative to its customers
D. unlawfully because the agent's brother in-law is not a registered agent (sales representative)

Back 250

C. The agent has acted unlawfully in effecting "private" securities transactions involving the broker-dealer's customers without proper supervision by the firm. Interests in a shopping center generally fall under the definition of securities.
(Page 81)

Front 251

Number of days from receipt by the administrator after which a withdrawal is effective

Back 251

30 Days

Front 252

Your registration may be denied if you were convicted of a felony within the past how many years?

Back 252

10 Days

Front 253

Number of days after notice of possible suspension from the administrator to request a hearing

Back 253

15 Days

Front 254

Number of days from date of issuance to appeal an administrative order of the administrator

Back 254

60 Days

Front 255

Which of the following justifies an administrator's suspension of an agent's registration
I. The order is in the public's best interest.
II. The agent has been found guilty of a felony.
III. A client is suing the agent.
A. I only
B. I and II only
C. II only
D. I, II and III

Back 255

B. Choices I and II would berg rounds for the suspension of an agent's registration by the state administrator.

Front 256

True or false?

The administrator's power to investigate is limited to the administrator's own state.

Back 256

False

Front 257

True or false?

The administrator may issue an injunction if he or she believes a violation of the act has occurred.

Back 257

False

Front 258

True or false?

The administrator's authority is limited to transactions that occur within the state.

Back 258

False

Front 259

True or false?

Any rule issued by the administrator has the same authority as a provision of the USA.

Back 259

True

Front 260

Denial, Suspension or Revocation of Registration

Back 260

• If order is in the public interest and registrant has
filed a misleading or an incomplete application;
- been convicted of a securities crime as an officer;
- willfully violated USA provisions;
- been enjoined temporarily by a court;
- been subject to a stop order of the administrator;
-become insolvent;
-engaged in dishonest or unethical securities practices;
-failed to pay fees;
-failed to supervise properly; or
- been found to have insufficient qualification based on training,
experience or knowledge.

Front 261

Cancellation of Registration

Back 261

• Applicant has ceased to exist, discontinued transaction business or
been declared mentally incompetent

Front 262

Withdrawal of Registration

Back 262

• Effective after 30 days of administrator's receipt if no revocation or suspension in process
• Revocation or suspension may be started up to one year after withdrawal

Front 263

Contumacy

Back 263

• Contempt of administrator's order

Front 264

Administrator's Subpoena Authority

Back 264

• Anywhere outside the state
. Full cooperation with other domestic and foreign regulators

Front 265

Administrators with Jurisdiction

Back 265

. State where offer was originated
• State to which offer was directed
• State where offer was accepted

Front 266

USA Right of Rescission

Back 266

• Seller may attempt to buy back illegal sale
. Buyer may not sue if no response to offer is made within 30 days

Front 267

USA Statute of Limitations

Back 267

. May not sue after two years of discovery or three years after transaction, whichever comes first

Front 268

USA Penalties

Back 268

• Criminal penalties
- Up to $5,000 and/or three years' imprisonment
• Civil liabilities
- Recover money paid including investment advisory fee Receive interest from date of purchase
-Receive court cost and attorney's fees
-Award reduced by income received from investment advice rendered

Front 269

Which of the following statements is (are) true regarding civil liabilities when a sale violates provisions of the Uniform Securities Act?
I. A buyer may not sue for compensation later than three years after the sale.
II. A rescission offer must include interest.
III. A rescission offer must be at a current price.
A. I only
B. I and II only
C. II only
D. I, II and III

Back 269

B. Rescission must occur by the earlier of two years after the discovery of the facts or three years after the occurrence. The offer of rescission is based on the price originally paid for the security. (Page 109

Front 270

Which of the following justifies an administrator's denial of a security's registration?
I. The order is in the public interest.
II. The company has not been paying dividends.
III. The underwriter's compensation is excessive.
A I
B. I and II
C. I and III
D. III

Back 270

C. Answers A and D are incorrect because neither choice I nor choice III by itself justifies an action for denial. (Page 104)

Front 271

Disciplinary proceedings under the Uniform Securities Act generally require an administrator to provide which of the following?
I. Opportunity for a hearing
II. Written findings of facts and conclusions of law
III. Appropriate prior notice
A I and III only
B. II only
C. II and III only
D. I, II and III

Back 271

D. In general, an administrator must provide appropriate prior notice, opportunity for a
hearing and written findings of facts and conclusions of law. Even if an order is issued summarily-that is, made effective upon issue without prior notice-a registrant must be notified upon issue of the order and must be given the opportunity to request a hearing.
(Page 103

Front 272

Under the USA, an administrator may do all of the following EXCEPT
A. issue a stop order to revoke the effectiveness of a registration statement
B. issue a cease and desist order without a prior hearing
C. issue an injunction to force compliance with an administrator's rule
D. revoke a previously allowed exemption

Back 272

C. Administrators cannot issue injunctions. They may, however, petition a court to issue an injunction, or enjoin, against certain activities.
(Page 104)

Front 273

A person who sells securities in violation of state securities laws is civilly liable for which of the following?
I. Principal
II. Interest
III. Court costs
IV. Attorney's fees
A. I, II and IV only
B. I and III only
C. II, III and IV only
D I, II, III and IV

Back 273

D. A person who sells securities illegally is liable for the purchase price of the securities plus
interest from the date of purchase, costs and reasonable attorney's fees. (Page 108

Front 274

A customer living in one state receives a phone call from an agent in another state. A transaction between the two occurs in yet another state. Jurisdiction falls under the administrator of
A. the state in which the customer lives
B. the state in which the agent's office is located
C. the state in which the transaction took place
D. each of the three states involved

Back 274

D. The Uniform Securities Act gives each state administrator jurisdiction over offers to buy or sell when the offers originate in the administrator's state or are directed to or accepted in that
state. (Page 106)

Front 275

An agent who willfully violated state securities law is subject to which of the following?
I. Civil liabilities
II. Criminal penalties
III. Denial, suspension or revocation of registration as an agent by the administrator
A I only
B. I and II only
C. III only
D. I, II and III

Back 275

D. Violations of securities laws are subject to criminal penalties, civil liabilities and denial, suspension or revocation of registration.
(Page 108)

Front 276

An agent's license could be revoked if which of the following occurred?
A. The agent was convicted of a securities related misdemeanor.
B. The agent was declared insolvent.
C. The agent was either convicted of a securities-related misdemeanor or declared insolvent.
D. Once issued, an agent's license cannot be revoked.

Back 276

C. If you answered this question incorrectly, review the list in the text on offenses leading to denial, suspension or revocation of
registration. (Page 102

Front 277

Which of the following subjects an agent to a possible denial of registration?
I. Engaging in fraudulent selling to an insurance company
'II. Conviction of a securities-related
misdemeanor eight years ago
III. Insolvency
IV. Failure to pay filing fees

A. I only
B. I, II and III only
C. II, III and IV only
D. I, II, III and IV

Back 277

D. Fraud, conviction of a felony or misdemeanor involving securities and insolvency are grounds for denial. (Page 102

Front 278

An agent works for a brokerage firm in Illinois, where his client also lives. The agent makes an offer to the client by phone while the client is vacationing in California. The client accepts the offer while still in California. The client travels to Texas before returning home and sends payment for the security from there. The check is from a money-market fund based in Ohio. The administrator(s) of which state(s) has (have) authority over the sale?
I. Illinois
II. California
III. Texas
IV. Ohio

A. I only
B. I and II only
C. II, III and IV only
D. I, II, III and IV

Back 278

B. The offer was made from Illinois to a person in California, so the state administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money-market fund is based are unimportant. (Page 106)

Front 279

As defined in the Uniform Securities Act, which of the following is NOT a security?
A. Pre-organization certificate in a real estate condominium
B. Commercial paper issued with an eight month maturity
C. Variable annuity
D. $100,000 whole life insurance policy

Back 279

D. A security is any piece of paper that can be traded for value. An investment is considered a security if a person invests his or her money in a common enterprise with the expectation of profit from the managerial efforts of a third party. Insurance policies and fixed annuities are not considered securities. (Page 12

Front 280

Which of the following persons is defined as an agent by the Uniform Securities Act?
A. Silent partner of a broker-dealer
B. Secretary of a branch office sales manager
C. Clerk at a broker-dealer who is authorized to take orders
D. Broker-dealer executive who does not solicit or transact business

Back 280

C. Anyone who solicits or receives an order while representing a broker-dealer is an agent.
(Page 20)

Front 281

As defined in the Uniform Securities Act, which of the following are considered securities?
I. Commodity option contract
II. Treasury stock
ill. Keogh plan
A. I and II only
B. I and ill only
C. II and III only
D. I, II and III

Back 281

A. An IRA or a Keogh plan is a vehicle for an investment, not a security itself. Note that a commodity option contract is considered a security, while a commodity futures contract is not.
(Page 12)

Front 282

According to the Uniform Securities Act, all of the following are investment advisers EXCEPT a
I. broker who charges for investment
advice
II. publisher of a financial newspaper
Ill. person who sells securities analysis
IV. CPA who charges for constructing a portfolio of tax-sheltered investments
A. I and II
B. II and ill
C. II and IV
D. III and IV

Back 282

. C. Investment advisers are persons in the business of selling investment advice. Profession¬als such as lawyers, accountants and teachers whose performance is incidental to the practice of their professions are not considered investment advisers. A publisher of a financial newspaper is specifically excluded from the definition of an investment adviser. (Page 22)

Front 283

Interests in which of the following are considered securities under the Uniform Securities Act?
I. Merchandising marketing program
II. Multilevel distributorship arrangement
Ill. Oil and gas drilling program

A. I and II only
B. I and III only
C. II and III only
D. I, II and Ill

Back 283

D. All of the investments listed fall under the definition of security. (Page 12

Front 284

Under the Uniform Securities Act, an individual must register as an agent if representing an issuer in which of the following transactions?

A. Sale of six-month commercial paper
B. Sale of Canadian corporation's common
stock
C. Transaction with an underwriter
D. Transaction in municipal securities

Back 284

B. An individual is not considered an agent
when representing an issuer in such securities as municipal securities, Canadian government securities or commercial paper maturing in 270 days or less. Also, an individual is not considered an agent when representing an issuer in exempt transactions, such as between issuers and underwriters. However, an individual representing a Canadian issuer of common stock is included in the Uniform Securities Act's definition of agent.
(Page 20)

Front 285

Under the Uniform Securities Act, the definition of an issuer includes which of the following?
A. Seller in a transaction on the floor of an exchange
B. Officer or director of a company that is offering new shares to the public
C. Person proposing to issue a security
D. Market maker for a new issue

Back 285

C. The term issuer includes any person who issues or proposes to issue any security.
(Page 17

Front 286

Under the Uniform Securities Act, the definition of a broker-dealer includes which of the following?
A. Person in the business of making trades in his or her own account or for the accounts of others
B. Agent handling principal transactions
C. Trust company when executing transactions in accounts in which it does not act in a fiduciary capacity
D. Authorized representative of an issuer

Back 286

A. A broker-dealer is defined as any individual or firm in the business of making trades in its own account or for the accounts of others.
(Page 18

Front 287

According to the Uniform Securities Act, which of the following constitutes a sale?
A. Attempt to transfer ownership of a security
B. Solicitation of an offer to buy
C. Contract to transfer ownership of a security for value
D. Offer equivalent contract

Back 287

C. A sale is defined as every contract to sell a security or an interest in a security, including a security given as a bonus with the purchase of another security, or a gift of assessable stock. An offer to sell is an attempt to solicit a purchase or sale in a security. (Page 26

Front 288

An employee of a large, publicly held company effects transactions with existing employees for the purchase of company debentures. Under the Uniform Securities Act, which of the following statements is true?
A. The employee must register as an agent of the issuer.
B. The employee need not register as an agent of the issuer.
C. The employee may receive commissions without registration.
D. the employee must register as an agent if he or she will receive commissions or remuneration, directly or indirectly.

Back 288

D. An individual is not considered an agent when effecting transactions with an issuer's employees only if no commission is paid.
(Page 20

Front 289

According to the Uniform Securities Act, which of the following is NOT considered a person?
A. Custodian
B. Minor
C. Municipality
D. Corporation

Back 289

B. Minors cannot enter into contracts and therefore are not considered legal persons.
(Page 16

Front 290

Under the Uniform Securities Act, a person who has passed the Uniform Securities Agent State Law Exam but whose license has not yet been issued can participate in which of the following activities?
A. Prospecting in person
B. Prospecting by mail
C. Accepting unsolicited orders
D.. None of the above

Back 290

D. A person who has passed the exam cannot transact business until the state administrator grants registration, which normally occurs on the 30th day after the application is filed.
(Page 39

Front 291

According to the Uniform Securities Act, a consent to service of process must accompany which of the following?
I. Agent's registration application
II. Civil complaint against a broker-dealer
III. Broker-dealer's initial registration
application
A. I only
B. I and III only
C. II and III only
D. I, II and III

Back 291

B. A broker-dealer, an agent or a state-registered investment adviser may obtain registration by filing an application and a consent to service of process with the administrator. The consent to service of process gives the administrator the irrevocable right to process legal complaints against the applicant. Federally registered advisers must give notice only and pay filing fees in the states in which they conduct business.
(Page 39)

Front 292

An agent representing a broker-dealer lives in one state and wants to do business in another state. Under the Uniform Securities Act, which of the following statements is true?
A. No registration is necessary in the other state as long as the agent's activities are limited exclusively to effecting transactions in certain exempted securities.
B. No registration is necessary if no commission or other remuneration is paid or given directly or indirectly.
C. If the agent is a partner, an officer or a director and held that position at the time the broker-dealer was registered, the individual need not register separately.
D. Registration is required only if an offer is directed, accepted and paid for in that other state.

Back 292

C. Both a broker-dealer and an agent must be registered in the state where they transact business even if the securities or the transactions are exempt from registration. At the time a broker dealer is registered, officers of the firm who act as agents are registered automatically as agents.
(Page 41

Front 293

Under the Uniform Securities Act, for what period of time is a broker-dealer's agent's license in effect?
A. It depends on the renewal dates in the various states.
B. Until December 31 unless renewed
C. Until withdrawn by the agent or
revoked by the administrator
D. Length of the agent's employment by all broker-dealers

Back 293

B. Registrations expire on December 31st of each year unless renewed. (Page 39

Front 294

Under the Uniform Securities Act, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities?
A. Public offering
B. Private placement
c. Rights offering
D. Offering to issuer's employees

Back 294

B. A private placement involves the sale of nonexempt securities to qualified public investors. Private placement transactions are exempt from registration. The Uniform Securities Act stipulates that no more than 10 non accredited investors receive offers in any 12-month period; that the purchase be made for the purpose of investment; and that no commissions be paid for solicitation of non institutional buyers.
(Page 69) [

Front 295

Which of the following securities is (are) exempt from the registration provisions of the Uniform Securities Act?
I. Issue of a savings and loan association
II. General obligation municipal bond
III. Bond issued by a company that has common stock listed on the American Stock Exchange
A. I only
B. II only
C. II and III only
D. I, II and III

Back 295

D. Each of the securities listed is exempt from registration under the Uniform Securities
Act. (Page 65

Front 296

Which of the following activities violates the Uniform Securities Act?
I. Buying and selling the same stock on the same day on different exchanges
II. Offering shares of an unregistered, nonexempt security to customers
III. Offering a Canadian government bond to a resident of a state in which the agent of a broker-dealer is not registered
A. I only
B. II only
C. II and III only
D. I, II and III

Back 296

C. Buying a security on one exchange and selling it on another is a proper market arbitrage. Broker-dealers and agents must be registered in each state where offers or sales occur. Also, every security must be registered unless it is an exempt security or transaction. (Page 81

Front 297

Which of the following exemptions under the Uniform Securities Act applies to the sale of securities to institutions that are regarded as professional investors?
A. Blue chip exemption
B. Manual exemption
C. Exempt transaction
D. Exempt security

Back 297

C. 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. (Page 68

Front 298

Which of the following statements is true regarding the antifraud provisions of the Uniform Securities Act?
A. The only securities exempt from the provisions are those regulated by federal authority.
B. The only exempt securities are those issued by national governments or political subdivisions of countries that maintain diplomatic relations with the United States.
C. The only exempt securities are those registered properly under blue-sky laws.
D. No securities are exempt from the antifraud provisions of the act.

Back 298

D. Neither exempt securities nor exempt transactions are exempt from the antifraud provisions. (Page 65)

Front 299

The Uniform Securities Act prohibits which of the following?
I. Agents exercising discretion in discretionary accounts
II. Charging larger than ordinary commissions on certain transactions
III. Soliciting orders for unregistered,
nonexempt securities
A. I only
B. II and III only
C. III only
D. I, II and III

Back 299

C. The Uniform Securities Act prohibits soliciting orders for unregistered nonexempt
securities. (Page 83

Front 300

A customer asks an agent to open an account and buy stock for the customer's spouse. According to the Uniform Securities Act, which of the following statements about this action is true?
A. The agent could be liable if the stock declines in value.
B. This practice is ordinary and acceptable.
C. This action is prohibited unless the spouse signs a trading authorization.
D. This action is prohibited unless the customer signs a trading authorization on behalf of her spouse.

Back 300

C. Effecting transactions without specific authority to do so is prohibited. (Page 86)

Front 301

A customer who wishes to retire in three years informs his agent that he wants to use the equity in his house to make enough money in the stock market to fund his retirement. According to the Uniform Securities Act, the agent should do which of the following?
A. Help meet the customer's needs by constructing a high-quality, growth oriented portfolio
B. Urge the customer to reconsider because the time allotted is not consistent with his means
C. Suggest that the customer invest in an ultraconservative portfolio of municipal bonds
D. Invest the money in stocks because of
their unlimited potential

Back 301

B. Making unsuitable recommendations to
customers is prohibited. (Page 81

Front 302

An agent hears that the chairman of a large manufacturing firm may be ousted because of erratic social behavior. The agent decides to tell all of his customers who own shares of the manufacturing corporation to liquidate their positions. Under the Uniform Securities Act, which of the following statements is true?
A. The agent may have made an error as to the effect of the rumor, so he should wait until he has a better feel for the situation.
B. This action is based on material inside information, so he must inform all of his customers of this fact.
C. This action constitutes a prohibited use of rumor to induce a purchase or sale.
D. This action is legal and legitimate as long as the agent limits the exposure to 12 customers or fewer.

Back 302

C. Repeating rumors is both misleading and prohibited under the Uniform Securities Act.
(Page 83)

Front 303

An agent hears material inside information regarding a publicly held company. Which of the following actions would NOT violate the Uniform Securities Act?
A. Soliciting orders based on this
information
B. Trading for the agent's personal account based on this information
C. Discussing the situation with a superior or compliance officer in the agent's firm
D. Discussing the information at a seminar, but making no investment
recommendation

Back 303

C. Disseminating and acting on inside information are prohibited. (Page 80)

Front 304

Under the Uniform Securities Act, which of the following may have custody of customer funds?
I. Investment adviser who maintains a $35,000 net worth
II. Investment adviser who maintains a $35,000 surety bond
III. Broker-dealer that maintains a $10,000 surety bond
IV. Broker-dealer in compliance with SEC net capital rules

A. I, II and IV
B. I and III
C. I and IV
D. III and IV

Back 304

A. If an investment adviser or a broker ¬dealer has custody of customer assets, the state administrator may set a minimum capital or surety bond requirement of $35,000. A broker¬ dealer in compliance with federal net capital rules is exempt from the state's rules. (Page 39)

Front 305

According to the Uniform Securities Act, which of the following would be an unlawful activity for an investment adviser?
A. Entering into an investment advisory contract that does not mention the compensation arrangements
B. Taking custody of a customer's securities or funds without notifying the administrator, even though the administrator has no rule that prohibits such custody
C. Entering into an investment advisory contract that provides specifically for compensation based on a share of capital appreciation of the customer's funds
D. All of the above

Back 305

D. Each of the answers listed is an example of an unlawful activity by an investment adviser.
(Page 88

Front 306

Which of the following actions by an agent is NOT considered unlawful under the Uni¬form Securities Act?
A. Making an untrue statement of a mate rial fact
B. Omitting a material fact because she knew she did not have time to cover everything in a short presentation
C. Deliberately failing to follow a customer's instructions
D. Actively soliciting orders in unregistered exempt securities

Back 306

D. Securities that do not require registra¬tion under the Uniform Securities Act are exempt securities. Although the securities are exempt, the agent who makes the solicitation and his or her broker-dealer must be registered.
(Page 65

Front 307

Under which of the following circumstances does the Uniform Securities Act permit excessive trading activity that generates high commissions and low returns in a customer's account?
A. If the account is discretionary
B. With the customer's written permission
C. When it is consistent with the customer's needs
D. Under no circumstances

Back 307

D. Excessive trading activity in an account is called churning, a prohibited practice.
(Page 81

Front 308

Under the Uniform Securities Act, which of the following statements is true regarding the use of material facts?
A. To omit material facts is fraudulent and unethical.
B. Because all material facts cannot be presented, it is up to the sales rep to decide which to use.
Restrictions apply only to sales, not to solicitations.
D. The agent is the final arbiter on what is material and what is not.

Back 308

A. Material facts are essential to making investment decisions. To omit them is fraudulent or deceitful. (Page 78)

Front 309

An agent receives a letter from an irate customer. This letter, which is the fourth in the last four months, is very abusive. The agent decides against a reply, and discards the letter. Under the Uniform Securities Act, which of the following statements is true?
A. The agent is entitled to decide how to handle such situations.
B. The administrator may, by rule, dictate how this should be handled.
C. All material complaints must be forwarded to the administrator.
D. The agent's behavior is prohibited. She must forward all written complaints to her employer.

Back 309

D. The Uniform Securities Act requires an agent to forward any written complaints he or she receives to the agent's employer.
, (Page 82)

Front 310

Which of the following is (are) considered an investment adviser representative(s) that is, a supervised person(s)-under the Uniform Securities Act?
I. Vice-president of a firm
II. Temporary employee hired to solicit clients
Ill. Employee who performs only clerical tasks
IV. Employee who supervises the management of customer accounts
A. I only
B. I, II and IV only C. ill and IV only D. I, II, III and IV

Back 310

B. Clerical and ministerial personnel are not included in the definition of investment adviser representatives (supervised persons). Any other person associated with an investment adviser, including an officer of the firm, generally is considered to be an investment adviser representative. (Page 23)

Front 311

According to the Uniform Securities Act, to determine whether an investment adviser is trading excessively in a customer's account, regulators examine whether the
A. adviser received compensation for the trades
B. transactions matched the investor's objectives
C. customer approved the transactions in writing
D. adviser acted as a principal or an agent

Back 311

B. Trading in a customer's account must not be excessive in terms of size or frequency with respect to the customer's investment objectives and financial ability. Whether the adviser acted as principal or agent or received compensation is not a consideration. The customer's approval of the transactions does not release the adviser from abiding by suitability requirements.
(Page 87

Front 312

Under the Uniform Securities Act, which of the following statements is true of an agent who deliberately gives a fictitious quote to
a customer?
A. The agent is guilty of a felony.
B. The agent has committed a fraudulent and misleading act.
C. The agent must execute at that price.
D. The agent is committed to selling or buying 100 shares at that price.

Back 312

B. Disseminating phony or misleading quotes is a prohibited practice. (Page 78)

Front 313

Which of the following is a fraudulent or prohibited activity under the Uniform Securities Act?
A. Using the dividends paid in the last 12 months to determine a common stock's current yield
B. Implying that registration of a security means approval of the security
C. Selling common stock to a customer with income objectives
D. Stating that zero-coupon bonds pay no current interest

Back 313

B. Registration of a security with the SEC or a state implies neither approval nor disapproval. (Page 79) [

Front 314

Which of the following practices violates the Uniform Securities Act?
A. Deliberately failing to charge a commission
B. Failing to charge a markup
C. Failing to state every fact
D. Failing to follow a customer's
instructions

Back 314

D. Deliberate disregard for a customer's instructions is a violation under the USA.
(Page 81

Front 315

Under the Uniform Securities Act, a state administrator may revoke or deny an investment adviser's registration for which of the following reasons?
A. Conviction for a securities felony
15 years ago
B. Conviction for a securities misdemeanor 15 years ago
C. Violation of another state's securities law five years ago
D. Lack of experience as an investment adviser

Back 315

C. A violation of any state or federal securities or commodities law is grounds for denial, suspension, revocation or cancellation of registration. Convictions are grounds for administrator action if they occurred within the past 10 years. Lack of experience is not sufficient cause for revoking or denying registration. (Page 102)

Front 316

Which of the following statements regarding licensing and registration under the Uniform Securities Act are true?
1. When an agent's license is suspended, the broker-dealer's license is suspended.
II. When a broker-dealer's license is suspended, its agents' registrations are suspended.
III. An administrator may suspend or revoke registrations whenever the public good is the sole consideration.
IV. If a principal's license is suspended, the broker-dealer's license is suspended.
A. I and II
B. II and III
C. II and IV
D. III and IV

Back 316

C. An administrator may suspend or revoke any registration if the administrator finds that the order is in the public interest and determines guilt of any of the listed offenses. The public good cannot be the sole consideration. The suspension of a broker-dealer's registration causes the suspension of all agents. The suspension of a principal's registration causes the suspension of the firm's. (Page 102)

Front 317

According to the Uniform Securities Act, which of the following rectifies an inadvertent sale of an unregistered, nonexempt security?
I. Offering to buy back the security from the customer
II. Asking the customer to sign an agreement that releases the agent because the customer is pleased with the securities' performance
III. Registering the stock by notification
IV. Offering to pay interest as set by the administrator, less income paid, from the date the security was purchased

A. I and III only
B. I and IV only
C. II and III only
D. I, II, III and IV

Back 317

B. The buyer has the rescission right to recover the purchase price and interest. If the seller discovers the illegal sale, he or she may offer to repurchase the security. The buyer has 30 days to accept after receiving the rescission letter offering to refund the money and interest; otherwise,
the sale stands. (Page 109)

Front 318

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

Back 318

D. The administrator in any state to or from which an offer is made has jurisdiction over the
offer. (Page 106

Front 319

Persons with $5 million or less in assets under management who act in advisory capacities in states that do not require registration must do which of the following?

A. Register with the SEC
B. Register with the NASD
C. Pass the Series 7 General Securities Representative Exam
D. Pass the Series 65 Uniform Investment Adviser Law Exam

Back 319

A. Those persons who act in advisory capacities in states that do not require registration must register with the SEC. (Page 45)

Front 320

An investment adviser ignores a state administrator's subpoena of records. Under the Uniform Securities Act, the adviser may be subject to
A. a court injunction
B. a registration revocation
C. a probationary period
D. all of the above

Back 320

A. If an investment adviser demonstrates contempt (contumacy) for an administrator's order or subpoena, a court may be asked to enforce it. The adviser's registration or ability to conduct business may not be affected.
(Page 105)

Front 321

Which of the following activities is prohibited for a sales rep according to the USA?
A. The sales rep enters into an agreement
to share in the profits and losses of a customer's account without investing in the account.
B. The sales rep and his spouse own jointly their own personal trading account at the rep's firm.
C. The sales rep, with his firm's and the client's permission, participates in the profits and losses of a customer's account in proportion to his investment in the account.
D. A sales rep refuses a client's request to share in the performance of the client's account.

Back 321

A. It is a prohibited practice under the USA for a sales rep to share in the profits and losses of a customer's account unless the customer or the employer has given written consent and the percentage of participation equals the percentage of the sales rep's personal funds in the account. A sales rep may own a personal account at the firm jointly. An agent can refuse to share in a customer's account. (Page 82)

Front 322

Which of the following are NOT considered violations of the USA?
I. Deliberately failing to follow a customer's instructions
II. Bringing a customer's written complaint to the attention of a rep's employer
III. Effecting a transaction with an investor who is not recorded on a firm's books with the advance written approval of the firm's principal
IV. Soliciting orders for unregistered, nonexempt securities
A. I and II
B. I and IV
C. II and III
D. III and IV

Back 322

C. Bringing a written complaint to the attention of a rep's employer does not violate the USA; however, failure to do so violates the act. If a firm's principal approves a transaction in advance, it may be effected for an investor who is not otherwise recorded on the firm's books. Deliberately failing to follow a customer's instructions and soliciting orders for unregistered, nonexempt securities are violations of the USA.
(Page 80)

Front 323

Which of the following conditions must a sales rep or an agent meet in order to be permitted to share in the profits and losses of a customer's account?
I. The sales rep or agent has obtained the employer's written consent.
II. The sales rep or agent has obtained the customer's written consent.
III. The sales rep or agent has capital invested in the account.
IV. The percentage of the profits and losses shared is the same percentage as the rep's or agent's personal investment in the account.
A. I and II only
B. I, II and III only
C. II, III and IV only
D. I, II, III and IV

Back 323

D. A sales rep must meet all of the conditions listed to participate legally in the profits and losses of a customer's account. (Page 82)

Front 324

Which of the following actions by a sales rep is considered a violation of the anti fraud provisions of the USA?
A. The sales rep recommends a security to a client based on the rep's investigation of the client's financial objectives.
B. A client places an order to buy stock without providing any suitability information; the rep enters the order, but marks the ticket "discretionary."
C. Upon receiving a signed trading authorization from a customer, the agent effects a discretionary transaction in accordance with the client's investment objectives.
D. After a client places an order, the sales rep discusses and reviews the transaction's suitability with the client before entering the trade.

Back 324

B. Failure to obtain suitability information violates of the Uniform Securities Act. Falsely marking. a trade "discretionary" without a signed trading authorization from the customer is a violation of the antifraud provisions of the act. The other actions listed are not fraudulent according
to the USA. (Page 81

Front 325

An agent tells his customer that a corporation has finally "graduated" to the level of quality acceptable for trading on the New York Stock Exchange. He recommends the stock to the customer based on the Exchange's rigorous listing requirements. In this situation, the agent has acted
A. lawfully because the New York Stock Exchange requires that companies it lists are substantially capitalized
B. lawfully because he did not guarantee returns
C. unlawfully because listing on the New York Stock Exchange does not reduce the client's loss exposure
D. unlawfully because the agent may sell only insurance products rather than securities

Back 325

C. Because New York Stock Exchange listing requirements are quantitative rather than qualitative (e.g., requiring minimum capitalization levels rather than potential earnings), Exchange listing by no means indicates the level of risk associated with owning the stock. The sales representative's statement is misleading and therefore unlawful. (Page 78

Front 326

An agent tells her customer of the long-term growth potential of General Gizmonics, but points out the significant risk of buying the stock. She explains the risk of using simple averages to analyze the company's earnings by indicating to the customer that earnings fell 50 percent two years ago and that last year's 100 percent increase in earnings offset the earlier reduction. In this situation, the agent has acted
A. lawfully because the risk and earnings volatility was disclosed
B. lawfully because it is generally under¬ stood that growth stock experiences earnings volatility
C. unlawfully because averages represent a form of technical analysis with which the customer may be unfamiliar
D. unlawfully because agent's bullishness on the stock is a prohibited projection of
performance

Back 326

A. The sales representative has disclosed General Gizmonics earnings volatility by pointing out the 50 percent drop. In the scenario she tells the customer not to rely on average earnings (sim¬ple averages are not technical analysis). Many customers are unaware of the volatile earnings associated with growth stocks. In merely offering a favorable opinion about a stock's potential growth, the agent is not projecting performance.
(Page 85)

Front 327

Ada Bullweather, a lifelong friend of an agent, is also that agent's best customer. Due to a substantial stock market drop, the agent receives a maintenance margin call he cannot satisfy without liquidating securities in his account. Mrs. Bullweather offers to transfer cash and securities from her own account into the agent's account. Because this offer could be misunderstood, the agent borrows $10,000 from Mrs. Bullweather under a legal and binding loan agreement specifying the rate of interest the agent will pay on the loan. In this situation, the agent has acted
A. lawfully because the loan operated as a standard business loan by agreement
B. lawfully if the agent can substantiate that Mrs. Bullweather was a friend before becoming a client
C. unlawfully because borrowing money or securities from a customer is prohibited
D. unlawfully because neither party was represented by counsel in drawing up the loan agreement

Back 327

C. Borrowing money or securities from a customer regardless of friendship is a prohibited practice. (Page 86

Front 328

Which two of the following statements describe the authority of each state securities administrator under the USA?
I. The administrator can start an investigation against a rep even if a violation has not yet occurred.
II. The administrator can subpoena witnesses living in the state only.
III. The administrator can subpoena witnesses living outside the state.
IV. The administrator can begin an investigation only after a violation of the act has occurred

Back 328

B. Under the USA, each administrator has a broad scope of investigative authority. An administrator may begin an investigation against a rep before a violation occurs and may subpoena witnesses in any state.(Page 105)

Front 329

Under the Uniform Securities Act, a person representing an issuer of which of the following securities need NOT be registered as an agent?
I. Banker's acceptance
II. Municipal bond
III. U.S. bank issue
IV. Investment contract issued in connection with an employee's stock purchase, savings, pension, profit-sharing or similar benefit plan
A. I and II only
B. I, III and IV only
C. III and IV only
D. I, II, III and IV

Back 329

D. An individual is not considered an agent when representing the issuer in each of the cases cited. Note that for purposes of the exam, unless otherwise stated, all commercial paper is considered to mature in 270 days or less.
(Page 20)

Front 330

Under the Uniform Securities Act, an individual is NOT considered an agent if he or she engages in which of the following types of transactions?
I. Between an issuer and an insurance company
II. Between an. issuer and unsophisticated
investors
III. Between an issuer and the underwriters
IV. Between an issuer and savings institutions or trust companies
A. I, III and IV only
B. II and III only
C. II and IV only
D. I, II, III and IV

Back 330

A. An individual who effects securities transactions for compensation is defined as an agent. A person representing an issuer in an exempt transaction does not fall under the definition, nor does a person who represents an issuer in effecting transactions with existing employees in which no commissions are paid.
(Page 20)

Front 331

An agent explains dollar cost averaging to a mutual fund prospect: "If you invest the same number of dollars each month and reinvest the distributions, the value in your mutual fund increases." In this situation, which of the following statements is true?
A. The agent has explained the result of dollar cost averaging accurately.
B. The agent has explained the result of dividend and capital gain reinvestment accurately.
C. The agent has made a misleading statement to the customer.
D. The agent has made a misleading statement to the customer only if the fund has not increased in value within the previous 10 years.

Back 331

C. Implying that dollar cost averaging or dividend reinvestment automatically produces profit for a mutual fund customer is misleading regardless of the fund's past performance.
(Page 82)

Front 332

Under the Uniform Securities Act, which of the following statements about sales and offers are true?
I. Any security given or delivered with or as a bonus for any purchase of securities is considered to have been offered and sold for value.
II. A gift of assessable stock is considered to involve an offer and a sale.
III. Every sale or offer of a warrant or stock right to purchase or subscribe to another security is considered to include an offer of the other security.
IV. Every bona fide pledge is considered an
offer and a sale.
A. I, II and III only
B. I and III only
C. II and IV only
D. I, II, III and IV

Back 332

A. The term sale does not include a bona fide pledge. It does include bonuses and gifts of assessable stock. Sales of rights or warrants are considered sales of the underlying security.
(Page 27

Front 333

According to the Uniform Securities Act, an offer or a sale does NOT exist if it is a(n)
I. reclassification of the issuer's securities
II. bona fide pledge or loan
III. act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares
IV. stock dividend of stock other than the issuer's for which nothing of value was given
A. I and II only
B. I, II and III only
C. IV only
D. I, II, III and IV

Back 333

D. The Uniform Securities Act specifically excludes these four choices from the definition of
offer and sale. (Page 27

Front 334

An interest in which of the following can be defined as a security under the Uniform Securities Act?
I. Merchandising marketing scheme
II. Multilevel distributorship arrangement
III. Oil and gas drilling program
A. I only
B. II and III only
C. III only
D. I, II and III

Back 334

D. Any investment contract entered into for profit where someone other than the investors manage the assets is considered a security.
(Page 11

Front 335

According to the Uniform Securities Act, an administrator has the power to require an agent,.licensee to

A. have minimum net capital, post a surety bond and pass an exam
B. post a surety bond and pass an exam
C. post a surety bond, pay filing fees and pass an exam
D. have minimum net capital, pay filing fees, pass an exam and post a surety bond

Back 335

C. The administrator may require that, as a condition of registration, the agent post a surety bond, pay filing fees and pass an examination that may be written, oral or both. (Page 39)

Front 336

An agent representing a broker-dealer in Utah wishes to do business in California exclusively in the trading of certain exempt securities. Under the Uniform Securities Act, which of the following statements is true?
A. The agent need not register in
California.
B. The agent must register in California.
C. The agent need not register if the broker-dealer is registered in California.
D. The agent can do business because the securities are exempt.

Back 336

B. Although the securities are exempted from registration, typically the agent must register in every state where he or she attempts to do
business. (Page 36

Front 337

According to the Uniform Securities Act, under what circumstances is an employee of a licensed broker-dealer firm allowed to sell exempt securities as an unregistered agent?
A. The securities are exempt.
B. The transaction is exempt.
C. The employee is paid no commission or
salary.
D. Under no circumstances

Back 337

D. It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered, even if the securities are
exempt. (Page 36)

Front 338

All of the following are part of the Uniform Securities Act's registration by filing procedure EXCEPT that
A. companies must have attained a specific level of earnings for the prior three-year period
B. a copy of the offering circular or prospectus must be filed
C. if not denied, registration becomes effective after 30 days
D. a statement must list the name(s) of the underwriter(s) and describe the terms of the offering

Back 338

C. Registration by filing becomes effective concurrently with federal effectiveness as long as documentation has been filed with the administrator for at least five days. (Page 61)

Front 339

All of the following statements are true regarding the selling of private placements under the Uniform Securities Act EXCEPT that
A. they can be offered without limitation to institutional investors
B. they cannot be offered to more than 35 nonaccredited persons in 12 consecutive months
C. the seller must reasonably believe that all buyers are purchasing for investment purposes only
D. no commission or other remuneration may be paid for soliciting noninstitutional buyers

Back 339

B. This question distinguishes the differences in federal and state requirements for private placements. Under state law, a private placement can be offered to no more than 10 nonaccredited
investors. (Page 69

Front 340

A registration statement for securities under the Uniform Securities Act remains in force for
A. a period of time determined by the administrator for each issue
B. one year from the effective date
C. one year from the date of issue
D. one year from the previous January 1

Back 340

B. Securities registration statements are effective for one year from the effective dates.
(Page 63

Front 341

An agent thinks that a particular technology stock is undervalued and is due to rise in price. She calls all of her clients to inform them and ask them to purchase some shares. According to the USA, which of the following statements is (are) true?
I. As long as she discloses all material facts, this practice is allowable under the provisions of the act.
II. This is an unethical sales practice because her firm has not recommended this technology stock.
III. This is an unethical business practice. She should review her customer accounts to determine suitability first.
IV. As long as she does not recommend that a client purchase an excessive number of shares, no violation of the act occurs.
A. I, II and IV only
B. I and IV only
C. III only
D. I, II, III and IV

Back 341

C. Under the USA, agents always must determine suitability before soliciting purchases
or sales. (Page 86

Front 342

All of the following are considered exempt securities under the Uniform Securities Act EXCEPT
I. U.S. government securities
II. unsolicited transactions
III. transactions between issuers and underwriters
IV. securities issued by credit unions
A. I, II and IV
B. I and IV
C. II and III
D. IV

Back 342

C. U.S. government and credit union issues are exempt securities. Unsolicited transactions and transactions between issuers and underwriters safe exempt transactions. (Page 65)

Front 343

According to the Uniform Securities Act, an administrator may cancel a person's registration under which of the following circumstances?
A. The person is judged to be mentally incompetent.
B. The administrator determines it would be in the public interest.
C. The person is the subject of an insider trading lawsuit.
D. The person has been terminated from employment at an investment adviser firm.

Back 343

A. An administrator may cancel registrationt if a registered person has been judged mentally incompetent. Merely being the subject of a lawsuit, without being convicted of the crime, is not grounds for cancellation. A person's registration is not in effect any time when the person is no longer associated with an employing firm; however, the registration has not been canceled.
(Page 103

Front 344

According to the Uniform Securities Act, the investment adviser brochure must include the business background of
A. the investment adviser
B. employees of the adviser
C. an affiliated broker-dealer
D. institutional clients

Back 344

A. The business background of any person who will be responsible for making investment recommendations must be included in Part II of Form ADV, filed for registration; substantially the same information must be provided in the disclosure brochure. (Page 50

Front 345

Under the Uniform Securities Act, which of the following constitutes an offer of a security?
A. Stock dividend distributed to current shareholders
B. Agreement between an issuer and an underwriter
C. Delivery of a prospectus
D. Tombstone advertisement

Back 345

C. A prospectus is the document that offers a security for sale. A tombstone advertisement is not considered an offer of the security; it is used to solicit indications of interest. An agreement between an issuer and an underwriter is not considered an offer to purchase or sell the security; and the definition of offer and sale specifically
excludes stock dividends. (Page 15

Front 346

A customer is upset with her agent for not servicing her account properly and sends him a complaint letter about his actions. Under the Uniform Securities Act, the agent should do which of the following?
A. Call the customer, apologize and
attempt to correct the problem
B. Tell the customer he is willing to make rescission
C. Do nothing and hope the customer for gets about the letter
D. Bring the customer complaint to his employer immediately

Back 346

D. Failure to bring customers' written complaints to the attention of an agent's broker-dealer is prohibited. (Page 82

Front 347

Which of the following is NOT considered a market manipulation under the Uniform Securities Act?
A. Three market makers start buying and selling the same security simultaneously in their own accounts.
B. A specialist buys and sells stock for his own account.
C. A principal in a broker-dealer allows a rumor to leak out that Microscam will acquire Datawaq; after a few days, the broker-dealer sells Microscam short for its own account.
D. A broker sells a customer's stock at the bid price and makes up the difference with a personal check.

Back 347

B. The function of a specialist normally is to act as a broker for orders other members leave with the specialist and to act as a dealer in buying and selling for his or her own account.
(Page 81)

Front 348

To dose a sale of $10,000 worth of bonds, an agent Promises to balance a customer's cl1eckbook each month for as long as the customer lives, even though the agent is in line for a promotion and an office transfer. Under the Uniform Securities Act, this is considered a(n)
A. acceptable practice
B. unacceptable practice
C. practice that is not a violation, but not wise either
D. acceptable practice if it complies with house rules

Back 348

B. According to the USA, an agent may not make promises that he or she probably cannot keep. (Page 82

Front 349

The state administrator revokes an agent's registration. Under the Uniform Securities Act, the agent may file for a review of the
revocation order within how many days of revocation?
A. 30
B. 60
C. 90
D.270

Back 349

B. If a person wishes to appeal a state administrator's final order, he or she may file a written petition with the appropriate court within 60 days of order entry. The court then may affirm or set aside the revocation order.
(Page 105)

Front 350

According to the Uniform Securities Act, market manipulation includes all of the following EXCEPT
A. buying on one exchange and selling on another
B. withholding a material fact from a
buyer
C. buying and selling intentionally to
show market activity
D. giving a false quote

Back 350

A. Buying on one exchange and selling on another is known as arbitrage, an accepted trading
practice. (Page 81)

Front 351

A customer has a discretionary account with his agent. The objective of the account is current income. The agent purchases a speculative growth stock. Under the Uniform Securities Act, this is considered a(n)
A. wash sale
B. unauthorized transaction
C. acceptable transaction
D. matching activity

Back 351

B. The customer authorized the agent to buy income-producing securities only. Wash sale and matching activities create the impression of activity in a stock by buying and selling the same stock at the same price without a change in beneficial ownership. These activities may cause others to buy or sell the security. (Page 86) [10992]

Front 352

Under the Uniform Securities Act, which of the following is responsible for proving that a securities issue is exempt from registration?
A. Underwriter
B. Issuer
C. State administrator
D. There is no need to prove eligibility for
an exemption.

Back 352

B. The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. (Page 59

Front 353

According to the Uniform Securities Act, which of the following are fraudulent or deceitful business practices?
I. Matched order
II. Phony quote
III. Material misrepresentation
IV. Wash sale
A. I and II only
B. I, II and III only
C. III and IV only
D. I, II, III and IV

Back 353

D. Both matched orders and wash sales dis¬tort the actual trading activity in a security. Phony quotes and material misrepresentations are untrue statements of fact and therefore are prohibited. (Page 81

Front 354

According to the Uniform Securities Act, which of the following is an example of market manipulation?
A. Creating the illusion of active trading
B. Omitting material facts in a presentation
C. Guaranteeing a security's performance
D. Effecting transactions that exceed a customer's financial capability

Back 354

A. Creating the illusion of trading activity is a manipulation of the market. Guaranteeing a security's performance and omitting material facts are prohibited; however, these practices are not market manipulation. Trades that are too large for a customer also are prohibited because they are not suitable. (Page 82

Front 355

A famous tennis player offers to record a testimonial for an investment adviser for use in a television commercial. Under the Uniform Securities Act, the investment adviser may do which of the following?
A. Use the testimonial as long as the athlete receives no compensation
B. Use the testimonial and pay the athlete
C. Use the testimonial with the state administrator's approval
D. The adviser may not use the testimonial under any circumstances.

Back 355

D. Testimonials promoting investment adviser services are specifically prohibited under both state and federal law. (Page 86

Front 356

An agent omits facts in which a prudent investor would be interested. Under the Uniform Securities Act, this action is fraudulent for
A. nonexempt. securities only
B. exempt securities only
C. both exempt and nonexempt securities
D. The act is not fraudulent if there was no
willful intent to omit the information.

Back 356

C. The omission of a material fact in the sale, purchase or offer of a security is fraudulent. This applies whether the security is exempt or
nonexempt. (Page 79

Front 357

According to the Uniform Securities Act, a person who sells securities in violation of state securities laws is civilly liable for which of the following?
I. Principal
II. Interest
III. Court costs
IV. Attorney's fees

A I, III and IV only
B. I and IV only
C. II and III only
D. I, II, III and IV

Back 357

D. A person who sells the securities illegally is liable for the purchase price of the securities plus interest from the date of purchase, costs and reasonable attorney's fees. (Page 108)

Front 358

Under the Uniform Securities Act, which of the following is (are) considered a broker dealer(s)?
I. Agent
II. Issuer
III. Corporation selling interests in an oil and gas limited partnership
IV. Credit union selling its own stock
A. I
B. I and III
C. II and IV
D. III

Back 358

D. A broker-dealer is defined as any person who invests for others or for his or her own account. A broker-dealer is not an issuer or an
agent. / (Page 18)

Front 359

Under the Uniform Securities Act, no specific response is required from the state administrator before which of the following types of securities registrations become effective?
I. Coordination
II. Qualification
III. Filing
IV. Application

A I and II only
B. I and III only
C. II and III only
D. I, II, III and IV

Back 359

B. Registration by filing and coordination do not require a response from the state administrator for effectiveness. Registration by qualification, however, becomes effective only at the order of the administrator. (Page 60)

Front 360

According to the Uniform Securities Act, a person must register as a broker-dealer in a state under which of the following circumstances?
I. The person has no place of business in the state, but has directed offers to clients with more than 30 days' temporary residency.
II. The person has no place of business in the state and deals exclusively with broker-dealers in that state.
III. The person has no place of business in the state and effects transactions exclusively with issuers of securities in that state.
IV. The person has a place of business in the
state.
A I, II and IV only
B. I and IV only
C. II and III only
D. I, II, III and IV

Back 360

B. The term broker-dealer does not include a person who has no place of business in the state and who (1) effects transactions exclusively through issuers, other broker-dealers or institutions or (2) directs an offer in the state to an existing customer who has more than 30 days' temporary residency within the state where the
offer is received. (Page 18)

Front 361

An issuer pays its directors commissions to sell stock to employees. According to the Uniform Securities Act, which of the following describe the directors?
I. Agents of the issuer
II. Agents of a broker-dealer
III. Need not be licensed
IV. Must be licensed

A. I and III
B. I and IV
C. IIand III
D. II and IV

Back 361

B. Registration as an agent of the issuer is necessary because commissions are paid.
(Page 20)

Front 362

According to the Uniform Securities Act, after an agent passes the Series 63 exam and an NASD/NYSE licensing exam, when can the agent begin to sell?
I. Immediately
II. When the agent is affiliated with a
broker-dealer
III. When the agent has been granted a registration from the state administrator
IV. When the agent gets permission from the principal in the office

A I
B. I and IV
C. II and III
D. II and IV

Back 362

C. Passing an NASD or NYSE licensing exam qualifies an individual to solicit securities sales on a federal level. The state administrator must grant registration and the individual must be associated with a broker-dealer before he or she may engage in securities transactions.
(Page 40)

Front 363

If a person is exempt from state registration but is a federally registered investment adviser, what must he or she do to practice within a particular state?
I. Pay state filing fees
II. Pass an oral or a written examination
III. Give notice to the state
IV. Become licensed as a broker-dealer

A I and II
B. I and III
C. II and III
D. II and IV

Back 363

B. While exempt from state registration, federally registered investment advisers must give written notice and pay state filing fees to practice within a given state. (Page 46) [19077]

Front 364

A customer living in one state receives a phone call from an agent in a different state. A transaction between the two occurs in yet another state. According to the Uniform Securities Act, the transaction falls under the jurisdiction of the administrator(s) of
A the state in which the customer lives
B. the state in which the agent's office is located
C. the state in which the transaction took place
D. all three states involved

Back 364

D. The Uniform Securities Act gives each state administrator jurisdiction over offers to buy or sell when the offers originate in, are directed to or are accepted in the administrator's state.
(Page 106)

Front 365

All of the following are exempt transactions EXCEPT
A manual exemptions
B. isolated nonissuer transactions
C. unsolicited nonissuer transactions
D. commercial paper

Back 365

D. While all of the items listed are exempt, commercial paper is an exempt security, not an
exempt transaction. (Page 66

Front 366

Under the USA, which of the following is an investment adviser?
A Broker-dealer that receives no compensation for investment recommendations
B. Individual who provides financial advice over the Internet, with no recommendations based on specific investment situations of individual clients
C. Investment adviser representative
D. Firm with no office in the state that provides specific investment advice to 10 noninstitutional clients within the state

Back 366

D. A firm with no office in a state that provides specific investment advice is not an investment adviser if its clients are investment
companies or institutions or if business communications or advice is directed to no more than five noninstitutional clients within the state. A broker dealer need not 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 or electronic form need not register as investment advisers. An investment adviser representative is specifically excluded from the definition of an investment adviser under the USA. (Think of the representative as an individual person representing an investment advisory firm; the investment adviser is the firm or service in the business of providing investment advice for a fee.) (Page 22)

Front 367

As defined by the Uniform Securities Act, an example of an investment adviser is a
A lawyer
B. magazine publisher
C. person paid a fee for advising customers on securities
D. person paid a commission for advising customers on securities

Back 367

C. An investment adviser is any person in the business of selling investment advice.
(Page 22

Front 368

Investment advisers are prohibited from which of the following activities under the USA's antifraud provisions?
A Employing any device, scheme or artifice to defraud
B. Engaging in any fraudulent or deceitful practice in the normal course of business
C. Engaging in any practice that the administrator defines by rule as unethical
D. All of the above

Back 368

D. The USA's antifraud provisions prohibit all of the activities listed. (Page 78

Front 369

An agent solicits orders for a primary nonexempt security (underwriting) in his home state. Within days, he learns that the underwriting is not registered in that state. Relieved that no customer orders were placed, he ceases soliciting orders in this security. In this situation, the agent acted
A. lawfully because he ceased soliciting orders immediately upon learning that the security was not properly registered
B. lawfully because no customer orders were executed
C. unlawfully because he did not mark the orders "solicited"
D. unlawfully because soliciting orders in nonexempt, unregistered securities is prohibited

Back 369

D. Soliciting orders in unregistered, nonexempt securities is unlawful, regardless of whether orders are placed. (Page 83)

Front 370

In the locker room at the country club, an agent overhears that Technotalk, a publicly traded company, has just lost its biggest account to a competitor. After learning this, the agent discontinues selling Technotalk common stock. In this situation, the agent acted
A. lawfully because he did not profit from selling Technotalk common stock short in his own account
B. lawfully because he did not take advantage of material, nonpublic information
C. unlawfully because he failed to report nonpublic information to the SEC
D. unlawfully because he failed to inform his customers of the negative news immediately

Back 370

B. Having material nonpublic information makes the sales representative an insider. An insider may not take advantage of or repeat (disseminate) nonpublic information.
(Page 80

Front 371

A customer needs $10,000 to pay for a new house within the next year. His agent suggests that he invest in a stock that has been performing extremely well the past year. The agent assures the customer that he cannot go wrong because a new product line the issuer has introduced surely will continue to dominate the market. "You're sure to make money with this," the agent states. According to the USA, this is an
I. unethical business practice
II. example of guaranteeing a profit III. example of flamboyant language
IV. unsuitable investment
A. I and II only
B. I and III only
C. I and IV only
D. I, II, III and IV

Back 371

D. All of the choices are true.
(Page 82

Front 372

After careful consideration, an agent recommends that a customer buy five different securities. The customer chooses to buy one of the five securities recommended, which is a stock in which the broker-dealer makes a market. The agent, in completing the trade, charges a markup that is larger than the normal markup for a stock transaction. Is this allowable under the USA?
I. No. The markup schedule is set and cannot be changed for an individual trade.
II. Markup schedules depend on the type of security, broker-dealer risk, services that the broker-dealer provides and effort in acquiring the security.
III. No. It is a prohibited practice to charge a higher than normal markup.
IV. Yes. However, proper disclosure is required.

A. I and III
B. II
C. II and IV
D. III

Back 372

C. Higher than average markups or commissions are not prohibited if they are justifiable and disclosed. (Page 87

Front 373

Mrs. Abbot, a customer, has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds
check be made out to her. Your firm sends the check, but makes it payable to both Mrs. Abbot and her sister. This is an example of
A. not following instructions, a prohibited practice under the USA
B. an unfortunate error that can be reconciled with the broker-dealer through a process called reclamation
C. a normal joint account procedure
D. an unlawful practice because the trans action was unauthorized

Back 373

C. In joint accounts, either party may act; however, by law, all checks must be made payable to all owners. The firm is following required procedure. (Page 87)

Front 374

For which of the following is a Series 63 license required?
A. Broker-dealer
B. Agent representing a broker-dealer to the public
C. Agent at a broker-dealer who is a silent partner
D. Issuer

Back 374

B. An agent who represents a broker dealer and effects transactions with the public must be registered at the state level. A Series 63 is a requirement of the state registration process.
(Page 36)

Front 375

An administrator may suspend a sales agent's registration under the USA for all of the following reasons EXCEPT the agent is
A. enjoined by a court of law from engaging in the securities business
B. discovered to be unqualified based on training, knowledge or experience
C. accused of violations of the USA's anti fraud provisions
D. convicted of willful violations of the USA

Back 375

C. An accusation is not grounds for suspension under the USA; however, convictions, court injunctions and lack of qualifications are.
(Page 102

Front 376

Your friend Bill is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent. Bill wants you to sell the policy and split the commissions with him. Is this possible?
A. Splitting commissions is an allowable activity at all times.
B. Splitting commissions in variable annuities is allowable only if the agents involved are both licensed in life insurance and securities.
C. Splitting commissions is an unethical trade practice.
D. Splitting commissions is allowable if the securities rep receives at least 60 percent
of the commissions and the insurance agent receives no more than 40 percent

Back 376

B. A person must be licensed in both insurance and securities to sell variable annuities as well as to split commissions. Commissions on securities transactions can be split only with registered agents. (Page 20

Front 377

A customer wants to sell a security because she read a discouraging report about the issuer's future. The agent takes the order and, before placing the customer's order,
fills a sell order for himself. The agent can do this under which of the following circumstances?
A. As long as he placed the customer's order promptly
B. As long as he entered the order
promptly and no price disparity exists between the orders
C. Under no circumstances because this is a type of market manipulation called front-end advantage
D. Under no circumstances because this is an unethical practice and called front running

Back 377

D. The agent first must place the customer order. The prohibited practice of front running occurs when an agent places his or her order or an order for the firm's account ahead of a customer
order. (Page 81

Front 378

An agent sells her customer $10,000 worth of 30-year U.S. Treasury bonds. The agent tells the customer that this is the best investment for him due to the" absolute safety" of Treasury securities. In this situation, the agent acted
A. lawfully because Treasury securities carry no default risk
B. lawfully because Treasury securities are the safest among all debt instruments available domestically
C. unlawfully because allocating the customer's entire $10,000 into bonds ignores the customer's need for diversification
D. unlawfully because "absolute safety" implies that the customer will make money

Back 378

D. Implying or stating to customers that they will profit from a security is prohibited. Although Treasury securities carry virtually no default risk, a customer faces significant interest rate risk, particularly in light of the bonds' 3D-year
maturities. (Page 82

Front 379

You are a broker having lunch with your grandfather, who is head of Datawaq. He tells you that the government did not approve a large contract, which will hurt Datawaq's profits next year. According to the Uniform Securities Act, you should do which of the following?
A Tell your best customers to sell their holdings in the corporation
B. Inform your broker-dealer of this
promptly
C. Contact the SEC because you have inside information
D. Sell Datawaq short for your discretionary customer accounts

Back 379

B. If you receive inside information, you should inform your supervisor immediately so that he or she may take the appropriate steps to avoid any transaction that may be construed to violate the Uniform Securities Act.
(Page 80

Front 380

A financial contract can best be defined as which of the following?
A Purchase of a whole life insurance policy
B.. Purchase of exchange-listed stock shares
C. Negotiated transaction with lawful consideration
D. Signing of an investment adviser's agreement with an investment company

Back 380

C. A financial contract is a binding agreement two parties enter into to meet the objectives of both. (Page 27

Front 381

Under the Uniform Securities Act, a state administrator may appoint another officer to
A serve subpoenas
B. grant registration exemptions
C. issue cease and desist orders
D. set record keeping requirements

Back 381

A. An official designated by the administrator may carry out the administrator's functions with regard to investigating violations of the USA. The other activities described are responsibilities the administrator may not delegate.
(Page 105

Front 382

Which of the following is an example of a nonissuer transaction as defined by the Uniform Securities Act?
A Private placement
B. Secondary offering
C. Primary issue of a corporation
D. Preemptive offering

Back 382

B. A nonissuer transaction is any transaction that does not benefit the issuer. Answers A, C and D would provide the issuer with capital and, therefore, a benefit. In a secondary offering, the seller, not the issuer, benefits. (Page 17)

Front 383

Under the Uniform Securities Act, which of the following is(are) considered a sale(s)?
I. Gift of an assessable stock
II. Gift of an ordinary stock
Ill. Security given as a bonus for purchasing a bond
IV. Offer of securities
A. I
B. I and II
C. I and ill
D. II, III and IV

Back 383

C. A sale is a contract or transaction for value. Because an assessable stock may have value, the gift is considered a sale. A warrant is both an offer and a sale. Gifts of stock are not sales, and choice IV is an offer, not a sale.
(Page 26)

Front 384

As defined by the Uniform Securities Act, secondary trades also are known as
A private placements
B. issuer transactions
C. nonissuer transactions
D. exempt transactions

Back 384

C. Secondary transactions do not benefit the issuer. Issuer transactions and private placements are primary offerings. (Page 17

Front 385

Under the Uniform Securities Act, which of the following can be distributed if an issuing company has applied for registration by qualification, but the security has not yet been cleared for sale?
I. Tombstone advertising
II. Red herring
III. Application with down payment
IV. Registration statement

A. I
B. I, II and IV
C. II and III
D. II and IV

Back 385

B. Before clearance, a red herring may be distributed to estimate customer interest. Additionally, the registration statement may be distributed, although normally it is not. A tombstone advertisement also is allowed. (Page 59)

Front 386

An agent tells a customer that one of the customer's stocks is worth $10 more per share than it really is. Under the Uniform Securities Act, which of the following statements is true?
A It is allowed if the agent explains that the difference is a service charge.
B. It is allowed if the customer makes a profit from the end result.
C. It is misrepresentation and a fraudulent act.
D. It is misrepresentation without written permission from the branch.

Back 386

C. In this situation, aside from misrepresenting the stock's value, the agent committed a fraudulent act. The USA prohibits misrepresentation and fraudulent acts. (Page 82

Front 387

Under the Uniform Securities Act, which of the following activities are market manipulations?
I. Disseminating false information
II. Giving market quotes that can be misinterpreted easily
III. Selling securities in large amounts to
help keep prices down
IV. Entering matched buy and sell orders to
attract attention to a security
A I and II only
B. I, III and IV only
C. II and III only
D. I, II, III and IV

Back 387

D. Any action taken to influence the price of a security is considered market manipulation. Stating falsehoods, misrepresenting prices,
matching and placing orders to influence prices are all examples of manipulation.
(Page 81

Front 388

As defined by the Uniform Securities Act, which of the following activities is an example of churning?
A Frequent purchases one day and sales of the same stock the next day to align with a customer's investment objectives
B. Bond swaps
C. Frequent purchases and sales of front-end load mutual fund shares in a single account
D. Day trading

Back 388

C. Churning is defined as excessive activity in a customer's account for the sole purpose of generating commissions. As long as the customer sanctions the trading, churning does not occur. Because mutual funds carry front-end loads and are considered long-term investment vehicles, frequent trades constitute churning.
(Page 86)

Front 389

A customer placed an order with an investment adviser to sell 100 shares of ALF so the customer would have cash for an urgent purchase the next day and instructed the adviser to limit any losses. The adviser did not have discretionary authority over the account. The adviser waited to sell the shares, hoping to get a better price for the customer. The price of the shares went down, so the adviser sold 50 ALF shares to limit the customer's losses. According to the Uniform Securities Act, which of the following statements is true?
A. This is a violation because the adviser acted without discretionary authority.
B. This is permissible because the adviser is obligated to get the best price for the customer.
C. This is a violation because the adviser must execute a sell transaction immediately after the order is placed.
D. This is permissible because the adviser may not guarantee a price to a customer.

Back 389

A. An investment adviser may determine the price and timing of a transaction without discretionary authority. In this situation, the adviser acted without authority changing the amount of
the security sold. (Page 86

Front 390

An investment adviser is a subsidiary of a broker-dealer. The adviser is the subject of a civil lawsuit alleging a fraudulent sale of securities to a customer. Under the Uniform Securities Act, the brokerage firm may be held jointly liable for the violation EXCEPT if the firm
A. received payment or another benefit from the transaction
B. has a record of similar violations
C. could not have reasonably known about the transaction
D. discussed the purchase with the
customer

Back 390

C. In general, supervisors and employers may be held jointly liable for violations committed by any person under their direct or indirect control This includes a firm that is in a position to manage or influence a subsidiary firm's activities. The controlling firm may be released from liability if it establishes that it did not know of the violation and could not reasonably have known of it. (Page 108

Front 391

A customer is retired, in a low tax bracket and living on a fixed income. An agent recommends and sells to the customer a portfolio of municipal bonds. Under the Uniform Securities Act, the administrator can do which of the following?
A. Force the agent to offer rescission
B. Revoke the agent's license for selling an unsuitable investment
C. Suspend the agent's license until the bonds mature
D. Take no action because the customer agreed to the purchase

Back 391

B. The keys here are "low tax bracket" and "fixed income." A portfolio of municipal bonds is an unsuitable investment in this situation. The customer would be better off to buy bonds that pay higher rates of return. Because the agent failed to make a suitable recommendation, the administrator could revoke the agent's license.
(Page 102

Front 392

An agent executes a trade in a customer's individual account for the customer. Three days later, when the security is trading three points higher, the customer's husband tells the agent to liquidate the account because his wife has lost her job. Under the Uniform Securities Act, the agent can do which of the following?
A. Write the customer a personal check for the original amount and keep the appreciation as a commission
B. Cancel the trade, but retain the
commission
C. Cancel the trade and return the
commission
D. Take no action

Back 392

D. The only individual who can place an order in an individual account is the person who owns the account. The husband's order cannot be accepted. (Page 81

Front 393

A millionaire wants to invest in an income portfolio. His agent, acting with discretionary power, invests the customer's money in a portfolio of stock stressing appreciation
and little, if any, income. Under the Uniform Securities Act, this activity is
A. ethical because the customer will make more money
B. illegal because the customer must make the investment decision
C. unsuitable
D. all of the above

Back 393

C. This investment is unsuitable because the investor wants income only. (Page 85

Front 394

Under the Uniform Securities Act, an agent may NOT make which of the following statements to a customer?
A. "This security is registered with the state."
B. "The administrator has cleared this security."
C. "The administrator has approved this security for sale."
D. "This security is exempt from
registration. "

Back 394

C. The state administrator does not approve anything. The other statements are statements of fact and are permitted. (Page 80

Front 395

An agent receives inside information concerning the possibility of an impending
merger. Under the Uniform Securities Act, the agent may divulge the information to
A. his best customers three days before a public announcement
B. anyone three days before a public announcement
C. the broker-dealer three days after public notice
D. anyone after public notice

Back 395

D. After the information has become public, it is no longer considered inside information and may be disseminated. (Page 80

Front 396

When a broker-dealer's registration under the Uniform Securities Act is revoked, which of the following occur(s)?
I. The registrations of that firm's agents are no longer in effect.
II. The registrations of that firm's agents remain in effect.

III. The agents' registrations are held in escrow until a hearing.
IV. The administrator chooses a local broker-dealer to oversee activities of the agents until the broker-dealer's registration is reinstated.
A. I
B. I and III
C. II
D. II and IV

Back 396

A. An agent's license remains effective only as long as that agent is associated with a registered broker-dealer. (Page 36

Front 397

Which of the following stocks qualifies for the blue chip exemption provided by the
Uniform Securities Act?
A. Stock of a corporation with $10 million in net worth
B. Stock of a corporation listed on the NYSE
C. Stock of a bank holding company
D. Stock of a municipal issuer

Back 397

B. Companies with securities listed on a national exchange, such as the NYSE or AMEX, qualify for the blue chip exemption. Listed companies must provide periodic reports concerning their firms, and the reports must be available to
prospective investors. (Page 66

Front 398

Under the Uniform Securities Act, a registered agent could sell securities during the underwriting period and before the effective date of registration in which of the fol-
lowing circumstances?
I. Never
II. With the use of a red herring
III. If the securities are not exempt
IV. Only if a bona fide registration statement has been filed properly with the state administrator and the SEC
A. I
B. II
C. II, III and IV
D. II and IV

Back 398

A. During the cooling-off period, indications of interest may be solicited with the use of a red herring. No offers or sales can be made before the registration's effective date. (Page 70

Front 399

If an agent receives a commission from both a broker-dealer and an issuer, under the Uniform Securities Act she is considered an
agent of

A. Me issuer
B. the broker-dealer
C. both the issuer and the broker-dealer
D. neither the issuer nor the broker-dealer

Back 399

C. For securities purposes, it is necessary only that the individual represent the broker dealer or the issuer. Receiving a commission from the sale of securities from either the broker-dealer or the issuer satisfies the basic definition of an agent. (Page 20)

Front 400

A president of a bank sells shares of the bank and receives a commission. Under the
Uniform Securities Act, he is

A. a broker-dealer for the bank
B. an agent of the issuer
C. an investment adviser
D. none of the above

Back 400

D. Bank securities are exempt, and a person who transacts business only in exempt bank securities is exempt from agent registration under the
USA. (Page 20

Front 401

Under the Uniform Securities Act, which of the following is(are) NOT considered a security(ies)?
I. Secondary sale of a bank mortgage as a pass-through certificate
II. Limited partnership unit in a cattle breeding program
III. Purchase of a condominium as a vacation home
IV. Franchise agreement that promises a profit

A. I, II and III
B. I, II and IV
C. I and III
D. III

Back 401

D. A vacation home is not a security; however, if the condominium was purchased to rent out, it may be a security. (Page 12

Front 402

Which of the following transactions are exempt from the USA's filing and antifraud provisions?
A. Transactions in unregistered exempt securities
B. Nonissuer transactions in securities subject to Section 12 of the Securities Exchange Act of 1934 that have met all required reporting requirements for one year
C. Transactions between issuers and underwriters
D. None of the above

Back 402

D. Although certain transactions are exempt from filing requirements under the USA, no securities transactions are exempt from its antifraud provisions. (Page 65

Front 403

An investment adviser may NOT have custody of a customer's funds and securities under the Uniform Securities Act if
A. a rule bars such custody
B. the adviser fails to tell the customer that he has custody
C. the adviser is not a registered broker dealer
D. the customer has not received a wrap fee brochure

Back 403

A. If a rule bars custody, under no circumstances may the adviser have custody of customer
funds or securities. (Page 87

Front 404

According to the Uniform Securities Act, a person representing an issuer of which of the following securities must be registered as an agent?
I. Commercial paper
II. Municipal bonds
III. Securities of a U.S. bank
IV. Investment contracts issued in connection with an employee stock purchase, savings, pension, profit-sharing or similar benefit plan

A. I and II
B. I, III and IV
C. II and IV
D. None of the above

Back 404

D. An individual is not considered an agent when representing the issuer in each of the cases cited. Note that for purposes of the exam and unless otherwise stated, all commercial paper is considered to mature in 270 days or less.
(Page 20)

Front 405

An issuer compensates its officers and directors for selling newly issued shares of the company. To comply with the Uniform Securities Act, the officers and directors must be registered as agents of
A. the issuer
B. the broker-dealer
C. the broker-dealer and the issuer
D. neither the broker-dealer nor the issuer because the transactions are exempt

Back 405

A. The definition of agent includes an individual representing an issuer in a transaction for the benefit of the issuer unless the individual does not receive compensation. (Page 20

Front 406

A corporate issuer pays its directors commissions to sell stock to employees. Under the Uniform Securities Act, which of the following statements are true?
I. The directors are agents of the issuer.
II. The directors are agents of a broker dealer.
III. The directors need not be licensed.
IV. The directors must be licensed.

A. I and III
B. I and IV
C. II and III
D. II and IV

Back 406

B. Registration as an agent of an issuer is necessary because commissions are paid.
(Page 20

Front 407

Advisers of private investment companies can be compensated by which of the following fee structures that typically may not be used to compensate other types of investment advisers?
A. Commission
B. Hourly rate
C. Performance fee
D. Percentage of profits

Back 407

C. Advisers of private investment companies may be compensated based on a performance
fee. (Page 88)

Front 408

According to the Uniform Securities Act, after an agent passes the Series 63 exam and a Series 6, 7 or 22 exam, when can he or she begin to sell?
I. Immediately
II. When the agent is affiliated with a broker-dealer
III. When the state administrator has granted the agent a registration
IV. When the agent gets permission from the principal in the office

A. I
B. I and IV
C. II and III
D. II and IV

Back 408

C. Passing the Series 6 (mutual funds and variable annuities), Series 7 (general securities) or Series 22 (direct participation programs) qualifies an individual to solicit securities sales on a federal
level. The state administrator must grant registration and the individual must be associated with a broker-dealer before he or she may engage in securities transactions. (Page 40)

Front 409

Under the Uniform Securities Act, an employee of a licensed broker-dealer firm may sell exempt securities as an unregistered agent under which of the following circumstances?
A. When the securities are exempt
B. When the transactions are exempt
C. When the employee is paid no commissions or salary
D. Under no circumstances

Back 409

D. It is unlawful for a person to transact business as a representative of a broker-dealer
unless that person is registered, even if the securities are exempt. (Page 40

Front 410

Which of the following requirements are common to the registration of agents, state¬registered investment advisers and broker dealers under the Uniform Securities Act?
I. All must file, along with their applications, a consent to service of process.
II. The registration for all is two years in length.
III. All may be required to pass a written exam.
IV. All may be required to post a surety bond.
A. I and III only
B. I, III and IV only
C. II and IV only
D. I, II, III and IV

Back 410

B. Broker-dealers, agents and state-registered investment advisers must file consent to service of process forms with initial applications for registration. The consents to service give the administrator rights over the applicants. Each applicant may be required to pass an exam and post a surety bond. Federally registered investment advisers must give notice and pay filing fees in any state in which they conduct business.
(Page 47

Front 411

Harry has been sales representative Sam's customer for nine years. While Harry is in Europe, two limit orders fill, resulting in a $750 margin call to Harry. Sam is unable to contact Harry. Because Sam believes Harry is a good credit risk, he deposits his personal check into Harry's account so the account is not sold out for failure to satisfy margin requirements. When Harry returns from Europe, he gratefully gives Sam a check for the $750. In this situation, the agent acted
A. lawfully because he served the customer's best interests
B. lawfully because the margin call was less than $1,000
C. unlawfully because the agent's funds never may be commingled with a client's
D. unlawfully because the agent was not operating under a trading authorization (power of attorney)

Back 411

C. A sales representative depositing a personal check into a customer's account constitutes commingling, which is prohibited. This prohibition prevails regardless of whether the account is
discretionary. (Page 81

Front 412

A registered broker-dealer gives investment advice as part of its business. One of its registered representatives gives investment advice outside the scope of his employment at the firm. Under SEC Release IA-I092, which of the following statements is (are) true?
I. The broker-dealer must register as an investment adviser.
II. The rep must register as an investment adviser.
III. The rep need not register as an investment adviser.
IV. The broker-dealer need not register as an investment adviser.

A. I and II
B. I and III
C. II and IV
D. III

Back 412

C. Broker-dealers and registered reps who give advice as part of their normal business need not register as investment advisers; however, if a registered rep provides investment advice outside his or her scope of employment at the broker¬dealer, the rep must be registered. Thus, both choices II and IV are true statements.
(Page 22

Front 413

Although the broker-dealer with which he is registered is not aware of his actions, an agent has raised capital from his customers with which he and his brother-in-law will build a small shopping center. The customers who contributed the capital received certificates of ownership in the shopping center, as well as full disclosure of their risks and participation in income from renting mall space to retail businesses. In this situation, the agent acted
A. lawfully because he disclosed the risks of the transaction to the customers in writing
B. lawfully because interests in a shopping mall are not securities .
C. unlawfully because the agent gave his broker-dealer no opportunity to supervise his activities relative to its customers
D. unlawfully because the agent's brother in-law is not a registered agent (sales representative)

Back 413

C. The agent acted unlawfully in effecting private securities transactions involving the broker-dealer's customers without proper supervision by the firm. Interests in a shopping center generally fall under the definition of a security.
(Page 81

Front 414

The Uniform Securities Act prohibits all of the following practices EXCEPT
I. borrowing money from a customer
without the customer's written
permission
II. failing to determine adequately the suitability of an investment for a customer
III. offering rescission
IV. telling a customer that an investment's past history is not indicative of future results
A. I and II
B. I, II and IV
C. II, III and IV
D. III and IV

Back 414

D. Offering rescission and explaining that performance is not guaranteed are permissible under the USA. (Page 109

Front 415

Broker-dealers are exempt from state registration under which of the following circumstances?
A. The broker-dealer is federally registered.
B. The broker-dealer is also an investment adviser.
C. The broker-dealer's client has less than 30 days' temporary residency within the state.
D. The broker-dealer transacts business in exempt securities only.

Back 415

C. A broker-dealer with no office in a state and clients with less than 30 days' temporary residency is exempt from state registration.
(Page 36)

Front 416

A customer buys $20,000 worth of stock with a required 50 percent initial margin deposit of $10,000 in cash. When he places the order, the customer tells the agent he cannot risk more than $4,000 in the stock market. Following a highly unfavorable news release causing a significant price drop, regulators halt trading in the stock. When the stock is permitted to reopen, its price is half the client's purchase price, and the client receives a maintenance margin call for $3,000. The customer is outraged that he has an unrealized loss of $10,000 and must deposit $3,000 more to maintain the position. In this situation, the agent acted
A. lawfully because the customer agreed to the risk of margin trading when he signed the margin agreement
B. lawfully because the agent cannot control regulatory trading halts
C. unlawfully because the agent did not urge the customer to enter a stop loss order on the stock
D. unlawfully because the agent failed to warn the customer of the true risk of margin trading

Back 416

D. The sales representative acted unlawfully by not fully informing the customer that trading on margin involves leverage that could lead to substantial loss. The agent failed to fully disclose the facts and circumstances of a securities
transaction. (Page 85

Front 417

An agent has municipal bonds available at a favorable price for the next five minutes. A specific customer has told the agent that she would like to purchase municipal bonds for her individual trading account. These bonds appear perfectly suited to the customer's objectives, but the agent cannot get in contact with the customer. The agent should do which of the following?
A. Put bonds in the customer's account if her spouse approves the transaction
B. Place bonds in the customer's account, mark the order ticket "pending" and send a fax for the customer's signed acceptance of the transaction
C. Purchase bonds for the agent's own account for later resale to the customer
D. Take no action without the customer's authorization

Back 417

D. It is prohibited to take action in a customer's account without that customer's direction unless the account has been approved for discretionary trading. (Page 82

Front 418

An agent's customer says that ABC Corporation is "about to be bought out." The customer wishes to place an order to buy ABC common stock based on this unreleased information, which he claims he learned from "someone very high up in the company." In this situation, the agent should do which of the following?
A. Accept the customer's order and mark it " solicited"
B. Bring the information to the attention of the state securities administrator (commissioner)
C. Discuss the matter with other, more experienced agents of the firm who may be better able to evaluate the validity of the information
D. Bring the information to the attention of the firm's supervisory principal named in the supervisory procedures manual to handle such matters.

Back 418

D. The customer seeks to place an order based on inside information or rumor. The agent should not accept the order before discussing it with his or her supervisor or principal. Under no circumstances should the agent repeat the information to fellow sales representatives. No rule requires that such information be reported to the state securities administrator (commissioner).
(Page 80)

Front 419

Your customer called to check on her account value at 9:00 a.m. You were unavailable to talk to her at the time. It is now 2:00 p.m., and you are able to call her back. Between 9:00 a.m. and 2:00 p.m., her account value dropped from $11,500 to $10,000. Which of the following should you say to her?

A. "At the time that you called your
account had a value of $11,500."
B. ' Your account value cannot be determined until the market closes."
C. "Your account is valued at $10,000 at this time."
D. "Your account was down to $9,700 earlier today, but it is up to $10,000."

Back 419

C. All other answers are clearly misrepresentations of account status. (Page 82) [

Front 420

An agent's former college roommate urges him to invest in his toy company, which plans to launch a new line of baby dolls. Because the issuer has no intent to issue its securities to the general public, it does not register them. The agent and his spouse invest in the business. The agent does not recommend this transaction to any customers and does not discuss the transaction with his firm. In this situation, the agent acted
A lawfully because the agent entered into the transaction in a private and personal capacity
B. lawfully because the issuer had no intention of offering securities to the general public
C. unlawfully because the transaction involved unregistered, nonexempt securities
D. unlawfully because the agent did not receive permission from his broker dealer before entering the transaction

Back 420

B. Here, the agent acted in a private capacity. Because he did not recommend the transaction to the broker-dealer's customers, he need not get its permission to enter into the transaction personally. (Page 81

Front 421

An agent has more than 200 customers. After extensive research on initial public offerings issued by solar energy companies, she recommends that all of her customers purchase shares in Solargen, Inc. She discusses the risk of buying Solargen stock with each customer. In this situation, the agent acted
A lawfully because she presented the risk to her customers
B. lawfully because she performed due diligence analysis on the recommended company
C. unlawfully because the recommendation does not consider each customer's financial objectives
D. unlawfully because solar energy is an industry that depends significantly on local weather conditions

Back 421

C. In recommending the same stock to 200 customers, the sales representative failed to consider each customer's investment objectives and financial abilities. The chance that an initial public offering is suitable for all 200 of the agent's customers is virtually impossible. (Page 85)

Front 422

An agent showed the account statement of his best and wealthiest customer to a more experienced agent for advice on additional securities to recommend to the customer. Some of the securities discussed were nonexempt, unregistered, private placement securities. In this situation, the agent acted
A. lawfully because seeking advice from a more experienced agent is in the customer's best interests
B. lawfully because the customer's high net worth made it suitable to purchase additional securities
C. unlawfully because some of the securities considered were unregistered, non¬exempt private placements
D. unlawfully because the agent did not receive permission to reveal the client's personal financial information to the other agent

Back 422

D. The agent acted unlawfully in revealing the client's personal or financial information to another agent without permission from the customer. (Page 87

Front 423

An agent has been recommending that customers buy common stock in XYZ Company. On a visit to XYZ, he overhears that the firm has just lost its biggest account. Which of the following actions may the agent pursue after hearing this unreleased news?
I. The agent may discuss the situation with his supervisory principal.
II. The agent may continue to recommend the security to customers and prospects.
III. The agent should stop recommending the security to customers and prospects.
IV. The agent may sell the stock short in his brother's account.
A I
B. I and III
C. I, III, and IV
D. III

Back 423

B. Whenever a sales representative has concerns about matters involving the broker dealer's customers, he or she should share the concerns with the agent's supervising principal. It is appropriate that the agent stop recommending XYZ stock to customers and prospects. He could not continue to do so without either omitting material information or repeating inside (unreleased) information. Furthermore, the agent should not 11'8e inside information in conjunction with a trade for a relative or another customer.
(Page 80

Front 424

Under the USA, an administrator may do all of the following EXCEPT
A. issue a stop order to revoke a registration statement's effectiveness
B. issue a cease and desist order without a prior hearing
C. issue an injunction to force compliance with one of the administrator's rules
D. revoke a previously allowed exemption

Back 424

C. Administrators cannot issue injunctions. They may, however, petition a court to issue injunctions against, or enjoin, certain activities.
(Page 104

Front 425

Joe, an agent at a broker-dealer firm, is very excited about new earnings projections he
has received from TechEd. TechEd sells at a market value of $10 and has paid a $1 dividend this past year. Earnings projections for the next year amount to an increase of
30 percent. Joe calls his clients based on this news, soliciting purchases of TechEd stock. In his solicitations, Joe says that if his clients buy now at $10 per share they will realize a yield of 13 percent. Joe should
A. show his clients how he came to his calculations, sending to them his charts that have been approved by his principal
B. say nothing yet because this is inside information
C. practice due diligence and call TechEd to verify that these earnings predictions are still current
D. refrain from making any such statement because it is a misrepresentation

Back 425

D. This is a clear case of misrepresenting dividends, and Joe must stop this activity immediately. (Page 82

Front 426

Adell, a retiring social worker, has some money to invest. A registered rep suggests she look into investing in a private placement security that is raising money to build apartment buildings in Puerto Rico. According to the USA, which of the following statements are true?
I. Building projects are not appropriate for retirees, who typically need immediate income.
II. Private placements usually are not appropriate for retiring individuals because they are not liquid.
III. Because the rep has only offered, not sold, the product, no rule has been violated.
IV. If the customer lives in Puerto Rico, the proposed investment may be suitable because there may be a ready market.
A. I and II
B. I and III
C. II and III
D. II and IV

Back 426

A. This type of investment normally is not suitable for a non accredited investor like Adell. More importantly, retiring individuals usually look for low-risk investments. Private placements
do not offer this safety. (Page 85

Front 427

A customer buys 200 shares of a common stock at $30 per share. On a day when the stock's price is down $5, the customer calls her agent and inquires as to its current price. "It's around where we bought it," the agent says. In the next few weeks, the stock's price turns around, and the customer liquidates the shares at $35 per share, realizing a $5 profit per share, excluding commission. In this situation, the agent acted
A. lawfully because the agent prevented the customer from losing a profit opportunity
B. lawfully because the interim price fluctuation did not affect the customer's profit
C. unlawfully because agents must provide accurate quotes to customers at all times
D. unlawfully because the customer could discern easily that the price the agent quoted did not match readily available quotes in the financial media

Back 427

C. Agents must provide customers with accurate market quotes at all times.
(Page 82

Front 428

Jack Nelson was soliciting sales in XYZ stock six months ago when the market value was $16 per share. One of Jack's more aggressive clients, Frank, did not purchase the stock at the time. Since then, Jack has read that a class action lawsuit is pending against XYZ, and the market value has dropped to $5 per share. If Frank were to contact Jack now and ask to purchase, Jack should say or do which of the following in accordance with the USA?
A. Enter the order
B. Point out that the price has dropped and that Frank can purchase almost three times the number of shares he could
when Jack first contacted him
C. Point out that the lawsuit is pending
D. Refuse the order

Back 428

C. Agents and broker-dealers must state all material information about a security.
(Page 87

Front 429

Is a commodity or future considered a security?

Back 429

No. Commodities or futures contracts are not securities.
There is no dependence on the management of an outside party in a commodities contract - a commodities futures contract is a two-party contract that calls for the delivery of some tangible commodity, such as gold, corn, soybeans, etc. to the holder of the futures contract.

Front 430

Is an option on future commodity considered a security?

Back 430

Yes. A commodities futures contract is not a security, but an option on that contract is considered a security - the performance is now dependent on the activities of a third party.

Front 431

What is the difference between an option and a future?

Back 431

!

Front 432

I own a condominium that I live in as my residence, is this a security?

Back 432

Condominiums are not securities when they are a person's residence. When, however, as is often the case, the condominium is a part of a rental pool arrangement - as in a condominium limited partnership - they may be considered securities.

Front 433

I own part of a REIT that is a condominium complex, is this security?

Back 433

Yes. Condominiums are not securities when they are a person's residence. When, however, as is often the case, the condominium is a part of a rental pool arrangement - as in a condominium limited partnership - they may be considered securities.

Front 434

Is a retirement plan a security?

Back 434

No. Retirement plans are not securities.
Your 401(k), Keogh or IRA may be supported by securities, but the retirement plan itself is not a security.

Front 435

Which Investments Are Not Securities? Basic 4

Back 435

1.Fixed Insurance, endowment or annuities policies
2.Retirement plans
3.Commodities or futures contracts
4.Condominiums - when used as personal residences

Front 436

True or False

The Uniform Securities Act (USA) is set of laws.

Back 436

False: The Uniform Securities Act (USA) is NOT an actual set of laws. It is documented guidance for EACH STATE to use as a template when forming securities-related legislation.

Front 437

Define

Remuneration

Back 437

means money paid for work or a service

Front 438

Those defined as not being an investment adviser.

Hint: TEAL

Back 438

Notice that as long as any investment advice provided by Teachers, Engineers, Accountants and Lawyers(teal) is "solely incidental to the practice of the person's profession" that person is not defined as an investment adviser.

Front 439

How should broker-dealers be registered that manage client accounts, take assets under management and charge "wrap fees"?

Back 439

Those B/Ds must be registered as both B/Ds and investment advisers.

Front 440

Yes or No.

Banks are not considered investment advisers

Back 440

Yes. Banks and similar institutions are exempt from many of the requirements of the USA because they are so heavily regulated by other entities. The USA, in recognition of this fact, has exempted banks and other similar institutions from yet another layer of regulation.

Front 441

transactions/items which are not considered to be a sale:

Back 441

1.A pledge of securities as collateral for a loan
2.A stock dividend
3.Securities received in exchange as a result of reorganization or merger

Front 442

pledge of securities is not a sale, why

Back 442

A pledge of securities as collateral for a loan is the normal practice in an investor's margin account. The investor is borrowing money to buy stock, using the stock as collateral. The act of pledging the stock as collateral is known as "hypothecation". This term, in the exam, may be associated with the term "lien", since the securities pledged are collateral for the loan.

Front 443

Define

hypothecation

Back 443

The act of pledging the stock as collateral is known as "hypothecation".

Front 444

A stock dividend is not a sale because ....

Back 444

A stock dividend is not a sale because, at the time of the payment of such a dividend, there is no transfer for value. Getting a stock dividend is much like getting four $5 bills for a $20 dollar bill.

Front 445

merger or reorganization of stocks is not a sale because ...

Back 445

When those people who own securities of company "A" receive stock from company "B" because of a merger or reorganization, the receipt of those securities by the stockholder doesn't represent a sale or a purchase of securities by the individuals.

Front 446

Bob owns a fancy set of ties, which he considers extremely valuable. He decides to sell the ties on eBay™, putting them up for auction starting at $10,000. Has he created a security by initiating an electronic auction?

Back 446

1.No, because the purchaser of the ties will receive them directly, and no other third party (that we know of) benefited from the transaction, other than eBay™ charging a fee - which does NOT qualify it as a broker-dealer. Please remember the three-part "Howey Test": Investment in a common enterprise - the investor's money is at risk with others.
2.There is an expectation of a profit from the investment.
3.The expected return is due to the management of a third party.

Front 447

What is a viatical settlement?

Back 447

A viatical settlement is a type of investment contract arrangement whereby someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies. Viatical settlement contracts have not yet been strictly defined, by the USA, as securities.

Front 448

"Non-issuer transaction" means...

Back 448

a transaction or distribution not directly or indirectly for the benefit of the issuer.

Hint 448

This is simple enough: if the company gets the money from a transaction; it is an issuer transaction. If the company does not get the money from a transaction - a secondary market trade - then it is a non-issuer transaction.

Front 449

Offer to Purchase defined as ...

Back 449

"Offer to purchase includes an attempt or offer to obtain, or solicitation of an offer to sell, a security or interest in a security for value."

Front 450

Initial Registration

Back 450

Before an offer to sell a security can legally be made, a REGISTRANT (the issuer, insider, or the underwriting broker-dealer) must file a registration with the state Administrator. As we noted earlier, the general requirement is that securities sold in the state must be registered with the state.

Front 451

The USA clearly states that it is "unlawful for a person to offer or sell a security" in a state unless:

Back 451

The USA clearly states that it is "unlawful for a person to offer or sell a security" in a state unless:
•"the security is a federal covered security;"
•"The security, transaction, or offer is exempted from registration;" and or
•"The security is registered under" the USA.

Front 452

the general requirement is that securities sold in the state must be registered with the state. Of course, there are exceptions to, and exemptions from, this rule, what are those exceptions?

Back 452

"Except for federal covered securities, exempt securities, or securities offered or sold in exempt transactions, no sale of a security may be made in this State before the security is registered."

Front 453

Take Note

Back 453

As a refresher, go back and take a look at the definition of a federal covered security. Remember, this term first came into securities law with the National Securities Markets Improvement Act (NSMIA) of 1996. It is only in the 2002 version of the USA and in NASAA documents that this law is taken into account.

Front 454

Registration by Coordination

Back 454

Under the USA, registration by coordination is for securities that are registered with the SEC, but are not federal covered securities. Securities that may fall under the category include those that do not meet the listing standards of exchanges and/or are upgrading.

Hint 454

"The objective of coordination is the simultaneous registration of the offering at the SEC and in the states where the offering is to be made. In order to facilitate coordinated registration, the state securities Administrator's association has implemented a system for coordinated review of these offerings by the states."

Front 455

Registration by Coordination

Back 455

The USA states that registration by coordination is for a "security for which a registration statement has been filed under the Securities Act of 1933 in connection with the same offering ..." Along with a registration application, issuers must also file a long "laundry list" of items regarding the security

Hint 455

It's not important to know what is on the list, it's only important to know there is a list.

Front 456

Registration by Coordination

Back 456

The term "coordination" describes registration, as securities are being registered with the SEC and any States where they are to be offered and/or sold. This is by far the most common method of registration.

Front 457

A registration by coordination becomes effective

Back 457

A registration becomes effective subsequent to the federal registration, if:
•A stop order or proceeding is not pending;
•The registration statement has been on file for at least 20 days; or
•The registration statement has been on file for less than 20 days, due to a rule adopted or order issued under the USA.

Front 458

A registration by qualification becomes effective, under the USA of 1956 when

Back 458

"A registration statement under this section becomes effective when the Administrator so orders."

Front 459

Name the type of registration that is treated by issuers as the last resort.

A) Registration by Qualification
B) Registration by Coordination

Back 459

A) Registration by Qualification

Hint 459

The USA has nearly five pages of data and documents and other information that the registration statement sent to the Administrator must contain. This section of the law is modeled on federal law (i.e., the Securities Act of 1933), and its requirements for information to be sent to the SEC as part of the registration statement.


The Administrator, of course, has the power to require additional documents and/or data and hold the registration statement until he or she is satisfied with the information provided.

Front 460

Name the two different types of exemptions according to the USA

Back 460

The specific types of exemptions are:
• Securities exempt from registration, and
• Transactions exempt from registration.

Front 461

Fact #1

Securities Exemptions

Back 461

There can be both securities and transactions that are exempt, or either can be exempt individually.

Front 462

Fact #2

Securities Exemptions

Back 462

a security that is not exempt must be registered.

Front 463

List the 8 most important securities exemptions:

Back 463

Government Securities
2. Financial Institution Securities
3. Public Utility and Common Carrier Securities
4. Insurance Company Securities
5. Securities Listed on Stock Exchanges
6. Not-for-Profit Enterprise Securities
7. Commercial Paper
8. Options or Warrants

Front 464

What makes a security exempt?

Back 464

The Uniform Securities Act specifies several securities that are exempt from registration requirements and the filing of advertising materials.

Front 465

"If the agent represents issuers of exempt securities..." then the person does not have to register as an agent under the Uniform Securities Act. Name the list of exempt securities.

Back 465

Government Securities
2. Financial Institution Securities
3. Public Utility and Common Carrier Securities
4. Insurance Company Securities
5. Securities Listed on Stock Exchanges
6. Not-for-Profit Enterprise Securities
7. Commercial Paper
8. Options or Warrants

Front 466

Government Securities security exemption

Back 466

Securities issued by levels of government extending from local city municipal bonds through the U.S. government are exempt from regulation except for the anti-fraud laws. This exemption extends to those securities issued by the governments.

Front 467

Canadian government securities

Back 467

Securities issued by the Canadian government and by the municipal governments of Canada are exempt. This would include bonds issued by provinces and cities.

◦ Securities issued by the national governments of other countries with which the U.S. maintains diplomatic relations are exempt but not those issued by foreign political entities below the national level.

Front 468

True or False

A city of Toronto municipal bond is exempt from registration under the Uniform Securities Act

Back 468

True.
Securities issued by the Canadian government and by the municipal governments of Canada are exempt. This would include bonds issued by provinces and cities.

Front 469

Is this security exempt?

A bond issued by the city of London, England

Back 469

No.
Securities issued by the national governments of other countries with which the U.S. maintains diplomatic relations are exempt but not those issued by foreign political entities below the national level.

Hint 469

Remember only on the national level, not city or state

Front 470

Exempt or Non-Exempt?

Financial Institution Securities

Back 470

Exempt

Issued or guaranteed by domestic banks, savings and loan associations or credit unions

Front 471

Exempt or Non-Exempt?

London Bank

Back 471

Non-Exempt

Issued or guaranteed by domestic banks, savings and loan associations or credit unions

Front 472

Exempt or Non-Exempt?

Campbell FCU

Back 472

Exempt

Issued or guaranteed by domestic banks, savings and loan associations or credit unions

Front 473

Exempt or Non-Exempt?

Wilmington Trust

Back 473

Exempt

Issued or guaranteed by domestic banks, savings and loan associations or credit unions

Front 474

Exempt or Non-Exempt?

Public Utility and Common Carrier Securities

Back 474

Exempt

Issued or guaranteed by any railroad, common carrier, or utility which is regulated by the Interstate Commerce Commission or state Public Service Commission

Front 475

Exempt or Non-Exempt?

Insurance Company Securities

Back 475

Exempt
Exempt

Regulated by state insurance commissions. This does not include the variable products sold by the companies.

Hint 475

The logic is that, if an institution is a highly-regulated entity, such as those above, the SEC has already examined their registration and they are also subject to additional oversight. Thus, there is no need for an additional level of regulation.

Front 476

Exempt or Non-Exempt?

Variable annuity sold by MetLife

Back 476

Non-Exempt

Only fixed annuities and life insurance are exempt.

Hint 476

The logic is that, if an institution is a highly-regulated entity, such as those above, the SEC has already examined their registration and they are also subject to additional oversight. Thus, there is no need for an additional level of regulation.

Front 477

Exempt or Non-Exempt?

Securities Listed on Stock Exchanges

Back 477

Exempt
Previously, we have defined "federal covered securities" as those the comprise the stocks listed on the exchanges and the NASDAQ. The NSMIA (National Securities Markets Improvement Act) preempts what had been state registration requirements for covered securities. This amendment affects Section 18 of the 1933 Act, and essentially states that offerings of covered securities will be exempt from further registration requirements. This exemption is often called the "blue-chip exemption."

Front 478

Exempt or Non-Exempt?

Not-for-Profit Enterprise Securities

Back 478

Exempt
Securities issued by persons organized and operated as non-profit or religious organizations are exempt from registration. NASAA has, in recent years been concerned about the potential abuse of this exemption and has worked to ensure that the Administrators have the necessary tools to prevent fraud.

Front 479

Exempt or Non-Exempt?

Commercial Paper

Back 479

Included in this category are instruments that may, on the exam, be called "promissory notes", "banker's acceptances" or "time drafts". To qualify for an exemption these must meet three conditions: ◦ The maturity cannot exceed 270 days (which is actually the standard)
◦ The denominations must be $50,000 or more
◦ The instrument must qualify for a safety rating from a service, such as Standard & Poor's (S&P), in the top three categories. In the S&P ratings these are: AAA, AA, A.

Hint 479

The concept behind the commercial paper exemption is that, if such instruments are short-term, safe investment vehicles in a relatively high denomination, it is unlikely that the general public is at risk from fraud.

Front 480

Define

Commercial Paper

Back 480

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Front 481

Exempt or Non-Exempt?

Options or Warrants

Back 481

Exempt
Within this category are put or call option contracts, warrants, subscription rights on warrants or an option (or similar derivative security) whose underlying assets is a security (or index) consisting of foreign currency.

These securities qualify for exemption IF they meet the following criteria: ◦ Securities are issued by a clearing agency that is registered under the Securities Exchange Act of 1934.

◦ Securities are listed or designated for trading on a national securities exchange.

Front 482

Definition of 'Option'

Back 482

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Hint 482

Call options give the option to buy at certain price, so the buyer would want the stock to go up.

Put options give the option to sell at a certain price, so the buyer would want the stock to go down.

Front 483

May a non-exempt security (one which should be registered) legally be traded in a state where it is not registered?

Back 483

Yes, if it is traded in an exempt transaction.

Front 484

Definition of 'Warrant'

Back 484

A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors.

Hint 484

The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.

Front 485

define

Exempt Transactions

Back 485

The Uniform Securities Act specifies a number of transactions by which non-exempt securities may be legally traded without registration.

Front 486

define

Isolated Non-Issuer Transactions

Back 486

The states define what "isolated" means on a local basis but it is specifically non-recurring. For example: An individual brought stock certificates for PDQ stock to Idaho when he moved from Tennessee. The stock is not registered in Idaho, but he may sell it to his neighbor and the transaction is exempt because the individual is not the issuer and the transaction is "isolated".

Front 487

define

Non-Issuer Transactions in Outstanding Securities

Back 487

This is often called the "manual exemption". If the security being traded is from an issuer that is currently up-to-date on all financial reporting with the SEC, is not experiencing financial difficulties, and is not a "blind pool", or "shell corporation", the transaction is exempt from registration. The securities involved in the transaction must have been in the hands of the public for at least 90 days.

Front 488

What is a "Shell Corporations"

Back 488

"Shell Corporations" are businesses without active operations or significant assets. These companies are often formed before commencing operations to obtain financing. Sometimes, they may be used as a front in tax evasion.

Front 489

What are "Blind Pools"

Back 489

"Blind Pools" occur when securities are sold to investors with no specific indication as to what the monies raised will be used for.

Front 490

Define

Unsolicited Transactions

Back 490

These transactions may be effected by, or through, a broker-dealer but are only exempt if they are truly unsolicited. The broker-dealer may be required by the Administrator to provide proof - a statement by the customer, for example - demonstrating the nature of the transaction.

Front 491

Define

Fiduciary Transactions

Back 491

These include sales by executors, Administrators, trustees, receivers, etc. For example, if an executor of an estate liquidates securities of a deceased person in accordance with the person's will, it is an exempt transaction.

Front 492

Transactions with Financial Institutions

Back 492

Exempt Transactions
This includes sales to banks, savings institutions, and insurance companies. This exemption goes back to the ideas discussed earlier. The Uniform Securities Act does not place as much emphasis on the protection of institutions as it does for individual investors.

Front 493

Private Placement Transactions

Back 493

Exempt Transactions
Private placements, as the name implies, are not "public" offerings and are not examined as closely by the SEC as a public offering.A private placement may be made to an unlimited number of accredited investors. However, If a private placement offering is to be exempt from registration under the Uniform Securities Act, there are additional requirements.relating to offers to non accredited investors. Any offer to non accredited investors must follow these guidlines:
• No more than 10 offers may be made in a twelve-month period.
• No commissions may be paid, directly or indirectly.
• The purchase is for the purpose of investment and not resale.

Hint 493

Institutional and accredited investors are exempt purchasers for the purpose of these rules.

Front 494

Private Placement Transactions Rules

Back 494

No more than 10 offers may be made in a twelve-month period.
• No commissions may be paid, directly or indirectly.
• The purchase is for the purpose of investment and not resale.

Hint 494

Institutional and accredited investors are exempt purchasers for the purpose of these rules.

Front 495

Look Out!

Back 495

In all cases where an exemption for a security or a transaction is claimed, the burden of proof is on the person requesting the exemption.
The Administrator may, as the USA states, "...by order deny or revoke an exemption ..." and specifies the transaction exemptions for institutions and private placements. In other words, the Administrator has the power to require that the party claiming an exemption demonstrate proof.

Front 496

Included as exempt transactions are:
Hint 2 points

Back 496

•Non-issuer transactions by a federal covered investment adviser - A non-issuer transaction by a federal-covered investment adviser with investments under management in excess of $100,000,000 acting under discretionary authority.


•Security Exchange - A transaction where no, or partial, cash is exchanged. This type of transaction is only valid after a hearing and approval by the Administrator. Note: This is not likely to form a Series 63 question, and is provided for informational purposes.

Front 497

Non-issuer transactions by a federal covered investment adviser are exempt transactions if...

Back 497

A non-issuer transaction by a federal-covered investment adviser with investments under management in excess of $100,000,000 acting under discretionary authority.

Front 498

Security Exchange is an exempt transaction if ...

Back 498

A transaction where no, or partial, cash is exchanged. This type of transaction is only valid after a hearing and approval by the Administrator.

Hint 498

Note: This is not likely to form a Series 63 question, and is provided for informational purposes.

Front 499

Transactions between Issuer and Underwriter are exempt transactions IF... (4 categories)

Back 499

•Secured Transactions
•Fiduciary Transactions
•Sale or offer of sale*
•Sale by, or on behalf of, an issuer*

Front 500

Fiduciary Transactions are exempt transactions, if ...

Back 500

A transaction by an executor, administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian or conservator.

Front 501

Secured Transactions are exempt transactions, if ...

Back 501

Transactions secured by a note, bond, mortgage or security agreement, if: ◦A general solicitation of the transaction is not made, or
◦A commission or other remuneration is not made.

Front 502

The transaction is exempt if a Sale by, or on behalf of, an issuer if:

(4 points)

Back 502

◦In a 12-month period, no more than 25 people purchase the security in the state registered.
◦A general advertisement or solicitation is not connected to the offer.
◦Commission is not paid.
◦The issuer believes that purchasers' interest is purely for investment.

Front 503

Sale or offer of sale to are exempt transactions when sold to:

(3 points)

Back 503

◦An institutional investor
◦Federally covered investment adviser
◦Any other person exempted by order of the Administrator

Front 504

Transactions to Existing Owners qualify as exempt transactions when ...

Back 504

•Offer to sell, but not a sale...
Of a security that is not exempt from registration under the Securities Act of 1933, if: ◦A registration has not been filed with the state, but is effective at a federal level,
◦A solicitation of interest is provided or
◦The Administrator has not issued a stop order.

Front 505

Transactions are considered exempt transactions when involving:

2 points

Back 505

◦A stock dividend
◦A judicially approved reorganization

Front 506

Transactions between issuers and security holders of another person are exempt when

(2 points)

Back 506

•Rescission offers - Offers of rescission are defined under civil liabilities.

•Offer of sale to a person from another state.

Front 507

Transactions of employee stock plans are exempt transactions when:

Back 507

•Stock purchase, savings, option, profit-sharing, pension or other benefit plans for: ◦Directors, general partners, trustees, officers, consultants and advisers
◦Family members who acquire securities though gifts or domestic relations orders
◦Former employees, who were providing services when the securities were offered
◦Insurance agents, who are exclusive agents of the issuer



•Transactions involving:
◦A stock dividend
◦A judicially approved reorganization

Front 508

"Federal covered security" means

Back 508

Federal covered securities are exempt from State registration due to The National Securities Markets Improvement Act of 1996

Hint 508

The basic concept is that if the issuer of a security - the corporation - has achieved a level of financial strength and stability sufficient for listing on one of the exchanges or quotation in the NASDAQ system, there is no need to have it examined by and registered again with the state. This is one of the major securities market simplification thrusts of NSMIA - the elimination of repetitive and duplicate registration.

Front 509

SEC has designated as federal-covered securities if listed on any of these

Back 509

Pacific Exchange
Philadelphia Stock Exchange
Chicago Board Options Exchange
New York Stock Exchange (NYSE)
American Stock Exchange (Amex)
NASDAQ stock market

Front 510

The USA specifically defines "fraud" as:

Back 510

An attempt by any person, individual or entity "in connection with the offer, sale or purchase of a security, directly or indirectly:
1.to employ a device, scheme or artifice to defraud;
2.to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
3.to engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person."

Front 511

What is the Exculpatory Clause

Back 511

It is vitally important to know that in NO case can an agent ask a client to sign an "affidavit of liability" waiver; meaning that the agent is not responsible for any losses that may occur in the account - better known as an Exculpatory Clause.

Front 512

IA Disclosure to client

Back 512

Investment advisers MUST disclose the nature of the relationship between the client and the investment adviser. Investment advisers CANNOT participate in, or be compensated (unless there is a specific exemption) by any percentage of gains of a client's portfolio, and the basis of all compensation must be disclosed in the investment advisory contract.

Hint 512

There is an exception to this rule.

Front 513

IA Disclosure to client exception

Back 513

There are a few instances in which an investment adviser can benefit from portfolio gains. Advisers can participate in capital gains (receive a performance-based fee), if the client is: an institutional investor, such as a mutual fund, a private client with a minimum net worth of $2 million or private client with a minimum of $1,00,000 invested with the adviser.

Front 514

What needs to be done when there are changes within an Investment Adviser's partnership firm

Back 514

if any change within an Investment Adviser's partnership firm is made (e.g. a change in partners or ownership); clients must be made aware of the change in a reasonable time. It is important to note that this act of notification only applies to partnerships, and not corporations. Also, if the change in partnership could result in new ownership of the business, the IA must have client approval.

Front 515

How frequently are investment advisors required to send statements?

Back 515

advisers are required to supply clients with account activity statements on a quarterly basis. Lastly, it is illegal for an adviser to have custody of a client's funds or securities, if the Administrator prohibits or restricts such.

Front 516

Define Custody

Back 516

Custody is defined as having physical possession of funds or securities, though an Administrator may require that an Adviser post a bond when maintaining custody. However, funds and securities can be placed in custodial accounts with broker-dealers instead.

Front 517

Define

Fiduciary

Back 517

A fiduciary is a person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person, rather than for his or her own profits.

All securities professionals must handle client funds and offer advice in a professional, ethical and responsible manor. Because of such, they have a higher standard of ethical responsibility than the average person.

Front 518

fiduciary duty

Back 518

if the professorial has a fiduciary duty to the client as in the case of an investment adviser the adviser, must put the interest of their clients above their own.

Front 519

Johnny Fast talker is an Agent for Big Blue Brokerage, which has recently come out with an analyst's report regarding the OTC BB oil/gas stock: Gassed Up. The firm's analysts believe the stock is a good buy, indicating a promising future with attractive growth potential. While getting doughnuts one morning, Johnny Fasttalker notices an article in a newspaper mentioning that Gassed Up officers are anticipating that the stock will soon be quoted on the NASDAQ National Markets system (NNM). Johnny is very excited about the news, since it reaffirms how brilliant his firm's analysts are. In turn, he immediately calls his best client to tell them about the stock. While chatting with his most risk-tolerant client, Johnny mentions that he noticed Gassed Up in the morning paper, which mentioned the possible NNM listing. Johnny feels that when the papers pick up such news, the upgrade in the stock's quotation generally is inevitable, and his client would be wise to get in before the listing is actually approved. Has Johnny committed any fraudulent activity?

Back 519

Yes, though the morning paper reported that Gassed Up company officials anticipate the quotation in the NNM, Johnny has no specific (or public) information as to any official confirmation of NASDAQ NM's approval. Thus, he has fraudulently misled his client, and can be liable for both civil and criminal penalties.

Front 520

The USA cites "prohibited conduct" and considers to be unlawful representations as:

Back 520

1.Fraudulent investment advice
2.Advertising materials
3.Misleading Filings
4.Other activities considered fraudulent include

Front 521

Fraudulent investment advice:

Back 521

"It is unlawful for a person to provide any type of investment advice (for compensation) either directly or indirectly or through publications or writings, to the value of securities or the advisability of investing in, purchasing, or selling securities that:
◦Attempts to employ a device, scheme or artifice to defraud.
◦Engage in any act, or course of business that would operate as fraud."

Front 522

Advertising materials

Back 522

Distribution of any unregulated or fraudulent prospectuses, pamphlets, circulars, sales literature or advertising communications, including any/all hard copy and electronic materials.

Front 523

Misleading Filings

Back 523

Misleading filings are prohibited under the USA. Such items include any filings that make false or misleading statements, or omit material facts concerning investment advice or an offering.

Front 524

Other activities considered fraudulent and deceptive practices include:

Back 524

◦Informing a client that registration of a security means that the SEC or state Administrator has approved (likes) an offering, or a security is a "good offering".


◦Deliberately misquoting a security to effect a securities transaction.


◦Untrue or inaccurate statements regarding commissions, including both markups and markdowns.


◦Inaccurate statements regarding registration status. If you tell a client that a security will be approved for a NASDAQ listing, when in fact, the company has only submitted an application, you have committed fraud.


◦Any deliberate and/or misleading statements regarding financial statements, dividends, earnings or future expectations.


◦Telling a client anything about their account that is untrue - including returns.


◦Promising services that you, your firm or your associates cannot (or simply will not) fulfill - with the intention of promising such to gain securities related business. This includes anything from analyzing an investment to obtaining shares of an IPO.

Front 525

churning

Back 525

Excessive trading
Any time an agent trades either on a discretionary basis or recommends trading excessively in, or for, a client's account for the sake of generating commissions, the agent is committing fraud. Legally, the term associated with this action is known as churning.

Hint 525

Exam Tips and Tricks
The SEC defines churning as follows:
Churning refers to excessive buying and selling in your account by your broker. For churning to occur, your broker must exercise control over the investment decisions in your account, either through a formal written discretionary agreement or otherwise, and must engage in excessive trading in light of the financial resources and character of the account for the purpose of generating commissions.

Front 526

Illegal insider trading

Back 526

Corporate officers, directors and employees who traded the corporation's securities after learning of significant, confidential corporate developments;

• Friends, business associates, family members and other "tippees" of such officers, directors and employees, who traded the securities after receiving such information;

• Employees of law, banking, and brokerage and printing firms, who were given such information to provide services to the corporation whose securities they traded;

• Government employees who learned of such information because of their employment by the government; and

• Other persons who misappropriated, and took advantage of, confidential information from their employers.

Front 527

Insider Trading

Back 527

As the SEC site informs, there are actually two types of insider trading, the legal kind and the illegal kind. The reason for this clarification is that many people simply associate the term with illegal activities. According to the SEC, legal insider trading occurs when insiders (officers, directors and certain other employees) trade their own firm's securities based on material, public information and report any/all transactions to the SEC.

Front 528

Selling Away

Back 528

Selling away is a violation that occurs when an agent attempts to sell securities not held or offered by his or her brokerage firm, or that they not able to immediately gain possession of at the time of the offer.

As a rule, such activities are a violation of securities regulations.

Hint 528

Look Out!
The basic premise here is that if you are selling away, as an agent, you are attempting to sell something that you DO NOT have rights to, or have not been authorized to sell by your firm. Such activity IS considered fraudulent!

Front 529

Conflict of interest

Back 529

This term should be self explanatory, simply don't do something in one client's account, with the intention of doing/trading something different in another, in an attempt to defraud. Another rule is that any potential conflict of interest must be disclosed to the client. For example if the broker dealer or its officers are owners or market makers in the security.

Front 530

Compliance

Back 530

If a customer files a formal complaint, the agent involved must bring the complaint to the attention of his/her supervising principal, the firm's compliance officer and/or broker-dealer officials.

Front 531

Guarantees

Back 531

It is considered fraudulent to guarantee any returns to any client. It is also considered fraudulent to guarantee a client's account against loss.

Front 532

Commingling funds

Back 532

Commingling funds is when customer and agent funds are mixed together. By law, an agent is required to use a separate trust or escrow fund to temporarily hold a client's funds. Basically, an agent cannot deposit a customer's funds that are intended for securities transactions in their own personal account. This activity is considered fraudulent, and violation could result in state or federal prosecution.

Front 533

An agent may share in a client's account profits, if:

2 points

Back 533

1) The agent's participation has been approved by a principal, and
2) The agent's participation is directly proportional to his/her contributions to the account.

Front 534

Trading Ahead

Back 534

The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information.

Front 535

Painting the tape

Back 535

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive unusual volume. This is similar to matching orders. Simply: this is cheating.

Front 536

Borrowing money from clients

Back 536

It is considered fraudulent to borrow money from clients for personal use, unless the person loaning the money (or securities) is specifically in the legitimate business of lending. Simply, this would be considered theft.

Front 537

Money Laundering

Back 537

Money laundering is the process of creating the appearance that large sums of money obtained from fraudulent sources, originated from a legitimate source.

Front 538

How is money laundering done?

Back 538

1) Placement - where the money enters the financial system, often through several small currency deposits, or commingled deposits from several legal and illegal enterprises.

2) Layering - this money is then moved throughout the financial system through a process of several complex transactions to confuse the paper trail.

3) Integration - the funds are made to appear legal through additional transactions, such as the purchase and resale of real estate, stocks or other assets.

Front 539

USA PATRIOT Act

Back 539

Under the USA PATRIOT Act, (enacted in 2001 in response to terrorist attacks around the world), an Anti-Money Laundering Program was established and requires all broker/dealers to comply.

Hint 539

FINRA has listed this requirement under Rule 3011, and requires firms to:
* Establish and implement policies and procedures that will detect and report suspicious transactions.
* Establish and implement policy procedures, and internal controls that comply with the Bank Secrecy Act.
* Provide for independent testing for compliance by an outside party or member personnel.
* Provide FINRA with identification of individual(s) responsible for monitoring day-to-day operations and internal controls. (Providing immediate updates should anything change.)
* Provide training for the appropriate personnel regularly.

Front 540

Currency Transaction Reports (CTRs)

Back 540

Under the Bank Secrecy Act (BSA), (enacted to aid in identifying the source, volume, and movement of currency in and/or out of the United States or deposited in financial institutions), firms are required to file a CTR for any cash transactions over $10,000.
In order to identify potentially fraudulent activity, banks are also required to maintain records of any funds transferred in the amount of $3,000 and above. Many banks will use software that aids in discovering suspicious activity, especially in larger banks where thousands of transactions are performed daily.

Hint 540

In addition, these reports include structured transactions, where a number of small transactions totaling $10,000 or more have been made over a short period of time. This activity often occurs when an individual is attempting to avoid the $10,000 reporting requirement.

Front 541

Suspicious Activity Reporting

Back 541

*Criminal violations involving insider abuse.
*Criminal violations for $5,000+, when suspect is identified.
*Criminal violations for $25,000+, even when no suspect is identified.
*Transactions for $5,000+, if the bank or affiliate knows, suspects or has reason to suspect the transaction:
*may involve potential money laundering, terrorism financing or other illegal activity,
*is designed to evade the BSA,
*has no apparent business or lawful purpose or seems odd when compared to the customer's normal activities, and there is no reasonable explanation after examining the facts.

Front 542

examples of suspicious activities include:

Back 542

customers who are uninterested in investment products that offer lower fees and higher returns,
customers who supply inaccurate, false or suspicious information,
customers with known criminal backgrounds, who begin to conduct numerous transactions or
customers who wire funds into an account, then immediately request to redirect funds to another institution, city or country.

Front 543

Sharing compensation as an agent

Back 543

As stated already, agents and/or advisers may not participate in percentage gains of an account except under certain circumstances:

Agents may participate in gains of an account, if the account is equally (dually) owned by the agent and client, and is approved by the broker-dealer. What's more, the agent must equally participate in any losses that occur.

Front 544

Sharing compensation as an Investment Advisor

Back 544

Investment Advisers may not participate in "performance-based fees" unless the client is:

an institutional investor,
a private client with a minimum net worth of $2. million or
a private client with a minimum of $1,000,000 invested with the adviser.

Hint 544

Look Out!
Participating in performance fees is mentioned twice in the study guide, and is quite likely to appear on the exam.

Front 545

Margin

Back 545

Any time a client is an owner of a cash account, an agent cannot open a margin account for that client without written authorization from the client. Without the client having signed a margin account agreement, an agent would NOT be in compliance if he/she were to effect any transactions on margin.

Hint 545

As a standard part of the margin account agreement, a broker-dealer usually has a client sign a hypothecation agreement, which allows the broker dealer to hold the margined securities in the street name (that is, in the name of the broker-dealer) and use the securities held as collateral for the loan from the broker-dealer to the customer. This is very much like a bank's name appearing on the title to an automobile for which it has made a loan. The car is held as collateral for the loan. Additionally, the client's stock may be used as collateral, by the broker-dealer, to borrow money from a bank - the primary source for the money loaned to the client.

Front 546

Complaints

Back 546

Any time a customer files a complaint with or broker-dealer, the complaint must immediately be reported to the firm's compliance department. In addition, the broker-dealer must promptly respond to the customer's complaint.

Hint 546

Look Out!
Specifically, the reply to a client must be in writing.

Front 547

Custody of Client Funds

Back 547

Investment advisers have different rules than broker-dealers. They must notify their Administrator if they will have direct possession of client funds (custody). If an investment adviser does have direct possession (custody) of a client's funds, an administrator may require that a surety bond be posted, or may completely disallow custody.

Hint 547

Because of the rules governing investment advisers, many firms choose to have a broker-dealer hold client's funds, while the investment adviser merely maintains discretionary authority over the accounts.

Front 548

Discretionary (Managed) Accounts

Back 548

A discretionary (managed) account allows a broker to buy and sell securities without the client's direct consent for each transaction.

Front 549

There are two types of discretionary (Managed) accounts:

Back 549

1) Limited accounts merely allow an investment adviser or broker to place orders, but DO NOT provide any authority to withdraw money.
2) Full access accounts DO allow a broker or investment adviser access to the client's funds. This is analogous to an unlimited power of attorney.

Hint 549

In most situations, investment advisers ONLY have limited discretionary authority.

Front 550

Administrator

Back 550

Each state has an administrator with certain jurisdiction and powers related to the offer and sale of securities in their state. Generally, an Administrator will simply issue a cease and desist order if a problem is found. However, the Administrator can also request that the appropriate court order an injunction. Additionally, the Administrator has the power to deny, revoke, or suspend registration of persons or securities.

Front 551

Administrator has ability to:

Back 551

1) issue a cease and desist order
2) court order an injunction
3) has the power to deny, revoke, or suspend registration of persons or securities
4) Investigate
5) Issue subpoenas

Front 552

Administrator can conduct public or private investigations within or outside of a state, which the Administrator considers necessary or appropriate to determine whether a person has violated, is violating or is about to violate a rule, or to aid in the enforcement of the USA. In conducting an investigation, the Administrator can at any time:

Back 552

require (or permit) a person to testify, file a statement or produce a record regarding facts or circumstances of a situation; or

"Publish a record concerning an action, proceeding or investigation."

Front 553

The Administrator can ... for investigation-related information, if he/she has jurisdiction over a transaction or security in question.

Back 553

Issue a subpoena

Front 554

Jurisdiction

Back 554

the Act applies to all offers to sell or buy and all acceptances of offers to buy or sell securities if they originate from, are directed to, or are accepted in a state [emphasis Investopedia's . Any part of an offer which is "in this state" will subject the whole transaction to the Act. Thus, if the client receives a soliciting telephone call in this state, it will not matter that the client actually goes out of the state to make payment, sign a contract, or to receive a security

Hint 554

Exam Tips and Tricks
Watch out for long, "scenario-type" questions in which an investor is offered a stock in state A, accepts the offer in state B, and resides in state C. If the question asks which states are involved in the transaction, the answer for this one would be states A, B, and C.

Front 555

Jurisdiction as applied to publications or radio

Back 555

An Administrator does not have jurisdiction if:
the publication is a bona fide newspaper or other print media, and;
more than two-thirds of the publication is circulated outside of the state it is published; or
it is a TV or radio broadcast that is syndicated from outside the state.

Front 556

an Administrator does not have jurisdiction over:

Back 556

1) any electronic communication originating from outside the state; or
2) any electronic communication that comes from within the state, but is not intended for distribution within the state.

Front 557

Jurisdiction as applied to investment advice and misrepresentation

Back 557

The Administrator has jurisdiction if an individual attempts to defraud in the Administrator's state, whether or not the individual/entity in question is in the state or not.

Hint 557

Look Out!
An Administrator generally has jurisdiction if a transaction was originated or accepted in their state, or is directed to that state.

Front 558

The Administrator has the power

Back 558

to deny, revoke or suspend registrations or licenses at any time, if the Administrator feels he/she is acting in the public interest.

Hint 558

Exam Tips and Tricks
If the Administrator denies, suspends or revokes registration, such an order must be based on a foundation of facts and conclusions of law. Orders of the Administrator must be made only in the public interest.

Front 559

In addition to the following items (initiated by the Administrator)

Back 559

a broker-dealer may withdraw its own registration at any time and is effective 30 days after an initial withdrawal application is filed (unless there are pending disciplinary proceedings).

Front 560

If the Administrator finds wrongdoing within one year after the broker-dealer withdraws its registration, can the the Administrator commence disciplinary proceedings?

Back 560

Yes.
if a broker-dealer withdraws its registration, and then (within one year) the Administrator finds wrongdoing, the Administrator may still commence disciplinary proceedings.

Front 561

The Administrator may deny an application if:

Back 561

* it is incomplete, contains any misleading information or omits vital facts;
* within the last 10 years, the applicant was convicted of a securities-related misdemeanor or any felony whatsoever -- regardless of whether it was securities related or not;
* another Administrator already denied registration, or another suspension or revocation order is already in effect;
* the Administrator finds that the applicant is not financially solvent, and/or in a state of bankruptcy. This is more frequently applied to firms than to individuals;
* a court order exists barring the registrant from working in the securities industry; or
* the Administrator deems that the registrant is not qualified for the type of business he/she intends to pursue. However, an Administrator cannot suspend registration if the registrant can materially prove he/she is qualified.

Hint 561

Look Out!
The exam may say that the registrant has "been enjoined", which means that an injunction has been ordered.

Front 562

True or False
An Administrator may revoke registration at any time if any one of the reasons for Denial are found to be true.

Back 562

True

AT ANY TIME

Front 563

the Administrator may revoke the registration of an officer or partner of a firm

Back 563

without crippling the entire firm, although such could also be grounds for revoking the registration of the firm as a larger entity.

Front 564

Registration may be revoked from an agent but not the broker-dealer, if ...

Back 564

the broker-dealer is found to have been competently supervising the agent - even though that broker-dealer was not able to prevent the agent from committing a fraudulent act. However, if the agent's fraudulent activity was the direct result of a broker-dealer's incompetent supervision, then the broker-dealer's registration is at risk as well.

Front 565

Suspension

Back 565

Suspension can occur for the same reasons as denial, although pending a hearing, registration may be reinstated. Hearings must be granted within 15 days of the written request of the party subject to the order.

Front 566

Cancellation

Back 566

Though not in the NCCUSA's outline of the Series 63 examination, an Administrator may CANCEL an agent's registration if the agent is found to be deceased or unable to perform his/her duties. In short, if for any reason the agent becomes mentally incompetent (legally), the Administrator may cancel registration.

If an agent disappears and cannot be found after a reasonable search, the Administrator may cancel registration.

Front 567

Cease and Desist

Back 567

The Administrator may issue a cease and desist order, if it has determined that a particular action is in violation of the USA. Then, if the order is ignored, the Administrator may have a court intervene and issue an injunction against the party in question.

Front 568

Civil Liabilities

Back 568

Civil liabilities arise when a violation of the USA has occurred and the person harmed wishes to sue in order to recover any losses incurred.
All securities professionals are liable for civil actions if the USA is violated. Purchasers of securities (where there is an infraction of the USA) can sue for recovery of losses.

Front 569

There are several instances in which a client may sue:
Civil Liabilities

Back 569

*A direct violation of the USA occurred, where a securities transaction ensued.
*An agent, broker-dealer or investment adviser sold securities in violation of a direct rule of the Administrator.
*Securities were sold by an unregistered person.
*Misleading statements or omitted facts led to the sale of a security.
*The securities sold were misrepresented - as either approved (as recommended) by the Administrator or another governing body; or misrepresented as being listed on an exchange (or to be listed), when, in fact, the information was false.
*There was a violation of the state's sales literature requirements.

Front 570

If a violation occurs, a purchaser can then sue for damages. There is a simple formula relating to recovery:
Civil Liabilities

HINT: RITA

Back 570

Purchasers can sue for:

REASONABLE attorney fees and other costs
+ INTEREST
+ THE purchase price of the securities
- ANY income (e.g., dividend or interest) received
= Damages

Hint 570

Just imagine RITA is a little upset at her broker today and she is ready to sue!

Front 571

Bob's broker lied to him about a stock -- stating that the state Administrator had approved (and recommended) the stock for purchase. Bob's broker further contended that Bob should buy the stock and that, given the Administrator's listing endorsement, it was a sure thing. Consequently, Bob bought $1,000 of the stock. Three weeks after his investment, he received a dividend payment for $15, which he was extremely pleased with. Shortly thereafter, the company issued a negative press release that triggered a sharp sell-off where the stock's value was cut in half. Bob sold the stock for $500. Soon after, Bob decided to sue his broker - even though legal costs were going to run around $300. What can Bob potentially recover?

Back 571

Reasonable attorney fees, and other costs $300
+ Interest $0
+ The purchase price of the securities $500*
- Any income (dividend, or interest) received $15
= Total potential award under the USA $785

*The original purchase price is $500 because Bob sold the investment, thereby recovering $500 (half) of his original investment.

Front 572

Investment Advice liable for civil penalties

Back 572

Any investment advice in violation of the USA is also liable for civil penalties, so long as the advice was dispensed for a fee.

Hint 572

Those harmed by fraudulent investment advice can sue for:

+ Cost of the advice
+ Loss resulting from the advice (recovery of the investment)
+ Attorney fees (reasonable) and other costs (e.g., court costs)
+ Interest (at the state's legal rate)________________________
- Money (e.g., dividend or interest) received
= Total liability payment.

Front 573

Those harmed by fraudulent investment advice can sue for:

Hint: CLAIM

Back 573

Those harmed by fraudulent investment advice can sue for:

+ Cost of the advice
+ Loss resulting from the advice (recovery of the investment)
+ Attorney fees (reasonable) and other costs (e.g., court costs)
+ Interest (at the state's legal rate)________________________
- Money (e.g., dividend or interest) received
= Total liability payment.

Hint 573

If the investment advice received violated the USA, you\'re going to CLAIM your money back.

Front 574

Under the USA, the statute of limitations for civil actions is either:

Back 574

1) three years after the sale, or
2) two years from discovery of the unlawful transaction

Hint 574

When studying for your upcoming Series 63 exam, use the aforementioned "three years after the sale, or two years from discovery of the unlawful transaction" when determining the statute of limitations for civil actions under the USA.

Front 575

If an agent/person discovers a violation the USA, a letter of rescission (containing an offer to buy back the security in question) may be tendered. Of course, the letter of rescission must also take into consideration (and make an offer for) any interest potentially gained or lost.

Back 575

In short, the above formulas for civil losses apply equally to letters of rescission -- with the exception that the party issuing the letter is generally trying to avoid legal fees. In addition, it is important to note that once a rescission offer is tendered, the buyer of the securities is required to respond in 30 days. Otherwise, he/she gives up all rights to future legal action.

Front 576

Billy, an agent of Bad Boy Brokers, Inc., discovers that he has violated the USA by misquoting dividend information that led to the purchase of a security by a customer. Although Billy's firm has a reputation for a few run-ins with the Administrator, he is trying to help re-establish the firm's reputation as a reliable business. He realizes that his client invested $1,000, expecting a 10% dividend. Billy immediately offers to repurchase the securities, expressly through a letter of rescission. From the time that Billy sends the letter and his client agrees to sell the securities (three days), the stock appreciates $5. Billy's client sells the securities to Billy for a $5 profit Assuming no commissions are paid, what is the total amount Billy owes his client?

Back 576

Answer
First, Billy owes his client $995, as the client already received $5 in capital gains.

Second, Billy rescinded the offer in three days, but had guaranteed 10%, which would equate to $3.65 a day. Thus, Billy owes his client $10.95 in interest. Thus, Billy's total tally is $995 + $10.95, working out to $1,005.95 (assuming that the client already received an additional $5). For the sake of this example, we are not considering commissions either.

Hint 576

Note: "C"omputing the dollar amounts of awards under the provisions of the civil liabilities section of the USA is not a usual type of question on the Series 63. Just remember that under the USA, the maximum liability payment to the buyer by the seller is:

The original investment
+ The state's legal rate of interest
- Any income received from the investment
+ Court costs and attorney's fees
= Total potential payment to client by seller to the buyer.

Front 577

TRUE OR FALSE If false, why


If the seller offers a refund of the original investment at the state's legal rate (less any income) and the client does not accept the offer within 45 days, the buyer may sue.

Back 577

FALSE 30 days and may NOT sueIf the seller offers a refund of the original investment at the state's legal rate (less any income) and the client does not accept the offer within 30 days, the buyer may not sue.

Hint 577

Civil Penalties

Front 578

Criminal penalties arise when a person or entity is proved guilty of a fraudulent securities transaction entailing a deliberate violation of the USA.

Back 578

Exam Tips and Tricks
The key word in criminal liabilities is "fraudulent", meaning that the violation was deliberate.

Hint 578

Criminal Penalties

Front 579

Once the Administrator issues an order (which may result in denial, suspension or revocation of registration), the offending person or entity may appeal the Administrator's order to the appropriate court, but must do so within 60 days of the order, under the Uniform Securities Act.

Back 579

Simultaneously, the affected member (agent or broker-dealer) must serve notice of the appeal to the Administrator as well. Upon receipt of the notice of appeal, the Administrator is obligated to provide the appropriate court with all evidence relevant to the case.

Hint 579

Unlike the normal judicial process, once the Administrator issues an order, it remains in effect unless reversed by court order. The fact that an appeal has been filed does not negate the Administrator's order unless directed by a court. The finding of courts regarding appeals is final, and the court has the right to change any part of the order.

Front 580

Conviction
If the offender is convicted of criminally violating the USA ...

Back 580

1) he/she may be imprisoned for up to 3 years,
2) or fined up to $5,000 (per violation).

Hint 580

Conviction

Front 581

The statute of limitations for criminal penalties is

Back 581

5 years.
The statute of limitations for criminal penalties is 5 years.

Hint 581

Exam Tips and Tricks
It is vitally important to note that there can be no prison sentence if a person can PROVE he/she had NO KNOWLEDGE that the USA was being violated!

Front 582

The Uniform Securities Act provides that an Administrator may demand a firm to ...

Back 582

"require the filing of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature or advertising communication addressed or intended for distribution to prospective investors, including clients or prospective clients of an investment adviser, unless the security or transaction is exempted."

Front 583

Exempted securities include:

Back 583

1) Federal covered securities
2) Any security issued or guaranteed by Canada
3) Any security issued by a foreign national government with whom the US has diplomatic relations
4) Any security issued or guaranteed by a bank, savings institution or trust company
5) Any security issued or guaranteed by any credit union (federal or otherwise)
6) Any security issued or guaranteed by any railroad, other common carrier, public utility or holding company
7) Securities issued or guaranteed by nonprofits (e.g., church bonds)
8) Any investment contract issued in connection with an employee's stock purchase, savings, pension, profit sharing or similar benefit plan

Front 584

Telephone Consumer Protection Act (TCPA) of 1991, which states that telemarketing organizations must adhere to the following requirements:

Back 584

1) Do-not-call (DNC) lists. When a prospective caller requests to be placed on a DNC list, the firm must keep his/her name on the list for 5 years.

2)Telemarketing firms must make sure that its representatives understand how to use the DNC list and immediately record any names and phone numbers of those who wish to be placed on the list.

3) Telemarketers may ONLY call homes of prospective clients between the hours of 8a.m. and 9p.m. in the customer's time zone.

Front 585

As it relates to the Uniform Securities Act which of the following are securities ?
I. A Futures contract on a blue chip stock.
II. A futures contract on light sweet crude oil.
III. A put contract on the S & P 500
IV. A variable annuity's separate account.

(A) I and IV
(B) III and IV
(C) I, II, III, and IV
(D) I, III and IV

Back 585

Correct answer(s):
Options, separate accounts, and individual stock futures are all considered securities. A commodity future is not a security.

Front 586

An agent employed by a brokerage firm solicits a customer's business in a state where the brokerage firm is not registered. Which of the following is not true ?
(A) The agent need not register as it is a isolated non issuer transaction.
(B) The agent has committed a violation
(C) the firm must track its isolated transactions
(D) This is an exempt transaction

Back 586

Correct answer(s): D
This is an isolated non issuer transaction and is therefore exempt. The agent has not committed a violation.

Front 587

A Canadian broker dealer regularly conducting business with an insurance company with in the state is:
(A) Required to file an application for registration
(B) Not required to register
(C) Required to file a consent to service of process
(D) Required to notify the administrator

Back 587

Correct answer(s): D
A Canadian firm conducting business with an institutional investor is not required to register.

Front 588

A registered broker dealer must do which of the following ?
I. Pay SIPC dues
II. Display the SIPC sign
III. Post a fidelity bond
IV. Obtain fingerprint record for associated persons
(A) I and III
(B) I, II, III and IV
(C) I, II, and III,
(D) I and II

Back 588

Correct answer(s): D
A registered broker dealer is required to do all of the items listed

Front 589

Creating false activity in a security to attract new purchaser is a fraudulent practice known as:
(A) Trading ahead
(B) Active concealment
(C) Front running
(D) Painting the tape

Back 589

Correct answer(s): D
This is known as painting the tape matched purchases or matched sales.

Front 590

A local appliance store is promoting it annual fourth of July sale. It has significantly marked down large screen TVs. Also anyone who purchases a large screen TV will receive a $100 US Savings Bond. Which of the following is true?
(A) The salesman at the store must registered as the gift of the bond attached to a sale is considered a sale.
(B) The salesman at the store need not register as the savings bond is an exempt security
(C) Using a security as an enticement for a person to make a large purchase is a violation of the USA
(D) Using a government security as an enticement for a person to make a large purchase is fraudulent and subject to criminal prosecution.

Back 590

Correct answer(s): D
The US savings bond is an exempt security and the sales person does not need to register. The practice of offering savings bonds during a promotion is not fraudulent or in violation of the USA.

Front 591

To maintain registration, the administrator may require:
(A) All sales literature and advertising to be distributed to the public be filed prior to use
(B) All accounting records and financial records as well as customer account files, order tickets, and correspondence be kept on file for at least three years
(C) An Investment Advisory Brochure be provided to prospective clients 48 hours before entering into an advisory contract
(D) All of the choices listed

Back 591

Correct answer(s): D
The administrator in order for a professional to maintain registration may require all of the above.

Front 592

An institutional investor is all of the following except:
(A) An insurance company
(B) An employee benefit plan with $1,300,000 in assets
(C) An accredited investor with $2,500,000 in their account
(D) A bank

Back 592

Correct answer(s): C
An accredited investor is not an institutional investor

Front 593

An agent knowingly sells an unregistered exempt security to a number of non accredited investors. According to the USA which of the following are true ? I. The agent must offer recession. II. The agent has engaged in a pattern of unethical practices. III. The agent does not have to offer recession. IV. The agent could be held both civilly and criminally liable for their actions.
(A) I and IV
(B) II and IV
(C) III only
(D) IV only

Back 593

Correct answer(s): C
The agent sold an exempt security to investors. Exempt securities by definition are exempt from the registration process and are therefore unregistered. An example of an exempt security would be a municipal bond or a treasury bond.

Front 594

A broker-dealer is required to file the following forms with the Administrator:

Back 594

1. Application
2. Consent to service of process
In addition to these two items, a broker-dealer can be required to take an examination, pay a filing fee, maintain a minimum (liquid) net capital specified by the Administrator, and potentially post a surety bond as well!

Hint 594

The Administrator may not establish requirements that are in excess of, or more burdensome than, those already established by the SEC.

Front 595

Withdrawal: At any time, a person may withdraw registration (if there are no violation-related proceedings in progress), by submitting such directly to the Administrator. When does it become effective?

Back 595

Withdrawal is effective 30 days after the receipt of the withdrawal request.

Front 596

Registration terminates when

Back 596

annually on December 31 each year

Front 597

What is/are the requirement(s) for renewal is for broker-dealers?

Back 597

pay annual fees

Hint 597

as long as there are no proceedings pending (including denial, suspension, revocation, or cancellation).

Front 598

Records of a broker-dealer must be kept

Back 598

for a minimum of three years

Front 599

all advertising and promotional material must be filed with the Administrator, unless

Back 599

it is exempt on either a security or transaction basis.

Front 600

How frequently do financial reports need to be filed with the Administrator

Back 600

annually, and in some cases, quarterly

Front 601

Administrators can reserve the right to require applicants to take an examination

Back 601

either oral or written.

Front 602

Exemption from registration
The broker-dealer with which the agent is associated has no place of business in the state and the agent only conducts business with existing customers:

Back 602

Who are not residents of the state, and are in the state for 30 days or less,

Who have moved to another state after establishing an account with the agent in his or her state of registration. The agent must apply for registration in the customer's new state of residence within 10 days of any securities transactions or of the discovery that the client has moved to the other state. There is a 60-day grace period allowed by law for transactions to continue so long as the agent has made application within the 10-day period. To apply for registration, the agent's B/D must be registered in the new state.

Front 603

The broker-dealer with which the agent is associated has no place of business in the state and the agent only conducts business is exempt from registration with existing customers :

Back 603

Who are not residents of the state, and are in the state for 30 days or less

i.e. on vacation

Front 604

The broker-dealer with which the agent is associated has no place of business in the state and the agent only conducts business is exempt from registration with existing customers :

Back 604

Who have moved to another state after establishing an account with the agent in his or her state of registration. The agent must apply for registration in the customer's new state of residence within 10 days of any securities transactions or of the discovery that the client has moved to the other state. There is a 60-day grace period allowed by law for transactions to continue so long as the agent has made application within the 10-day period. To apply for registration, the agent's B/D must be registered in the new state.

Front 605

The broker-dealer itself is exempt from registration in the state because of the Canadian and other foreign broker-dealer exemption

Back 605

and the agent's only transactions are with existing customers as while visiting (i.e. on vacation) and when a client has moved to another state while in the process of registering.

Front 606

The agent is exempt from registering with the state when representing

Back 606

issuers of exempt securities

Hint 606

Securities issued by governments. This includes the U.S. government; state and local governments and foreign governments with which the U.S maintains diplomatic relations.

Securities issued by banks. Remember that banks virtually always qualify as exemptions.

Securities issued by insurance companies authorized to do business in the state

Securities issued by railroads and public utilities that are regulated by the U.S. government, the state or a Canadian government regulatory body

Securities that are considered federal covered securities as described in the definition above

Securities of nonprofit organizations, such as churches

Investment grade commercial paper. Sometimes the exam will refer to these as promissory notes­, which have maturities of no more than 270 days and a minimum face amount of $50,000. The term "investment grade"refers to the top 4 grades, in terms of safety, as determined by such organizations as Moody's and Standard & Poor's.

Front 607

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 607

Securities of nonprofit organizations, such as churches

Front 608

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 608

Securities issued by governments. This includes the U.S. government; state and local governments and foreign governments with which the U.S maintains diplomatic relations.

Front 609

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 609

Securities issued by banks. Remember that banks virtually always qualify as exemptions.

Front 610

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 610

Securities issued by insurance companies authorized to do business in the state

Front 611

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 611

Securities issued by railroads and public utilities that are regulated by the U.S. government, the state or a Canadian government regulatory body

Front 612

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 612

Securities that are considered federal covered securities

Front 613

The agent is exempt from registering with the state when representing issuers of exempt securities of ...

Back 613

Investment grade commercial paper. Sometimes the exam will refer to these as promissory notes­, which have maturities of no more than 270 days and a minimum face amount of $50,000. The term "investment grade"refers to the top 4 grades, in terms of safety, as determined by such organizations as Moody's and Standard & Poor's.

Front 614

If an agent represents an ISSUER of EXEMPT SECURITIES, then he or she is exempt from registration with the state.

Back 614

If an agent represents one of those companies, he or she doesn't have to register with the state. This does not mean that the person isn't registered at all. The agent is likely to be registered with the SEC, just not with the state.

Front 615

securities of certain issuers, such as New York Stock Exchange (NYSE) stocks, as federal covered securities

Back 615

If an agent represents one of those companies, he or she doesn't have to register with the state. This does not mean that the person isn't registered at all. The agent is likely to be registered with the SEC, just not with the state.

Front 616

an individual is not considered an agent if he or she does not make transactions in securities with public customers.

Back 616

this law is designed to protect the investing public.

Front 617

An agent dealing with securities is exempt from registration under the Uniform Securities Act, when ...

Back 617

A representative of a B/D making transactions for federal covered investment advisers. Such IAs are considered "sophisticated investors."

Hint 617

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Front 618

An agent dealing with securities is exempt from registration under the Uniform Securities Act, when ...

Back 618

An individual, such as an officer of a company, selling stock of his or her company (the issuer) and receiving no compensation for the transaction.

Hint 618

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Front 619

An agent dealing with securities is exempt from registration under the Uniform Securities Act, when ...

Back 619

An individual selling stock of his or her own company to employees of that company and receiving no compensation for the transactions. An example of this would be the clerk who handles employee stock option purchase plans. That person is paid for clerical duties, not for stock transactions.

Hint 619

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Front 620

An agent dealing with securities is exempt from registration under the Uniform Securities Act, when ...

Back 620

A person whose duties are strictly clerical (or ministerial as the law says) in nature and who has no authority to accept orders

Hint 620

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Front 621

An agent dealing with securities is exempt from registration under the Uniform Securities Act, when ...

Back 621

An individual who represents an issuer in transactions with an underwriter

Hint 621

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Front 622

An agent dealing with securities is exempt from registration under the Uniform Securities Act, when ...

Back 622

An officer or director of a broker-dealer who is not involved in effecting securities transactions or the supervision of persons who make such transactions

Hint 622

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Front 623

"An individual may not act as an agent for more than one broker-dealer or one issuer at a time, unless the broker-dealer or the issuer for which the agent acts is affiliated by direct or indirect common control or is authorized by rule or order under this [Act]."

Back 623

Dual registration of an agent is a possibility only if directly authorized by the Administrator.

Hint 623

What if a broker-dealer chooses to have persons affiliated with the firm who should be registered, but does not have them registered? The Administrator has the power to suspend or revoke the company's registration. The firm would also be subject to criminal and civil penalties.

Front 624

Agent: Termination of Registration

Back 624

If an agent terminates his or her affiliation with a broker-dealer, that person is no longer considered an agent until he or she becomes affiliated with another broker-dealer.

Front 625

If an agent terminates his or her affiliation with a broker-dealer, that person is no longer considered an agent until he or she becomes affiliated with another broker-dealer.

Back 625

When a person who was an agent of broker-dealer "A" chooses to leave that firm and goes to broker-dealer "B," the agent must file a new application for registration with the Administrator within 30 days of termination with the original B/D. As long as there have been no new disciplinary issues found in the files within the past 12 months, the agent's registration is effective upon filing, and paying the appropriate fee, of course. Both the "old" B/D and the "new" B/D are also required to notify the Administrator.

Front 626

If broker Shenanigans calls one of his best customers while she is on her Lear jet over Mississippi and effects a transaction to sell some of her stock, does he have to be registered in that state?

Back 626

No, because Shenanigan's client was simply visiting (or in this case, flying over) the state.

Front 627

An agent can effect transactions in a state if his or her registration is pending (but not approved) for 60 days ONLY WITH EXISTING CUSTOMERS, assuming:

Back 627

He or she is registered in another state.
The broker-dealer the agent represents is registered in the state.
There must not be an injunction restricting the agent from registration in another state.

Front 628

John decides one day that he has had it with New York, where he is a registered agent. Consequently, he throws all his stuff in a suitcase and relocates to sunny California, where he gets a job with the broker-dealer Flashy Cali, Inc. He begins effecting transactions with existing customers who have also recently moved to the state - with the consent of his new firm, of course. He operates for the first 56 days, until the Administrator informs him that his registration is active. Because John began effecting transactions before actual registration approval by the Administrator, has he committed any fraudulent activity?

Back 628

No, assuming his registration was never revoked in another state and his new firm Flashy Cali, Inc. is registered in California, John is in the clear. John can ONLY conduct transactions with existing customers who have moved into the state while in the 60-day window, he cannot solicit new business until his registration is active. Thus, because Flashi Cali, Inc is registered in California, he has not had his registration revoked in another state and he has effected transactions for less than 60 days, he has not violated the USA.

Front 629

Agent needs to register #1

Back 629

If you receive direct compensation from a commission, you must register as an agent.

Hint 629

Regardless of exemptions, if you accept a commission /compensation based on the sale of a security, you ARE an agent and registration as an agent, under the USA, IS REQUIRED.

Front 630

Agent needs to register
#2

Back 630

If you represent a broker-dealer that charges commissions, or an underwriting fee, you must register as an agent.

Hint 630

Regardless of exemptions, if you accept a commission /compensation based on the sale of a security, you ARE an agent and registration as an agent, under the USA, IS REQUIRED.

Front 631

Agent needs to register
#3

Back 631

If you do not charge a commission and are effecting exempt transactions and/or in exempt securities, you DO NOT need to register as an agent.

Hint 631

Regardless of exemptions, if you accept a commission /compensation based on the sale of a security, you ARE an agent and registration as an agent, under the USA, IS REQUIRED.

Front 632

Agent needs to register

#4

Back 632

Usually, unless you are representing a government-oriented entity, you need to register. For example, if you represent a firm that does not charge a commission for the sale of a municipal or federal security, but DOES receive an underwriting fee, you have to register.

Hint 632

Regardless of exemptions, if you accept a commission /compensation based on the sale of a security, you ARE an agent and registration as an agent, under the USA, IS REQUIRED.

Front 633

"If you are an office assistant and do not directly benefit from a securities related commission, are you an agent?"

Back 633

"No". Assistants who provide price and/or supporting information are NOT agents. A simple way to view this is if an individual deals with public customers in securities, then he or she should be registered as an agent.

Front 634

The USA "limits agents to a single employment or affiliation unless a rule or order of the Administrator authorizes multiple affiliations."

Back 634

an agent can only represent one firm unless he or she gains approval by the Administrator

Front 635

An agent has no specific minimum financial requirements to register,

Back 635

although the Administrator reserves the right to require the agent or broker-dealer to post a bond.

Front 636

If the agent becomes insolvent (i.e. bankrupt), registration may be terminated

Back 636

if it is deemed, by the Administrator, to be "in the public interest."

Front 637

Multiple agents may split commissions as long as the same parent broker-dealer employs them.

Back 637

transactions from a state can only benefit more than one agent if the agents are both registered in that particular state.

Front 638

Agents: Initial Registration #1

Back 638

Initial registration for an agent is very simple. If a person or an entity falls under the definition of an agent he/she/it MUST register as an agent via the broker-dealer. He or she must also sign a consent to service of process.

Front 639

Agents: Initial Registration #2

Back 639

the USA mentions that both the agent and broker-dealer are to notify the Administrator of new or terminated employment.

Front 640

Agents: Update of information

Back 640

If at any time an agent has any material change in vital information (i.e., name or address), he/she and the broker-dealer are required to notify the Administrator.

Front 641

Agents: Renewal

Back 641

An agent's broker-dealer usually pays annual renewal fees.

Front 642

If an agent's affiliation with a broker-dealer is terminated at any time, either by the agent or the broker-dealer, ...

Back 642

both the agent and the broker-dealer are to notify the Administrator.

Front 643

An agent's registration is only active as long ...

Back 643

has he or she is affiliated with a broker-dealer.

Front 644

The acid test for a publication (and you could see a question regarding internet publications on the exam) is whether the publisher gives advice on the SPECIFIC investment situations of clients. If a publication does not advise clients of stock-specific information and is a "bona-fide" publication (for example: the Wall Street Journal Online), ...

Back 644

it is NOT an investment adviser.

Front 645

An investment adviser is a firm that:

Back 645

For compensation, engages in the business of advising others as to the value of securities, or as to the advisability of investing in, purchasing, or selling securities

Hint 645

Exam Tips and Tricks
As a general rule of thumb, if a person specifically gives advice related to investments for a client\'s specific condition or portfolio, that person is defined as an investment adviser.

Front 646

If broker-dealers that have "wrap accounts" must register as

Back 646

both broker-dealers and as investment advisers.

Front 647

De Minimis:
The NSMIA provides a de minimis exemption for investment advisers that have no place of business in the state and direct business communications to ...

Back 647

"no more than five non-institutional clients" in a year.

Front 648

NASAA addresses the requirements of NSMIA regarding investment advisers and investment adviser representatives

Back 648

"If an investment adviser does not qualify for SEC registration, its registration is governed by state laws. State registration authority is limited, however, by a national de minimis standard that prohibits the laws of any state requiring registration, licensing, or qualification as an investment adviser if the adviser does not have a place of business located in the state and during the prior 12 months had five or fewer clients that reside in the state. In addition, the NSMIA requires a state to enforce only those books and records, minimum net capital, or bonding requirements of the state in which the investment adviser maintains its principal place of business."

Hint 648

if the adviser does not have a place of business located in the state and during the prior 12 months had five or fewer clients that reside in the state.

Front 649

The USA also states that an investment adviser is prohibited "from employing an individual who is prohibited from such employment or association by the Administrator." Violation of this provision does not always result in strict liability, as employees can often mislead employers.

Back 649

To be liable, the investment adviser must have known or should have known of the Administrator's order suspending or barring employment for the employee.

Front 650

An investment adviser may conduct business with institutional clients in different states than its registration without registering in the additional states if: #1

Back 650

The investment adviser has no physical address in the state(s), but is registered in another state.

Front 651

An investment adviser may conduct business with institutional clients in different states than its registration without registering in the additional states if: #2

Back 651

The client the investment adviser is providing advice for is an institutional client, such as a bank, another investment adviser, a benefit plan with assets greater than $1 million and/or the government.

Front 652

The De Minimis exemption has frequently been reported to be on the test, so remember: For registration exemption, an investment adviser must have

Back 652

1) fewer than five clients in twelve months, and
2) NOT have a physical address in the state!

Hint 652

Often, this has been reported to be worded as "five or fewer."

Front 653

Investment Adviser: Initial Registration and Requirements
SEC versus the state:

Back 653

If an investment adviser manages less than $25 million, his or her registration is under the USA, at the state level.

Those managing more than $30 million are required to register with the SEC. If an investment adviser registers with the SEC, he or she must give notice to the state adviser and pay filing fees.

An investment adviser with assets of $25 million to $30 million may register with the SEC or with the state - the choice is left up to the firm. In addition, there are several categories of investment advisers who are required to register with the SEC instead of states.

Front 654

There are several categories of investment advisers who are required to register with the SEC instead of states. They include:

Back 654

*Nationally Recognized Statistical Rating Organizations (NRSROs)
Consultants who advise pension plans with assets over $50 million
*Any adviser that believes it may be required to register with the SEC within 120 days of initial state registration
*Investment advisers managing the portfolios of registered investment companies such as mutual funds

Front 655

An investment adviser registered or required to be registered under the act who has custody of client funds or securities shall maintain at all times a minimum net worth of $35,000 except:

Back 655

1) Advisers having custody solely due to direct fee deduction and complying with the terms described under Rule 102(e)(1)-1(a)6 and related books and records, as described in Rule 203(a)(2), shall not be required to comply with the net worth or bonding requirements of this rule.

2) Advisers having custody solely due to advising pooled investment vehicles and complying with the terms described under Rule 102(e)(1)-1(a)7 or Rule 102(e)(1)-1(b)(3) and related books and records, as described in Rule 203(a)(2), shall not be required to comply with the net worth or bonding requirements of this rule.

Hint 655

Essentially, Administrators have the ability to require investment advisers to carry bonds or insurance if the aforementioned persons/entities have discretionary authorization or hold client funds. In short, if the Administrator feels that a situation is risky to the client, he/she may require bonds to protect clients against potentially excessive losses. If you need to recognize a dollar figure on the exam, go with the $35,000.

Front 656

Investment Adviser
Is a person that:

3 things

Back 656

1) Offers advice regarding specific security-related information,
2) Receives compensation for securities-related advice, or
3) Is considered to be in the business of securities-related advice,

Front 657

The entity IS an investment Adviser and must be registered as such, unless exempt.
5 Exclusions:

Back 657

1) Investment adviser representative (IAR). These are the individuals who work for an investment adviser (IA).
2) Individuals whose advice is incidental to their professional businesses. Think TEAL: teachers, engineers, accountants and lawyers
3) Bona fide publications not issuing client-specific advice
4) Broker-dealers providing advice as part of their normal business that DO NOT receive compensation for such. Note that often the exam will use the word, "Remuneration," rather than compensation.
5) Banks, savings institutions, or trusts. Notice, once again, how banks and bank-related entities are excluded.

Front 658

If an investment adviser is registered with the SEC, the states may not require registration, licensing, or qualification of the investment adviser or its supervised persons except that states may license, register, or otherwise qualify investment adviser representatives who have a place of business located within that state. Additionally, the states retain the authority to investigate and bring enforcement actions in the case of fraud or deceit, and as otherwise permitted by the NSMIA, by SEC registered investment advisers and their associated persons.

Back 658

If a person meets the above criteria for IAR, he/she MUST register with the state!
Basically, the investment adviser (the firm) may be registered with the state (under the USA) or, the firm may be a "federal covered adviser" and not registered with the state. The IAR is always registered with the state of residence.

Hint 658

Look Out!
If you are having trouble with the term investment adviser representative, think of an IAR in a similar capacity as an agent is to a broker-dealer. An IAR represents an investment adviser.

Front 659

An IAR is NOT:

Back 659

someone who Performs only clerical or ministerial acts

Front 660

An IAR is NOT:

Back 660

Is an agent whose performance of investment advice is solely incidental to the individual acting as an agent, and who does not receive special compensation for investment advisery services

Front 661

An IAR is NOT:

Back 661

Is a federal covered investment adviser representative (however, if a federal-covered investment adviser has a place of business in a state where a representative conducts business, the representative may be required to register with the state Administrator.) Do NOT confuse a federal covered investment adviser with an investment adviser required to file on a state level.

Front 662

If John calls Excellent Money Managers, Inc. to speak with someone about his portfolio and ends up talking to Kathy Kash, is he talking to the investment adviser representative, or the investment adviser?

Back 662

John is talking to the investment adviser representative (Kathy Kash), an employee of the investment adviser, Excellent Money Managers, Inc.

Front 663

Big Bubba Bob is an investment adviser representative of Kamikaze Portfolio Managers, a federal covered investment adviser (meaning it is registered with the SEC); he has clients in California, New York, Colorado and Alaska. The company's offices are located in Georgia. In what states does he have to register with the Administrator(s) to work as an investment adviser representative?

Back 663

None, except Georgia if that's where he does business. However, because Kamikaze Portfolio Managers is a federal covered investment adviser (registered with the SEC) he does not have to register in the state where his firm has no physical address.

Front 664

All books and records required to be made under the provisions of paragraph (a) to (c)(1), inclusive, of this Rule (except for books and records required to be made under the provisions of paragraphs (a)(11) and (a)(16) of this Rule), shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on record, the first two years in the principal office of the investment adviser.

Back 664

Memorize the fact that the number of years required for recordkeeping is a MINIMUM of FIVE YEARS. It is highly likely you will be tested on this concept on your upcoming exam.

Front 665

Investment Advisers: Books and Records
The books, records and financial reporting requirements of broker-dealers are governed by the SEC and the self-regulatory organizations (SRO), such as the exchanges and FINRA.

Back 665

Federal law: the Securities and Exchange Act of 1934 prohibits states from imposing requirements on broker-dealers that are more extensive or burdensome. The Section of the '34 Act that spells this out is Section 15(h), which, in part, says:

Hint 665

If, on the Series 63 exam, you see a reference to Section 15(h) just remember that the states cannot impose requirements on broker-dealers that are more difficult or extensive than those already mandated by the SEC.

Front 666

The records of a broker-dealer's business must be maintained, by SEC Rule, for ...

a) 5 years
b) 3 years
c) 1 year

Back 666

b) 3 years

The records of a broker-dealer's business must be maintained, by SEC Rule, for three years.

Hint 666

BD business records 3 years

Front 667

The records that a broker-dealer maintains for its customer accounts must generally be maintained for how many years?
a) 5 years
b) 3 years
c) 6 years

Back 667

c) 6 years
The records that a broker-dealer maintains for its customer accounts must generally be maintained for six years.

Hint 667

Client records = 6 years

Front 668

Investment advisers that are covered by the USA (not federal covered) are required to maintain records for how many years?
a) 5 years
b) 3 years
c) 6 years

Back 668

a) 5 years

Hint 668

"...All books and records required to be made under the provisions o f... this rule ... shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on record, the first two years in the principal office of the investment adviser."

Front 669

a state cannot require an investment adviser or broker-dealer to report MORE FREQUENTLY than quarterly

Back 669

You will probably NOT see a question regarding financial reporting on the test as applied to investment advisers and broker-dealers because such requirements can easily differ from state to state. However if you do, it is wise to remember that a state cannot require an investment adviser or broker-dealer to report MORE FREQUENTLY than quarterly, though in most cases annual reporting is the norm!

Front 670

Sarbanes-Oxley Act (SOA)
In July 2002, the Sarbanes-Oxley Act (SOA) introduced major changes to the regulation of corporate governance and financial practice.

Back 670

The SOA affected the USA by changing the federal statute of limitations for criminal charges from two years to five years.

Hint 670

SOA Federal statue for criminal charges 5 years

Front 671

3 tests to determine when an investment contract is a security are:

Back 671

1) Is it an investment of money?
2) Is it in a common enterprise?
3) Are its profits to come solely from the efforts of others?

Hint 671

"The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."

Front 672

To demonstrate, let's apply these three tests to a security that we're all familiar with: common stock.

Back 672

The person who buys the stock is pooling his/her money with the investments of many other people - a common enterprise. The investor obviously will only risk his/her capital in the expectation of a return on the investment - a profit. The investor may vote on the board of directors, but has no direct control over the management of the company in which the money is invested, so he/she expects the profits to come from the efforts of others. These tests have proven that a stock certificate is definitely "investment contract".

Front 673

Are Commodities or futures contracts are securities?

Back 673

No, There is no dependence on the management of an outside party in a commodities contract - a commodities futures contract is a two-party contract that calls for the delivery of some tangible commodity, such as gold, corn, soybeans, etc. to the holder of the futures contract.

Hint 673

A commodities futures contract is not a security, but an option on that contract is considered a security - the performance is now dependent on the activities of a third party.

Front 674

A commodities option or futures options contract considered securities?

Back 674

Yes, if the term option is added to a commodities or futures contract, then the instrument becomes a security.

Hint 674

A commodities futures contract is not a security, but an option on that contract is considered a security - the performance is now dependent on the activities of a third party.

Front 675

Under the Uniform Securities Act, federal covered securities include those sold to qualified purchasers only. Qualified purchasers include:
a) Individuals with investments of at least $5,000,000
or investment managers with at least $30,000,000
under management
b) Individuals with investments of at least $5,000,000
or investment managers with at least $25,000,000
under management

c) Individuals with investments of at least $3,000,000
or investment managers with at least $25,000,000
under management
d) Individuals with investments of at least $2,500,000 or investment managers with at least $30,000,000 under management

Back 675

The correct answer is b.
Qualified purchasers are defined under the Uniform
Securities Act as either a person who owns at least $5,000,000 of investments or an investment manager with at least $25,000,000 of investment assets under management.

Front 676

Under the Uniform Securities Act, the registration of an investment adviser results in automatic registration of any investment adviser representative who is a:
a) Solicitor
of the investment adviser
b) Partner of the investment adviser
c) Sales representative of the investment adviser
d) Administrative employee of the investment adviser

Back 676

The correct answer is b.
Clerical employees do not need to be registered as investment adviser representatives, while solicitors, sales representatives and other employees who give investment advice must so register. However, any directors, partners or officers named in the investment adviser’s registration application are automatically registered as investment adviser representatives.

Front 677

After a federal covered security has filed notice with the Administrator for an initial public offering, what actions are subsequent offerings subject to?

a) No filing notice would be required for subsequent secondary offerings
b) Filing notice would be required for subsequent
secondary offerings
c) Registration of subsequent secondary offerings
would be required only by Administrator’s order
d) Registration would be required for subsequent secondary offerings

Back 677

The correct answer is b.
Notice filings are required under the Act for both initial and secondary offerings of federal covered securities.

Front 678

A sales representative solicits and executes a mutual fund trade, but fails to record the trade with the broker-dealer. Under the Uniform Securities
Act, this action would be:
a) Allowed, but only if no commission was taken on the trade
b) Allowed, since mutual fund trades are not required to be kept on the broker-dealer’s books
c) Prohibited
d) Allowed, since mutual fund trades are recorded on the mutual fund company’s books

Back 678

Answer: The correct answer is c).


This would be considered a private securities transaction,
which is not permitted. All securities trades must
be entered into the broker-dealer’s books.

Front 679

Under the Uniform Securities Act, federal covered securities include those sold to qualified purchasers only. Qualified purchasers include:
a) Individuals with investments of at least $2,500,000 or investment managers with at least $30,000,000 under management
b) Individuals with investments of at least $5,000,000 or investment managers with at least $25,000,000
under management
c) Individuals with investments of at least $3,000,000 or investment managers with at least $25,000,000 under management
d) Individuals with investments of at least $5,000,000 or investment managers with at least $30,000,000 under management

Back 679

The correct answer is b.
Qualified purchasers are defined under the Uniform
Securities Act as either a person who owns at least $5,000,000 of investments or an investment manager with at least $25,000,000 of investment assets under management.

Front 680

Failure to report certain transactions to the IRS is a prohibited practice under the Uniform Securities Act. Which of the following transactions would require such notification?
a) Withdrawal of $5,000 in cash
b) Withdrawal of $12,000 in cash
c) Deposit of $15,000 of bonds
d) Deposit of $5,000 in cash

Back 680

The correct answer is b.
Any deposits or withdrawals of amounts over $10,000 must be reported. However, only cash amounts have this requirement, not securities.

Front 681

Under the Uniform Securities Act, registration with the Administrator as an investment adviser is required in which of the following situations?
I. A broker-dealer that makes investment recommendations
to clients.
II. A broker-dealer that charges a fee for securities
advice.
III. A financial planner that charges a fee for investment
recommendations.
IV. A general circulation investment newsletter.

a) II, III & IV
b) I & III
c) II & III
d) I & II

Back 681

The correct answer is c.
I) Is incorrect, since broker-dealers or their agents who don’t receive a fee for making investment recommendations are not required to register, since the advice is considered incidental to their services.
IV is incorrect, since investment newsletter publishers only need to register if they give recommendations based on specific client situations. However, broker-dealers
and financial planners that provide investment recommendations for a fee do need to register as in investment adviser with the Administrator.

Front 682

Under the Uniform Securities Act, all of the following are prohibited EXCEPT:
a) Omitting a material fact due to time constraints
b) Refusal to follow a client’s instructions
c) Soliciting trades for unregistered exempt securities
d) Making an untrue statement regarding a material fact

Back 682

The correct answer is c.
Refusing to follow a client’s instructions and making false statements (or omitting true ones!) about material facts are all prohibited. Furthermore, while soliciting trades for unregistered non-exempt securities is prohibited, there is no prohibition for soliciting orders for unregistered exempt securities (such as US Government bonds).

Front 683

If an issuer wishes to register a
security in the state, and it is a new issue being
registered with the SEC, the least complicated method
to choose would be:


a) Registration by coordination

b) Registration by qualification

c) Registration by filing

d) Registration by certification

Back 683

The correct answer is a.


Registration by coordination is permitted when the
issuer has filed a registration application with the
SEC under the Securities Act of 1933.

Front 684

Under the Uniform Securities Law, broker-dealers are required to sign a consent to service of process. Filing such a consent means that:
a) The individual may not be required to give
self-incriminating testimony in the event of a proceeding.
b) The Administrator is permitted to assess fines or other penalties in the event of
a violation of the Act.
c) The Administrator is empowered to receive suits on behalf of the individual.
d) The individual is under the jurisdiction of the Administrator for up to a year after registration
is withdrawn.

Back 684

The correct answer is c.
The consent to service of process appoints the Administrator as attorney in the event of any lawsuits that may
be filed. This ensures that the individual cannot be sued for a securities related violation without the Administrator knowing about it. Once the Administrator receives such a suit, the individual is promptly
notified of the suit.

Front 685

Federal covered securities are subject to which of the following requirements?
I. State registration
II. State anti-fraud statutes
III. SEC registration
IV. SEC anti-fraud statutes

a) I & II
b) II, III & IV
c) I, II, III & IV
d) III & IV

Back 685

The correct answer is b.
Federal covered securities are subject to only federal
Registration with the SEC and do not have to register with the state. However, they must comply with both state and federal anti-fraud statutes.

Front 686

Under the Uniform Securities Act, the Administration is empowered to perform which
of the following acts?
I. Subpoena a broker-dealer’s books and records after a suspension order is received
II. Obtain an injunction against any person the Administrator
suspects of violating the Act
III. Suspend a sales representative’s registration
prior to the hearing, without stating a reason for the suspension
IV. Revoke the registration of all sales representatives associated with a broker-dealer at the time the broker-dealer’s registration is revoked by the Administrator

a) I, II & IV
b) II only
c) I, II, III & IV
d) I & II

Back 686

The correct answer is a.
The Administrator does have the power to subpoena records and obtain an injunction. Also, a sales representative’s registration is only effective when associated with a broker-dealer, so upon revocation or suspension of a broker-dealer’s registration, all associated
sales representatives registrations will be revoked as well, until they become associated with another broker-dealer. However, the Administrator may not suspend a registration prior to the hearing unless a reason for the suspension is stated.

Front 687

Under the Uniform Securities Act, a registrant who holds custody of client funds must do all of the following EXCEPT:

A) Segregate client funds from their own funds
B) Prompt notice whenever funds or securities have been moved to a new location
C) Arrange for an annual unannounced audit from an independent accountant
D) Send a monthly account statement that lists details of all security transactions

Back 687

Answer: The correct answer is d).
A registrant is required to segregate client funds, send notice whenever funds have been moved and arrange for an annual audit at least annually. However, the registrant is required to send a quarterly account statement, not a monthly statement.

Front 688

Under
the Uniform Securities Act, which of the following
are defined as securities?


I. Variable annuities

II. Fixed annuities

III. Oil & gas program fractional
interests

IV. Real estate
limited partnerships


a) I, III & IV

b) III & IV

c) I & II

d) I, II, III & IV

Back 688

The correct answer is a.


Fixed annuities are not considered securities,
since the purchaser bears no investment risk. However,
variable annuities, real estate limited partnerships
and fractional interests in oil & gas programs
are all defined as securities.

Front 689

Under the Uniform Securities Act, the Administrator of California may examine the financial books and records of all of the following, EXCEPT?
a) A broker-dealer in Illinois that has no California branches and doesn’t trade in California
b) The main office in Illinois of the California branch referred to above
c) Investment adviser’s office in California
d) The branch office of a broker-dealer in California whose main office is in Illinois

Back 689

The correct answer is a.
The Administrator has jurisdiction over investment
advisers, broker-dealers and sales representatives located in the state or involved with securities offers directed into the state. However, the Administrator has no jurisdiction over an office located outside
the state, which has no branch office or securities activities within the state.

Front 690

Under the Uniform Securities Act, the statute of limitations for criminal suits is how long?
a) 1 year from discovery
b) 2 years from discovery
c) 5 years from discovery
d) 7 years from discovery

Back 690

The correct answer is c.
For alleged criminal violations, the suit must be filed within five years from discovery.

Front 691

If ABC corporation, which is listed on the New York Stock Exchange, plans to distribute a stock dividend to current shareholders, which of the following statements is true?

A) ABC must file a registration by qualification with the Administrator
B) ABC must file a registration by coordination with the Administrator
C) ABC must file a registration by filing with the Administrator

D)
ABC does not have to file any registration with the Administrator because the transaction is exempt.

Back 691

The correct answer is d).

This transaction would qualify under two different exemptions – the first because it is an exchange listed stock and the second because no commissions or other compensation is involved with a stock dividend.

Front 692

If ABC corporation, which is listed on the New York Stock Exchange, plans to distribute a stock dividend to current shareholders, which of the following statements is true?


A) ABC must file a registration by qualification with the Administrator
B) ABC must file a registration by coordination with the Administrator
C) ABC must file a registration by filing with the Administrator
D) ABC does not have to file any registration with the Administrator because the transaction is exempt.

Back 692

The correct answer is d).
This transaction would qualify under two different exemptions – the first because it is an exchange listed stock and the second because no commissions or other compensation is involved with a stock dividend.

Front 693

A sales representative or broker-dealer that violates the Uniform Securities Act when offering or selling securities incurs civil liability to:
I. Pay court fees and reasonable attorney’s fees
II. Repurchase the security from the customer at the original purchase price
III. Pay interest as required by the Administrator, minus any income the customer received from the security

a) I, II & III
b) I & II
c) II only
d) I & III

Back 693

The correct answer is a.
The sales representative or broker-dealer is required to pay interest, court and attorney’s
Fees and to buy back the security from the customer if a violation occurs.

Front 694

Under the Uniform Securities Act, which of the following actions is permitted for a registered sales representative?
a) Make trades in a state where the sales representative is registered, but the broker-dealer is not.
b) Make trades in a state where the sales representative is not registered, as long as the broker-dealer is registered in that state.
c) Solicit trades for non-exempt unregistered securities, as long as the sales representative is registered in the state.
d) Offer investment advisory services as long as no separate fee is charged and the services are incidental to his or her brokerage services.

Back 694

The correct answer is d).
A sales representative may not make trades in a state unless both the sales representative and the broker-dealer are registered in the state. In addition, they may not solicit trades for non-exempt unregistered securities, (although it is permitted for unregistered exempt securities such as municipal bonds).
A sales representative is permitted to provide investment
Advisory services, as long as no separate fee is received and the services are incidental to the brokerage services.

Front 695

The Administrator issue may issue a stop order for a federal covered security under all the following conditions EXCEPT:
a) It is in the best interest of the public
b) The issuer fails to file copies of SEC documents with the Administrator
c) The issuer fails to provide the required notice filing
d) The issuer of an exchange listed stock fails to pay a filing fee in the state

Back 695

The correct answer is d.
The Administrator may issue a stop order if it believes it to be in the best interest of the public, or if the issuer fails to comply with requirements for notice filing, consent to service of process,
filing of federal documents or payment of the required fee. However, exchange listed stocks may not be issued a stop order solely for not filing a fee in the state.

Front 696

A person whose registration has been revoked by an Administrator due to a felony conviction of a securities-related crime within the last 10 years is prohibited from registration as:
I. Broker-dealer principal
II. Sales representative
III. Investment adviser
IV. Investment adviser representative

a) I, II, III & IV
b) III & IV
c) I & II
d) II only

Back 696

The correct answer is a.
The Administrator may suspend, deny or revoke registration in any capacity if the person has such a conviction by the Administrator of that state or any other.

Front 697

Under the Uniform Securities Act, there are anti-fraud provisions that apply to securities. Which of the following statements is true?


a) Anti-fraud provisions apply to both exempt and
non-exempt securities

b) Anti-fraud provisions apply to exempt securities
only

c) Anti-fraud provisions apply to non-exempt securities
only

d) Anti-fraud provisions apply neither to exempt or
non-exempt securities

Back 697

The correct answer is a.
As with other antifraud provisions under the Act, the antifraud provisions apply to all securities without exempt from registration or part of an exempt transaction.

Front 698

All of the following are unethical behaviors prohibited under the Uniform Securities Act EXCEPT:
a) Deliberately failing to follow a client’s instructions
b) Executing a trade that the sales representative believes to be unsuitable at the client’s orders
c) Telling a client that the investment adviser is registered and therefore has been approved by the state Administrator
d) Failing to tell a client that making trades recommended
by the investment adviser will subject them to a large tax liability

Back 698

The correct answer is b.
All registrants must follow the client’s instructions, including executing a trade that the registrant believes is not suitable. It would only be unethical if the registrant had recommended the inappropriate trade. Also, neither an investment adviser nor a sales representative may imply that registration by the Administrator means that they are “approved” by the Administrator.

Front 699

Under the Uniform Securities Act, the statute of limitations for criminal suits is how long?
a) 2 years from discovery
b) 1 year from discovery
c) 7 years from discovery
d) 5 years from discovery

Back 699

The correct answer is d.
For alleged criminal violations, the suit must be filed within five years from discovery.

Front 700

Under the Uniform Securities Act, which of the following advisers is NOT defined as a federal covered adviser:


a) One who advises only mutual funds (investment companies)

b) One who advises only insurance companies

c) One who gives advice only about US Government securities

d) One who manages over $25,000,000 in client assets

Back 700

The correct answer is b).
Federal covered advisers include those who manage client assets of $25,000,000 or more or who
advises only mutual funds. A federal covered adviser is also one who is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 (including those who give advice solely on US Government securities. However, those who advise only insurance companies are not defined as federal covered advisers, since insurance companies are only regulated at the state level, not federal.

Front 701

Definition of 'Hypothecation'

Back 701

The established practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement. Hypothecation also refers to securities in a margin account that an investor uses as collateral to borrow funds from a brokerage.

Front 702

Definition of 'Remuneration'

Back 702

Payment or compensation received for services or employment. This includes the base salary and any bonuses or other economic benefits that an employee or executive receives during employment.

Hint 702

This term often refers to the total compensation received by an executive, which includes not only the base salary but options, bonuses, expense accounts and other forms of compensation.

Front 703

Definition of 'Indemnity'

Back 703

Compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. A typical example is an insurance contract, whereby one party (the insurer) agrees to compensate the other (the insured) for any damages or losses, in return for premiums paid by the insured to the insurer.

Hint 703

Indemnity may be paid in the form of cash, or by way of repairs or replacement, depending on exactly what is spelled out in the indemnity agreement.

For example, in the case of home insurance, the homeowner pays insurance premiums to the insurance company in exchange for the peace of mind of knowing that he or she will be indemnified if the house sustains damage from fire, natural disasters or other perils specified in the insurance agreement. In the unfortunate event that the home is damaged significantly, the insurance company will undertake to bring it back to its original state, either by means of repairs undertaken by its authorized contractors, or by reimbursing the homeowner for expenditures incurred in association with such repairs.

Front 704

Definition of 'Gramm-Leach-Bliley Act of 1999 - GLBA'

Back 704

A regulation that Congress passed on November 12, 1999, which attempts to update and modernize the financial industry. The main function of the Act was to repeal the Glass-Steagall Act that said banks and other financial institutions were not allowed to offer financial services, like investments and insurance-related services, as part of normal operations.

The act is also known as Gramm-Leach-Bliley Financial Services Modernization Act.

Hint 704

Due to the horrific losses incurred as a result of 1929's Black Tuesday and Thursday, the Glass-Steagall act was created originally during the 1930s in order to prevent bank depositors from additional exposure to risk associated with stock market volatilities. As a result, for many years, banks were not legally allowed to act as brokers. Since many regulations have been instituted since the 1930s to protect bank depositors, GLBA was created to allow the financial industry to offer more services.

Front 705

Definition of 'Securities Exchange Act Of 1934'

Back 705

The Securities Exchange Act of 1934 was created to provide governance of securities transactions on the secondary market (after issue) and regulate the exchanges and broker-dealers in order to protect the investing public.

Hint 705

All companies listed on stock exchanges must follow the requirements set forth in the Securities Exchange Act of 1934. Primary requirements include registration of any securities listed on stock exchanges, disclosure, proxy solicitations and margin and audit requirements.

From this act the Securities Exchange Commission (SEC) was created. The SEC's responsibility is to enforce securities laws.

Front 706

Definition of 'Securities Act Of 1933'

Back 706

A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets.

Hint 706

The Securities Act of 1933 was the first major piece of federal legislation regarding the sale of securities. Prior to this legislation, the sale of securities was primarily governed by state laws; however, the market crash of 1929 raised some serious questions about the effectiveness of how the markets were being governed. Because of the turmoil surrounding the investing community at this time, the federal government had to bring back stability and investor confidence in the overall system.

In general, the legislation was enacted as the need for more information within and about the securities markets was acknowledged. The legislation addressed the need for better disclosure by requiring companies to register with the Securities and Exchange Commission. Registration ensures companies provide the SEC and potential investors with all relevant information by means of the prospectus and registration statement.

Front 707

Definition of 'North American Securities Administrators Association - NASAA'

Back 707

A voluntary organization, established in 1919, of securities regulators whose aim is to protect investors who buy securities or investment advice by educating the public, investigating violations of state and provincial law and filing enforcement actions. Membership includes securities regulators from all 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

Hint 707

NASAA also administers the Series 63, 65 and 66 examinations, which licenses finance professionals to function as an agent . In most States, the Series 63 is a requirement for securities agents.

Front 708

"A (n) … exempt security retains its exemption when initially issued and in subsequent trading."

Back 708

if a stock - let's say a NYSE-listed stock that was approved for listing at its initial public offering (IPO) - is exempt from registration under the USA, it is exempt in both the primary market and in subsequent secondary market trading.

Front 709

"A … transaction exemption must be established for each transaction."

Back 709

If a stock is a non-exempt stock, it should be registered unless the circumstances that bring it into the state make the transaction exempt.

Front 710

A qualified pension plan

Is or is not a security?

Back 710

in defining the term "security", the USA states that it does not include "an interest in a contributory or noncontributory pension or welfare plan subject to the Employee Retirement Income Security Act of 1974".

In other words, a qualified pension plan is excluded from the definition of security. Certain stocks, such as those listed on exchanges are, by contrast, exempt from registration.

Front 711

Are Canadian municipal securities exempt from registration?

Back 711

U.S. Government and Municipal Securities: As issuers, these are exempt from virtually everything except the anti-fraud laws. For the most part, we also can add securities issued by foreign governments with which the U.S. maintains diplomatic relations. The exam questions you see might focus on Canadian securities. In the case of Canada (only) the municipal securities also are exempt from registration under the USA.

Front 712

Are Banks exempt from registration?

Back 712

The regulatory structure for federal and state banking is, in most cases, considered sufficient to ensure that the public is not being defrauded. In other words, an additional layer of regulatory oversight for banks usually is deemed unnecessary.

Front 713

Transactions with institutions almost always are exempt transactions.

Back 713

The USA primarily is structured to protect the investing public - not institutions - from fraud. The essential idea here is that institutions are (or should be) sophisticated investors that have the expertise available to investigate securities offerings and can afford to take risks that the normal investor should not.

Front 714

Under the Uniform Securities Act, the definition of “broker-dealer” does not include:
I) Securities issuers
II) Any person who trades securities for their own or the accounts of others
III) Financial institutions regulated under banking laws
IV) Sales representatives who transact trades for broker-dealers

a) I & III
b) I, II & IV
c) II & IV
d) II only

Back 714

A The Uniform Securities Act does not consider sales representatives, banks and securities issuers broker-dealers. Sales representatives are registered representatives of broker-dealers.

Front 715

Which of the following actions does the Uniform Securities Act permit for a registered sales representative?
a) Making trades in a state where the sales representative is registered, but the broker-dealer is not
b) Making trades in a state where the sales representative is not registered, as long as the broker-dealer is registered in that state
c) Offering investment advisory services as long as no separate fee is charged and the services are incidental to his or her brokerage services
d) Soliciting trades for non-exempt unregistered securities, as long as the sales representative is registered in the state

Back 715

C
A sales representative may not make trades in a State unless both the sales representative and the broker-dealer are registered in that State.A sales representative may not solicit trades for non-exempt unregistered securities, although the Act permits unregistered exempt securities such as municipal bonds.

Sales representatives are permitted to provide investment advisory services, as long as no separate fee is received and the services are incidental to the brokerage services.

Front 716

If an investment adviser representative terminates employment with a federal covered investment adviser, which of the following statements are true:

a) Both the federal covered adviser and the investment adviser representative must notify the Administrator within 30 days
b) The investment adviser representative must notify the Administrator promptly
c) Both the federal covered adviser and the investment adviser representative must notify the Administrator promptly
d) The federal covered adviser must notify the Administrator promptly.

Back 716

B
The federally covered investment adviser would not have to notify the State as they are not registered with the State. The investment adviser representative must notify the Administrator promptly of the termination.

Front 717

An unregistered employee of a registered broker-dealer may only sell securities

a) If the transaction is exempt
b) In unsolicited transactions
c) If the securities are exempt
d) None of the Above

Back 717

D
In order to sell securities, the employee must register, and the type of security or transaction is irrelevant. The only non-registered person who may sell securities is one who meets an exemption such as an individual that represents an issuer.

Front 718

Under the Uniform Securities Act, the Administrator of California may examine the financial books and records of all of the following, except

a) The branch office of a broker-dealer in California whose main office is in Illinois
b) A broker-dealer in Illinois that has no California branches and doesn’t trade in California
c) The main office in Illinois of the California branch referred to above
d) Investment adviser’s office in California

Back 718

B
The Administrator has jurisdiction over investment advisers, broker-dealers and sales representatives located in the state or involved with securities offers directed into the state. However, the Administrator has no jurisdiction over an office located outside the state, which has no branch office or securities activities within the state.

Front 719

A customer calls their agent to sell 1000 shares of XYZ. The agent informs the client that the earnings for XYZ are being released tomorrow and that the stock should do well as a result. The client thanks the agent for the information and decides to sell anyway. The agent holds the order over night and sells the stock at a much higher price the next day. This is:

a) An example of a full service broker
b) A violation; an agent must always execute a customer's order
c) A violation known as front running
d) A violation known as trading ahead

Back 719

B
An agent must always execute a customer's order. The fact that the client in this case received a much better price does not change the fact that the agent committed a violation by failing to follow the client's instructions.

Front 720

A registered broker dealer must do which of the following?

I. Pay SIPC dues
II. Display the SIPC sign
III. Post a fidelity bond
IV. Obtain fingerprint record for associated persons

a) I and II
b) I and III
c) II and IV
d) I, II, III, IV

Back 720

D
A registered broker dealer is required to do all of the items listed to ensure that the firm is in compliance with all state and federal regulations

Front 721

A registered broker dealer who is a syndicate member may do which of the following during the cooling off period ?

I. Run a tombstone ad
II. Gather interest
III. Send out the final prospectus
IV. Send out sales literature

a) I and II
b) I and IV
c) II and III
d) II only

Back 721

A
A syndicate member may only run a tombstone ad announcing the issue and gather indications of interest during the cooling off period. No sales literature maybe sent and the final prospectus is not complete during the cooling offer period

Front 722

A local appliance store is promoting it annual Fourth of July sale. It has significantly marked down large screen TVs. Also, anyone who purchases a large screen TV will receive a $100 US Savings Bond. Which of the following is true?

a) The salesman at the store must be registered, as the gift of the bond attached to a sale is considered a sale
b) The salesman at the store need not register, as the savings bond is an exempt security
c) Using a security as an enticement for a person to make a large purchase is a violation of the USA
d) Using a government security as an enticement for a person to make a large purchase is fraudulent and subject to criminal prosecution

Back 722

B
The US savings bond is an exempt security and the sales person does not need to register. The practice of offering savings bonds during a promotion is not fraudulent or in violation of the USA.

Front 723

A New York agent representing a New Jersey broker dealer has several clients in Pennsylvania and three clients in Florida. Where must the agent be registered ?
a) New Jersey and Pennsylvania
b) New Jersey, New York, and Pennsylvania
c) Pennsylvania, and Florida
d) New York, New Jersey, Pennsylvania, and Florida

Back 723

D
The agent must register in their home state, in their state of employment and in the states where they have clients. In this case New York, New Jersey, Pennsylvania, and Florida

Front 724

A person will be considered an investment adviser if he does all of the following except:

a) Engages in the business of advising others, directly or indirectly, about the merits of securities, either for purchase or for sale
b) Provides reports or analysis concerning securities in the regular course of his business
c) Solely participates in the buying and selling of the securities for the accounts of clients
d) Receives compensation for his securities advice

Back 724

C
Solely participates in the buying and selling of the securities for the accounts of clients / Selected option: Provides reports or analysis concerning securities in the regular course of his business

Front 725

A small broker dealer is applying for registration in a nearby state. The State Securities Administrator is asking that the broker dealer post a surety bond. Which of the following is true?

I. Cash can be substituted for the bond
II. A deposit of qualified securities may be substituted for the bond
III. An agent of the firm subject to the surety bond requirements may not make substitutions for the bond
IV. If the broker dealer meets the SEC's minimum net capital requirement they are exempt from the surety bond requirement.
a) II and IV
b) I and III
c) I, II and IV
d) II, III, IV

Back 725

C
All of the choices listed are correct except number II. An agent may substitute a deposit of cash or securities for the bond.

Front 726

According to the Uniform Securities Act, an investment adviser is considered to have custody of client's funds under which of the following circumstances?

I. The adviser has full discretion
II. The adviser self-clears
III. The adviser has limited discretion
IV. The adviser accepts client's securities for depositbr />
a) I and III
b) I and II
c) I, II and IV
d) I, II, III, IV

Back 726

D) I, II, III, IV
An adviser is considered to have custody if they have full discretion to withdraw cash and securities as well as when they accept customer's securities for deposit. An adviser that self-clears holds all of the customer's cash and securities.

Front 727

As it relates to a consent to service of process, which of the following are true?
I. It is an agreement with administrator whereby the registrant agrees to allow actions to be commenced against them upon the receipt of notice by the office of the Administrator.
II. It is required only by broker dealers and investment advisors.
III. Any action arising out of the business of the broker dealer in the state served to the office of the administrator will bind all agents as well as principals of the firm.
IV. The registrant must file an ethical business affidavit with the consent to service of process.
a) I and III
b) II and IV
c) I, II, and IV
d) I, II, III, and IV

Back 727

A) I and III
All broker dealers, investment advisors and agents must sign a consent to service of process, which is an agreement allowing the administrator to accept legal notices for the registrant. There is no requirement that the registrant file an ethical business affidavit.

Front 728

Excluded from the definition of broker dealers are individuals who have no place of business in the state, as well as entities who do each of the following except:

a) Transact business only with other broker dealers, issuers, or financial institutions in that state
b) Are licensed in the state where they transact business and make offers only to existing customers who are not residents of that state
c) Make no more than five public offerings during a 12-month period
d) Act on behalf of issuers in the sale of non-exempt securities to the public in state

Back 728

D Act on behalf of issuers in the sale of non-exempt securities to the public in state
A person that represents an issuer in the sale of non-exempt securities to the public must be registered as a broker dealer.