CSLB General Building (B) — All Questions

Under the Uniform Securities Act, what is the correct order of registration for a security using the coordination method?

• a.It is registered only at the state level with no federal filing
• b.It becomes effective the moment the application is filed with the Administrator
• c.A federal registration statement under the Securities Act of 1933 is filed simultaneously with the state, and state effectiveness is coordinated with the SEC✓
• d.The Administrator must personally approve the merits of the offering before it can be sold

Registration by coordination is used when a security is registered federally under the Securities Act of 1933 at the same time as the state filing. State effectiveness is timed to coincide with SEC effectiveness. The Administrator never passes on the merits of an offering.Uniform Securities Act

An agent registered in State A takes an unsolicited order from a client who is vacationing in State B, where the agent is not registered. Which statement is most accurate?

• a.The transaction is always prohibited because the agent is not registered in State B
• b.The transaction may be permissible under a limited exemption for existing clients temporarily present in another state✓
• c.The agent must immediately register in State B before accepting any order
• d.The client must open a new account in State B for the order to be legal

An agent typically must be registered where the client is located, but limited exemptions exist for transactions with existing clients who are only temporarily present in another state. The order being unsolicited and the client's transient presence are relevant factors. This narrow relief prevents technical violations during travel.Uniform Securities Act

Which of the following is considered an exempt SECURITY under the Uniform Securities Act?

• a.A general obligation bond issued by a municipality✓
• b.A private placement sold to 40 non-institutional buyers
• c.An unsolicited transaction by an existing customer
• d.A sale to an insurance company

A municipal general obligation bond is an exempt security because of the nature of the issuer. The other choices describe exempt TRANSACTIONS, which relate to how or to whom a security is sold rather than the security itself. Distinguishing exempt securities from exempt transactions is a core Series 66 concept.Uniform Securities Act

An investment adviser representative learns material nonpublic information about a public company from a client who is a corporate insider. The IAR then buys the stock for personal gain. This conduct is best described as:

• a.A permitted use of client-provided research
• b.An exempt transaction because it was unsolicited
• c.Acceptable if the IAR discloses it in the next ADV update
• d.A prohibited practice constituting insider trading✓

Trading on material nonpublic information is prohibited regardless of how the information was obtained. No disclosure or exemption cures the violation. The IAR breached both securities law and fiduciary duty by placing personal interest ahead of the duty to the market and clients.Uniform Securities Act

Under the Uniform Securities Act, which person would MOST likely need to register as an agent?

• a.An officer of an issuer who sells exempt securities and receives no commission
• b.An individual employed by a broker-dealer to solicit securities transactions from the public for compensation✓
• c.A clerk who only processes trade confirmations
• d.An administrative assistant who schedules client meetings

An agent is an individual who represents a broker-dealer or issuer in effecting securities transactions. The person soliciting transactions from the public for a broker-dealer meets the definition. Clerical and ministerial employees who do not solicit or effect trades are generally excluded.Uniform Securities Act

Which of the following professionals would most likely qualify for the exclusion from the definition of investment adviser because advice is incidental to their practice and no special compensation is received?

• a.A person whose sole business is publishing a paid stock-picking newsletter with specific client advice
• b.A financial planner who charges a fee for creating investment plans
• c.An accountant who occasionally comments on the tax effect of an investment while preparing a return✓
• d.An individual who manages discretionary accounts for a wrap fee

The Investment Advisers Act excludes certain professionals — lawyers, accountants, engineers, and teachers — when advice is incidental to their profession and no special compensation is received. An accountant commenting on tax effects during return preparation fits this LATE exclusion. Charging separately for investment advice defeats the exclusion.Investment Advisers Act of 1940

A federal covered investment adviser with clients in five states is generally subject to registration and oversight primarily by:

• a.The SEC, though states retain antifraud authority✓
• b.Each state in which it has a single client
• c.Only the state of its principal office
• d.No regulator, because it is federal covered

A federal covered adviser registers with the SEC rather than with individual states. However, states retain antifraud jurisdiction and can require notice filings and fees. This preserves state enforcement power while avoiding duplicative registration.Investment Advisers Act of 1940

An agent tells a customer, 'This stock is guaranteed to go up because the state Administrator approved the registration.' This statement is:

• a.Accurate, because registration signifies approval
• b.Permissible if made only to accredited investors
• c.A lawful description of registration by qualification
• d.A prohibited misrepresentation of the effect of registration✓

Registration with the Administrator never means the state approved the merits or guaranteed the security. Implying that registration ensures profit is a material misrepresentation and a prohibited practice. Agents must not misstate the effect of registration.Uniform Securities Act

Which of the following is an exempt TRANSACTION under the Uniform Securities Act?

• a.A public offering of common stock through registration by qualification
• b.An isolated non-issuer transaction not effected through a broker-dealer✓
• c.A solicited retail sale of a mutual fund
• d.A general solicitation to 100 retail investors

An isolated non-issuer transaction is a classic exempt transaction because it is a one-off sale not part of a regular business. Exempt transactions depend on the manner of sale rather than the security's identity. Public retail offerings and general solicitations do not qualify.Uniform Securities Act

The state Administrator may deny, suspend, or revoke the registration of an agent if the agent:

• a.Earns high commissions in a given year
• b.Recommends a product the Administrator personally dislikes
• c.Has been convicted of a securities-related felony within the past ten years✓
• d.Chooses to work for more than one broker-dealer with proper registration

The Administrator may take disciplinary action for enumerated causes, including a securities-related felony conviction within the prior ten years. High commissions or personal preference are not statutory grounds. Registration actions must be based on cause and are subject to notice and hearing rights.Uniform Securities Act

Under NASAA model rules on custody, an investment adviser that has custody of client funds or securities generally must:

• a.Maintain the assets with a qualified custodian and arrange for account statements to be sent to clients✓
• b.Commingle client cash with the adviser's operating account for efficiency
• c.Avoid any surprise examination by an independent accountant
• d.Hold client securities in the adviser's personal safe deposit box

NASAA custody rules require use of a qualified custodian and delivery of account statements to clients, often supplemented by a surprise examination. Commingling client and firm assets is prohibited. These safeguards protect clients against misappropriation.NASAA Model Rule

A broker-dealer with no place of business in a state deals exclusively with which type of client and may qualify for an exemption from registration in that state?

• a.Retail walk-in customers
• b.Institutional clients such as other broker-dealers and banks✓
• c.First-time individual investors
• d.Clients referred by local advertising

A broker-dealer with no place of business in the state may be exempt from registration if it deals only with institutional clients, other broker-dealers, or issuers. Dealing with retail customers in the state generally triggers registration. The exemption is designed for limited, professional-to-professional activity.Uniform Securities Act

Under the Investment Advisers Act, an adviser's brochure (Form ADV Part 2) must be delivered to a client:

• a.Only after the client complains
• b.Never, because Form ADV is confidential
• c.At or before entering into the advisory agreement, with annual updates offered✓
• d.Only to institutional clients

The brochure rule requires delivery of Form ADV Part 2 at or before entering into the advisory contract, with an annual delivery or offer of an updated brochure. This ensures clients receive material disclosures about the adviser's business, fees, and conflicts. It is a cornerstone of the fiduciary disclosure framework.Investment Advisers Act of 1940

An investment adviser wants to enter a contract that assigns the advisory agreement to another firm following a merger. Under the Uniform Securities Act, assignment of an advisory contract generally requires:

• a.No client involvement whatsoever
• b.Only a notice filing with the SEC
• c.Approval solely by the Administrator
• d.Consent of the client✓

An advisory contract may not be assigned without the client's consent. This protects the personal nature of the advisory relationship. A change in control of the adviser may also constitute an assignment requiring consent.Uniform Securities Act

Which of the following best describes a fiduciary obligation that an investment adviser owes but a broker-dealer historically did not owe under a pure suitability standard?

• a.An ongoing duty of loyalty and care requiring the adviser to place the client's interest first and disclose all material conflicts✓
• b.A duty only to ensure a single transaction is not unsuitable at the point of sale
• c.A duty to guarantee investment performance
• d.A duty owed only to institutional clients

An investment adviser is a fiduciary with continuing duties of loyalty and care, including full disclosure of material conflicts and placing the client's interest first. A historical suitability standard focused on whether a specific recommendation was suitable at the moment of sale. No adviser can guarantee performance.Uniform Securities Act

An agent 'churns' a client's account. This unethical practice is best defined as:

• a.Recommending long-term buy-and-hold securities
• b.Excessive trading designed to generate commissions rather than to benefit the client✓
• c.Rebalancing a portfolio once per year
• d.Diversifying across asset classes

Churning is excessive trading in a customer's account driven by the agent's desire for commissions rather than the client's interests. It is a prohibited practice regardless of whether individual trades are suitable. Frequency and cost relative to the client's objectives are key indicators.Uniform Securities Act

Under the Uniform Securities Act, the term 'security' would NOT typically include:

• a.An investment contract
• b.A note or bond
• c.A fixed-payment whole life insurance policy✓
• d.A share of stock

A fixed, guaranteed whole life insurance policy and fixed annuities are generally excluded from the definition of a security. Investment contracts, notes, bonds, and stock are securities. Variable products, by contrast, are securities because of investment risk borne by the holder.Uniform Securities Act

An agent shares in the profits and losses of a customer's account. Under NASAA standards, this is permitted only if:

• a.The customer verbally agrees at the point of sale
• b.The agent shares proportionally with no written approval
• c.The account earns a profit that quarter
• d.The customer and the broker-dealer give written consent and sharing is proportional to the agent's own contribution✓

Sharing in a customer account is prohibited unless the agent obtains written authorization from both the customer and the broker-dealer, and shares only in proportion to the agent's financial contribution. Verbal agreement alone is insufficient. This rule limits conflicts of interest.Uniform Securities Act

A client sends an unsolicited written complaint to an agent alleging unauthorized trading. The agent should:

• a.Promptly forward the complaint to a designated supervisor or compliance for handling and recordkeeping✓
• b.Destroy the letter to avoid escalation
• c.Personally settle with the client using firm funds without notice
• d.Ignore it unless the client repeats the complaint in writing three times

Written customer complaints must be promptly forwarded to the firm's designated supervisor or compliance for review and recordkeeping. Agents may not conceal, destroy, or unilaterally settle complaints. Proper handling protects both the client and the firm's compliance obligations.Uniform Securities Act

Under the Investment Advisers Act, a performance-based fee that charges a share of capital gains is generally permitted only when the client is:

• a.Any retail client who signs a waiver
• b.A qualified client meeting minimum net worth or assets-under-management thresholds✓
• c.A first-time investor
• d.A client under the age of 21

Performance-based compensation is generally prohibited unless the client is a qualified client meeting net worth or assets-under-management thresholds. This protects less sophisticated investors from fee structures that could encourage excessive risk-taking. A signed waiver alone does not qualify a retail client.Investment Advisers Act of 1940

The Administrator may issue a cease and desist order:

• a.Only after a criminal conviction
• b.Only with the consent of the SEC
• c.With or without a prior hearing to prevent a violation of the Act✓
• d.Only against federal covered advisers

The Administrator has authority to issue cease and desist orders, and may do so with or without a prior hearing when necessary to prevent an ongoing or imminent violation. This is a preventive administrative power. It does not require a criminal conviction first.Uniform Securities Act

An IAR recommends a securities transaction that will generate a large commission for the IAR's affiliated broker-dealer. To act ethically, the IAR must at minimum:

• a.Avoid mentioning the arrangement to keep the client calm
• b.Cancel the transaction entirely
• c.Increase the client's fee to offset the conflict
• d.Disclose the conflict of interest so the client can make an informed decision✓

A fiduciary must disclose material conflicts of interest, such as additional compensation to an affiliate, so the client can evaluate the recommendation. Concealment violates the duty of loyalty. Disclosure, not necessarily cancellation, is the baseline requirement, though the recommendation must still be in the client's best interest.Uniform Securities Act

Which of the following is generally an exempt security under the Uniform Securities Act?

• a.A security issued by a bank organized under U.S. law✓
• b.A limited partnership interest sold to the public
• c.A promissory note from a start-up sold door to door
• d.A newly issued penny stock offered to retail clients

Securities issued by banks are exempt securities under the Act because of the regulated nature of the issuer. Public limited partnership interests, speculative promissory notes, and penny stocks are not automatically exempt. The exemption rests on issuer characteristics.Uniform Securities Act

An agent guarantees a customer against loss on a stock recommendation to close the sale. This practice is:

• a.Permitted if the guarantee is in writing
• b.Prohibited because agents may not guarantee customers against loss✓
• c.Permitted for accredited investors
• d.Required by the suitability rule

Agents and broker-dealers may not guarantee a customer against loss. Such guarantees misrepresent the risk of investing and are a prohibited practice. Putting the guarantee in writing does not make it permissible.Uniform Securities Act

Under the Uniform Securities Act, the statute of limitations for a purchaser to bring a civil suit for a violation is generally:

• a.Ten years from the sale regardless of discovery
• b.Unlimited
• c.The earlier of two years after discovery or three years after the sale (subject to state variation)✓
• d.Thirty days after the sale

Civil liability suits are generally subject to a statute of limitations tied to discovery of the violation and the date of sale, commonly framed as two years after discovery or three years after the transaction, subject to state adoption. This limits stale claims. Exact periods can vary by state enactment.Uniform Securities Act

A remedy available to a defrauded purchaser under the civil liability provisions of the Act typically allows recovery of:

• a.Triple the purchase price automatically
• b.Only future lost profits
• c.Punitive damages in all cases
• d.The consideration paid plus interest, costs, and attorney fees, less any income received✓

The civil liability provision generally allows a purchaser to recover the amount paid plus interest at a specified rate, court costs, and reasonable attorney fees, reduced by any income already received. Automatic treble or punitive damages are not the standard remedy. The measure is designed to make the buyer whole.Uniform Securities Act

An investment adviser exercises discretion in a client account. Under the Uniform Securities Act, this generally requires:

• a.Prior written discretionary authority from the client✓
• b.Nothing beyond a verbal understanding
• c.Only the Administrator's approval
• d.A performance guarantee

Exercising discretion in a client's account requires written discretionary authorization from the client. For investment advisers, oral discretion may be permitted for a limited initial period regarding price and time only, but full discretion needs written authority. This protects clients from unauthorized transactions.Uniform Securities Act

NASAA's model rule on unethical business practices of investment advisers would consider which of the following a violation?

• a.Disclosing all fees in the advisory contract
• b.Borrowing money from a client who is not a lending institution or affiliate✓
• c.Rebalancing per the client's stated policy
• d.Providing the brochure before the contract

Borrowing money or securities from a client is an unethical practice unless the client is in the business of lending, such as a bank, or is an affiliate. It creates a serious conflict of interest. Proper fee disclosure and policy-based rebalancing are appropriate conduct.NASAA Model Rule

Which threshold generally determines whether a mid-sized adviser registers with the SEC rather than the states?

• a.Number of employees only
• b.The adviser's marketing budget
• c.Assets under management crossing a regulatory threshold (with $100 million as a key dividing line under federal rules)✓
• d.The adviser's years in business

Assets under management determine federal versus state registration, with $100 million as a key dividing line for many advisers, and $110 million as the point requiring SEC registration, plus buffer rules. Below the threshold, an adviser is generally state-registered. Employee count and marketing budget are not the test.Investment Advisers Act of 1940

An agent effects a transaction that is not recorded on the books of the employing broker-dealer, without the firm's knowledge or authorization. This is best described as:

• a.Coordination
• b.A permitted private transaction
• c.Registration by qualification
• d.Selling away, a prohibited practice✓

Selling away is when an agent effects private securities transactions outside the employing broker-dealer's supervision and records without authorization. It is prohibited because it evades supervision and firm oversight. Agents must have firm approval and, where required, recordkeeping.Uniform Securities Act

The definition of 'sale' or 'offer to sell' under the Uniform Securities Act generally includes:

• a.A gift of assessable stock✓
• b.A bona fide pledge of securities as loan collateral
• c.A stock dividend where no consideration is given
• d.A bona fide gift of nonassessable stock

The Act treats a gift of assessable stock as a sale because the recipient may owe future assessments, constituting value. Bona fide gifts of nonassessable stock, stock dividends, and collateral pledges are generally not sales. These definitional nuances affect when the Act applies.Uniform Securities Act

An Administrator's authority to conduct investigations and subpoena witnesses generally extends to conduct that:

• a.Occurs only within the Administrator's own state and nowhere else
• b.Originates in, is directed to, or is accepted within the state, even across state lines✓
• c.Has no connection to the state
• d.Involves only federal covered securities

The Administrator has jurisdiction over an offer or sale that originates in, is directed into, or is accepted within the state. This includes cross-border activity touching the state. The Administrator may investigate and subpoena to enforce the Act within that jurisdictional reach.Uniform Securities Act

A broker-dealer wishes to withdraw its registration. Under the Uniform Securities Act, withdrawal generally becomes effective:

• a.Immediately upon filing with no waiting period ever
• b.Only after five years
• c.30 days after filing, unless the Administrator institutes a proceeding✓
• d.Only with SEC approval

A withdrawal of registration typically becomes effective 30 days after filing, provided no revocation or other proceeding is pending or instituted. The Administrator retains authority to act on violations for a period after withdrawal. This orderly process protects investors during transitions.Uniform Securities Act

An adviser engages in an agency cross transaction, arranging a trade between two of its advisory clients. To do this properly, the adviser generally must:

• a.Never disclose the arrangement
• b.Charge a performance fee
• c.Guarantee both clients a profit
• d.Obtain client consent, disclose its role and any compensation, and not recommend the transaction to both sides✓

Agency cross transactions require written client consent, disclosure of the adviser's role and compensation, and the adviser generally may not have recommended the trade to both parties. These safeguards address the conflict of representing both sides. Annual statements of cross transactions are also required.Investment Advisers Act of 1940

Under the Uniform Securities Act, the least intrusive method of state registration for a well-established issuer with a strong track record filing a federal statement is:

• a.Notice filing for a federal covered security✓
• b.Registration by qualification
• c.A door-to-door offering
• d.Registration without any federal filing

Federal covered securities, such as those listed on major exchanges or certain investment company shares, are subject only to state notice filings and fees rather than full state registration. Qualification is the most burdensome method used when no federal registration exists. Notice filing is the least intrusive for covered securities.Uniform Securities Act

An agent recommends a security to a client without any reasonable basis to believe it is suitable, simply to meet a sales quota. This conduct:

• a.Is acceptable because quotas are legitimate business goals
• b.Violates the agent's obligation to have a reasonable basis for recommendations✓
• c.Is exempt if the client is wealthy
• d.Is permitted for exempt securities

Recommending securities without a reasonable basis for suitability is a prohibited practice, regardless of sales quotas or the client's wealth. Agents must consider the client's financial situation, objectives, and needs. Quotas never justify unsuitable recommendations.Uniform Securities Act

Which of the following persons is EXCLUDED from the definition of 'broker-dealer' under the Uniform Securities Act?

• a.A firm soliciting retail securities orders in the state
• b.A dealer with a branch office in the state
• c.An agent, issuer, or bank acting within the statutory exclusions✓
• d.A firm making a market in over-the-counter stocks for state residents

The definition of broker-dealer excludes agents, issuers, and banks, savings institutions, and trust companies. These persons are regulated under other provisions or excluded by policy. Firms soliciting or making markets for state residents generally are broker-dealers requiring registration.Uniform Securities Act

Under NASAA model recordkeeping rules, a state-registered investment adviser must generally preserve required books and records for a minimum of:

• a.Six months
• b.One year
• c.Two years
• d.Five years, with the first two years in an easily accessible location✓

State-registered advisers must generally keep required records for five years, with the most recent two years readily accessible, often at the principal office. This ensures records are available for examination. Shorter periods do not meet the model rule.NASAA Model Rule

An agent commits fraud in connection with the sale of a security that is itself exempt from registration. Under the Uniform Securities Act, the antifraud provisions:

• a.Still apply, because antifraud provisions apply to exempt and non-exempt securities alike✓
• b.Do not apply because the security is exempt
• c.Apply only if the client is a resident
• d.Apply only to federal covered securities

The antifraud provisions of the Act apply to all securities transactions, including those involving exempt securities and exempt transactions. Exemption from registration never exempts a person from the duty not to commit fraud. This is a frequently tested distinction.Uniform Securities Act

An IAR wishes to advertise using a client testimonial. Historically under NASAA and adviser rules, the treatment of testimonials has been:

• a.Always freely permitted with no conditions
• b.Restricted or requiring specific conditions and disclosures to avoid being misleading✓
• c.Required in every advertisement
• d.Prohibited only for broker-dealers

Adviser advertising involving testimonials has historically been restricted and, where permitted under updated marketing rules, requires clear disclosures to prevent misleading impressions. Unconditioned use risks being deceptive. Advisers must ensure advertising is not false or misleading in any respect.Uniform Securities Act