CSLB General Building (B) — All Questions

An individual is hired by a start-up corporation to sell the corporation's own common stock to retail investors in State A, and she is paid a commission on each sale. Under the Uniform Securities Act, this individual is:

• a.An issuer, because she sells only the company's own shares
• b.Excluded from the definition of agent because she represents an issuer rather than a broker-dealer
• c.An agent who must register in State A✓
• d.A broker-dealer, because she effects securities transactions for compensation

An agent is an individual who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities, so representing an issuer does not by itself create an exclusion. The narrow exclusions for issuer representatives cover certain exempt securities, specified exempt transactions, and employee plans with no commission, none of which apply to commissioned retail sales of common stock. She is not the issuer; the corporation is. She is not a broker-dealer because a natural person representing an issuer is treated as an agent.Uniform Securities Act

Which of the following would NOT meet the Uniform Securities Act's definition of a 'person'?

• a.An individual who died last month✓
• b.A limited partnership formed to invest in real estate
• c.A city that issues revenue bonds
• d.An unincorporated investment club

'Person' is defined broadly to include individuals, corporations, partnerships, associations, joint-stock companies, trusts, unincorporated organizations, and governments or political subdivisions. The classic exclusions are a deceased individual, a minor, and an individual who has been judged mentally incompetent. Partnerships, municipalities, and unincorporated associations all fall squarely inside the definition.Uniform Securities Act

Which of the following is NOT a security under the Uniform Securities Act?

• a.A certificate of interest in an oil and gas drilling program
• b.A variable annuity contract
• c.A limited partnership interest in a real estate venture
• d.A fixed annuity contract whose payout is guaranteed by the insurance company✓

A fixed annuity shifts the investment risk to the insurer and pays a guaranteed dollar amount, so it is treated as an insurance product rather than a security. A variable annuity passes investment risk to the contract holder and is a security. Fractional interests in oil and gas programs and limited partnership interests are both named in the statutory definition.Uniform Securities Act

A broker-dealer registered in State X has no office in State Y. Its only State Y business consists of trades executed for three banks, a registered investment company, and another broker-dealer. Must the firm register in State Y?

• a.Yes, because any securities business conducted with State Y residents requires registration
• b.No, because a firm with no place of business in the state whose only clients there are institutions is excluded from the definition of broker-dealer in that state✓
• c.No, because broker-dealers register only with the SEC and never with a state
• d.Yes, unless it has fewer than five total clients in State Y

The institutional exception removes a firm from the broker-dealer definition in a state where it has no place of business and deals only with other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, and large employee benefit plans. The exception depends on the character of the clients, not a headcount, so the five-client answer is wrong. Broker-dealers doing business in a state generally do register at the state level, so the third choice misstates the law.Uniform Securities Act

An agent registered only in State A telephones a long-standing client who is spending the winter in State B. The agent recommends a bond purchase and the client agrees. Which statement is correct?

• a.No registration in State B is required, because the client remains a resident of State A and is only temporarily present in State B✓
• b.The agent must register in State B before the call because the offer was received there
• c.The agent may complete the trade only if the client signs a waiver of State B law
• d.The agent must wait until the client returns to State A before accepting the order

The so-called snowbird exception excludes from the broker-dealer and agent definitions a firm or individual with no place of business in the state whose only contacts there are existing customers who are not residents of that state. Residency, not physical location on the day of the call, drives the analysis. No client waiver can manufacture an exemption, and nothing in the act requires the agent to postpone the order.Uniform Securities Act

An investment adviser has its only office in State M. Over the past twelve months it has advised five individual clients who reside in State N, where it has no place of business. Regarding State N registration, the adviser:

• a.Must register because it has more than one client in the state
• b.Must register because advisers never qualify for numerical exemptions
• c.Qualifies for the de minimis exemption because it has no place of business in the state and has had five or fewer non-institutional clients there in the preceding twelve months✓
• d.Must register only if the five clients' combined assets exceed one million dollars

The de minimis exemption applies to an adviser with no place of business in the state that has had no more than five non-institutional clients in that state during the preceding twelve consecutive months. Client asset size is irrelevant to the count. Had the adviser maintained an office in State N, registration would be required no matter how few clients it had.Uniform Securities Act

Which statement about the consent to service of process is correct?

• a.It must be refiled with each annual renewal of the registration
• b.It is filed with the initial application and remains in effect permanently, appointing the Administrator to receive legal papers on the registrant's behalf✓
• c.It is required only of applicants whose principal office is outside the state
• d.It authorizes the Administrator to settle civil claims against the registrant

The consent to service of process is filed once with the original application and stays in force indefinitely; it names the Administrator as the registrant's attorney to receive service of process in actions arising under the act. It is required of all applicants, in-state and out-of-state alike, and of issuers registering securities. It is a procedural document and gives the Administrator no authority to settle claims.Uniform Securities Act

An agent resigns from Broker-Dealer One and joins Broker-Dealer Two the following week. Under the Uniform Securities Act, notice of the change must be given to the Administrator by:

• a.The agent only
• b.Broker-Dealer One only
• c.Broker-Dealer Two only
• d.The agent, Broker-Dealer One, and Broker-Dealer Two✓

When an agent begins or terminates a connection with a broker-dealer or issuer, the act places the notification duty on all three parties: the agent, the firm being left, and the firm being joined. An agent's registration is not effective during any period when the agent is not associated with a registered broker-dealer or issuer, which is why the transition must be documented on both ends.Uniform Securities Act

Which individual at a state-registered investment advisory firm would be considered an investment adviser representative?

• a.A receptionist who schedules client meetings
• b.A portfolio manager who selects securities for client accounts and supervises two junior analysts✓
• c.An accounts-payable clerk who processes vendor invoices
• d.A building maintenance technician employed by the firm

An investment adviser representative is a supervised person who makes recommendations or renders advice, manages accounts, determines what advice to give, solicits advisory services, or supervises those who do. Individuals whose functions are purely clerical or ministerial are excluded, which covers the receptionist, the clerk, and the maintenance worker. The portfolio manager both advises and supervises, so registration is required.Uniform Securities Act

Absent a denial order or pending proceeding, an application for registration as a broker-dealer, agent, investment adviser, or investment adviser representative becomes effective:

• a.Immediately upon filing with the Administrator
• b.At the close of business on the tenth day after filing
• c.When the applicant passes the required qualification examination
• d.At noon on the thirtieth day after a complete application is filed✓

The act provides that a registration application becomes effective at noon of the thirtieth day after filing if no stop order is in effect and no proceeding is pending. The Administrator may by rule or order specify an earlier effective date. Passing an examination is a qualification the Administrator may impose, but it does not by itself trigger effectiveness.Uniform Securities Act

A state-registered investment adviser maintains custody of client funds and securities. Regarding financial requirements, the Administrator may:

• a.Require a minimum net worth and a surety bond, though an adviser that meets the state's net worth standard may be excused from posting the bond✓
• b.Require a surety bond but never a minimum net worth
• c.Require nothing, because financial requirements are set exclusively by federal law
• d.Require the adviser to insure client accounts against market losses

The act authorizes the Administrator to establish minimum net capital or net worth standards for broker-dealers and advisers and to require surety bonds, particularly where the firm has custody or discretionary authority. States commonly allow an adviser that satisfies the net worth requirement to deposit cash or securities in lieu of the bond or to be excused from it. No state may require a firm to guarantee client accounts against market loss.Uniform Securities Act

A registered broker-dealer files an application to withdraw its registration in a state. Which statement is correct?

• a.The withdrawal is effective immediately upon filing
• b.The withdrawal never becomes effective if a customer complaint is on file
• c.The withdrawal becomes effective thirty days after filing unless a proceeding is pending, and the Administrator retains jurisdiction for one year to institute a revocation or suspension proceeding✓
• d.The Administrator loses all authority over the firm the moment the application is filed

Withdrawal becomes effective thirty days after filing, or earlier if the Administrator so determines, provided no revocation or denial proceeding is pending. The Administrator keeps jurisdiction for one year after the withdrawal takes effect and may still enter a revocation or suspension order. A pending complaint alone does not permanently block a withdrawal.Uniform Securities Act

Unless renewed, the registration of a broker-dealer, agent, investment adviser, or investment adviser representative expires:

• a.On the anniversary of the original effective date
• b.Every two years on June 30
• c.Only when the registrant ceases doing business in the state
• d.On December 31 of each year✓

State registrations run on a calendar-year cycle and expire on December 31 unless renewed by filing the required renewal and paying the annual fee. There is no rolling anniversary date and no two-year cycle under the act. A registrant who stops doing business must affirmatively withdraw rather than simply let the file lapse.Uniform Securities Act

An individual represents a corporate issuer in selling only United States Treasury notes and general obligation bonds of the state to the public. Under the Uniform Securities Act, this individual:

• a.Must register as an agent because he sells to the public
• b.Is excluded from the definition of agent because he represents an issuer in transactions in specified exempt securities✓
• c.Must register as a broker-dealer instead of an agent
• d.Must register as an agent only if he receives commissions

The act excludes from the agent definition an individual who represents an issuer in effecting transactions in certain exempt securities such as federal and municipal government obligations and qualifying commercial paper. Because the exclusion applies, no agent registration is required whether or not commissions are paid. A natural person representing an issuer is never a broker-dealer under the act.Uniform Securities Act

A certified public accountant prepares tax returns for a client. During the engagement she explains that municipal bond interest would reduce the client's tax bill and suggests he discuss municipal bonds with a broker. She charges only her standard tax preparation fee. Under the Uniform Securities Act, the accountant is:

• a.An investment adviser who must register in the state
• b.An investment adviser representative of her accounting firm
• c.Excluded from the definition of investment adviser because the advice was solely incidental to her accounting practice and she received no special compensation✓
• d.A broker-dealer because she referred the client to a securities firm

The act excludes lawyers, accountants, teachers, and engineers whose investment advice is solely incidental to their profession and who receive no special compensation for it. Both prongs are met here: the comment arose out of tax work and no separate advisory fee was charged. Had she billed a distinct fee for securities advice, the exclusion would be lost.Uniform Securities Act

Which of the following is specifically excluded from the definition of broker-dealer under the Uniform Securities Act?

• a.A bank, savings institution, or trust company✓
• b.A firm that maintains a branch office in the state and trades for retail customers
• c.A firm with no place of business in the state that solicits retail investors there by telephone
• d.A partnership organized to trade securities for the accounts of its many outside investors

The broker-dealer definition expressly excludes agents, issuers, and banks, savings institutions, and trust companies. A firm with a place of business in the state must register regardless of client type, and a firm cold-calling retail residents from out of state is doing business in that state. The trading partnership effects transactions for the accounts of others and would need to register.Uniform Securities Act

An investment adviser with $400 million in assets under management is registered with the SEC and has offices in three states. With respect to those states, the adviser:

• a.Cannot be required to register with the states, but may be required to file a notice, pay fees, and file a consent to service of process✓
• b.Must also register in each state where it has an office
• c.Has no obligation of any kind to the state Administrators
• d.Must register in the state of its principal office and notice file in the others

An adviser required to register with the SEC is a federal covered adviser, and federal law preempts state registration requirements for such firms. States retain the right to require notice filings, collect fees, and demand a consent to service of process, and they keep full antifraud authority. State registration itself may not be imposed on a federal covered adviser, even in the state of its principal office.Uniform Securities Act

An individual who advises clients on behalf of a federal covered investment adviser works out of the firm's branch office in State P. This individual:

• a.Is exempt from state registration because the firm is federally covered
• b.Must register with the SEC rather than with State P
• c.Must register as an investment adviser representative in State P because he has a place of business there✓
• d.Need not register anywhere as long as he has fewer than six clients

Although the firm itself is federally covered and cannot be required to register with a state, individual representatives are registered at the state level. The trigger is having a place of business in the state, so a representative working from an in-state office must register there. The SEC does not register individual representatives, and the de minimis client count applies to advisory firms without a place of business, not to representatives with one.Uniform Securities Act

A broker-dealer registered in State A opens a branch office in State B. Its only State B customers will be three large insurance companies. Regarding State B registration, the firm:

• a.Is excluded because its only clients there are institutions
• b.Must register in State B because it maintains a place of business in the state✓
• c.Must register only after it accepts a retail account
• d.May rely on its State A registration under reciprocity

The institutional exception is available only to a firm with no place of business in the state. Once the firm opens an office in State B, registration is required regardless of how sophisticated its customers are. The Uniform Securities Act contains no general reciprocity provision that lets one state's registration substitute for another's.Uniform Securities Act

An agent working from an office in State A mails a prospectus and a solicitation letter to a prospect who reads it at her home in State B. Under the Uniform Securities Act, the offer is considered made:

• a.Only in State A, where the letter originated
• b.Only in State B, where the letter was received
• c.In neither state, because no sale occurred
• d.In both State A and State B, giving each Administrator jurisdiction✓

An offer is made in a state if it originates from that state or is directed to and received in that state, so both Administrators have jurisdiction. The failure to complete a sale is irrelevant because the act reaches offers as well as sales. Sending offering material into a state is precisely the conduct that triggers the receiving state's authority.Uniform Securities Act

A securities offering is advertised in a television broadcast that originates outside State C but is viewed by residents of State C. Under the Uniform Securities Act, the offer is:

• a.Deemed made in State C because residents saw it
• b.Deemed made in State C only if a State C resident responds
• c.Not deemed made in State C, because the broadcast originated outside the state✓
• d.Deemed made in every state where the signal is received

The act contains a media exception: an offer is not deemed made in a state when it appears in a bona fide newspaper or periodical published outside the state, or in a radio or television broadcast originating outside the state. The point of origination controls, not where the signal lands. A resident's response would create an ordinary transaction subject to the usual rules, but it does not retroactively make the broadcast an in-state offer.Uniform Securities Act

An employee of a manufacturing corporation is asked to distribute and explain the company's new stock purchase plan to fellow employees. She receives no commission or other remuneration for these sales. Under the Uniform Securities Act, she is:

• a.Not an agent, because she represents the issuer in transactions with the issuer's employees and receives no commission✓
• b.An agent who must register before speaking with any employee
• c.An investment adviser representative
• d.A broker-dealer with respect to the plan

The act excludes from the agent definition an individual who represents an issuer in effecting transactions with the issuer's employees, partners, or directors when no commission or other remuneration is paid for soliciting those persons. The absence of transaction-based compensation is essential; paying her a commission would destroy the exclusion. She gives no investment advice for compensation and does not effect trades for the accounts of others as a firm.Uniform Securities Act

A broker-dealer's state registration is suspended for sixty days. During the suspension, the registrations of the agents employed by that firm:

• a.Remain fully effective because they were registered individually
• b.Are automatically revoked and must be reapplied for
• c.Transfer automatically to any affiliated firm
• d.Are also not in effect, because an agent's registration is effective only while the agent is associated with a registered broker-dealer or issuer✓

An agent's registration is derivative: it is effective only while the agent is associated with a registered broker-dealer or issuer, so suspending the firm suspends the agents' ability to act. The registrations are not revoked outright, so a brand-new application is not automatically required. Registrations do not migrate to affiliates by operation of law.Uniform Securities Act

A registered broker-dealer reorganizes and a successor firm takes over the business in the middle of the registration year. Under the Uniform Securities Act, the successor firm:

• a.Must file a completely new application and wait thirty days before doing business
• b.May file an application that becomes effective on the date the predecessor's registration terminates and is effective for the unexpired portion of the year without an additional filing fee✓
• c.May simply continue to operate under the predecessor's registration indefinitely
• d.Must cease all business until the next annual renewal cycle

The act permits a successor to file an application that takes effect when the predecessor's registration terminates and runs for the unexpired portion of the year, with no filing fee charged for that partial period. The successor cannot simply operate on the predecessor's registration, but neither must it endure a full waiting period or suspend operations.Uniform Securities Act

A Canadian broker-dealer with no U.S. office wants to continue servicing the self-directed retirement accounts of Canadian clients who are temporarily living in a U.S. state. Under the NASAA model rule for Canadian firms, the broker-dealer:

• a.May not deal with those clients at all while they are in the United States
• b.Must obtain full broker-dealer registration in the state
• c.Is completely exempt from all state requirements
• d.May obtain a limited registration by filing an application, evidence of home-jurisdiction registration and good standing, and a consent to service of process✓

The NASAA model rule creates a limited registration path for Canadian broker-dealers and their agents servicing Canadian clients temporarily present in the United States, primarily for self-directed tax-advantaged retirement accounts. The firm files an application, proof that it is registered and in good standing in its home jurisdiction, and a consent to service of process. It is neither barred from the business nor forced into full domestic registration, and it is not free of all state obligations.NASAA Model Rule

Which of the following would be considered a 'sale' under the Uniform Securities Act?

• a.A bona fide gift of fully paid, nonassessable stock to a family member
• b.A gift of assessable stock✓
• c.A stock dividend for which shareholders give up nothing of value
• d.A pledge of securities as loan collateral that is never foreclosed

The act treats a gift of assessable stock as a sale because the recipient takes on a potential future obligation, which functions as consideration. A bona fide gift of nonassessable stock involves no value given and is not a sale, and a stock dividend for which nothing is surrendered is likewise excluded. A pledge creates a security interest rather than a transfer of ownership for value.Uniform Securities Act

An individual employed by a registered broker-dealer answers the main telephone line, routes calls to registered personnel, and files paperwork. He never discusses securities or accepts orders. This individual:

• a.Must register as an agent because he is employed by a broker-dealer
• b.Must register as an agent because he speaks with customers
• c.Need not register, because his functions are clerical and he does not effect or attempt to effect securities transactions✓
• d.Must register as an investment adviser representative

Registration as an agent turns on whether the individual effects or attempts to effect purchases or sales of securities, not on mere employment at a firm. Purely clerical and ministerial staff fall outside the definition. If he began taking orders or making recommendations, registration would immediately be required.Uniform Securities Act

An investment adviser opens a small office in State Q and, during its first year, takes on only two clients who reside in State Q. Regarding State Q registration, the adviser:

• a.Must register, because the de minimis exemption is unavailable to an adviser that has a place of business in the state✓
• b.Need not register, because it has fewer than six clients in the state
• c.Need not register until it has at least fifteen clients
• d.Must register only if the clients are institutional

The de minimis exemption requires that the adviser have no place of business in the state; the client count is a second condition, not a substitute for the first. Once an office exists in the state, registration is required even with a single client. Institutional clients would, if anything, make an exemption easier to reach rather than harder.Uniform Securities Act

For purposes of the institutional exception from the broker-dealer definition, which of the following clients would NOT preserve the exception?

• a.A commercial bank
• b.An individual investor with a $4 million portfolio✓
• c.A registered investment company
• d.An insurance company

The institutional exception lists other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, and large employee benefit plans. A wealthy individual is still a retail customer and does not appear on that list, no matter how large the account. Doing business with even one such person in a state where the firm has no place of business defeats the exception.Uniform Securities Act

An agent is registered only in State A. Her broker-dealer is registered in both State A and State B. She begins cold-calling residents of State B from her desk in State A. Which statement is correct?

• a.No registration in State B is needed because her firm is registered there
• b.No registration in State B is needed because she never physically enters the state
• c.She may solicit up to five State B residents before registering
• d.She must register as an agent in State B, because her offers are directed into and received in that state✓

Agent registration is individual and state-specific; the firm's registration does not cover its agents. An offer directed into and received in a state is made in that state, so physical presence is irrelevant. The de minimis client counts belong to the investment adviser provisions and create no free-solicitation allowance for agents.Uniform Securities Act

Which statement about issuers under the Uniform Securities Act is correct?

• a.An issuer is any person who issues or proposes to issue a security, and an issuer selling only its own securities is not a broker-dealer✓
• b.An issuer must always register as a broker-dealer before selling its own securities
• c.Only corporations can be issuers
• d.An issuer is automatically an agent of the individuals who sell its shares

The definition covers any person who issues or proposes to issue a security, which includes governments, partnerships, and trusts as well as corporations. Because a broker-dealer effects transactions for the accounts of others, an entity selling only its own securities falls outside that definition. The relationship in the last choice is backwards: individuals who sell for the issuer may be its agents.Uniform Securities Act

An agent's employing broker-dealer voluntarily withdraws its state registration. Absent any other affiliation, the agent's registration in that state:

• a.Continues until the next December 31 renewal date
• b.Is unaffected because agents register independently of their firms
• c.Is not in effect, because an agent may not act while unassociated with a registered broker-dealer or issuer✓
• d.Automatically converts to an investment adviser representative registration

The act states that an agent's registration is not effective during any period when the agent is not associated with a registered broker-dealer or issuer. Withdrawal by the firm therefore parks the agent's registration until a new affiliation is filed. Agent and investment adviser representative registrations are separate categories and never convert automatically.Uniform Securities Act

A registered broker-dealer discovers that information in its original state application has become materially inaccurate. The firm should:

• a.Wait and correct the information at the next annual renewal
• b.Correct the information only if a customer or the Administrator asks about it
• c.Promptly file an amendment with the Administrator correcting the information✓
• d.Withdraw its registration and file a new application

Registrants must keep their filings current and promptly amend any information that becomes inaccurate or incomplete in a material respect. Waiting for renewal or for someone to ask leaves a false filing on record, which is itself a ground for discipline. Withdrawing and refiling is a drastic step the act does not require for a simple amendment.Uniform Securities Act

An investment advisory firm has its only office in State D, where it is registered. It also serves three individual clients in State E and four individual clients in State F, with no office in either. Which statement is correct?

• a.It must register in all three states because it has clients in each
• b.It must register in State E and State F but may withdraw from State D
• c.It need not register anywhere because no state has more than five of its clients
• d.It must remain registered in State D and may rely on the de minimis exemption in States E and F✓

Registration is required in the state where the adviser maintains a place of business, so State D registration is mandatory. In States E and F the firm has no place of business and has had five or fewer non-institutional clients in the preceding twelve months, satisfying the de minimis exemption. The counts are measured state by state and never excuse registration where an office exists.Uniform Securities Act

An unregistered individual introduces investors to a small private company and receives a percentage of every dollar the investors put in. The most likely conclusion under the Uniform Securities Act is that she:

• a.Is acting as an unregistered agent, because transaction-based compensation for effecting securities sales points squarely to agent status✓
• b.Is exempt because she never handled customer funds
• c.Is an investment adviser rather than an agent
• d.Is a broker-dealer because she was paid a percentage

Receiving compensation tied to the size or completion of securities transactions is the strongest indicator that a person is effecting or attempting to effect sales and is therefore acting as an agent. Never touching customer money creates no exemption. She is not an adviser because she is paid for sales rather than for advice, and a natural person representing an issuer is treated as an agent rather than a broker-dealer.Uniform Securities Act

An issuer is conducting an interstate public offering and has filed a registration statement with the SEC under the Securities Act of 1933. To register the same offering in a state, the issuer would most appropriately use:

• a.Registration by qualification
• b.Registration by coordination✓
• c.Registration by notification
• d.No state registration, because a federal filing always preempts state law

Registration by coordination is designed for offerings registered federally under the Securities Act of 1933; the state filing rides alongside the federal one and becomes effective at the same moment as the federal registration, provided the state's timing and pricing conditions are satisfied. Qualification is the fallback for offerings with no federal filing. Notification is a streamlined route reserved for established issuers. Federal preemption applies only to federal covered securities, which is a separate concept from simply having filed with the SEC.Uniform Securities Act

Which statement about registration by qualification is correct?

• a.It is available to any issuer, requires the most detailed disclosure, and becomes effective when the Administrator so orders✓
• b.It is available only to issuers listed on a national exchange
• c.It becomes effective automatically two business days after filing
• d.It may be used only when a federal registration statement has also been filed

Qualification is the most demanding method, requiring extensive information about the issuer, its officers, its capitalization, and the use of proceeds, and effectiveness comes only when the Administrator orders it. It is the universal method, available to any issuer, and is typical for purely intrastate offerings with no federal filing. Automatic effectiveness on a short clock describes notification, not qualification.Uniform Securities Act

Registration by notification, sometimes called registration by filing, is generally available to:

• a.Any issuer regardless of operating history
• b.Only issuers making their very first public offering
• c.Only issuers of exempt securities
• d.Established issuers that meet stated requirements such as a minimum operating history and no default on senior securities✓

Notification is the abbreviated method reserved for seasoned issuers that satisfy conditions on operating history, earnings, and the absence of defaults on debt or preferred dividends. A first-time issuer with no track record cannot use it and would turn to coordination or qualification. Exempt securities need no registration at all, so the method would be irrelevant to them.Uniform Securities Act

A mutual fund registered under the Investment Company Act of 1940 offers shares to residents of State G. With respect to State G, the fund's shares are:

• a.Required to be registered by coordination in the state
• b.Required to be registered by qualification in the state
• c.A federal covered security, so the state may require only a notice filing, fees, and a consent to service of process, while retaining antifraud authority✓
• d.Completely outside the state Administrator's reach for any purpose

Investment company shares registered under the Investment Company Act of 1940 are federal covered securities, and federal law bars states from requiring their registration. States may still require notice filings, collect fees, and demand a consent to service of process. Antifraud jurisdiction is never preempted, so the last choice overstates the preemption.Uniform Securities Act

A privately held manufacturer sells its unregistered notes to eight insurance companies and two banks. No general advertising is used. This offering is best described as:

• a.A sale of exempt securities, because institutional buyers were involved
• b.An exempt transaction, because sales to institutional investors are exempted from the registration requirement✓
• c.Both an exempt security and an exempt transaction
• d.Neither exempt nor permissible without state registration

This is the classic exempt-security versus exempt-transaction trap. The notes themselves are ordinary corporate securities with no special status, so nothing about the instrument is exempt; what is exempt is the manner of sale, namely a transaction with institutional buyers. Change the buyers to retail investors and the very same notes would require registration, which is exactly what distinguishes a transactional exemption from a security-level one.Uniform Securities Act

Which statement about United States Treasury bonds under the Uniform Securities Act is correct?

• a.They are exempt only when sold to institutional investors
• b.They are exempt securities, so the exemption follows the instrument in every transaction✓
• c.They are exempt transactions rather than exempt securities
• d.They must be registered by coordination in each state

Federal government obligations are listed as exempt securities, meaning the exemption attaches to the instrument itself and holds regardless of who buys or how the sale is arranged. An exempt transaction, by contrast, depends entirely on the circumstances of the particular sale. Because the security is exempt, no method of state registration is needed.Uniform Securities Act

An individual investor sells 200 shares of an unregistered local company directly to her neighbor in a one-time private arrangement, with no broker involved and no pattern of similar sales. This is best characterized as:

• a.An isolated non-issuer transaction, which is an exempt transaction✓
• b.A sale of an exempt security
• c.A public offering requiring registration by qualification
• d.A prohibited transaction under the act

An isolated non-issuer transaction, meaning a one-off resale by someone other than the issuer, is one of the enumerated exempt transactions. The shares themselves are ordinary corporate stock and are not exempt securities, so the exemption is transactional only. The antifraud provisions still apply, so the seller may not misrepresent the company even in an exempt transaction.Uniform Securities Act

A customer telephones her broker-dealer and asks to buy shares of a specific company that is not registered in the state. The firm made no recommendation and no solicitation. The trade is:

• a.Prohibited, because the security is not registered in the state
• b.Permitted only if the customer is an institution
• c.Permitted only after the firm registers the security by qualification
• d.Permitted as an unsolicited non-issuer transaction, an exempt transaction the firm may be required to document with a signed customer acknowledgment✓

Unsolicited non-issuer transactions are exempt transactions, which is why an unregistered security may still be purchased when the order originates entirely with the customer. Administrators frequently require the firm to obtain a written customer acknowledgment that the order was unsolicited so the exemption can be verified later. The exemption is not limited to institutions, and no registration of the security is needed.Uniform Securities Act

Under the private placement exemption in the Uniform Securities Act, an issuer may make offers to no more than a limited number of non-institutional persons in any twelve-month period. Which additional condition applies?

• a.The buyers must all be residents of the same state
• b.The issuer must file a registration statement by notification
• c.The buyers must purchase for investment rather than for resale, and no commission may be paid for soliciting non-institutional buyers✓
• d.The offering must raise at least one million dollars

The state private placement exemption limits the number of non-institutional offerees in a twelve-month period, requires that buyers purchase for investment and not with a view to distribution, and forbids paying commissions for soliciting those non-institutional buyers. Institutional buyers are not counted against the limit. Residency and minimum offering size are not conditions, and filing a registration statement would defeat the purpose of an exemption.Uniform Securities Act

Which of the following is NOT an exempt security under the Uniform Securities Act?

• a.A general obligation bond issued by a school district
• b.Common stock issued by a commercial bank
• c.Bonds issued by a nonprofit religious organization
• d.A variable annuity contract issued by a licensed insurance company✓

The insurance company exemption covers traditional insurance and fixed annuity products, but a variable annuity is a security whose value depends on a separate investment account and it is not exempt on that basis. Municipal obligations, securities issued by banks, and securities of nonprofit religious and charitable organizations all appear on the exempt security list. The identity or nature of the issuer is what drives most of these exemptions.Uniform Securities Act

A church issues bonds to finance construction of a new fellowship hall and sells them to members of the congregation. Under the Uniform Securities Act, these bonds are:

• a.Exempt securities, because they are issued by a nonprofit religious organization✓
• b.Exempt transactions, because sales were limited to members
• c.Required to be registered by coordination
• d.Not securities at all

Securities issued by nonprofit religious, educational, charitable, and fraternal organizations are enumerated exempt securities, so the exemption travels with the instrument. The buyers' membership status is not what creates the exemption, which is why this is a security-level exemption rather than a transactional one. Debt instruments sold to raise money from investors are clearly securities, and the Administrator keeps antifraud authority over the sale.Uniform Securities Act

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

• a.A registered agent recommending a growth stock to a retail client
• b.A sale of securities by a court-appointed executor settling a decedent's estate✓
• c.An issuer's advertised public offering of common stock
• d.A mutual fund's continuous offering to the general public

Transactions executed by fiduciaries such as executors, administrators, sheriffs, marshals, receivers, trustees in bankruptcy, guardians, and conservators are enumerated exempt transactions because they arise from a legal duty rather than a sales effort. A recommended retail trade is ordinary solicited business. Advertised public offerings and continuous mutual fund offerings are the opposite of isolated or private transactions, though fund shares may escape state registration as federal covered securities, which is a different exemption entirely.Uniform Securities Act

In an administrative proceeding, a party claims that an offering qualified for an exemption from registration. Which statement is correct?

• a.The Administrator must prove that the exemption does not apply
• b.An exemption once claimed cannot be revoked
• c.The burden of proving an exemption rests on the person claiming it, and the Administrator may by order deny or revoke a specific exemption✓
• d.Exemptions may be revoked only by a court

The act places the burden of proving an exemption or an exception on the person who claims it, so a firm relying on an exemption should document the supporting facts at the time of the sale. The Administrator also has authority to deny or revoke an exemption for a particular security or transaction by order, subject to notice and hearing rights. No court order is needed for the Administrator to act.Uniform Securities Act

A seller relies on a valid exempt transaction and therefore does not register the securities. Which statement is correct?

• a.The antifraud provisions of the act still apply to the offer and the sale✓
• b.The antifraud provisions do not apply because the transaction is exempt
• c.The Administrator has no jurisdiction over the sale
• d.The seller may make optimistic projections without qualification

An exemption relieves the parties of the registration requirement only; it never suspends the antifraud provisions, which reach any offer or sale of any security. The Administrator therefore retains full jurisdiction to investigate misstatements in an exempt offering. Unfounded projections presented as fact would be actionable regardless of the exemption.Uniform Securities Act

Which statement about a state securities registration statement is correct?

• a.It may be filed only by the issuer itself
• b.Once declared effective it remains effective indefinitely
• c.It may not be amended after the effective date under any circumstances
• d.It may be filed by the issuer, by any other person on whose behalf the offering is made, or by a registered broker-dealer, and it is generally effective for one year✓

The act allows the issuer, a selling shareholder or other person on whose behalf the offering is being made, or a registered broker-dealer to file the registration statement. Effectiveness generally runs for one year from the effective date, so a continuing offering must be renewed. Post-effective amendments are permitted, most commonly to increase the number of shares registered.Uniform Securities Act

A small issuer registers a stock offering by qualification. The Administrator is concerned that the business plan cannot be carried out unless a substantial portion of the offering is sold. The Administrator may:

• a.Prohibit the offering outright without a hearing
• b.Guarantee the offering by state funds
• c.Require as a condition of registration that the proceeds be impounded in escrow until a specified amount is received✓
• d.Require the underwriter to purchase any unsold shares

The act lets the Administrator condition an effective registration on impounding the proceeds until the issuer receives a specified minimum amount, protecting investors in an undersubscribed deal. Escrow of proceeds is a condition, not an outright prohibition, and a denial would require notice and an opportunity for hearing. No state guarantees offerings, and the Administrator cannot force an underwriter into a firm commitment.Uniform Securities Act

After a securities registration statement becomes effective in a state, the Administrator may require the person who filed it to:

• a.Repurchase shares from any dissatisfied investor
• b.File reports, no more often than quarterly, showing the progress of the offering and the sale of the registered securities✓
• c.Guarantee a minimum rate of return to purchasers
• d.Register the securities again in every other state

The act authorizes the Administrator to require periodic reports, but not more frequently than quarterly, to keep the record of the offering current. Repurchase obligations arise only as a remedy for a violation, not as a routine condition. No securities registration ever carries a guaranteed return, and each state's registration requirement stands on its own.Uniform Securities Act

A corporation issues short-term notes to raise working capital. For the notes to fall within the commercial paper exemption, they must generally:

• a.Be convertible into common stock
• b.Be sold only to individual investors
• c.Mature within nine months, be rated in one of the top categories by a nationally recognized rating agency, and be issued in large denominations✓
• d.Be guaranteed by a commercial bank

The commercial paper exemption is limited to high-quality, short-term paper: a maturity of nine months or less, a top-tier rating, and denominations large enough that the instruments are bought by institutions rather than small retail investors. Convertibility would give the note an equity feature and take it outside the exemption. Neither a bank guarantee nor a retail-only distribution is part of the test.Uniform Securities Act

An investor is offered shares of a bank holding company that owns a single commercial bank. Regarding state registration, these shares are:

• a.Exempt securities, because the underlying subsidiary is a bank
• b.Not automatically exempt, because the exemption covers securities issued by a bank itself, not by a separate holding company✓
• c.Exempt transactions in every case
• d.Federal covered securities regardless of where they trade

The exemption is drafted around securities issued or guaranteed by a bank, savings institution, or trust company; a holding company is a separate corporate issuer and does not inherit its subsidiary's status. Such shares may still qualify as federal covered securities if they are listed on a national exchange, but that depends on listing, not on the banking business. Nothing about the sale makes it an exempt transaction by default.Uniform Securities Act

Organizers of a proposed corporation solicit subscriptions from a handful of prospective shareholders before the company exists. For this preorganization certificate exemption to apply:

• a.The subscribers must each invest at least $10,000
• b.A registration statement must be filed by qualification
• c.At least twenty-five subscribers are required
• d.The number of subscribers must be limited, no commission may be paid for soliciting them, and no payment may be made by any subscriber✓

The preorganization certificate or subscription exemption is conditioned on a small, capped number of subscribers, the absence of any commission for soliciting them, and the fact that no subscriber actually pays money at that stage. A minimum investment is not part of the test, and requiring a large number of subscribers would contradict the exemption's private character. Because it is an exemption, no registration statement is filed.Uniform Securities Act

An agent handles a conservative retiree's account and generates 60 round-trip trades in six months, producing commissions that consume a large share of the account's value. This practice is best described as:

• a.Churning, which is excessive trading in light of the customer's resources, objectives, and account character✓
• b.Front-running, because the agent traded ahead of the customer
• c.A permissible active management style since the customer never objected
• d.Selling away, because the trades were placed outside the firm

Churning is trading that is excessive in size or frequency given the customer's financial resources, investment objectives, and the nature of the account, and it is judged by the pattern rather than by any single trade. The customer's silence is not consent and does not cure the violation. Front-running involves trading ahead of a known block order, and selling away involves transactions outside the employing firm, neither of which is described here.NASAA Model Rule

A customer tells his agent, 'Buy 500 shares of a good technology company sometime this week.' The agent selects the issuer and buys the shares two days later. The agent has:

• a.Acted properly, because the customer authorized a technology purchase
• b.Acted properly under time and price discretion
• c.Committed no violation because the customer approved afterward
• d.Exercised discretion without prior written authorization, because choosing the security and the day requires a signed discretionary agreement✓

Discretion over the security, the number of shares, or whether to buy or sell requires prior written authorization from the customer and acceptance by the firm. Time and price discretion is narrower: the customer must specify the security, the action, and the amount, and that limited authority is generally good only for the day it is given. After-the-fact approval does not retroactively authorize a discretionary trade.NASAA Model Rule

An agent learns that his firm is about to execute a very large buy order for a thinly traded stock and immediately buys shares for his own account before entering the customer's order. This is:

• a.Permissible, because the agent's order was small
• b.Permissible if the agent later discloses it
• c.Front-running, a prohibited practice that misuses knowledge of a pending customer order✓
• d.Merely a suitability issue

Front-running is the use of advance knowledge of a pending block order to trade ahead of it for the agent's own benefit, and it is prohibited regardless of the size of the personal order. Later disclosure does not cure a violation that was complete when the order was entered. The problem is misuse of customer order information and market integrity, not the suitability of the security.NASAA Model Rule

An investment adviser deposits a client's advance advisory fee into the firm's general operating account and uses it to pay office rent. This conduct is:

• a.Acceptable because the fee had already been earned on paper
• b.Commingling of client funds with firm assets, a prohibited business practice✓
• c.Acceptable if the client is later refunded
• d.Permitted for any adviser with a surety bond

Client funds and securities must be kept separate from firm assets, and mixing them exposes clients to the firm's creditors and obscures the audit trail. Prepaid fees that have not yet been earned belong to the client and must be handled under the applicable custody and prepayment rules. Neither a later refund nor a surety bond makes commingling permissible.NASAA Model Rule

A hesitant client says she will invest only if she cannot lose money. Her agent replies, 'Don't worry, if the stock drops below your purchase price I'll personally cover the difference.' The agent has:

• a.Violated the prohibition on guaranteeing a customer against loss✓
• b.Acted properly because the promise was voluntary and personal
• c.Acted properly if the firm approves the arrangement in writing
• d.Merely made a puffing statement with no regulatory consequence

Guaranteeing a customer against loss, whether by the firm or personally by the agent, is an unethical practice under the NASAA model rules because it misrepresents the risk of the investment. No firm approval can authorize the guarantee. A statement that removes the client's perception of risk is a misrepresentation of a material fact rather than harmless puffery.NASAA Model Rule

An agent proposes to share in the profits and losses of a customer's account. Under NASAA rules, this arrangement:

• a.Is prohibited under all circumstances for every registered person
• b.Is permitted for an agent only with the written authorization of both the customer and the employing broker-dealer, and generally only in proportion to the agent's own capital contribution✓
• c.Is permitted whenever the customer requests it orally
• d.Requires only the branch manager's verbal approval

Sharing in a customer account is permitted for an agent only where both the customer and the employing broker-dealer give written authorization and the sharing is proportionate to the agent's financial contribution to the account. Oral requests and verbal approvals do not satisfy the rule. Investment adviser representatives face a stricter standard, but the flat 'never for anyone' answer overstates the rule for agents.NASAA Model Rule

An agent is short of cash and asks a wealthy retail client for a $20,000 personal loan, promising repayment with interest. Under NASAA rules this is:

• a.Permitted because the client is wealthy and the loan is documented
• b.Permitted because the loan is unrelated to securities
• c.Prohibited, because borrowing money or securities from a customer is an unethical practice unless the customer is a financial institution in the business of lending or a permitted family relationship and firm policy allows it✓
• d.Permitted if the agent discloses the loan at year end

Borrowing money or securities from a customer, or lending to one, is an unethical business practice because it creates a conflict of interest and a risk of exploitation. Narrow exceptions exist where the customer is in the business of lending, such as a bank, or is an immediate family member, and only where the firm's written procedures permit the arrangement. The client's wealth, the loan's unrelated purpose, and later disclosure do not cure the violation.NASAA Model Rule

An agent arranges private investments in a real estate partnership for several clients, collects a finder's fee directly from the sponsor, and never mentions the activity to his broker-dealer. This is:

• a.Selling away, a prohibited private securities transaction effected without the knowledge and consent of the employing broker-dealer✓
• b.Permitted because real estate is not a security
• c.Permitted because the fee came from the sponsor rather than the clients
• d.A suitability violation only

Effecting securities transactions away from the employing firm without providing prior written notice and obtaining the firm's approval is the prohibited practice known as selling away, and it deprives the firm of its supervisory responsibility. A limited partnership interest is a security, so the real estate label does not help. The source of the compensation is irrelevant, and the violation exists even if every investment turned out to be suitable.NASAA Model Rule

An agent tells a prospect, 'My state registration means the Administrator has reviewed my qualifications and approved the investments I recommend.' This statement is:

• a.Accurate, because registration requires an examination
• b.Accurate for exempt securities only
• c.Accurate if the firm is also registered
• d.Prohibited, because it is unlawful to represent that registration means the Administrator has approved the registrant's qualifications or the merits of any security✓

The act expressly makes it unlawful to represent that registration, or the effectiveness of a securities registration, means the Administrator has passed on the merits of a security or the qualifications of the person. Registration is a disclosure and compliance filing, not an endorsement. That is true whether or not an examination was required and regardless of the firm's status or the type of security.Uniform Securities Act

Two traders repeatedly buy and sell the same thinly traded security between themselves at rising prices to attract outside buyers. This conduct is:

• a.Legitimate market making
• b.Permitted because both parties consented
• c.Market manipulation through matched orders creating misleading activity, which is prohibited✓
• d.Permitted if the trades are reported to the tape

Wash sales and matched orders create the false appearance of trading volume and price movement and are prohibited manipulative practices. Consent between the participants is irrelevant because the deception targets the investing public. Reporting the trades does not legitimize them, and genuine market making involves bona fide two-sided quotations rather than prearranged trades with no change in beneficial ownership.Uniform Securities Act

Before recommending a security to a new customer, an agent must:

• a.Guarantee that the recommendation will meet the customer's return objective
• b.Make reasonable inquiry into the customer's financial situation, investment objectives, tax status, and needs, and have a reasonable basis for believing the recommendation is suitable✓
• c.Obtain the Administrator's prior approval of the recommendation
• d.Confirm only that the customer has enough cash to pay for the trade

Recommending securities without reasonable grounds to believe they suit the customer, based on information the agent has actually gathered about the customer's situation and objectives, is an unethical practice. A customer who refuses to provide information limits what the agent may reasonably recommend. Administrators do not pre-approve recommendations, and settlement ability alone says nothing about suitability.NASAA Model Rule

Which statement best distinguishes the duties of an investment adviser from those of a broker-dealer effecting transactions for a customer?

• a.An investment adviser is a fiduciary owing duties of loyalty and care, including full disclosure of material conflicts, while a broker-dealer's recommendations must at a minimum be suitable for the customer✓
• b.A broker-dealer is always a fiduciary and an adviser is not
• c.Neither owes any duty beyond executing orders accurately
• d.An adviser owes duties only to institutional clients

The advisory relationship rests on a fiduciary standard: the adviser must place the client's interests first, disclose material conflicts such as compensation arrangements and proprietary products, and seek best execution. A broker-dealer making recommendations must have reasonable grounds to believe they are suitable and must disclose material facts about the transaction. Both roles carry duties well beyond accurate order entry, and fiduciary status does not depend on the client being institutional.NASAA Model Rule

A broker-dealer sells a customer bonds out of the firm's own inventory. Which disclosure obligation applies?

• a.None, because the customer received a confirmation of the trade price
• b.The firm must disclose only the current market price of the bonds
• c.The firm must obtain the Administrator's approval before acting as principal
• d.The firm must disclose that it acted as a principal, and its compensation is a markup rather than a commission✓

A customer is entitled to know the capacity in which the firm acted, because a principal trade produces a markup embedded in the price while an agency trade produces a disclosed commission. Failing to state capacity or disguising a markup as something else is an unethical practice. No Administrator approval is required to act as principal in an ordinary customer trade.NASAA Model Rule

A broker-dealer decides to raise its account maintenance and transfer fees substantially. Under NASAA rules, the firm:

• a.Must give customers notice of the change and may not charge unreasonable or undisclosed fees✓
• b.May implement the change without notice because fees are a business decision
• c.Must obtain each customer's written consent to every fee
• d.May charge any amount as long as it appears on the confirmation

Charging unreasonable and inequitable fees for services, or failing to disclose a change in the firm's fee schedule, is an unethical business practice. Customers must receive notice so they can decide whether to keep the account. Written consent for every fee is not required, and simply printing an excessive charge on a confirmation does not make it reasonable.NASAA Model Rule

A broker-dealer publishes a market letter recommending a stock in which it holds a substantial proprietary position and for which it makes a market. The letter must:

• a.Say nothing about the firm's position, to avoid influencing readers
• b.Disclose the firm's position and its role as a market maker, and present projections as opinions rather than as fact✓
• c.Guarantee the accuracy of the price target
• d.Be filed with the SEC before publication

Publishing research or a market letter without disclosing that the firm makes a market in or holds a position in the security conceals a material conflict of interest. Forecasts must be identified as opinion, since presenting a projection as an assured fact is a misrepresentation. No firm can guarantee a price target, and routine market letters are not filed with the SEC for approval.NASAA Model Rule

Regarding advertising and sales literature used to offer securities in a state, the Administrator:

• a.Has no authority over advertising of any kind
• b.May prohibit only advertising that mentions past performance
• c.May require prior approval of advertising for federal covered securities
• d.May by rule require the filing of advertising and sales literature, except for federal covered securities and exempt securities and transactions✓

The act allows the Administrator to require that prospectuses, pamphlets, circulars, letters, and other sales literature used in the state be filed, and material that is false or misleading may be halted. That filing authority does not extend to federal covered securities, where federal law preempts, or to exempt securities and exempt transactions. Antifraud authority over misleading advertising remains in all cases.Uniform Securities Act

A customer receives a margin call and cannot meet it. The agent offers to lend the customer the money personally so the position need not be sold. This is:

• a.Permitted because it protects the customer from a forced sale
• b.Permitted with oral disclosure to the branch manager
• c.Prohibited, because lending money to a customer creates a conflict of interest and is an unethical practice outside narrow exceptions✓
• d.Permitted if the customer signs a promissory note

Lending money or securities to a customer, like borrowing from one, is prohibited except in narrow circumstances such as a lending relationship through the firm or an immediate family member, and only where the firm's written procedures permit it. Good intentions do not create an exception. Documentation such as a promissory note or an oral notification to a manager does not make the loan permissible.NASAA Model Rule

A customer instructs her agent to sell her entire position in a stock. The agent, believing the stock will rebound, sells only half. The agent has:

• a.Acted prudently in the customer's best interest
• b.Committed a prohibited practice by failing to follow the customer's instructions and effectively exercising unauthorized discretion✓
• c.Acted properly because a partial sale is less risky
• d.Acted properly if the stock later recovers

Failing to execute a customer's order as instructed is an unethical practice, and substituting the agent's own judgment for the customer's amounts to unauthorized discretion. The agent may voice a contrary opinion but must ultimately follow the instruction or decline the account. A favorable market outcome does not retroactively excuse the deviation.NASAA Model Rule

An agent realizes a new account form is missing a signature, so he signs the customer's name himself, reasoning that the customer had already agreed by telephone. This conduct is:

• a.Acceptable because the customer consented orally
• b.Acceptable if the customer later ratifies the signature
• c.Prohibited, because falsifying or forging records and signatures is an unethical practice regardless of intent✓
• d.Acceptable if no customer is harmed

Signing a customer's name, backdating documents, or otherwise falsifying firm records is prohibited because it destroys the integrity of the books and records regulators rely on. Neither an oral agreement nor a later ratification cures the falsified document. The absence of financial harm is not a defense; the recordkeeping violation is complete when the record is made.NASAA Model Rule

An agent urges a client to buy a mutual fund now because 'the fund pays a big distribution next week and you'll pick up extra income.' This sales tactic is:

• a.Sound advice, because the client receives cash sooner
• b.Acceptable if the fund is otherwise suitable
• c.Acceptable because the distribution is publicly announced
• d.Selling dividends, a prohibited practice, because the share price drops by the distribution amount and the investor gains nothing while incurring a tax liability✓

Selling dividends is prohibited because the net asset value falls by the amount of the distribution on the ex-date, so the investor simply converts principal into a taxable payment. Framing an imminent distribution as a reason to buy misrepresents the economics of the transaction. Public disclosure of the distribution and general suitability of the fund do not make the pitch acceptable.NASAA Model Rule

A client intends to invest $48,000 in a mutual fund whose sales charge drops at a $50,000 breakpoint. The agent processes the order at $48,000 without mentioning the breakpoint. This is:

• a.A breakpoint sale, a prohibited practice, because the agent failed to disclose that a slightly larger investment would reduce the sales charge✓
• b.Acceptable because the client chose the amount
• c.Acceptable because breakpoints apply only to accumulation over several years
• d.Acceptable if the agent's commission was standard

Failing to disclose an available breakpoint, or deliberately keeping an order just below one to preserve a higher sales charge, is an unethical practice. The agent must alert the client to quantity discounts, letters of intent, and rights of accumulation. The fact that the client named the dollar figure does not relieve the agent of the disclosure duty, and breakpoints apply to single purchases as well as to accumulated holdings.NASAA Model Rule

An agent regularly advises clients to redeem shares of one mutual fund family and buy a similar fund in another family, generating a new front-end sales charge each time. Absent a documented benefit to the client, this is:

• a.Proper diversification across fund sponsors
• b.Acceptable because each fund is individually suitable
• c.Acceptable because the client signs each order ticket
• d.Improper mutual fund switching, because inducing exchanges between fund families without reasonable grounds imposes needless sales charges✓

Recommending that a client move between fund families without reasonable grounds is an unethical practice, since the new sales charge is a real cost with no corresponding benefit when comparable objectives are available within the existing family. Suitability of each individual fund does not justify the repeated charges. Signed order tickets document the trade but do not supply the required reasonable basis.NASAA Model Rule

A customer emails an agent complaining that a trade was never authorized. The agent should:

• a.Resolve it privately with the customer and say nothing to the firm
• b.Delete the email since the matter is disputed
• c.Promptly forward the written complaint to the firm so it can be reviewed, acted on, and preserved in the firm's records✓
• d.Wait to see whether the customer follows up before reporting it

Written customer complaints must be routed promptly to the firm and retained, because the firm has supervisory and recordkeeping obligations and regulators may inspect complaint files. Handling a complaint privately or settling it without the firm's knowledge is itself an unethical practice. Destroying or delaying the record compounds the original problem.NASAA Model Rule

A state-registered investment adviser takes custody of client securities. Under the NASAA custody rule, the adviser generally must:

• a.Notify the Administrator that it has custody, segregate client assets with a qualified custodian, send account statements to clients, and arrange for an independent verification of the assets✓
• b.Hold the securities in the firm's own name to simplify administration
• c.Send statements only upon client request
• d.Avoid any recordkeeping beyond a summary ledger

The custody rule requires notice to the Administrator, use of a qualified custodian, segregation of client assets from firm assets, periodic account statements sent directly to clients, and an independent surprise verification of the funds and securities. Registering client assets in the firm's name defeats the segregation requirement. Custody also raises the adviser's recordkeeping and financial requirements rather than lowering them.NASAA Model Rule

An investment adviser wants to charge a fee based on a share of the capital gains in a client's account. Under NASAA rules, such a performance-based fee is:

• a.Prohibited for every client without exception
• b.Permitted only for clients who meet defined net worth or assets-under-management standards, with the arrangement and its risks disclosed in writing✓
• c.Permitted for any client who signs a waiver
• d.Permitted only if the adviser also guarantees against loss

Performance-based compensation is limited to clients who satisfy financial thresholds designed to identify investors able to bear the incentive risk, and the arrangement must be disclosed along with the conflicts it creates. A client waiver cannot substitute for the eligibility standards, and provisions purporting to waive compliance with the act are void. Guaranteeing against loss is itself prohibited, so it could never be a condition of a permitted fee.NASAA Model Rule

An investment adviser directs client brokerage to a firm that provides research reports and also pays the adviser's office rent. Regarding these soft dollar arrangements, the adviser:

• a.May accept research and brokerage services that benefit clients within the recognized safe harbor and must disclose the arrangement, but paying general overhead such as rent falls outside it✓
• b.May accept anything of value so long as commissions are competitive
• c.Need not disclose soft dollar arrangements because they cost the client nothing extra
• d.May accept overhead payments if the client's returns are positive

Soft dollar benefits are acceptable only when they consist of research or brokerage services that assist the adviser's investment decision-making for clients, and the arrangement must be disclosed because it creates a conflict in the choice of executing broker. Payments for ordinary business overhead such as rent, salaries, or travel are outside the safe harbor and amount to using client commissions for the adviser's benefit. Client commissions are a real cost, so the claim that nothing extra is paid is false.NASAA Model Rule

An investment adviser proposes to act as broker for a client on one side of a trade while representing the counterparty on the other. This agency cross transaction:

• a.Is flatly prohibited in every circumstance
• b.Requires disclosure of the adviser's role and the conflicts involved, and the client's consent, with the adviser never having recommended the trade to both parties✓
• c.Requires only that commissions be reasonable
• d.Requires approval from the Administrator before each trade

An agency cross transaction is permitted only with disclosure of the capacity in which the adviser acts, the compensation it will receive, and the conflict inherent in serving both sides, together with the client's consent and periodic reporting. The adviser may not have recommended the transaction to both the buyer and the seller. Reasonable commissions alone do not satisfy the rule, and there is no requirement of trade-by-trade approval by the Administrator.NASAA Model Rule

An investment adviser pays an accountant a fee for every client the accountant refers. Under NASAA rules, this arrangement requires that:

• a.Nothing be disclosed, because the client pays no additional fee
• b.The solicitor register as an investment adviser in every state
• c.The arrangement be in writing and disclosed to the client in writing, so the client knows the referral was compensated✓
• d.The referral fee be capped at five percent of the first year's advisory fee

Compensated solicitation arrangements must be documented in a written agreement and disclosed to the prospective client in writing so the client can weigh the referral's independence. Whether the client pays more is beside the point; the conflict itself is the material fact. The rules impose disclosure and documentation requirements rather than a universal percentage cap, and a solicitor is not automatically an investment adviser in every state.NASAA Model Rule

An agent's friend asks about the holdings and balance in a mutual acquaintance's brokerage account. The agent should:

• a.Share general information as long as no dollar figures are given
• b.Share the information if the friend is also a client of the firm
• c.Share the information because account data is not confidential
• d.Decline, because customer account information is confidential and may be released only with the customer's consent or under proper legal authority✓

Disclosing confidential customer information without the customer's consent is an unethical business practice; the recognized exceptions are limited to responses to subpoenas, court orders, and legitimate regulatory demands. Being a client of the same firm gives the friend no right to another customer's data. Withholding dollar amounts does not make the disclosure permissible, since holdings themselves are confidential.NASAA Model Rule

A client loses money on a trade the agent recommended. To keep the client from complaining, the agent quietly writes a personal check covering the loss and tells no one at the firm. The agent has:

• a.Resolved the matter appropriately at his own expense
• b.Acted properly because the client suffered no net loss
• c.Committed a prohibited practice by settling a complaint without the firm's knowledge and effectively guaranteeing the customer against loss✓
• d.Acted properly because no securities were involved in the payment

Reimbursing a customer for losses out of personal funds both conceals a potential complaint from the firm's supervisory system and operates as a guarantee against loss, each of which is an unethical practice. The firm must be able to review the underlying recommendation and record the complaint. Making the client whole financially does not cure the concealment.NASAA Model Rule

In investigating a suspected violation, the Administrator may:

• a.Act only within the borders of his or her own state
• b.Compel testimony only after obtaining a criminal indictment
• c.Require testimony but never demand documents
• d.Conduct investigations inside or outside the state, administer oaths, subpoena witnesses and records, and require written statements under oath✓

The act grants broad investigative authority: the Administrator may investigate in or outside the state, publish information about violations, administer oaths, compel attendance of witnesses, and require the production of books, papers, and other records. These powers do not depend on a criminal charge. If a person refuses to comply, the Administrator asks a court to compel obedience through its contempt power.Uniform Securities Act

Which statement about a cease and desist order is correct?

• a.It may be issued only after a full hearing on the merits
• b.The Administrator may issue it with or without a prior hearing, but must go to court to obtain an injunction enforcing it✓
• c.It automatically revokes the recipient's registration
• d.It may be issued only against registered persons

The Administrator may issue a cease and desist order with or without a prior hearing to stop conduct that violates the act, subject to the recipient's right to request a hearing. The Administrator cannot enforce the order directly; obtaining an injunction or other coercive relief requires applying to a court. Revocation is a separate proceeding, and the antifraud reach of the act extends to unregistered persons as well.Uniform Securities Act

Before denying, suspending, or revoking a registration, the Administrator must generally find that:

• a.The order is in the public interest and a statutory ground exists, after appropriate notice, an opportunity for hearing, and written findings of fact and conclusions of law✓
• b.The registrant has been convicted of a felony
• c.The registrant has caused a customer to lose money
• d.A majority of the registrant's customers have complained

Disciplinary orders require both a public interest finding and one of the enumerated statutory grounds, such as a material misstatement in an application, a securities-related conviction, an injunction, or a violation of the act. Procedural protections include prior notice, an opportunity for a hearing, and written findings. Customer losses and complaint counts may be evidence but are not themselves the legal standard.Uniform Securities Act

The Administrator believes immediate action is needed against a registrant while a proceeding is pending. The Administrator may:

• a.Do nothing until a final order is entered
• b.Order the registrant to pay restitution without any hearing
• c.Have the registrant arrested pending the outcome
• d.Summarily postpone or suspend the registration pending final determination, provided prompt written notice is given and a hearing is promptly scheduled if requested✓

The act permits a summary postponement or suspension of a registration while a proceeding is pending, balanced by the requirement of prompt written notice of the order and the reasons for it, plus a hearing within a short period if the affected person requests one. Waiting helplessly for a final order would defeat the purpose of the emergency power. Arrests and criminal sanctions are for courts, not the Administrator.Uniform Securities Act

Under the Uniform Securities Act as commonly adopted, a person convicted of a willful violation of the act faces criminal penalties of:

• a.A fine, imprisonment, or both, with prosecution generally required to begin within five years of the alleged violation✓
• b.Life imprisonment with no fine
• c.A fine imposed directly by the Administrator, with no court involvement
• d.No criminal exposure, because the act provides only civil remedies

Willful violations are criminal offenses punishable by a fine, imprisonment, or both, and the act sets a statute of limitations of five years from the alleged violation for beginning a prosecution. Criminal cases are brought in court by the appropriate prosecuting authority, not decided by the Administrator. Proof of willfulness means proof that the person intended the act, though not that the person knew it was unlawful.Uniform Securities Act

An investor buys a security in a sale that violated the registration provisions of the act. In a civil suit, the investor may generally recover:

• a.Triple the amount invested as punitive damages
• b.The consideration paid plus interest, less any income received on the security, together with costs and reasonable attorney's fees, upon tender of the security✓
• c.Only the difference between the purchase price and the current market price
• d.Nothing, because civil remedies are unavailable under the act

The civil liability provision makes the buyer whole by returning the purchase price plus interest, reduced by income already received, along with court costs and reasonable attorney's fees, in exchange for tendering the security back. If the investor no longer owns it, damages are calculated in a comparable way. The act's remedy is restitutionary rather than a punitive multiple of the investment.Uniform Securities Act

A broker-dealer discovers it sold securities in violation of the act and sends the purchaser a written offer of rescission. Which statement is correct?

• a.The purchaser may accept at any time within three years
• b.The offer must be accompanied by a cash payment before the buyer responds
• c.The purchaser generally loses the right to sue if the written offer, containing the required disclosures and the offer of the price paid plus interest, is not accepted within the period specified by the act✓
• d.The Administrator must approve the offer in advance

A proper rescission offer must be in writing, disclose the violation, and offer to repay the consideration plus interest less income received; a purchaser who does not accept within the statutory response period loses the right to bring the civil action. This gives a firm that self-corrects a way to cut off liability. The offer itself does not require prepayment or prior approval by the Administrator, and it is not open indefinitely.Uniform Securities Act

A registrant disagrees with a final order entered by the Administrator. The registrant may:

• a.Ignore the order until the Administrator brings an enforcement action
• b.Obtain judicial review by filing a petition in the appropriate court within sixty days of the order, though filing generally does not stay the order✓
• c.Appeal directly to the SEC
• d.Demand a jury trial before the Administrator

Final orders are subject to judicial review on a written petition filed within sixty days, and the reviewing court examines the administrative record. Filing the petition does not by itself suspend the order unless the court so directs, so the registrant must comply in the meantime. State administrative orders are not appealed to the SEC, and administrative hearings are conducted without juries.Uniform Securities Act

An Administrator has jurisdiction over an offer or sale when:

• a.The offer originated in the state, or was directed into and received in the state, or the acceptance of the offer took place in the state✓
• b.Only when both the buyer and the seller reside in the state
• c.Only when the security involved is registered in the state
• d.Only when the transaction was profitable for the seller

Jurisdiction attaches where an offer originates, where it is directed and received, and where an offer to buy or sell is accepted, which is why a single transaction can fall under two states' laws. Residency of both parties is not required. Neither registration of the security nor the seller's profit has any bearing on jurisdiction, and the antifraud provisions reach offers even where no sale occurs.Uniform Securities Act

Regarding records of registered broker-dealers and investment advisers, the Administrator:

• a.May inspect records only after obtaining a search warrant
• b.May require records but may never inspect them outside the state
• c.May by rule require registrants to make and keep specified records and may examine those records within or outside the state, at any reasonable time and as often as necessary✓
• d.May inspect records only during an annual audit announced in advance

The act authorizes the Administrator to prescribe recordkeeping requirements and to conduct reasonably frequent examinations of registrants' records, whether the records are located in the state or elsewhere. Examinations may be announced or unannounced and do not require a warrant, because registration carries consent to inspection. Registrants must also ensure records are preserved for the periods set by rule.Uniform Securities Act

Which statement about the Administrator's rulemaking authority is correct?

• a.The Administrator may adopt rules but never prescribe forms
• b.Rules take effect only after approval by the SEC
• c.Rules may be adopted in secret and enforced immediately
• d.The Administrator may make, amend, and rescind rules, forms, and orders necessary to carry out the act, and rules must be published before they can be enforced✓

The act gives the Administrator broad authority to adopt, amend, and rescind rules and forms and to issue orders as necessary to administer the statute, subject to publication so that regulated persons have notice. No rule may be enforced against a person who had no notice of it. State rules are not submitted to the SEC for approval, though they cannot conflict with preemptive federal law.Uniform Securities Act

Which of the following may the Administrator NOT do?

• a.Deny an application for registration after notice and an opportunity for hearing
• b.Issue a cease and desist order
• c.Issue an injunction or sentence a violator to prison✓
• d.Subpoena records located in another state

Injunctions and criminal sentences are judicial remedies: the Administrator must ask a court for an injunction and must refer evidence to a prosecutor for criminal charges. Administrative powers include denying, suspending, and revoking registrations after notice and an opportunity for hearing, issuing cease and desist orders, and compelling the production of records wherever they are kept. Keeping the administrative and judicial roles straight is a heavily tested distinction.Uniform Securities Act

A non-resident broker-dealer is sued under a state's securities act. Because the firm filed a consent to service of process, legal papers may be:

• a.Served only at the firm's out-of-state headquarters
• b.Served only if the firm still has clients in the state
• c.Ignored unless the firm agrees to appear
• d.Served on the Administrator with the same effect as personal service on the firm, with notice forwarded to the firm✓

The consent to service of process appoints the Administrator as the registrant's attorney to receive service of process in any noncriminal action arising under the act, and service on the Administrator carries the same force as personal service. The Administrator then forwards a copy to the last known address. The consent survives the firm's departure from the state and cannot be disregarded.Uniform Securities Act

After an investigation, the Administrator concludes that a person has willfully violated the act and that criminal charges are appropriate. The Administrator may:

• a.Refer the evidence to the attorney general or the appropriate prosecuting attorney, who may institute criminal proceedings✓
• b.Impose a prison sentence directly
• c.Convene a grand jury without involving prosecutors
• d.Do nothing, because criminal violations are exclusively federal

The Administrator may refer the evidence gathered in an investigation to the attorney general or the proper district or prosecuting attorney, who has discretion to bring criminal proceedings in court. The Administrator has no power to sentence anyone or to convene a grand jury. State securities acts create state criminal offenses, so the matter is not exclusively federal.Uniform Securities Act

An applicant for agent registration has passed the required examination and has no disciplinary history, but the Administrator considers her inexperienced. Under the Uniform Securities Act, the Administrator:

• a.May deny the application solely because of the applicant's lack of experience
• b.May consider training, experience, and knowledge of the securities business, but may not deny a registration solely on the ground that the applicant lacks experience✓
• c.Must deny the application because experience is a statutory prerequisite
• d.May grant the registration only on the condition that the applicant waive the right to a hearing

The act allows the Administrator to weigh an applicant's training, experience, and knowledge of the securities business as part of the qualification determination, but it expressly forbids denying a registration to an individual solely for lack of experience. Experience is therefore a factor rather than a prerequisite. Any provision purporting to waive compliance with the act, including hearing rights, is void.Uniform Securities Act