NASAA Series 63 — All Questions

An agent proposes to a customer that he receive 20% of the profits in her account in exchange for his picking the trades. Under what condition would this arrangement avoid being a prohibited practice?

• a.The agent must reduce his share to 10% and report the arrangement quarterly to the Administrator
• b.The customer must provide written authorization, and the agent's supervising principal must approve orally
• c.Both the customer and the broker-dealer that the agent represents must give written authorization✓
• d.The broker-dealer must approve it in writing, and the customer need only be told of it orally

Sharing directly or indirectly in the profits or losses in a customer's account is prohibited without the written authorization of both the customer and the broker-dealer. An oral approval from either side, or a smaller percentage, is insufficient.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 2.d

An agent receives a $1,000 commission. With which person may he lawfully split it?

• a.A certified public accountant who referred the customer but who is not registered as an agent
• b.A friend who is registered as an agent with a broker-dealer that is unaffiliated with the agent's firm
• c.His spouse, who is not registered but did much of the research that led the customer to invest
• d.Another agent who is registered for the same broker-dealer or for one under common control✓

An agent may divide compensation only with a person who is also registered as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control. A referral source, an agent at an unrelated firm, or a family member who is not registered cannot share in the commission.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 2.e

A conservative retiree has a $20,000 account. In six months her agent executes 90 trades, each in a suitable security, generating $9,000 in commissions. What is the best description of the agent's conduct?

• a.A prohibited practice only if the trading produced a net loss in the account over the full six months
• b.A permissible practice, because the retiree never objected to any of the confirmations or monthly statements she received
• c.Inducing trading excessive in size or frequency for the account's resources, even though each trade was suitable✓
• d.A permissible practice, provided each trade was suitable and each was confirmed to the customer promptly

Inducing trading that is excessive in size or frequency relative to the account's financial resources and character is a listed practice. Individually suitable trades can still add up to churning, and silence or the absence of an overall loss does not make the pattern acceptable.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.b

Without asking about her income, savings or objectives, an agent recommends that a retired customer put most of her savings in speculative options strategies. Which listed practice is most directly implicated?

• a.Recommending a transaction without reasonable grounds to believe it suits the customer after reasonable inquiry✓
• b.Failing to segregate the customer's securities, because the strategy involves moving positions between accounts
• c.Entering a discretionary transaction without written authority, because the agent chose the strategy for her
• d.Guaranteeing against loss, because speculative strategies implicitly promise the customer a return

Recommending a security or strategy without reasonable grounds to believe it is suitable, after reasonable inquiry into objectives, financial situation and needs, is the listed practice. A recommendation is not a discretionary trade, and nothing here involves segregation or a guarantee.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.c

An agent registered only as a broker-dealer agent prints business cards reading "Senior Financial Advisor." He holds no investment adviser or IAR registration. How should the title be treated?

• a.Prohibited, since using a form of "adviser" or "advisor" without adviser licensure is a listed practice✓
• b.Permitted, because holding an agent registration entitles him to use any title that suggests financial expertise
• c.Permitted, if a disclaimer in small print on the card states that he is not an investment adviser
• d.Prohibited only if he actually charges an advisory fee separate from the commissions on the account

Using a title, credential or designation containing a variant of "adviser" or "advisor" without licensure as an investment adviser or IAR is a listed practice, unless otherwise permitted by law. A disclaimer or the absence of a separate fee does not cure it.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.e

A broker-dealer sells a customer 100 shares from its own inventory at 12% above the price at which the stock is trading in the market, with no explanation. Which listed practice is implicated?

• a.Executing a transaction without the customer's authorization, since the price was not agreed in advance
• b.Representing that a security is offered at the market when the only market is the firm's own quotes
• c.Entering into a transaction at a price not reasonably related to the current market price✓
• d.Failing to make a bona fide public offering of the securities allotted to the firm for distribution

Dealing with a customer at a price not reasonably related to the current market price, or taking an unreasonable commission or profit, is the listed practice. The facts do not involve an underwriting allotment, a market the firm itself creates, or an unauthorized trade.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.k

Shares in a new public offering are sold to a customer through a broker-dealer. What delivery deadline does the policy set for the final prospectus, or for a preliminary prospectus plus a supplemental document carrying the final information?

• a.No later than the due date of the confirmation of the transaction✓
• b.Only when the customer requests it in writing after the transaction
• c.No later than the day the offering is declared effective by the SEC
• d.Within thirty days after the settlement date of the transaction

The listed practice is failing to furnish a final prospectus (or a preliminary prospectus plus an additional document) to a customer purchasing in an offering no later than the due date of the confirmation. A 30-day period or a request requirement is later or conditional, and the effective date is not the measuring point.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.l

A broker-dealer advertises that it will buy 1,000 shares of XYZ at $20. When a customer calls to sell 500 shares at $20, the firm declines. Which listed practice is implicated?

• a.Offering to buy at a stated price without being prepared to buy at that price and on the stated conditions✓
• b.Using advertising that is deceptive because it relies on unfounded or unrealistic claims about expected returns
• c.Publishing a report of a purchase or sale that the firm does not believe was a bona fide transaction
• d.Charging unreasonable fees for services such as safekeeping, collection of dividends or transfer

A broker-dealer that offers to buy or sell at a stated price must be prepared to trade at that price and on the stated conditions. Declining a 500-share order within the advertised 1,000 shares is the violation. The other practices concern return claims, fictitious reports, and service fees.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.n

A trader controls two accounts and enters a buy order in one and a sell order of the same size, price and time in the other, hoping to make a thinly traded stock look active. How is this classified?

• a.A manipulative device, since matching orders to create a false appearance of active trading is a listed practice✓
• b.A permitted market-making activity, as long as the commissions on both sides are properly reported
• c.A permitted hedging technique, because both orders are executed at the same price and for the same size
• d.A bona fide agency cross, which the policy expressly allows when the trades are at the same price

Entering orders with knowledge that matching orders of the same size, time and price will be entered, to create a false appearance of active trading, is a manipulative practice. Only bona fide agency crosses are excused, and a purpose to mislead the market defeats that exception.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.p

A broker-dealer mails a glossy flyer headed "Projected 20% annual returns" for a mutual fund. The projection rests on no data, and the flyer downplays the prospectus's risk disclosures. How should it be classified?

• a.Permitted, so long as the flyer states that past performance does not guarantee future results
• b.Permitted puffery, because projections are mere opinions and are not statements of material fact
• c.Deceptive advertising, since unfounded claims that detract from a prospectus are a listed practice✓
• d.A violation only if the flyer is mailed to persons who already own shares of that same fund

Using advertising or sales presentations that are deceptive or misleading, such as unfounded or unrealistic claims designed to detract from or defeat the purpose of a prospectus, is a listed practice. A boilerplate disclaimer does not cure it, and it does not matter whether the recipients already own the fund.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.s

A broker-dealer controlled by an issuer's parent company recommends the issuer's bonds. It tells the customer about the relationship orally before the trade. How and when must it supplement the oral disclosure?

• a.In writing, within thirty days after the customer's next account statement
• b.In writing, at or before the completion of the transaction in question✓
• c.In writing, within ten days after the trade date of the transaction
• d.Only in writing, and only if the customer requests it after the sale

A broker-dealer must disclose control by, control of, or affiliation with the issuer before entering into the contract, and if the disclosure is not in writing it must be supplemented by written disclosure at or before completion of the transaction. Later deadlines or a request requirement fall short.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.t

A broker-dealer loses a customer-initiated arbitration and a final award is issued. The firm neither pays nor reaches any written agreement with the customer. How is the firm's conduct classified?

• a.A listed practice only if the customer first obtains a court order confirming the award in a lawsuit
• b.A listed practice, because a final award must be paid unless the parties agree otherwise in writing✓
• c.Acceptable, so long as the firm intends to pay the award once its next fiscal quarter has fully ended
• d.Acceptable, if the firm has recorded a general denial of liability in its own internal corporate records

Failing to pay and fully satisfy a final judgment or arbitration award from a customer-initiated proceeding is a listed practice unless the parties have agreed in writing to alternative payment arrangements and the firm complies with them. A court confirmation is not a precondition.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.w

An agent tells a prospect, "The state Administrator registered this security, so it has been reviewed and approved for you." Under the Act, what is the status of that statement?

• a.Lawful, because a state's registration of a security reflects its approval of the issuer's financial condition
• b.Lawful, provided the agent adds that the registration must be renewed every year thereafter
• c.Unlawful, because registration is not a finding or approval by the Administrator of the security's merits✓
• d.Unlawful only if the agent also makes a specific prediction about the security's future price

The Act says the fact of registration is not a finding that the filed documents are true and complete, nor does it mean the Administrator has passed on merits or approved the security; it is unlawful to make a representation to a customer inconsistent with this. A renewal disclaimer or the presence of a price forecast changes nothing.Uniform Securities Act (1956, as amended by NASAA) §405

An agent buys shares from a customer, telling her they are nearly worthless while knowing a buyout offer at triple the price is pending. Does the Act's antifraud provision reach the agent's conduct?

• a.No, because the customer, as a seller, is the party who must exercise caution in the sale
• b.No, §101 applies only to persons who sell or offer to sell securities to members of the public
• c.Yes, but only if the shares involved are registered with the state or are listed on a national exchange
• d.Yes, §101 covers purchases as well as sales, so the misstatement and omission are covered✓

Section 101 makes it unlawful, in connection with the offer, sale or purchase of any security, to make an untrue statement or omit a material fact. It covers buyers as well as sellers, and registration status does not matter because exemptions do not remove antifraud coverage.Uniform Securities Act (1956, as amended by NASAA) §101

An agent applicant was convicted 12 years ago of a misdemeanor involving a security and 6 years ago of a felony unrelated to securities. On which conviction may the Administrator base a denial, assuming a public-interest finding?

• a.Only the securities misdemeanor, because convictions in the securities business have no time limit
• b.Both convictions, because a felony or a securities misdemeanor is disqualifying however long ago it occurred
• c.Only the felony conviction, because the securities misdemeanor falls outside the ten-year look-back period✓
• d.Neither conviction, because the ground reaches only convictions that occurred within the past five years

Conviction of any felony, or of a misdemeanor involving a security, is a ground only if it occurred within the past ten years. The 12-year-old misdemeanor is outside that window and the 6-year-old felony is inside it. No five-year limit applies, and the felony need not relate to securities.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(C)

Four years ago, after notice and a hearing, the securities administrator of another state found that an applicant had willfully violated that state's securities law. The applicant now seeks registration here. How is that finding treated?

• a.It is not a ground, because an out-of-state finding counts only if a federal court has confirmed it
• b.It is a ground only if the other state also suspended or revoked the applicant's registration there
• c.It is a ground for denial, because an adjudication by another state's administrator within the past ten years counts✓
• d.It is not a ground, because only orders entered by this state's own Administrator can support a denial

A willful-violation determination made after notice and opportunity for hearing by another state's securities administrator, within the past 10 years, is a listed ground, whether or not any registration action followed. The same-state-order ground is a separate clause. Nothing requires a federal court to confirm the other state's finding.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(F)

Six years ago a foreign securities regulator revoked an applicant's right to act as a securities agent in that country. Standing alone, can that revocation support a denial here?

• a.No, a foreign regulator's action can never support a denial because only United States regulators count
• b.No, a foreign regulator's action counts only if it was taken within the past five years✓
• c.Yes, a foreign revocation counts for ten years, the period for another state's adjudication
• d.Yes, if the applicant has not been registered with that regulator since the revocation

A foreign regulator's action denying, revoking or suspending the right to engage in the securities business is a ground only within the past five years, and the ten-year period belongs to other clauses. Foreign actions do count when timely, so they are not excluded. Later registration abroad is not part of the test.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(H.1)

An agent of a broker-dealer violates the Act. The firm had written procedures and a supervisor, and it acted on the first complaint. May the Administrator suspend the firm's registration solely because its agent violated the Act?

• a.Yes, because a firm answers for every violation committed by its agents under the Act
• b.No, the Administrator may proceed only against the agent's own registration, never against the firm
• c.Yes, but only if the agent is an officer, director or partner who also holds a stake in the firm
• d.No, the firm is reachable on that basis only if it failed reasonably to supervise the agent✓

The firm's registration may be reached through its agent's conduct only on a finding that it failed reasonably to supervise, together with a public-interest finding. Vicarious liability for every agent violation is not the rule. The statement that only the agent can be sanctioned is also wrong, since the supervision clause lets the Administrator proceed against the firm when supervision fails.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(J)

When applying, an agent disclosed a final, unstayed order against her from another state's administrator, and the Administrator registered her on January 5. Relying solely on that disclosed order, by when must a suspension or revocation proceeding begin?

• a.Within one year after registration, the same period that governs a proceeding begun after a registrant has withdrawn
• b.Within thirty days after the Administrator receives the application disclosing the order
• c.At any time, since a final order from another state is a ground for revocation
• d.Within ninety days following registration; a disclosed order cannot serve later as the sole basis✓

The Administrator may not start a suspension or revocation proceeding solely on a final order the applicant made known before the registration took effect unless it does so within ninety days after registration. The one-year period applies to proceedings begun after a withdrawal, and the clock runs from registration, not from the filing date. A final order from another state is a ground for action only within that limit, which does not apply to renewals.Uniform Securities Act (1956) §204(a), final paragraph (90-day limit on proceedings based on a disclosed final order)

The Administrator summarily suspends an agent's registration pending a final determination. The agent's written request for a hearing is received on June 10. By what date must the matter be set down for hearing?

• a.June 25, which is fifteen days after the request is received✓
• b.June 17, which is seven days after the written request is received
• c.July 10, which is thirty days after the request is received
• d.June 20, which is ten days after the Administrator receives the request

A summary order must tell the registrant that, within fifteen days after receipt of a written request, the matter will be set down for hearing. Fifteen days from June 10 is June 25. The seven-day, ten-day and thirty-day periods do not appear in this provision.Uniform Securities Act (1956, as amended by NASAA) §204(c)

The Administrator plans to revoke an agent's registration after finding grounds, and no summary order is involved. Which procedure must precede a final revocation order?

• a.Prior notice to the agent and the employer, a hearing opportunity, and written findings of fact and conclusions of law✓
• b.Prior notice to the agent only, a hearing if the agent asks for one, and an oral summary of the findings
• c.A hearing before the Administrator, followed by written approval of the revocation from the attorney general
• d.Prior notice to the agent, with a hearing and written findings required only if the agent appeals the order

Apart from a summary postponement or suspension, no order may be entered without appropriate prior notice (to the employer or prospective employer as well, for an agent), opportunity for hearing, and written findings of fact and conclusions of law. The findings are not triggered by an appeal. Approval by the attorney general is not part of the process.Uniform Securities Act (1956, as amended by NASAA) §204(f)

A broker-dealer's application to withdraw is received on March 10. No revocation or suspension proceeding is pending, and none is begun afterwards. On what date does the withdrawal take effect?

• a.March 11, because a withdrawal is effective on the next business day automatically
• b.May 9, because the Administrator has sixty days to review the withdrawal application
• c.April 9, thirty days after receipt, unless the Administrator sets a shorter period✓
• d.March 25, because withdrawal becomes effective fifteen days after receipt

Withdrawal becomes effective thirty days after the application is received, or sooner if the Administrator so determines, unless a proceeding is pending or begun within the thirty days. Thirty days from March 10 is April 9. The fifteen-day, sixty-day and next-day periods have no basis in the section.Uniform Securities Act (1956, as amended by NASAA) §204(e)

An agent's withdrawal became effective with no proceeding pending. Seven months later the Administrator learns the agent had willfully violated the Act while registered. What may the Administrator do?

• a.Nothing, because the Administrator loses all authority over a registrant once the withdrawal takes effect
• b.Institute a proceeding for any violation, willful or not, within five years after the withdrawal
• c.Institute a revocation or suspension proceeding within one year after the withdrawal became effective✓
• d.Institute a proceeding only within thirty days after the withdrawal became effective

After an automatic withdrawal, the Administrator may still begin a revocation or suspension proceeding within one year, on the willful-violation ground, and enter the order as of the last date the registration was effective. The thirty-day period governs whether the withdrawal becomes effective at all. A non-willful violation is not a ground for the late proceeding.Uniform Securities Act (1956, as amended by NASAA) §204(e)

The Administrator hears that a promoter is about to sell unregistered securities by phone to residents from an office in another state. How far does the Administrator's investigative power extend?

• a.Publicly or privately, inside or outside the state, and without any prior complaint✓
• b.Only within this state, and it must rely on other states for any conduct occurring elsewhere
• c.Privately only, because a public inquiry of the promoter requires a prior court order
• d.Only after a customer files a sworn written complaint about the promoter with the office

The Administrator may make public or private investigations within or outside the state as deemed necessary to determine whether anyone has violated or is about to violate the Act. No complaint is required, and no court order is needed for a public investigation. A promoter's location in another state does not remove the power to investigate.Uniform Securities Act (1956, as amended by NASAA) §407(a)

A witness served with an Administrator's subpoena for books and records refuses to appear. How may the Administrator enforce the subpoena?

• a.Close the investigation, since subpoenas under the Act bind only persons who have consented to them
• b.Direct a state officer to detain the witness until the witness produces the requested records for inspection
• c.Apply to the court for an order of compliance; disobeying that order is punishable as contempt✓
• d.Fine the witness in an order of the Administrator that is enforceable like a court judgment

On contumacy or refusal to obey a subpoena, the Administrator applies to the appropriate court, which may order the person to appear and produce evidence, with contempt as the sanction for disobeying the court. The Administrator has no power to detain a witness or to fine one by order. The subpoena binds without consent.Uniform Securities Act (1956, as amended by NASAA) §407(b), (c)

An agent being questioned in an investigation claims the privilege against self-incrimination. What result follows under the Act?

• a.The agent may decline, because testimony that may incriminate is excused under the Act
• b.The agent must testify and is then immune from every prosecution, including perjury committed in testifying
• c.The agent must still testify, but may not be prosecuted for the matter, except for perjury or contempt✓
• d.The agent must testify, and the testimony may later be used against the agent in a criminal prosecution

No one is excused from testifying or producing records because the evidence may incriminate, but an individual compelled after claiming the privilege cannot be prosecuted or penalized on account of the matter. The immunity does not shield perjury or contempt committed in the testimony. The Act does not allow the testimony to be used for a prosecution of the underlying conduct.Uniform Securities Act (1956, as amended by NASAA) §407(d)

An unregistered promoter is selling securities in this state while an investor complaint is pending. The Administrator wants the activity halted at once. What may the Administrator do under the Act's prohibitory-order provision?

• a.Issue a cease and desist order with or without a hearing, and may also seek an injunction in court✓
• b.Issue a cease and desist order only after the promoter has been convicted of willfully violating the Act
• c.Issue a cease and desist order only after a hearing, never alongside an injunction action
• d.Seek an injunction only, since a cease and desist order requires a court's prior approval to take effect

The Administrator may issue a cease and desist order with or without a prior hearing, or bring an injunction action, or both. A prior hearing is not required and a conviction is not a precondition. The order is administrative, so no court approval is required.Uniform Securities Act (1956, as amended by NASAA) §408(a)

The Administrator sues in court to enjoin a firm from continuing violations and asks for a temporary restraining order. The firm demands that the Administrator post a bond. How should the court rule?

• a.A bond may be required for a restraining order, but not for an injunction
• b.The court may not require the Administrator to post any bond✓
• c.The court must require a $5,000 bond, matching the Act's maximum fine
• d.The court must require a bond equal to the value of securities sold

In an injunction action brought by the Administrator, the court may not require the Administrator to post a bond. The $5,000 figure is the criminal fine ceiling and has no bearing on a bond. A permanent or temporary order carries no bond requirement.Uniform Securities Act (1956, as amended by NASAA) §408(b)

A court convicts an agent of willfully violating a provision of the Act other than §404. What is the maximum criminal penalty the section allows?

• a.A fine of up to $1,000 or imprisonment of up to one year, but the court may not impose both
• b.A fine of up to $5,000, imprisonment of up to three years, or both penalties✓
• c.A fine of up to $10,000, with no imprisonment available for a first offense under the Act
• d.Imprisonment of up to three years but no fine, because the section does not allow both

A willful violation is punishable on conviction by a fine up to $5,000, imprisonment up to three years, or both. Fine and imprisonment may be imposed together, so a no-fine rule is wrong. No minimum term exists, and the $1,000, one-year and $10,000 figures belong to no provision of the Act.Uniform Securities Act (1956, as amended by NASAA) §409(a)

An agent is convicted of willfully violating an Administrator's rule. At trial the agent proves that he had no knowledge of the rule. What is the effect of that proof?

• a.He cannot be imprisoned for the rule violation, though he may still be convicted and fined✓
• b.He may not be convicted at all, because knowledge of the rule is an element of every offense
• c.He may be imprisoned only if the Administrator had personally served the rule on him beforehand
• d.He may be imprisoned, because everyone is presumed conclusively to know the Administrator's rules

The Act provides that no person may be imprisoned for violating a rule or order if he proves that he had no knowledge of it. This protects only against imprisonment for a rule or order violation. It does not create a presumption of knowledge, and personal service is not what the section turns on.Uniform Securities Act (1956, as amended by NASAA) §409(a)

A buyer paid $40,000 for a security sold in violation of §301 and still owns it. She has received $2,000 of income on it. Before interest, costs and fees, what amount does the buyer recover on tender?

• a.$38,000, the $40,000 consideration less the $2,000 income received✓
• b.$2,000, because only income can be recovered when the security is returned
• c.$42,000, because income received is added back into the refund amount
• d.$40,000, because income already received by the buyer is hers to keep

On tender of the security, the buyer recovers the consideration paid plus interest, costs and attorneys' fees, less any income received. That gives $40,000 minus $2,000. Income is a deduction, not a bonus, and the buyer recovers the price, not just the income.Uniform Securities Act (1956, as amended by NASAA) §410(a)

A buyer paid $30,000 for a security sold by means of a material misstatement, and received $1,000 of income. She later sold it for $18,000, its value at that time. Before interest, what are her damages?

• a.$13,000, the price paid plus the income, less the value at disposal
• b.$11,000, the $29,000 tender amount less the $18,000 value✓
• c.$18,000, the amount for which the buyer later sold the security
• d.$12,000, the price paid less the value at the time of disposal

A buyer who no longer owns the security recovers the amount recoverable on tender, here $30,000 less $1,000 of income, minus the value when she disposed of it, plus interest from the date of disposition. The result is $29,000 minus $18,000. Ignoring the income gives $12,000, and adding it back gives $13,000.Uniform Securities Act (1956, as amended by NASAA) §410(a)

A buyer sues for rescission, alleging the seller omitted a material fact that made the sales presentation misleading. The buyer did not know of the omission. Which defense is available to the seller?

• a.The seller may escape liability by showing that the buyer never relied on the presentation in deciding to buy
• b.The seller may escape liability if the buyer fails to prove that the seller intended to deceive him
• c.The seller is strictly liable, because no defense is available once a material omission has been shown
• d.The seller may escape liability by proving he did not know, and with reasonable care could not have known, of the omission✓

For a misstatement or omission claim, the buyer must not have known of the problem, and the seller bears the burden of proving he did not know and could not have known with reasonable care. The buyer need not prove reliance or intent to deceive. The seller is therefore not strictly liable either.Uniform Securities Act (1956, as amended by NASAA) §410(a)

A salesperson sells securities by misstatements and is liable to the buyers. The firm's president did not take part in the sales and did not know of them. Is the president liable under the Act?

• a.No, unless the buyers first prove she personally directed the salesperson to make them
• b.Yes, jointly and severally, unless she proves she did not know and could not have known✓
• c.Yes, automatically, because a person controlling a liable person has no defense available
• d.No, because only the person who personally made the sales to the buyers can be held liable

Persons who control a liable person, including officers and directors, are jointly and severally liable to the same extent unless they prove they did not know and could not have known with reasonable care. The burden is on the president, not the buyers. Control liability is not limited to the direct seller, and it is not automatic.Uniform Securities Act (1956, as amended by NASAA) §410(c)

A buyer's contract of sale was made on March 1, 2021, and she discovered the untrue statement on January 15, 2023. What is the last date she may sue under §410?

• a.March 1, 2024, the earlier of the two statutory deadlines✓
• b.January 15, 2026, three years after she discovered the violation
• c.March 1, 2026, five years after the contract of sale was made
• d.January 15, 2025, two years after she discovered the violation

Suit must be brought within three years after the contract of sale, or within two years after discovery of the facts, whichever expires first. Three years from March 1, 2021 is March 1, 2024, and two years from discovery is January 15, 2025. The earlier date controls, and no five-year or three-years-from-discovery period applies.Uniform Securities Act (1956, as amended by NASAA) §410(f)

A buyer sold her security last year. She now receives a written offer to refund the price paid plus interest, less income received, does nothing for 45 days, and sues under §410. What is the result?

• a.She is barred only if she accepted the offer in writing within sixty days of receiving it
• b.She may sue, because silence is treated as a rejection of a refund offer by a former owner
• c.She may sue, but her recovery is reduced by the interest that the offer would have paid
• d.She is barred, because a former owner must reject such an offer in writing within thirty days✓

A buyer who no longer owns the security is barred from suing unless she rejected the written refund offer in writing within thirty days of receiving it, so that the seller knows where it stands. Silence therefore does not preserve the claim. The sixty-day period and the reduced recovery have no basis in the section.Uniform Securities Act (1956, as amended by NASAA) §410(g)

A subscription agreement signed by an investor says he waives all rights under the state securities act in connection with the purchase. The waiver is initialed and printed in bold type. How is it treated?

• a.It is valid as to civil liability, but it cannot waive the Administrator's powers
• b.It is void, and the investor keeps every right and remedy the Act provides✓
• c.It is valid, because it was initialed and conspicuous, so the investor gave up his rights
• d.It is valid if the investor is financially sophisticated enough to judge the offering

Any condition, stipulation or provision binding a buyer or advice recipient to waive compliance with the Act or a rule or order is void. Conspicuous formatting, initials or sophistication do not change that, and the Act makes no exception for civil liability.Uniform Securities Act (1956, as amended by NASAA) §410(i)

An aggrieved registrant wants judicial review of a final order entered on April 3. What is the last day to file a written petition with the court?

• a.June 2, which is sixty days after the order was entered✓
• b.May 3, which is thirty days from the order's entry
• c.April 18, which is fifteen days after the order was mailed
• d.July 2, which is ninety days after the Administrator signed it

A person aggrieved by a final order may petition for review by filing in court within sixty days after the order is entered. Sixty days from April 3 is June 2. The other dates reflect thirty, ninety or fifteen days, none of which the section uses.Uniform Securities Act (1956, as amended by NASAA) §411(a)

A registrant whose registration was revoked files a timely petition for judicial review. Meanwhile the registrant keeps operating. What is the effect of the petition on the Administrator's order?

• a.It stays only the revocation, leaving any cease and desist provisions in effect
• b.It stays the order for sixty days, after which the court must rule or lift it
• c.It automatically stays the order until the court rules on the petition
• d.It does not stay the order, unless the court specifically orders a stay✓

Starting a review proceeding does not operate as a stay of the Administrator's order unless the court specifically orders one. An automatic stay would make orders ineffective during litigation. No sixty-day stay exists, and the section draws no distinction between kinds of relief.Uniform Securities Act (1956, as amended by NASAA) §411(b)

An investment adviser in this state advises a client residing in another state. The advice is prepared and mailed from this state and is fraudulent. Does the Act's advisory antifraud provision reach the conduct?

• a.No, because the advisory antifraud provision applies only to clients who reside in this state
• b.Yes, since an act instrumental to the conduct was done here, wherever the parties are✓
• c.No, because the Act reaches only offers that are made to buyers and accepted within this state
• d.Yes, but only if the client is also registered with the home-state administrator

The investment adviser provisions apply when any act instrumental in effecting the prohibited conduct is done in this state, even if neither party is present here. The offer-and-acceptance tests govern the sale and purchase provisions, not these. Client registration elsewhere is irrelevant.Uniform Securities Act (1956, as amended by NASAA) §414(f)

An applicant for registration files an irrevocable consent appointing the Administrator to receive service of process. What does that consent cover?

• a.The consent lapses when the registration is withdrawn, so later suits must be served on the registrant
• b.Service is effective once a copy is left at the Administrator's office, with no mailing required
• c.Non-criminal suits arising under the Act; service is effective only with registered-mail notice afterward✓
• d.Criminal and non-criminal proceedings, so that a prosecution may be served on the Administrator

The consent covers non-criminal suits, actions and proceedings arising under the Act, and service on the Administrator is effective only if the plaintiff forthwith mails notice and a copy by registered mail to the defendant's last address on file and files an affidavit of compliance. Criminal proceedings are excluded, and the consent is irrevocable and applies to later actions.Uniform Securities Act (1956, as amended by NASAA) §414(g)

A dentist made about forty purchases and sales in her own brokerage account over the past twelve months. She used only her own money, has no customers and holds herself out as nothing. Must she register as a broker-dealer in this state?

• a.No, an ordinary investor who trades often with her own money is not in the business of effecting securities transactions.✓
• b.Yes, because the definition expressly covers a person who effects transactions for her own account, whatever the trading volume.
• c.Yes, because more than fifteen transactions for her own account in twelve months makes a person a broker-dealer.
• d.No, but only if every one of her orders passes through a registered broker-dealer that takes on her registration duty.

Section 401(c) covers a person engaged in the business of effecting transactions for others or for her own account, and the Official Comment separates that person from an ordinary investor who buys and sells with some frequency. The same comment says that more than fifteen own-account transactions in twelve months, made in the course of ordinary investment, do not alone make someone a broker-dealer. The dentist serves no one else, so she is an investor. Her routing orders through a firm is not what keeps her out of the definition.Uniform Securities Act §401(c) and Official Comment

Harbor Securities Inc. regularly buys municipal bonds for its own inventory and resells them to retail buyers at a markup. It never executes an order as agent for a customer. Is Harbor a broker-dealer under the Act?

• a.Yes, regularly trading for its own account makes it a broker-dealer even if it never acts for a client as agent.✓
• b.No, because the definition reaches only a firm that effects transactions for the account of others as their agent.
• c.No, because municipal bonds are exempt securities and a firm dealing only in exempt securities need not register.
• d.Yes, but only if it also holds itself out to the public as a market maker in the bonds it sells from inventory.

Section 401(c) covers a person in the business of effecting transactions in securities for the account of others or for his own account, so a regular dealer qualifies without ever acting as agent. The municipal bond exemption in Section 402(a) removes the securities from the registration and filing requirements for securities. It does not relieve the dealer of the duty in Section 201(a) to be registered. Market-maker status is not a condition of the definition.Uniform Securities Act §401(c); §201(a)

Priya runs a securities brokerage as a sole proprietorship under her own name, takes customer orders herself and answers to no other firm. How does the Act classify Priya?

• a.As neither until she hires employees, because the broker-dealer definition applies only to firms with more than one person.
• b.As an agent, because every individual who takes customer orders in the state is an agent regardless of whom she works for.
• c.As a broker-dealer, because an agent is an individual other than a broker-dealer who represents a firm, and she represents none.✓
• d.As an agent of her own business, because a sole proprietor is treated as represented by the proprietorship she owns.

Section 401(b) defines an agent as an individual other than a broker-dealer who represents a broker-dealer or issuer, and the Official Comment ties agency to acting subject to the control of the firm represented. Priya acts for no one, so she is herself a broker-dealer in the business of effecting transactions for others. Section 401(c) applies to any person, which includes an individual, and it contains no minimum size.Uniform Securities Act §401(b), §401(c)

A national bank forms a separately incorporated subsidiary that sells securities to the public for commissions. The bank itself sells none. Is the subsidiary excluded from the broker-dealer definition because of its parent?

• a.No, because the exclusion covers only state-chartered banks, so a national bank's securities business must register.
• b.No, the exclusion names the bank, and a separately incorporated subsidiary is another person outside it.✓
• c.Yes, because a wholly owned subsidiary of an excluded bank takes on the exclusion whenever the parent holds all its stock.
• d.Yes, but only if the subsidiary sells solely to customers who already hold deposit accounts at the parent bank.

Section 401(c)(3) excludes a bank, savings institution or trust company, and the exclusion attaches to that institution. A separately incorporated company is a different person, so a subsidiary that sells securities for commissions is a broker-dealer unless it has an exclusion of its own. The parent's charter type plays no part, and a test based on the customer base does not appear in the definition.Uniform Securities Act §401(c)(3)

A retired lawyer is trustee of one family trust. A few times a year, without pay, he buys and sells stocks for it. Is he a dealer or a broker under the Securities Exchange Act definitions?

• a.No, an individual who trades in a fiduciary capacity but not as part of a regular business falls outside both definitions.✓
• b.No, but only because he is unpaid, and a trustee who took a fee for the same trades would become a dealer or broker.
• c.Yes, because dealer status turns on holding securities in any capacity, and the exclusion covers only trades with personal funds.
• d.Yes, because the trades are for the account of the trust, a person other than himself, so he is a broker who must register.

Section 3(a)(5)(B) excludes from dealer a person who buys or sells for his own account, either individually or in a fiduciary capacity, but not as part of a regular business. Section 3(a)(4) makes a broker a person in the business of effecting transactions for the account of others. A trustee making occasional trades for a single trust is in neither business. The test is the regular business, not whether he is paid.Securities Exchange Act §3(a)(5)(B); §3(a)(4)

Marcus sells securities to the customers of Delta Securities, a registered broker-dealer. He is paid only commissions, and Delta tells him whom to call, what to offer and how to handle accounts. Is Marcus an agent or a broker-dealer?

• a.An agent only after Delta files notice that it supervises him, because supervision alone does not create agency.
• b.A broker-dealer, because an individual becomes an agent only when the firm pays him a salary rather than commissions.
• c.An agent, because he works subject to Delta's control, and the form of his pay does not change that.✓
• d.A broker-dealer, because anyone paid only commissions for effecting securities transactions is in the business himself.

The Official Comment to Section 401(b) says that whether an individual is an agent or himself a broker-dealer turns on the factors that create agency at common law, mainly whether he has consented to act subject to the firm's control. Marcus follows Delta's direction, so he is its agent. Commission pay is common for agents and neither a salary nor a notice filing is required for the status.Uniform Securities Act §401(b) and Official Comment

A corporation applies for broker-dealer registration. One investor holds all of its stock but is neither an officer nor a director, and in practice controls the company. May the Administrator require the application to show this investor's qualifications and business history?

• a.Yes, the application may call for the history of any person who controls the applicant, not only its officers.✓
• b.No, only partners, officers and directors are covered, so a shareholder outside those roles is not reached.
• c.Yes, but only if the shareholder also intends to register as an agent or to sell its securities in the state.
• d.No, ownership of the stock is disclosed on the federal form alone, and the Administrator may not ask for it again.

Section 202(a)(3) lets the Administrator require, for a broker-dealer or adviser applicant, the qualifications and business history of any partner, officer or director, any person in a similar status, and any person directly or indirectly controlling the applicant. The sole shareholder fits the last group. Agent status plays no part, and the Act does not defer to the federal form.Uniform Securities Act §202(a)(3)

A broker-dealer renewing its registration in a state is told the Administrator has issued a rule requiring a newspaper announcement of each application. Can the Administrator require this firm to publish an announcement of its renewal?

• a.No, because the Act allows publication to be required only of investment advisers and never of broker-dealers.
• b.Yes, the Administrator may require publication for any application, since the rule covers initial and renewal filings.
• c.No, the authority to require publication of an announcement applies to applicants for initial registration only.✓
• d.Yes, but only if the firm's renewal reports a change of officers or owners during the preceding year.

Section 202(a) permits the Administrator, by rule or order, to require an applicant for initial registration to publish an announcement of the application in specified newspapers in the state. It does not extend that power to renewals. The power is not limited by the type of registrant, and a change of officers does not enlarge it.Uniform Securities Act §202(a)

A broker-dealer files its application on March 1. The Administrator has not set an earlier date and no proceeding is pending. On March 20 the firm files an amendment, and the Administrator by order defers the effective date. Counting from the amendment filing, when does registration become effective?

• a.At noon on March 31, the thirtieth day after the original application was filed.
• b.At noon on April 18, the day before the thirtieth day after the amendment was filed.
• c.At noon on April 30, the thirtieth day after the month in which the amendment was filed.
• d.At noon on April 19, which is the thirtieth day after the amendment was filed.✓

Under Section 202(a) registration becomes effective at noon of the thirtieth day after an application is filed, absent a denial order or pending proceeding. The Administrator may by order defer the effective date until noon of the thirtieth day after the filing of any amendment. Thirty days after March 20 is April 19, since March has 31 days. The original filing date no longer controls once the deferral is ordered.Uniform Securities Act §202(a)