NASAA Series 63 — All Questions

An agent executes a trade for a friend through another firm's account and keeps the order off the books of his own broker-dealer. His employer did not know about the trade. How does the policy treat this?

• a.It is unethical, because trades must be on the firm's regular books unless it authorized them in writing beforehand.✓
• b.It is unethical only if the agent earned a commission, since uncompensated trades are outside the scope of the policy.
• c.It is acceptable, because the other firm will report the trade to the Administrator and so the employer need not record it.
• d.It is acceptable, because a trade in a friend's account is a personal matter and falls outside the employer's supervision.

Effecting securities transactions not recorded on the regular books or records of the broker-dealer the agent represents is unethical unless the broker-dealer authorized the transactions in writing before execution. This is a form of selling away, which prevents the firm from supervising its agent. Whether the agent earned a commission does not matter.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.b

An agent proposes to a customer that they share 20% of the gains in the customer's account, and 20% of any losses. What must happen before the arrangement is acceptable under the policy?

• a.Only the broker-dealer must approve, since the arrangement is a matter of the agent's compensation.
• b.Both the customer and the agent's broker-dealer must give written authorization.✓
• c.Only the customer must agree, and an oral agreement is enough between the two of them.
• d.Nothing further, since sharing in an account's profits is permitted if losses are also shared.

The policy treats sharing directly or indirectly in the profits or losses in a customer's account without the written authorization of the customer and the broker-dealer that the agent represents as unethical. Both authorizations are needed in writing. Sharing losses as well as gains does not remove the requirement.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.d

An agent registered with Firm A wants to pay half of her commissions on a sale to a friend who works for an unrelated firm and referred the customer. The friend is not registered with Firm A. Is that allowed?

• a.No, because an agent may never share compensation with anyone, including others at the same broker-dealer.
• b.No, because splitting compensation is allowed only with agents of the same or a commonly controlled broker-dealer.✓
• c.Yes, because the policy limits only the percentage of a commission an agent may split, and half is within the limit.
• d.Yes, because a referral fee to any registered agent of any broker-dealer is allowed if the customer is told.

Dividing or otherwise splitting the agent's commissions, profits or other compensation from securities sales with a person not also registered as an agent for the same broker-dealer, or for one under common control, is unethical. The restriction depends on who receives the payment and not on the percentage. Agents of the same firm may share compensation.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.e

A broker-dealer is a wholly owned subsidiary of an issuer, and its agent is about to recommend the issuer's new debentures to a customer. When and how must the affiliation be disclosed?

• a.Only in the confirmation, which suffices because the customer then has a chance to cancel in writing within three days.
• b.Before the customer agrees to buy, followed by written disclosure at or before completion if the first one was oral.✓
• c.Only if the customer asks, since the broker-dealer need not volunteer corporate relationships that appear in public filings.
• d.Only if the issuer's debentures are speculative, because affiliation matters little for investment-grade securities.

Failing to disclose that the broker-dealer is controlled by, controlling, or under common control with the issuer before entering into any contract with or for a customer is unethical, and if the disclosure is not made in writing, it must be supplemented by written disclosure at or before completion of the transaction. A customer is entitled to know about this conflict before deciding, whatever the issuer's quality.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.t

A broker-dealer buys a thinly traded stock for its own inventory at $10 and sells it to a retail customer the same day at $13, when the current market price is $10.10. What is the concern under the policy?

• a.The price is not reasonably related to the current market price, and the profit may be unreasonable.✓
• b.The concern is that the broker-dealer did not hold the stock for at least 30 days before offering it to a customer.
• c.There is none, because a dealer acting as principal may charge any price the customer accepts when the order is confirmed.
• d.The only concern is that the dealer should have charged a commission rather than a markup for acting as principal.

Entering into a transaction with or for a customer at a price not reasonably related to the current market price, or receiving an unreasonable commission or profit, is unethical. A $2.90 markup on a $10.10 market price is hard to defend as reasonable. A customer's acceptance does not make an unreasonable price acceptable, and no minimum holding period is stated in the policy.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.k

An agent lost an arbitration brought by a customer and was ordered to pay $40,000. He has made no payment and has no written payment arrangement with the customer. How does the policy treat that?

• a.It is unethical only if the agent also transfers assets to someone else to keep them out of the customer's reach.
• b.Leaving a final customer arbitration award unpaid is unethical unless the customer agreed to other terms in writing.✓
• c.It is acceptable until the agent's registration is next renewed, when the Administrator will review any open awards.
• d.It is acceptable, because an arbitration award is enforceable only through a court, not through a registration action.

The policy lists failing to pay and fully satisfy a final judgment or arbitration award from an investment-related, customer-initiated proceeding as unethical, unless alternative payment arrangements were agreed in writing and are being followed. Attempting to avoid payment is a separate item. The Administrator can act on the unpaid award without awaiting a court proceeding.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.w

An agent registered only as a broker-dealer agent prints business cards that read 'Senior Financial Advisor'. She is not registered as an investment adviser representative. How does the policy treat the card?

• a.It is acceptable, as long as the card also states in smaller print that the agent is registered as a broker-dealer agent.
• b.It is unethical only if the agent actually gives continuing investment advice to clients for a separate advisory fee.
• c.It is acceptable, because 'advisor' is a general descriptive word rather than a protected professional designation or credential.
• d.It is unethical, because an 'adviser' title may not be used without licensure as an investment adviser or representative.✓

The policy lists using a title, purported credential or designation containing any variant of 'adviser' or 'advisor' without licensure as an investment adviser or an investment adviser representative, unless otherwise permitted by law, as unethical. Adding a disclosure about the agent's actual registration does not cure the title. The conduct is judged by the title, not by the fee arrangement.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.e

An agent tells a prospect that a mutual fund is 'no load' and describes it as having 'no sales charge'. The fund has no front-end or deferred load, but it charges a Rule 12b-1 fee of 0.30% and a service fee of 0.15% of average net assets per year. Is the description permitted?

• a.No, because a fund charging any 12b-1 fee at all may never be described as no-load in any circumstances.
• b.Yes, because each fee is below one percent, which is the point at which a fund must stop describing itself as no-load.
• c.Yes, because 'no load' refers only to the absence of front-end and deferred sales charges, and annual fees are separate.
• d.No, because a no-load fund's 12b-1 and service fees may total no more than 0.25% of average net assets a year.✓

The investment company shares policy treats it as unethical to state or imply that shares are no-load or carry no sales charge if there is a front-end or contingent deferred load, or a 12b-1 or service fee that exceeds 0.25% of average net fund assets per year. Here the total is 0.45%, so the description is misleading. A 12b-1 fee at or below the cap is compatible with the term.NASAA Statement of Policy on Investment Company Shares §A.2

A customer plans to invest $48,000 in a fund family whose sales charge falls at a purchase of $50,000. The agent does not mention the discount or the option to commit to buying more. What problem arises?

• a.No problem, since a discount need be disclosed only after the customer invests at or above the breakpoint.
• b.The agent should have recommended a closed-end fund instead, because those funds charge no sales load.
• c.The agent may not recommend a fund family with more than one sales charge level for any purchase.
• d.The agent failed to disclose the breakpoint discount and any letter of intent that could lower the sales charge.✓

Failing to disclose any relevant sales charge discount at or above a breakpoint, or a letter of intent feature, which would reduce the sales charge is unethical in connection with soliciting investment company shares. A customer near a breakpoint must be told so that the customer can decide whether to invest more. Closed-end funds have their own underwriting costs.NASAA Statement of Policy on Investment Company Shares §A.3

An agent persuades a customer to redeem shares of a growth fund in one fund family and use the proceeds to buy a growth fund with the same objective in another family, generating a new front-end load, without any analysis of costs. Why is this a concern?

• a.Switching is prohibited outright, and an agent may never recommend moving money between funds of any kind or family.
• b.Switching is acceptable if the new fund's recent return is higher than the old fund's over the last twelve months.
• c.Switching is acceptable if the customer signs a form acknowledging that new sales charges will apply to the purchase.
• d.Such a switch needs reasonable grounds of suitability that weigh the customer's objectives and the added transaction charges.✓

The policy treats recommending the redemption of investment company shares to buy a different portfolio with similar objectives and policies, without reasonable grounds to believe that this is suitable in light of the customer's objectives, financial situation, other holdings and the transaction charges, as unethical. It is not an outright ban. A signed acknowledgment or last year's return does not establish suitability.NASAA Statement of Policy on Investment Company Shares §B.2

An investment adviser representative will receive a bonus from a fund company whenever clients buy its funds on the representative's advice, but charges an advisory fee. When must the representative disclose this conflict, and in what form?

• a.In the annual brochure update delivered after the close of the fiscal year.
• b.Orally, at the time of the client's first purchase of the fund.
• c.In writing, and before the representative gives the client any advice.✓
• d.In writing, within thirty days after the client opens the account.

Model Rule 102(a)(4)-1(k) treats failing to disclose in writing, before any advice is rendered, any material conflict of interest that could reasonably be expected to impair unbiased and objective advice, including compensation in addition to the client's fees, as an unethical practice. Oral disclosure, later disclosure and annual updates all arrive after the advice has been given.NASAA Model Rule 102(a)(4)-1 (k)

A client's brother, who has no written authority from the client, phones an investment adviser and tells it to sell all of the client's technology stocks. The adviser places the sell order the same day. What did the adviser do wrong?

• a.Nothing, because relatives of an advisory client are presumed to have the authority to give instructions.
• b.It placed an order on a third party's instruction without first obtaining the client's written trading authorization.✓
• c.It placed an order without waiting ten business days for the client to confirm the instruction by telephone.
• d.It placed an order without the brother's written consent, though the client's own authorization was not necessary.

Placing an order for a client's account on the instruction of a third party without first having obtained a written third-party trading authorization from the client is an unethical practice under Model Rule 102(a)(4)-1(e). The authority must come from the client and be in writing. The ten-business-day period applies to discretionary authority, and family ties create no presumption of authority.NASAA Model Rule 102(a)(4)-1 (e)

An investment adviser drafts a new advisory contract that states the services, the term, the fee and the fee formula, and says whether the adviser has discretion, but is silent about refunds of prepaid fees and about assignment. Why is the contract a problem?

• a.It must also state the adviser's total assets under management and the names of its ten largest clients by account size.
• b.It must also be notarized by the client and filed with the Administrator within ten days after the client signs it.
• c.It must also state the prepaid fee to be returned on termination and that no assignment may occur without consent.✓
• d.It is acceptable, because the other required terms may be added by oral agreement after the contract is signed.

Model Rule 102(a)(4)-1(p) makes it unethical to enter into, extend or renew an advisory contract unless it is in writing and discloses the services, term, fee, fee formula, prepaid fee to be returned on termination or non-performance, whether discretion is granted, and that no assignment may be made without the consent of the other party. The contract here omits two of those items. Notarization and filing are not required.NASAA Model Rule 102(a)(4)-1 (p)

A financial planner at an investment adviser mentions to a friend at a dinner party that a wealthy client of the firm recently moved a large sum into municipal bonds. The client had not agreed to the disclosure. How is the remark classified?

• a.It is acceptable, because the planner did not name the client, and the investment details are not confidential.
• b.It is unethical, since client affairs may not be disclosed unless required by law or consented to by the client.✓
• c.It is acceptable, because comments made in a social setting are not treated as business conduct by the Administrator.
• d.It is unethical only if the friend acts on the remark by buying the same bonds and earns a profit on them.

Model Rule 102(a)(4)-1(n) lists disclosing the identity, affairs or investments of any client, unless required by law or consented to by the client, as an unethical practice. Describing a client's investments to a third party falls within it, and the rule does not depend on whether the friend trades or whether the setting was social. Even a partial description can identify a client.NASAA Model Rule 102(a)(4)-1 (n)

Under the Uniform Securities Act (1956), a seller located in State Y telephones a resident of State Z and offers to sell unregistered securities. Does State Z's securities law apply to the offer, and why?

• a.No, because the call originated in State Y, so only State Y's law governs it and State Z's law reaches no offer made from outside its borders.
• b.Yes, because an offer directed to a state and received there is made in that state, whether or not the seller is present there.✓
• c.No, because a telephone offer crosses state lines, so only federal securities law governs the call.
• d.Yes, but only if the resident answers in State Z and later signs a written contract there.

Under Section 414(c), an offer to sell is made in a state, whether or not either party is then present there, when it originates from that state or is directed by the offeror to the state and received at the place to which it is directed. The call was directed to and received in State Z, so State Z's law reaches the offer. It also originated in State Y, so State Y's law may apply as well, but that does not displace State Z's. Federal law does not exclude state law, and nothing requires the resident to sign a contract.Uniform Securities Act §414(a), (c)

A resident of State A mails an offer to buy shares from a seller located in State B. The seller accepts by phone, reaching the resident at home in State A, and has not accepted anywhere else previously. In which state is the offer accepted?

• a.State B, because the acceptance originated with the seller there and the place where acceptance begins decides the question.
• b.Both states, because a single acceptance is deemed made wherever either party can later be reached for a signature.
• c.Neither state, because acceptance of an offer takes place wherever the shares are physically delivered to the buyer.
• d.State A, because the acceptance reached the offeror in that state without first being communicated outside it.✓

Section 414(d) provides that an offer is accepted in a state when the acceptance is communicated to the offeror in that state and has not previously been communicated to the offeror outside it. The resident was the offeror, was in State A, and received the acceptance there. Where the seller started the call or where delivery occurs is not the test.Uniform Securities Act §414(d)

A national financial magazine is published in another state and mailed to paid subscribers in this state. An issuer in the other state places an advertisement offering its unregistered securities. Is the advertisement an offer made in this state?

• a.Yes, because the exclusion applies only to newspapers and not to monthly magazines mailed to subscribers.
• b.Yes, because any printed advertisement received by a resident of this state is an offer made in the state.
• c.No, but only if no more than ten residents of this state are among the magazine's paid subscribers.
• d.No, because a paid-circulation publication issued outside this state does not make an offer here.✓

Section 414(e) says an offer is not made in a state when a bona fide newspaper or other publication of general, regular and paid circulation published outside the state is circulated there, or one published inside the state has had more than two-thirds of its circulation outside the state in the past twelve months. A magazine is a publication, and no subscriber count applies.Uniform Securities Act §414(e)

A radio program that originates in another state is broadcast and received in this state. During the program, a guest urges listeners to buy shares of an unregistered company. Does this make an offer in this state under the scope rules?

• a.No, but only if the program carries a disclosure that the security is not registered in the receiving state.
• b.No, because a radio or television program that originates outside the state is not an offer made in the state.✓
• c.Yes, unless the broadcaster is registered as a broker-dealer with the securities Administrator of the other state.
• d.Yes, because the broadcast reached residents here, so the offer is made wherever it is received and also heard.

Section 414(e) excludes from offers made in a state a radio or television program originating outside the state that is received in it. The program is treated as originating where the microphone or camera is, and no disclosure or registration is a condition. A person who later directs a specific offer to a resident here is in a different position.Uniform Securities Act §414(e)

An investment adviser located in another state, with no office in this state, emails investment advice to a client. A member of the adviser's staff working in this state prepared and sent the advice. Does this state's investment adviser provision apply?

• a.No, because advice sent by email is not treated as an act done in any particular state under the scope provisions.
• b.Yes, but only if the client is also a resident of this state at the time the advice is given and received.
• c.No, because the registration provisions govern only the state where the adviser's principal office is located.
• d.Yes, because Section 102 reaches any adviser conduct when an act instrumental in it is done in this state.✓

Section 414(f) provides that Sections 102 and 201(c) apply when any act instrumental in effecting the prohibited conduct is done in the state, whether or not either party is then present there. Preparing and sending the advice from within the state is such an act. The client's residence is not a requirement under that subsection.Uniform Securities Act §414(f)

A company that plans to sell its securities through agents in this state files for registration. What must it file with the Administrator for service of process, and how does service work afterward?

• a.A revocable appointment of any local attorney, with service valid once the Administrator receives a copy of the complaint.
• b.An irrevocable consent naming the Administrator to receive process, with notice and a copy sent by registered mail.✓
• c.A bond of at least $25,000, which the Administrator may draw on if a judgment is entered against the issuer.
• d.An irrevocable consent that makes service complete as soon as process is left at the Administrator's office in the state.

Section 414(g) requires an applicant for registration and an issuer offering through agents to file an irrevocable consent naming the Administrator to receive service of process in any non-criminal action arising under the Act. Service 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. Leaving process at the office alone is not enough.Uniform Securities Act §414(g)

A nonresident individual who never registered or filed a consent sells securities to residents of this state by mail in violation of the Act. Can the Administrator serve process on this person within the state?

• a.Yes, because the prohibited conduct appoints the Administrator to receive service, with registered-mail notice.✓
• b.No, because service on a nonresident requires the person to travel to this state and receive the papers in person.
• c.Yes, but only in a criminal proceeding, since civil suits require a written consent filed with the Administrator.
• d.No, because a nonresident who has filed no consent cannot be served within this state under any provision of the Act.

Under Section 414(h), when a person, including a nonresident, engages in conduct prohibited by the Act without having filed a consent, that conduct is equivalent to appointing the Administrator as attorney to receive service in non-criminal actions arising from it. Service is effective only if notice and a copy are sent by registered mail to the last known address and an affidavit of compliance is filed. The provision covers non-criminal proceedings.Uniform Securities Act §414(h)

During an investigation, the Administrator subpoenas a firm's books and records. The firm's owner refuses to comply. What recourse does the Administrator have?

• a.Refer the matter to the SEC, since only a federal agency may compel the production of a firm's books and records.
• b.Impose a fine on the owner directly, since the Administrator may punish refusal of a subpoena without going to court.
• c.Apply to the appropriate court for an order requiring compliance, punishing disobedience as contempt of court.✓
• d.Drop the investigation, because a person may refuse any subpoena that seeks records rather than testimony.

Section 407 lets the Administrator subpoena witnesses and records for an investigation or proceeding, and in case of contumacy or refusal to obey a subpoena, the Administrator may apply to the court, which may order compliance and punish disobedience as contempt. The Administrator does not enforce a subpoena by self-imposed fines.Uniform Securities Act §407(b), (c)

A witness compelled to testify before the Administrator invokes the privilege against self-incrimination. The Administrator compels the testimony anyway. What protection does the witness get under the Act?

• a.The witness is protected only from federal prosecution, because the Act cannot restrict the state's own prosecutions.
• b.The witness is excused from testifying altogether, because the Act recognizes the privilege as grounds to refuse.
• c.The witness gets no protection, because the privilege against self-incrimination yields entirely to the Administrator's investigation.
• d.The witness may not be prosecuted for the matter he was compelled to testify about, apart from perjury or contempt.✓

Section 407(d) says no person is excused from testifying or producing records on the ground of self-incrimination, but no individual may be prosecuted or penalized on account of any matter for which he was compelled, after claiming the privilege, to testify or produce evidence. The witness remains liable for perjury or contempt committed in testifying.Uniform Securities Act §407(d)

The Administrator finds that an unregistered person is actively selling securities in this state and wants to stop it immediately. Which action is available to the Administrator under Section 408?

• a.Issue a cease and desist order with or without a hearing, or sue in court for an injunction.✓
• b.Issue a cease and desist order only after a full hearing and written findings of fact are completed.
• c.Wait until the person has been convicted, then ask a court for an order of restitution.
• d.Seize the person's assets without a court order and hold them until the investigation is finished.

Section 408 lets the Administrator, in his discretion, use either or both of two remedies: a cease and desist order, issued with or without a prior hearing, or an action in court to enjoin the acts or practices. A conviction is not a prerequisite, and asset seizure without a court is not provided. Courts may order rescission, restitution or disgorgement and appoint a receiver.Uniform Securities Act §408

In a Section 408 injunction action, the Administrator asks the court for a temporary injunction against a seller. The seller's lawyer demands that the Administrator post a bond first. What is the rule?

• a.The Administrator must post a bond equal to the amount of the seller's estimated losses.
• b.The Administrator must post a bond only if the injunction is temporary and not permanent.
• c.No bond is required, because the court may not demand one from the Administrator.✓
• d.The bond requirement is waived only if the seller has no assets in this state.

Section 408 provides that, upon a proper showing, the court shall grant a permanent or temporary injunction, restraining order or writ of mandamus, and appoint a receiver or conservator if needed, and that the court may not require the Administrator to post a bond. The Administrator may also seek rescission, restitution or disgorgement.Uniform Securities Act §408

Under the Uniform Securities Act (1956), a person is convicted of willfully selling unregistered securities in violation of the Act. What is the maximum criminal penalty?

• a.A fine of up to $10,000, imprisonment of up to five years, or both.
• b.A fine of up to $1,000, imprisonment of up to one year, or both.
• c.A fine of up to $5,000, with prison only for a repeat offender.
• d.A fine of up to $5,000, imprisonment of up to three years, or both.✓

Section 409(a) of the 1956 Act provides that a person who willfully violates the Act, or a rule or order under it, is on conviction subject to a fine of not more than $5,000 or imprisonment of not more than three years, or both. The penalty does not depend on a prior offense. A criminal case also does not bar the civil remedies in Sections 408 and 410.Uniform Securities Act §409(a)

A broker-dealer violates an Administrator's order without knowing that the order existed. The prosecutor seeks a prison term. What does the Act provide?

• a.Imprisonment is allowed, because ignorance of an administrative order is not a defense under the Act.
• b.Imprisonment is barred only if the broker-dealer corrected the violation within fifteen days of discovering it.
• c.Imprisonment is mandatory, because willfulness is presumed whenever a rule or order is violated.
• d.No person may be imprisoned for violating a rule or order if he proves he had no knowledge of it.✓

Section 409(a) states that no person may be imprisoned for the violation of any rule or order if he proves that he had no knowledge of the rule or order. A fine remains possible on a conviction. The defense is a matter of proof by the defendant, and it does not turn on how quickly the violation was corrected.Uniform Securities Act §409(a)

The Administrator gathers evidence that an agent defrauded several customers and believes criminal charges are warranted. Who prosecutes under the Act?

• a.Only the defrauded customers, who may bring the criminal case in their own names after a civil judgment.
• b.The Administrator may refer the evidence to the attorney general or a district attorney for criminal proceedings.✓
• c.The SEC must take over the case, since a state cannot bring criminal proceedings for violations of the antifraud provisions.
• d.The Administrator prosecutes the case directly in criminal court, because only the Administrator may enforce the Act.

Section 409(b) lets the Administrator refer available evidence of violations to the attorney general or the proper district attorney, who may, with or without a referral, institute the appropriate criminal proceedings under the Act. The Administrator administers civil and administrative remedies rather than prosecuting crimes.Uniform Securities Act §409(b)

A buyer sues a seller under Section 410(a)(2), claiming the seller sold shares by means of a material misstatement. The buyer did not know of the misstatement. On whom does the burden of proof fall regarding the seller's knowledge?

• a.The buyer, who must prove that the seller actually knew about the misstatement at the time the shares were sold.
• b.The seller, who must prove he did not know, and with reasonable care could not have known, of the untruth.✓
• c.The Administrator, who must first certify that the seller acted willfully before the buyer may bring any suit.
• d.Neither party, because liability under Section 410(a) is strict, so the seller's knowledge is not an issue at all.

Under Section 410(a), a seller who sells in violation of Section 301 or by means of an untrue statement or omission of material fact is liable to the buyer unless the seller sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. The statute shifts that burden to the seller, though it is not strict liability.Uniform Securities Act §410(a)

A buyer who purchased securities sold in violation of Section 301 still holds them and sues. What may the buyer recover under Section 410(a)?

• a.Triple the consideration paid, less any income received, whether or not the buyer tenders the security.
• b.The consideration paid plus interest, costs and attorneys' fees, less income received, on tender of the security.✓
• c.Only the loss in the market value of the securities, since the Act does not provide for rescission of a sale.
• d.Only the consideration paid, since interest, costs and attorneys' fees are not recoverable under the Act.

Section 410(a) lets the buyer sue for the consideration paid, interest, costs and reasonable attorneys' fees, less the income received on the security, upon tender of the security, or for damages if the buyer no longer owns it. The remedy is rescission, not a multiple of the price, and interest and fees are part of the recovery.Uniform Securities Act §410(a)

An agent materially aids a broker-dealer in selling securities by means of an untrue statement. A buyer wins a judgment against the broker-dealer. Can the buyer also recover from the agent?

• a.No, because an agent is liable only when the firm that employs the agent has no assets to pay the judgment.
• b.No, because only the person who actually sold the security to the buyer can be sued under the civil liability provisions.
• c.Yes, since an agent who materially aids the sale is jointly and severally liable unless he proves he did not know.✓
• d.Yes, but only for half of the judgment, since liability among those who aid the conduct is divided equally.

Section 410(c) imposes joint and several liability on persons who control a liable person, partners, officers and directors, employees who materially aid the conduct, and every broker-dealer or agent who materially aids it, unless the person proves he did not know, and in the exercise of reasonable care could not have known, of the facts. Contribution among those liable is provided, but not a fixed half share.Uniform Securities Act §410(c)

A buyer purchased securities by means of a misstatement on March 1 of Year 1. The buyer discovered the misstatement on March 1 of Year 2. By what date must the buyer sue under Section 410?

• a.March 1 of Year 7, which is six years after the date of the contract of sale itself.
• b.March 1 of Year 3, which is only two years after the date of the contract of sale.
• c.March 1 of Year 4, when both the three-year and the two-years-after-discovery periods expire.✓
• d.March 1 of Year 5, which is three years after the date the buyer discovered the facts.

Section 410(f) bars a suit brought more than three years after the contract of sale, or after two years from discovery of the facts, whichever first occurs. Three years from March 1 of Year 1 ends March 1 of Year 4, while two years from discovery would end March 1 of Year 4 as well, so both periods expire on the same date. The longer deadlines in the other choices do not exist in the statute.Uniform Securities Act §410(f)

A buyer who still owns the securities receives a written offer from the seller to refund the full price with interest, less income received. The buyer takes no action for 45 days and then sues. What is the result?

• a.The suit is barred only if the buyer accepted the offer in writing within sixty days of receiving it.
• b.The suit may proceed, because a refund offer does not affect the buyer's right to sue until the court approves it.
• c.The suit is barred, because the buyer did not accept the refund offer within thirty days of receiving it.✓
• d.The suit may proceed, because the buyer has three years from the sale to decide whether to accept the offer.

Section 410(g) bars a suit by a buyer who, while owning the security, received a written offer before suit to refund the consideration with interest, less income received, and failed to accept it within thirty days of receipt. Forty-five days exceeds the period. The three-year limitations period in subsection (f) is a separate rule and does not extend the offer's thirty days.Uniform Securities Act §410(g)

A subscription agreement for private securities says the investor waives all rights under the state securities act and agrees not to sue for any misrepresentation. How is this clause treated?

• a.It is valid, because an investor who signs the agreement knowingly gives up the right to bring a civil claim.
• b.It is void, because any provision binding a purchaser to waive compliance with the Act or a rule under it is void.✓
• c.It is void only to the extent that it bars claims for fraud, and it remains valid for other violations.
• d.It is valid, but only if the investor is accredited and signs the waiver in the presence of a witness.

Section 410(i) declares void any condition, stipulation or provision binding a person acquiring a security or receiving investment advice to waive compliance with any provision of the Act or any rule or order under it. The investor's sophistication or the presence of a witness is irrelevant. The clause is void in its entirety.Uniform Securities Act §410(i)

A buyer who knew a contract of sale violated the Act at the time it was made later tries to enforce the contract by suing the seller for specific performance. Can the buyer base the suit on the contract?

• a.Yes, because the buyer is the person the Act is meant to protect and may enforce any contract it makes.
• b.Yes, because the Act voids only those contracts of sale that were made through unregistered agents.
• c.No, because the Act forbids the buyer from suing the seller for any reason once a sale has been completed.
• d.No, because a party to a contract made in violation of the Act, with knowledge of the facts, cannot sue on it.✓

Section 410(h) provides that a person who has made or engaged in the performance of a contract in violation of the Act, or who acquired purported rights under it with knowledge of the facts making it a violation, may not base any suit on the contract. The Act protects buyers who sue under Section 410(a), but not those who knowingly take part in an illegal contract.Uniform Securities Act §410(h)

The Administrator enters a final order revoking an agent's registration. The agent files a petition for judicial review 20 days later. Does the filing suspend the effect of the order?

• a.No, because commencing review proceedings does not stay the order unless the court specifically orders it.✓
• b.No, because a petition filed after fifteen days is untimely and the court has no authority to review the order.
• c.Yes, because a petition filed within thirty days stays any order that revokes a registration.
• d.Yes, because the order is automatically stayed until the court has issued its decision on the petition.

Under Section 411, a person aggrieved by a final order may petition for review within sixty days after its entry, so twenty days is timely. Commencing proceedings does not operate as a stay unless the court specifically so orders. The agent's registration therefore stays revoked unless the court grants a stay.Uniform Securities Act §411

A broker-dealer sells securities in conformity with an Administrator's published rule. Later, a court finds the rule invalid. Can the broker-dealer be held liable under the Act for sales made in good faith under the rule?

• a.Yes, because a rule that is held invalid never existed, so the broker-dealer acted without any lawful authority.
• b.No, but only for sales completed before the rule was challenged in court by an interested person or by the Administrator.
• c.Yes, but only civil liability, since criminal penalties are excluded for acts done in conformity with a rule.
• d.No, because good-faith acts in conformity with a rule carry no liability, even if the rule is later held invalid.✓

Section 412(e) provides that no provision of the Act imposing liability applies to any act done or omitted in good faith in conformity with a rule, form or order of the Administrator, even if it is later amended, rescinded or found invalid for any reason. The protection is not limited to civil liability and does not turn on when a challenge was filed.Uniform Securities Act §412(e)

In an administrative hearing against an agent, the agent asks that the hearing be closed to the public. The Administrator's staff objects. How must the Administrator rule?

• a.The hearing must be public in every case, because the Act allows the Administrator no discretion over closure.
• b.The hearing may be closed on the staff's own motion, since confidential matters are always held in private.
• c.The hearing is public unless the Administrator grants a request joined in by all respondents for a private hearing.✓
• d.The hearing must be closed, because every request made by a respondent for privacy must be granted outright.

Section 412(f) makes every administrative hearing public unless the Administrator, in his discretion, grants a request joined in by all the respondents that the hearing be private. The decision belongs to the Administrator, and the staff cannot close the hearing by its own motion. One respondent's request is not sufficient where there are several.Uniform Securities Act §412(f)

A reporter asks the state securities office to see its register of registrations, exemption notices and orders. May the Administrator refuse, saying the register is confidential?

• a.Yes, because the register is open only to registered broker-dealers and investment advisers in the state.
• b.Yes, because the files of the Administrator are confidential and may be disclosed only to law enforcement agencies.
• c.No, because the Administrator must keep a register of such filings and orders available for public inspection.✓
• d.No, but only for orders, since applications and exemption notices must be kept private to protect the filers.

Section 413(b) requires the Administrator to keep a register of applications and registration statements, exemption notices, orders, and interpretative opinions or no-action determinations, and says the register is available for public inspection. Information that has not been made public is protected by Section 406(b), which is a separate rule.Uniform Securities Act §413

An agent tells a prospect, 'This fund is registered with the state, so the Administrator has reviewed it and approved it as a sound investment.' What is wrong with the statement?

• a.It is lawful, because registration by qualification carries an approval that registration by coordination does not.
• b.It is unlawful only if the fund later falls in value and the prospect suffers a loss in the first year.
• c.It is lawful, because the Administrator reviews the merits of each security before it can be registered in the state.
• d.It is unlawful, because registration is not a finding or approval of the merits, and saying otherwise is prohibited.✓

Section 405 states that the fact of registration, or of an available exemption, is not a finding that any filed document is true, complete and not misleading, and that the Administrator has not passed on the merits or given approval. Under Section 405(b), it is unlawful to make a representation inconsistent with that to a prospective purchaser, customer or client. Loss is not needed.Uniform Securities Act §405

An investment adviser recommends that a client buy bonds that the adviser itself holds in its own inventory, intending to sell them to the client as principal. What must the adviser do before completing the sale?

• a.Obtain only the consent of the adviser's compliance officer, because the client's consent is not required.
• b.Disclose in writing the capacity in which it is acting and obtain the client's consent to the transaction.✓
• c.Disclose orally, since written disclosure applies only to transactions in which the adviser acts as broker.
• d.Nothing, because a principal transaction with an advisory client is always permitted if the price is fair.

Section 102(a)(3) makes it unlawful for an adviser, acting as principal for its own account, to knowingly sell a security to a client without disclosing in writing before completion of the transaction the capacity in which it is acting and obtaining the client's consent. A fair price does not remove the requirement. The same applies when the adviser acts as broker for another person.Uniform Securities Act §102(a)(3)

An agent leaves Broker-Dealer X on March 1 and does not join another registered firm until April 15. During that gap, the agent's registration is:

• a.Effective through December 31, because it belongs to the individual and runs by calendar year
• b.Cancelled outright, so the agent must retake the examination before joining any new firm
• c.Effective for 30 days, then it lapses unless the agent files a fresh application
• d.Not effective, because it is tied to association with one particular registered firm✓

An agent's registration is not effective during any period when the agent is not associated with a particular registered broker-dealer or issuer. December 31 is only the renewal date, so the registration does not carry the agent through the gap on its own. The Act contains no 30-day grace window. Nothing cancels the registration or forces a new examination merely because of the gap; the agent and the new firm notify the administrator when the association begins.Uniform Securities Act (1956) §201(b)

Agent Lee moves from Firm A to Firm B, and both firms are registered in the state. Who must promptly notify the administrator of the change?

• a.Lee, Firm A, and Firm B, since each must report the end or start of the association✓
• b.Firm A alone, since only the firm that is losing the agent carries the duty to report the change
• c.Lee alone, since a registration follows the individual and neither firm has to report anything
• d.Firm B alone, since the hiring firm must file before the agent makes any sales on its behalf

When an agent begins or ends a connection with a broker-dealer or issuer, the agent and the broker-dealer or issuer must each promptly notify the administrator, so all three persons report on a move between firms. Leaving the duty to only the old firm, only the agent, or only the new firm omits parties the Act names.Uniform Securities Act (1956) §201(b)

A registered broker-dealer's president also takes customer orders. Which statement about the president's own registration as an agent is correct?

• a.The president is exempt, since an officer of a registered firm is outside the definition of agent
• b.The firm's registration automatically registers the president, so no separate agent application is needed✓
• c.The president must first pass the agent examination, since a firm's filing covers no one who sells
• d.The president must file a separate agent application, since officers receive no coverage from the firm's filing

Registration of a broker-dealer automatically constitutes registration of any agent who is a partner, officer, or director. An officer is an agent only if he otherwise comes within the definition, and a president who takes customer orders does, so the president is an agent but is covered by the firm's filing. The president is therefore neither required to file separately nor outside the definition of agent.Uniform Securities Act (1956) §202(a); §401(b)

Agent Dana files a complete application on June 1. No denial order or proceeding is pending, and the administrator sets no earlier date. When does the registration become effective?

• a.At noon on June 15, the fifteenth day after filing, which matches the hearing period after a summary order
• b.Only when the administrator signs a written order that grants the application for registration
• c.At 12:01 a.m. on June 2, the day after the administrator receives the complete application
• d.At noon on the thirtieth day after filing, which here is July 1, unless the administrator orders earlier✓

If no denial order is in effect and no proceeding is pending, a registration application becomes effective at noon of the thirtieth day after filing, unless the administrator sets an earlier date or defers it. The fifteen-day figure belongs to hearing requests after a summary order, not to effectiveness. Registration is not effective the next day, and no affirmative order is needed; an order is how a security registered by qualification becomes effective, not a person's registration.Uniform Securities Act (1956) §202(a)

Agent Kim's registration became effective on March 10. If it is not renewed, when does it expire?

• a.March 9 of the next year, one year after the date it became effective
• b.December 31 of the following year, so a spring registration gets a full extra year
• c.June 30 of the same year, the midpoint of the annual registration cycle
• d.December 31 of the same year, the fixed expiration for all registrations✓

Every registration or notice filing expires on December 31 unless renewed, whatever the month in which it became effective. An expiration one year after the effective date, at mid-year, or at the end of the following year has no basis in the section.Uniform Securities Act (1956) §201(e)

For the past 12 months an adviser with no office in the state has advised 5 individuals who live there and 3 insurance companies located there. The adviser:

• a.Must register, since the adviser has eight clients in the state and the limit counts every client served
• b.Must register, since clients who are individuals defeat the exemption whatever their number may be
• c.Must register, since the exemption protects only advisers whose entire client list is made up of institutions
• d.Needs no registration, since insurers do not count and no more than five other clients exist✓

An adviser with no place of business in the state is exempt if, during the preceding twelve months, it has had no more than five clients other than the listed institutions, and insurance companies are among those institutions. Five individuals is within the limit, so counting all eight clients is wrong. The exemption is not limited to purely institutional client lists, and individuals do not defeat it so long as they stay within five.Uniform Securities Act (1956) §201(c)

An adviser with no place of business in the state serves only three state-resident clients: a bank, an insurance company, and an employee benefit plan with $2,000,000 in assets. Registration in the state is:

• a.Required, since only investment companies and other advisers qualify as exempt institutional clients
• b.Required, since the exemption applies only to advisers with five or fewer clients in the state
• c.Required, since any adviser paid for advice must register before it accepts a first institutional client
• d.Not required, since every client in the state belongs to a listed institutional class✓

An adviser with no place of business in the state need not register there if its only clients in the state are listed institutions, which include banks, insurance companies, and employee benefit plans with assets of at least $1,000,000. The five-client test is a separate alternative, the institutional list is longer than investment companies and advisers, and payment for advice alone does not force registration.Uniform Securities Act (1956) §201(c)

A federal covered adviser (registered with the SEC) has a place of business in the state. What may the state require of the firm itself?

• a.A full state registration with its own examination and a state review of its Form ADV
• b.A notice filing of its SEC documents and a notice filing fee, not a state registration✓
• c.A state registration that takes effect on the thirtieth day after filing and must be renewed each year
• d.Nothing at all, since an SEC-registered adviser is beyond the reach of state authority, even antifraud

A federal covered adviser files with the administrator the documents it filed with the SEC and pays a notice filing fee; it is not registered by the state. States still keep antifraud authority over these advisers, so the claim of no authority fails. Thirty-day effectiveness describes registration, which does not apply to the firm, although its representatives with a place of business in the state must register.Uniform Securities Act (1956) §202(b); §202(c)(3)

A state-registered adviser employs a representative who gives investment advice to clients in the state. Which statement is correct?

• a.Only a representative who manages discretionary accounts must register, not one who only recommends securities
• b.The representative registers separately, and it stays effective after leaving the adviser until December 31
• c.The representative needs no registration, since the adviser's registration covers every employee who advises clients
• d.The representative must be registered, and that registration is ineffective while unemployed by a registered adviser✓

An adviser required to be registered may employ an investment adviser representative only if that person is registered, and the registration is not effective during any period when the person is not employed by a registered adviser. The firm's registration automatically covers only partners, officers, and directors, not ordinary employees. The definition reaches anyone who recommends or advises, not only discretionary managers.Uniform Securities Act (1956) §201(d); §401(g)