Registration & Licensing
A broker-dealer's agent that is registered in State A, wishes to sell a security in State B. Which of the following may be sold in State B without the agent being registered in State B?
I U.S. Government Agency Issues
II Commodity Futures
III Fixed Annuities
IV Limited Partnership interests investing solely in securities of U.S. Government Agencies
A I only
B II and III only
C I and IV only
D I, II, III, IV
B II and III only
Since commodity futures and fixed annuities are not defined as securities, they are not regulated by the Uniform Securities Act. If an agent registered in State A, wishes to sell securities in State B, the agent must be registered in State B unless an exemption is available. Individuals (agents) who represent broker-dealers selling either exempt or non-exempt securities must be registered in that State. Thus, the agent selling U.S. Governments (an exempt security) in State B must be registered in State B. The individual selling limited partnership units (a non-exempt security) in State B must be registered in State B.
Do not confuse these with the following exemptions:
A customer buys shares of a stock that had its initial public offering 5 years ago. Which statement is TRUE regarding prospectus delivery?
A) The prospectus must be delivered to the customer within 24 hours of confirmation
B) The prospectus must be delivered to the customer within 3 business days of the transaction
C) The prospectus must be delivered to the customer no later than settlement of the transaction
D) A prospectus is not required because the initial public offering happened 5 years ago
D) A prospectus is not required because the initial public offering happened 5 years ago
Prospectus delivery is only required for new issues being sold in the primary market. Once a company is trading in the secondary market, it is reporting its results to the SEC and this information is publicly available. Thus, an investment decision can be made from this information and there is no longer a prospectus delivery requirement.
Under the Uniform Securities Act, an agent that sells securities to a customer in a transaction that is not recorded on the books and records of his or her broker-dealer:
A can only do so if the securities involved, or the transactions, are exempt
B can only do so if the transactions are unsolicited
C will cause the agent's registration to be revoked
D will cause the agent to become a statutory broker-dealer
D will cause the agent to become a statutory broker-dealer
Agents are prohibited from effecting securities transactions for customers unless the trades are known to the broker-dealer; are supervised by the broker-dealer; and are recorded on the books and records of the broker-dealer. This agent is "selling away" from his firm and is executing trades for customers that are not being recorded by the broker-dealer. He or she becomes a "statutory broker-dealer" under the Uniform Securities Act and is required to register in the State as such.
Criminal violations of the Uniform Securities Act are punishable by:
I $5,000 fine
II $10,000 fine
III 3 years in jail
IV 5 years in jail
PICK TWO
Correct Answer: I and III
Under the Uniform Securities Act, criminal violations are punishable by a $5,000 fine per offense and up to 3 years in prison. In contrast, criminal violations of Federal law are punishable by a $10,000 fine per offense and up to 5 years in prison.
Regarding surety bond coverage required by the Administrator as a condition of registration, which statement is FALSE?
A Cash is acceptable as a deposit in lieu of a bond
B Securities are acceptable as a deposit in lieu of a bond
C The Administrator is given discretion over which securities are acceptable as a bond
D The Administrator may disallow the posting of cash and require a policy issued by a licensed insurance company
D The Administrator may disallow the posting of cash and require a policy issued by a licensed insurance company
To register as a(n):
a surety bond must be posted with the State.
The surety bond can be in the form of cash, securities, or an insurance policy. The typical surety bond amount is $10,000. This is an asset that the Administrator can seize and use to pay customers if a registrant violates State law. The Administrator cannot disallow the posting of cash as a security bond - there is no better collateral, after all!
Under the Uniform Securities Act, posting of cash in lieu of meeting the surety bond requirement is permitted for all of the following EXCEPT:
A Agent registration
B Broker-dealer registration
C Investment adviser registration
D Security registration
D Security registration
The posting of a surety bond can only be required by the Administrator for registration as a broker-dealer, investment adviser, or agent. When such a bond is posted, the State, in effect, has money on deposit from the registrant that the Administrator can take to satisfy any claims resulting from a violation of the Act. There is no requirement for the posting of a surety bond for a securities registration.
A Registered Investment Adviser has a client who has a joint account with his spouse. The client telephones and informs the RIA that he is secretly getting a divorce from his spouse, but that he wishes to continue to use the RIA's services. The RIA should:
A notify the spouse, in writing, that the RIA will no longer be providing services to her and suggest the name of another adviser
B explain to the client that the joint account must be closed
C open an individual account for the client
D freeze the account until the proper court papers are received
C open an individual account for the client
This question is pretty judgmental. Since the client is getting a divorce from his wife, with whom he has a joint account with the adviser, the division of the assets in the account will be settled in the divorce proceeding. The adviser should not take any action regarding the joint account until there is a resolution of the divorce issue; however, there is nothing stopping the adviser from opening an individual account for the client.
Due to an overall market decline, an investment adviser that imposes a .50% annual management fee on its clients is under financial pressure. To meet its expenses, the adviser wishes to increase its management fee to .65% for any new clients; the existing clients will see no change to the management fee charged. In order to do so, the adviser must:
I file an ADV Part 2A with the Administrator within 30 days
II provide the amended ADV Part 2A or a brochure to its new clients
III provide the amended ADV Part 2A or a brochure to its existing clients at year end
A I only
B I and II only
C II and III only
D I, II, III
D I, II, III
A large change in fees is a material event and requires prompt notice to the Administrator, defined as notice within 30 days (on the other hand, a small change in fees would not be considered to be material). Such a change in fee structure must be included in the ADV Part 2A, which is provided to the customer when an account is opened (it is the "brochure" that details the adviser's business and fee structure). In addition, a copy of the amended Form ADV Part 2A or the Summary of Significant Changes section of the Form ADV with the offer of the complete Form must be sent to any existing customers at year end.
Under NASAA, investment advisers must update their ADV filing made with the State:
I yearly, within 90 days of calendar year end
II yearly, within 90 days of fiscal year end
III within 30 days of any significant material change
IV within 90 days of any significant material change
A I and III
B I and IV
C II and III
D II and IV
C II and III
Under NASAA rules, investment advisers must update their Form ADV (State registration form) annually, within 90 days of fiscal year end, to reflect current and accurate information and must send the updated Form ADV to its clients within 120 days of year end if there is a material change. In addition, if there is a significant material change in the ADV information that occurs during the year, the filing must be amended within 30 days.
The Form ADV is stored in the IARD (Investment Adviser Registration Depository) system. It is used to register both State registered advisers and Federal covered advisers, and to send notice filings to States by Federal covered advisers. Also note that while the annual updating amendment required for both Federal covered and State registered advisers must be filed within 90 days of fiscal year end for either; the filing rule for an "other-then-year" end material change notification is "promptly" under SEC rules for Federal covered advisers; while NASAA requires that it be filed within 30 days for State registered advisers.
On January 2nd, an issuer files a registration statement with the State Administrator for a new issue of common stock. 14 months later, the offering has not been completed and the issuer wishes to continue selling the securities until all of the common shares have been placed with the public. Which statement is TRUE?
A The issuer can continue to sell the shares because the registration expires only when the sale is complete
B The issuer cannot continue the sale of the issue because each securities registration automatically expires after 180 days
C The issuer cannot continue the sale of the issue because each securities registration automatically expires after 12 months
D The issuer can continue to sell the shares because each securities registration never expires
A The issuer can continue to sell the shares because the registration expires only when the sale is complete
The basic rule for registration statements filed with the Administrator for securities offerings is that they are good for 12 months. However, if the offering takes longer than 12 months, the registration is still good until the sale is complete. The exact wording of the Uniform Securities Act is:
"Every registration statement is effective for one year from its effective date, or any longer period during which the security is being offered or distributed in a non-exempted transaction by or for the account of the issuer or other person on whose behalf the offering is being made or by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution, except during the time a stop order is in effect."
An investment adviser has been experiencing a business decline due to a weak local economy and a weak investment outlook. To rebuild her business base, the investment adviser puts an advertisement in the local newspaper that says: "Because times are tough for all of us, we are offering, for a limited time only, a free investment consultation and free year-end tax preparation to anyone who signs a 1-year advisory contract for an introductory rate of only $25 per month." This is permitted:
A under no circumstances
B as long as the duration of the limited time offer is included in the advertisement
C as long as the adviser accepts all potential clients that respond to the offer made in the advertisement
D only if the word "free" is removed twice from the advertisement
D only if the word "free" is removed twice from the advertisement
"Free" offers of services cannot be conditioned on buying something. They must be truly "free." So either the adviser must remove the words "free" from the offer of a consultation and "free" from the offer of year-end tax preparation, since they are conditioned on buying a $25 a month contract; or the adviser must get rid of the condition that a contract be purchased for $25 a month for these "free" services.
Under the Uniform Securities Act, the financial records of a broker-dealer must be retained for:
A 5 years, with the prior 2 years records readily accessible for audit
B any time period specified by the State Administrator
C the time period specified by the Securities Exchange Act of 1934 and if the record is not specified in the 1934 Act, then the time period specified by the Administrator
D the lesser of the time period specified by the State Administrator or the time period specified in the Securities Exchange Act of 1934
C the time period specified by the Securities Exchange Act of 1934 and if the record is not specified in the 1934 Act, then the time period specified by the Administrator
Financial records of a broker-dealer must be kept for the time period specified by the Administrator. In the absence of a rule by the Administrator, the retention period is the same as that required under the Securities Exchange Act of 1934. If there is a retention period for the same record set by both regulators, then federal supremacy dictates that the record be maintained under the 1934 Act requirements, even if this is longer than the Administrator's rule.
A person who renders advice on variable annuities for a fee; and who then sells the annuities, charging a commission, MUST:
I register as an investment adviser in that State
II register as a broker-dealer in that State
III register as an agent in that State
A I only
B I and II
C I and III
D None of the above
B I and II
A variable annuity is defined as a non-exempt security under the Uniform Securities Act. If advice is rendered for a fee about variable annuities, then registration as an investment adviser would be required. If a variable annuity is sold for a commission, then the firm must register as a broker-dealer as well.
The sale of securities to an insurance company is exempt under the Act under the:
A blue chip exemption
B exempt security
C sophisticated investor exemption
D non-issuer exemption
C sophisticated investor exemption
The sale of securities to financial institutions is an "exempt transaction" under the Act, since the general public is not involved, and these investors are considered to be "sophisticated" - meaning they can "watch out" for themselves.
Also remember that an "exempt transaction" means that the security involved is not required to be registered in the State. It does NOT exempt the broker-dealer and agent involved from having to register in the State. The broker-dealer and agent must be registered in the State unless they can get an exclusion or exemption. In this case, as long as the broker-dealer and agent have no place of business in the State, they would be excluded from registration as long as they are dealing only with institutional clients.
A market maker in ABCD stock is currently quoting the stock at:
$42.00 Bid (500 shares); $43.00 Ask (1,000 shares)
If the market maker receives a customer order to buy 800 shares of ABCD at $42.50, the market maker:
A must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares)
B must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares)
C must send the order to a stock exchange floor for execution
D is not required to take any action
A must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares)
Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently bidding the stock at $42.00 - this is the price at which he is willing to buy up to 500 shares. Since this customer is willing to pay more to buy - $42.50 for up to 800 shares, the customer's bid must be displayed in the market.
Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.
Any final order of an Administrator may be appealed to the:
A Securities and Exchange Commission
B State Securities Commission
C State Superior Court
D Federal District Court
C State Superior Court
Final orders of the State Administrator can be appealed to that State's court system.
Which of the following is NOT considered to be an "issuer transaction" under the Uniform Securities Act?
A Google Incorporated, selling its common shares in an initial public offering to investors via Dutch auction and then listing its shares on NASDAQ
B MM Mars Corporation, a privately held company that is proposing to go public by offering 20% of its common stock in an initial public offering and then listing its shares on the NYSE
C RJR Corporation, a publicly held company listed on the NYSE that is proposing to go "private" in a leveraged buyout transaction
D AJAX Company, a publicly held company listed on the AMEX (NYSE American), making a secondary offering of common shares that will be listed on the AMEX (NYSE American)
C RJR Corporation, a publicly held company listed on the NYSE that is proposing to go "private" in a leveraged buyout transaction
The Uniform Securities Act defines an "issuer" as any person that issues, or proposes to issue, a security. Choices A, B and D meet this definition. Notice that in issuer transactions, the issuer is receiving the proceeds from selling securities. Choice C is a non-issuer transaction. When a publicly held company goes "private," the existing shareholders are bought-out. In such a transaction, the proceeds go to the shareholders - not the issuer - hence this is a "non-issuer" transaction.
A broker-dealer has a place of business in State A does business exclusively in State A and is registered in the State. The broker-dealer has no office in State B and is contacted by a client in State B who wants to sell some securities that he inherited. State B has a de minimis rule for broker-dealers. The client is not interested in opening an account and only wants the broker-dealer to do this transaction and remit the proceeds to the customer. Which statements are TRUE?
I In order to effect this transaction, the broker-dealer must be registered in State B
II In order to effect this transaction, the broker-dealer is not required to be registered in State B
III In order to effect this transaction, the securities involved must be registered in State B
IV In order to effect this transaction, the securities involved are not required be registered in State B
A I and III
B I and IV
C II and III
D II and IV
D II and IV
If a broker-dealer with no office in that State, effects an isolated non-recurring trade in that State in a 12 month period, the transaction is exempt, and the security is not required to be registered in that State. This is an "isolated non-issuer transaction."
Note that the broker-dealer still must be registered in the State unless the broker-dealer has no office in the State and the broker-dealer qualifies for a "de minimis" exemption in the State. This State has a "de minimis" rule, which for those States that have adopted it, typically limits the broker-dealer to no more than 3 clients in the State in 1 year. Because this broker-dealer has no office in the State and it is only doing 1 trade for the customer, with no future planned business, the broker-dealer will be exempt.
A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action:
A is allowed
B is not allowed
C may trigger a "pay to play" disclosure to customers
D may trigger a "soft dollar" disclosure to customers
A is allowed
There is no prohibition on a broker-dealer compensating its agents with prizes for meeting a sales contest requirement. The broker-dealer will have to report the compensation value as taxable income to the IRS, but this is not part of the question.
"Pay to play" refers to the illegal investment adviser practice of "hiring" a third party solicitor (for "pay") who works for, or who has recently left, a government entity such as a government, state or municipal pension plan. For "pay," this person steers that pension plan's advisory business to the adviser (the "play" part of the term).
Soft dollar compensation is where a broker-dealer offers "free" services to a mutual fund or investment adviser in return for "directed brokerage" (which is the mutual fund or investment adviser directing its portfolio trades at full commission rates to that broker-dealer). The SEC requires that mutual funds can only accept soft dollars if the services benefit all shareholders of the fund. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific.
The Administrator is empowered to require the registration of a:
A municipal bond of another State sold in that State
B U.S. Government bond sold in that State
C Federal covered securitysold in that State
D security sold in anexempt transactionin that State
D security sold in anexempt transactionin that State
As a general rule, the Administrator cannot revoke the exemption from registration granted to the specific "exempt" securities listed in the Uniform Securities Act, such as U.S. Governments, Agencies, or Municipals. In addition, the State Administrator cannot require the registration of "federal covered" securities in the State (but can require a "notice" filing). (Also note that the Administrator does have the power to compel registration of non-profit issues, such as Church Bonds, due to major abuses that have occurred with these.)
However, the Administrator can deny the claim of an exempt transaction and make that security be registered