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25 Cards in this Set
- Front
- Back
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An agent registered in a State files an application to engage in the business of selling securities with a foreign jurisdiction. If the foreign securities regulator denies the application, the:
A. Administrator of the State in which he is registered can revoke that individual's registration B. Administrator of the State in which he is registered cannot revoke that individual's registration C. individual will be permitted to sell U.S. securities in the foreign jurisdiction, but cannot sell the securities of that country D. individual will be denied entry to the foreign country
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The best answer is A. The Uniform Securities Act permits the Administrator to deny registration to an applicant or to revoke the registration of an agent based on actions taken by another securities or banking regulator, including foreign regulators. |
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Under the Investment Advisers Act of 1940, if an investment adviser has an impaired financial condition, this must be disclosed to customers:
A. by all investment advisers B. only by investment advisers that take custody of customer funds; or those that accept prepaid advisory fees of $1,200 or more C. only if the investment adviser files for bankruptcy D. only if the investment adviser is also a broker-dealer |
The best answer is B. Disclosure of an impaired financial condition to customers by an investment adviser is only required where the investment adviser already has his "hands in the customer's pocket," and thus, could use the customer's monies to help the firm through its financial difficulties! Thus, this disclosure is required only if the adviser takes custody of client funds or securities; or if the adviser accepts prepaid advisory fees of $1,200 or more, 6 or more months in advance of rendering services. |
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Under the Uniform Securities Act, an offer or sale does NOT exist if the securities are: I being pledged as collateral for a loan II non-assessable and are given as a gift III exchanged for another type of security under a judicially approved reorganization |
The best answer is All.. A sale is defined as a contract to dispose of a security for value. The pledge of securities is not a "sale;" the gift of non-assessable securities is not a "sale;" and an exchange of one security for another under a judicially approved corporate reorganization is not considered a "sale." |
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Under the provisions of the Investment Advisers Act of 1940, which statements are TRUE about sending account statements to customers? I Account statements must be sent monthly by advisers that take custody of customer funds or securities II Account statements must be sent quarterly by advisers that take custody of customer funds or securities III Account statements must be sent quarterly by advisers that do not take custody of customer funds or securities IV There is no account statement mailing rule for advisers that do not take custody of customer funds or securities |
II and IV. The best answer is D. The Investment Advisers Act of 1940 requires that if an adviser takes custody of customer funds or securities, account statements must be sent to the customer by the adviser at least quarterly. There is no such rule for advisers that do not take custody. |
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An investment adviser makes an offer to send, by mail, a "free" analysis covering his top 50 stock picks in an advertisement. In order for an individual to get the report, the adviser could require that individual to:
A. fill out a questionnaire detailing that individual's financial resources B. pay a shipping and handling fee of $38 to get the report sent out C. provide the names and addresses of 3 other persons who would be interested in the adviser's reports D. telephone the adviser and listen to a brief sales pitch before taking the mailing information |
The best answer is D. Free means just that - free. Charging a high shipping fee for the "free" report means that it is not free, so this is prohibited. The offer of a free service cannot be made conditional, so requiring the customer to complete a detailed financial questionnaire crosses the line; as does asking for 3 customer references in order to get the "free" report. Making the individual call the adviser to get the "free" report is OK; and making the customer listen to a brief sales pitch to get the report is OK as well. |
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An agent registered in the State of New York has been referred to new potential clients in the State of Florida, where the agent is not registered. These clients are dual American-Brazilian citizens, who spend most of their time in Brazil. The agent files a registration application in the State of Florida and also files a registration in Brazil to sell securities there. The Brazilian securities regulator denies the registration. This action on the part of the Brazilian regulator:
A. cannot affect the registration of the agent in the State of New York B. cannot affect the registration of the agent in the States of New York and Florida C. can cause the Administrator of the State of Florida to deny the registration application but cannot affect the agent's registration in the State of New York because he is already registered there D. can cause the Administrator of the State of Florida to deny the registration application and can cause the Administrator of the State of New York to suspend or revoke the agent's registration |
The best answer is D. The Uniform Securities Act permits the Administrator to deny registration to an applicant or to revoke the registration of an agent based on actions taken by another securities or banking regulator, including foreign regulators. |
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An investment adviser that typically places about 900 trades per month for its clients receives a notice from its executing broker that the cost per trade will drop to a flat $8.00 from the current $12.00 if 1,000 trades per month are placed. The investment adviser wishes to take advantage of the discount. To do this, the investment adviser should effect the extra 100 trades per month:
A. across its customer accounts in proportion to the size of each account B. divided equally across all customer accounts C. across its customer accounts in proportion to trading activity in each account D. in the adviser's proprietary accounts |
The best answer is D. Excessive trading in customer accounts is "churning" and is prohibited. If the adviser wishes to effect an extra 100 trades per month to get the trading discount, it should do those trades in the firm's proprietary trading account. The only reason to increase trading activity in the customer accounts is if there will be a benefit to the customer in doing so. Just because the adviser will receive a lower commission cost per trade if it trades more does not mean that the adviser will pass along the discount to the customer! |
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Which of the following persons is "in the business" of giving investment advice?
A. A full service broker-dealer who charges higher commissions than discount brokers because of the value of recommendations made B. An insurance agent that advertises "no-fee" financial planning but who sells insurance for a commission to advisory clients C. A real estate agent who receives a fee from customers to appraise the value of their real estate holdings D. An accountant who charges a fee to customers where the services rendered include tax deferral strategies on securities positions |
The best answer is B. If an insurance agent creates "no-fee" financial plans, and then takes commissions on insurance policies sold to these customers that are part of the plan, then this person is "in the business" of giving advice about "securities" (since the SEC views financial plans are giving advice about securities) and is "compensated," so this person must register. Broker-dealers who do not charge separately for advice are excluded and need not register; real estate agents appraising real estate holdings are not dealing in securities and are excluded; and accountants who do not charge separately are excluded. |
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An Investment Adviser Representative (IAR) has been employed by a Registered Investment Adviser (RIA) for the past 12 years and has accumulated $18,000,000 of customer assets under management in accounts for 47 different customers. The IAR has experienced a personal economic decline and has been trading these customer accounts with ever-increasing frequency to generate the commissions necessary to meet his personal debt obligations. Which statements are TRUE? I The IAR has regulatory liability II The IAR has no regulatory liability III The RIA has regulatory liability IV The RIA has no regulatory liability |
I and III. The best answer is A. This representative is churning his customer accounts, which is an unethical business practice. Not only does the investment adviser representative have liability, but his employing firm has liability for failing to supervise this individual. |
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A money market fund that charges .10% of annual management fees and .20% of annual 12b-1 fees:
A. cannot be called "no-load" because the total of these fees exceeds .25% B. cannot be called "no-load" because such funds cannot charge 12b-1 fees C. can be called "no load" D. can be called "low load" |
The best answer is C. A mutual fund (money market funds are mutual funds) cannot be called a "no-load" fund if it charges 12b-1 fees of more than .25% (25 basis points) annually. 12b-1 fees are charges against net asset value that pay for the cost of soliciting new investment to the fund, and they can be used to compensate salespersons that sell the fund's shares.
All mutual funds charge management fees. These have nothing to do with sales loads. |
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An investment adviser representative (IAR) prepares an investment plan for a customer and explains to the customer that he places trades through ABCbroker-dealer with whom the IAR has a soft dollar relationship. The customer tells the IAR that he wants 1/2 of the trades placed through DEF broker-dealer. The IAR should:
A. place 1/2 the trades with ABC broker-dealer and 1/2 the trades with DEF broker-dealer B. place all of the trades through ABC broker-dealer since the customer has no say in which broker performs the IAR's trades C. place all the trades though DEF broker-dealer since such an arrangement is a conflict of interest D. close the account and refund all monies to the customer |
The best answer is A. A "soft dollar" relationship is where a broker-dealer provides "free" research or stock quotes to an adviser, in return for the adviser directing its portfolio trades to that broker-dealer. Since this can be viewed as a conflict of interest, it must be disclosed to customers. If the customer wants his or her trades placed through another broker-dealer, follow the customer's instructions - after all, it is the customer's account. |
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Under the Investment Advisers Act of 1940, if an investment adviser wishes to renew an advisory contract which will allow it to start taking prepaid advisory fees of $1,200 or more, 6 months in advance of rendering services, which of the following statements is TRUE?
A. A revised "Brochure" must be sent to each of the adviser's customers B. The adviser's customers must be given a "Brochure" at least 48 hours prior to contract renewal; and then decide during that time frame whether or not they wish to accept the terms of the new contract. C. The investment adviser must file a Form ADV 2A and balance sheet with the SEC promptly, and must make the revised "Brochure" available to its customers D. The investment adviser is prohibited from changing the terms of the advisory contract. |
The best answer is C. If the adviser wishes to renew an advisory contract with a customer where the terms of the contract are changed, this requires that a revised "Brochure" be given to that customer. However, if, for the first time, the adviser will accept $1,200 or more of prepaid fees 6 months or more in advance of services rendered, then the adviser must file an ADV Part 2A with an audited balance sheet promptly. |
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An investment adviser has decided to change its fee structure and will begin charging a prepaid advisory fee for new clients, but will keep its pre-existing fee structure for its existing clients. Under the requirements of the Investment Advisers Act of 1940, which statements are TRUE? I A revised brochure must be provided to new clients II Prompt amendment of Form ADV filed with the SEC is required III Approval of the investment adviser's existing clients must be obtained IV Filing with the SEC of the fee change must be completed within 30 days |
The best answer is I and II. Since this fee change only affects new clients, there is no requirement to get existing client approval (Choice III). This is a material fee change, so the Form ADV filed with the SEC must be amended promptly and a copy of the Adviser's balance sheet is now required (non-material changes are dealt with by filing a year-end amendment with the SEC within 90 days of fiscal year end). |
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If an investment adviser puts its records on microfiche or electronic storage media, all of the following statements are true EXCEPT:
A. the paper or hard copy form, as those records are kept in their original form, must be preserved and maintained for 5 years B. the duplicate copy of the record may be immediately reproduced in the medium chosen and must be preserved and maintained for 5 years C. the original record and duplicate copy of the record in the chosen medium must be stored in separate locations for 5 years D. the duplicate copy must be preserved in a format that is alterable, rewritable and erasable |
The best answer is D. Consider this to be a lesson in the NASAA recordkeeping rules. Hard copy paper records must be retained for 5 years. Duplicate copies can be retained electronically, but these records must be non-alterable, non-erasable and non-rewritable. Duplicate copies must be kept separately from original records. |
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A customer opens an account at a brokerage firm to purchase securities in an offering. The customer must receive the disclosure document/prospectus:
A. no later than the confirmation of the sale B. no later than the settlement of the transaction C. within 7 days of the transaction D. within 90 days of the transaction |
The best answer is A. NASAA states that "failing to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus," is an unethical practice. |
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ACME Advisers has as a client, a large broker-dealer - ACCO Brokerage. ACME wishes to open an account to buy securities on margin at ACCO Brokerage. Which statement is TRUE?
A. This is prohibited because of the inherent conflict of interest B. This is prohibited under the Uniform Securities Act C. This is permitted because the broker-dealer is in the business of lending money on securities D. This is permitted because investment advisers can arrange loans from any willing lenders |
The best answer is C. An investment adviser is prohibited from borrowing money from a customer. However, if the customer is a bank or broker-dealer (these are persons who are in the business of lending money); the adviser may borrow funds in an arm's length relationship. |
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A person who renders investment advice relating solely to municipal securities is:
A. exempted from the definition of an investment adviser, and is not required to register under the Act B. defined as an investment adviser and must register under the Act C. defined as a broker-dealer and must register under the Act D. defined as an agent and is required to register under the Act |
The best answer is B. A person who gives investment advice relating solely to municipal securities is not exempted from registering as an investment adviser under State law. (Please note, however, that a person who gives advice solely about U.S. Government guaranteed securities is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. This is another type of federal covered adviser, for which there is no state registration.) |
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Which of the following is EXEMPT from the requirement to register as an investment adviser in a State?
A. Federal covered adviser B. Investment adviser representative C. Trust company D. Person with no place of business in the State who renders advice solely to Federal covered advisers |
The best answer is D. This is a very picky question that sees if you know the difference between an exclusion and an exemption. Excluded from the definition of an investment adviser are investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers. Exemptfrom registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are:
* other advisers; * federal covered advisers; * broker-dealers; * deposit taking institutions; * insurance companies; * investment companies; * employee benefit plans with assets of at least $1,000,000; and * governmental agencies. Also exempt from registration as an investment adviser is any person that has no place of business in the State that has 5 or fewer clients in the State in the past 12 months. |
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A person who renders investment advice relating solely about municipal securities is:
A. defined as an investment adviser and must register under the Act B. exempted from the definition of an investment adviser, and is not required to register under the Act C. defined as a broker-dealer and must register under the Act D. defined as an agent and is required to register under the Act |
The best answer is A. A person who gives investment advice relating solely to municipal securities is not exempted from registering as an investment adviser under State law. (Please note, however, that a person who gives advice solely about U.S. Government guaranteed securities is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. This is another type of federal covered adviser, for which there is no state registration.) |
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If an investment adviser wishes to charge a performance fee that allows it to share a percentage of capital gains in a customer account, then under the Investment Advisers Act of 1940:
A. such an arrangement is prohibited because of the inherent conflict of interest between the investor and the adviser B. the adviser must disclose to the customer that such an arrangement can give the adviser an incentive to increase the portfolio's risk exposure C. the adviser must disclose that if a fixed fee were charged, the customer would be paying a lower fee, but the adviser would have to make this up by increasing its charges D. such an arrangement is permitted as long as all fees are disclosed to customers |
The best answer is B. The Investment Advisers Act of 1940 allows performance fees to be charged if a customer is wealthy ($1,000,000 of assets with the firm or a $2,000,000 net worth). However, such performance fees can give the adviser the incentive to take on higher levels of risk in order to increase portfolio return (and hence increase the adviser's compensation). Advisers must disclose all material information regarding their performance fees, including that the fee arrangement may cause the adviser to enter into more speculative investments than would be the case otherwise; and that the adviser will receive increased compensation based on realized and unrealized appreciation of the customer's securities. |
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Under the Investment Advisers Act of 1940, an SEC registration application as an investment adviser must be granted; or a proceeding must be initiated denying registration, within:
A. 10 days B. 30 days C. 45 days D. 60 days |
The best answer is C. Investment adviser registration applications filed with the Securities and Exchange Commission must be granted; or a proceeding started to deny registration; within 45 days of filing. |
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An investment adviser representative's friend provides him with a list of 10 prospective clients. The representative agrees to pay his friend a referral fee for each person on the list that opens an account with the adviser. Which statement isTRUE?
A. The arrangement is permitted without restriction B. The arrangement is permitted only if it is in writing between the investment adviser and the friend C. The arrangement is permitted only if it is in writing between the investment adviser and the friend and the arrangement is disclosed in writing to any customer opening an account D. The arrangement is prohibited |
The best answer is C. An investment adviser that pays a referral fee to another individual for finding new clients comes under SEC Rule 206(4)-3 covering solicitors. An investment adviser can only pay a solicitor if there is a written agreement between the adviser and the solicitor. The investment adviser must give the customer its brochure and the solicitor's brochure, in which the referral fee arrangement must be disclosed. |
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A registered broker-dealer has an employee who is not registered as an agent in that State. The employee wishes to sell municipal bonds in that State. Which statement is TRUE?
A. The employee is permitted to sell municipal bonds because thesecurities are exempt B. The employee is permitted to sell municipal bonds because thetransaction is exempt C. The employee is permitted to sell municipal bonds only if no commissions or other "transaction based" compensation is paid D. The employee is prohibited from selling the municipal bonds unless he is registered as an agent in that State |
The best answer is D. In order for the agent of a broker-dealer to be able to sell a security in that State, either he must be registered, or must fall under an exemption provided from registration. No exemption from State registration is provided to agents of broker-dealers that offer municipal securities. This exemption is only available to agents of issuers that offer exempt securities in a State. If this broker-dealer were exempt, then its agents would be exempt from registration. Since this question states that the broker-dealer is registered, we must assume that the broker-dealer is non-exempt; therefore its agents must be registered under the Act. |
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Which of the following individuals is EXCLUDED from the definition of an "agent" under the Uniform Securities Act? I An individual who represents a broker-dealer selling exempt securities to the public II An individual who represents a broker-dealer selling securities listed on a national stock exchange III An individual who represents an issuer in an exempt transaction IV An individual who represents an issuer in a transaction with existing employees without accepting a commission
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III and IV. The best answer is B. An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt.
Individuals who represent issuers in trading exempt securities are excluded. For example, an employee of GNMA who markets GNMA securities to investors, is excluded from the definition of an agent, because these are very safe securities and State Administrators are not worried about these being sold to State residents. Individuals who represents issuers in specified exempt transactions are excluded. For example, an employee of the issuer who negotiates the sale of the issuer's securities to an underwriter or to an institutional investor is not defined as agent. The idea here is that the purchaser is sophisticated and the State protection of agent registration is not required. An individual who represents an issuer in a transaction with existing employees without taking a commission is engaging in an exempt transaction (since no commission is taken) and therefore is excluded from the definition of agent. The example here is an issuer-employee that works in the pension department of the company and who places employee purchases of company shares into employee 401(k) accounts. |
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An investment adviser is permitted to use a solicitor to sell that adviser's services to customers:
A. under no circumstances B. only if no fees are paid to the solicitor by the adviser C. if there is an agreement in writing between the solicitor and the adviser D. if the solicitor has registered as an investment adviser with the SEC or that State |
The best answer is C. If an investment adviser wishes to use a solicitor to sell its advisory services, it may do so as long as the adviser is registered with the SEC (Federal Covered adviser) or that State; there is a written agreement between the solicitor and the investment adviser; the solicitor agrees to provide to customers the investment adviser's "Brochure" in compliance with the "Brochure Rule"; the solicitor agrees to provide its own "Brochure" that describes the nature of the relationship between the solicitor and the adviser, and the fact that the adviser is paying the solicitor; and that this may result in a higher cost to the customer. Finally, the adviser must obtain written acknowledgment from the customer, that both brochures were received. |
