NASAA Series 63 — 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 agent who must register in State A✓
• b.An issuer, because she sells only the company's own shares
• c.A broker-dealer, because she effects securities transactions for compensation
• d.Excluded from the definition of agent because she represents an issuer rather than a broker-dealer

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

'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 limited partnership interest in a real estate venture held for the account of passive outside investors, an instrument the Act lists outside its securities definition because real estate is tangible property
• b.A certificate of interest in an oil and gas drilling program marketed broadly to the public, which the statute classifies as a fractional mineral right rather than as an investment security
• c.A variable annuity contract
• 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.No, because broker-dealers register only with the SEC and never with a state
• 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.Yes, unless it has fewer than five total clients in State Y
• d.Yes, because any securities business conducted with State Y residents requires registration

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.The agent must register in State B before the call because the offer was received there, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.The agent may complete the trade only if the client signs a waiver of State B law
• c.No registration in State B is required, because the client remains a resident of State A and is only temporarily present in State B✓
• 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 advisers never qualify for numerical exemptions
• b.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✓
• c.Must register because it has more than one client in the state
• 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 authorizes the Administrator to settle civil claims against the registrant
• b.It is required only of applicants whose principal office is outside the state
• c.It must be refiled with each annual renewal of the registration
• d.It is filed with the initial application and remains in effect permanently, appointing the Administrator to receive legal papers on the registrant's behalf✓

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.Broker-Dealer One only, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.The agent, Broker-Dealer One, and Broker-Dealer Two✓
• c.Broker-Dealer Two only, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.The agent only

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.An accounts-payable clerk who processes vendor invoices, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• b.A building maintenance technician employed by the firm
• c.A portfolio manager who selects securities for client accounts and supervises two junior analysts✓
• d.A receptionist who schedules client meetings

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.At the close of business on the tenth day after filing, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.Immediately upon filing with the Administrator, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.When the applicant passes the required qualification examination, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• 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 the adviser to insure client accounts against market losses
• d.Require nothing, because financial requirements are set exclusively by federal law, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

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 Administrator loses all authority over the firm the moment the application is filed
• b.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✓
• c.The withdrawal never becomes effective if a customer complaint is on file
• d.The withdrawal is effective immediately upon filing

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

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.Is excluded from the definition of agent because he represents an issuer in transactions in specified exempt securities✓
• b.Must register as an agent only if he receives commissions, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Must register as a broker-dealer instead of an agent
• d.Must register as an agent because he sells to the public, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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

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

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 register in the state of its principal office and notice file in the others
• c.Must also register in each state where it has an office
• d.Has no obligation of any kind to the state Administrators

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, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Must register with the SEC rather than with State P
• c.Need not register anywhere as long as he has fewer than six clients
• d.Must register as an investment adviser representative in State P because he has a place of business there✓

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.Must register only after it accepts a retail account
• b.May rely on its State A registration under reciprocity, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Is excluded because its only clients there are institutions, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Must register in State B because it maintains a place of business in the state✓

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.In neither state, because no sale occurred
• b.Only in State A, where the letter originated
• c.In both State A and State B, giving each Administrator jurisdiction✓
• d.Only in State B, where the letter was received, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

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.Not deemed made in State C, because the broadcast originated outside the state✓
• c.Deemed made in State C only if a State C resident responds, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Deemed made in every state where the signal is received, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

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.A broker-dealer with respect to the plan
• b.An agent who must register before speaking with any employee, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Not an agent, because she represents the issuer in transactions with the issuer's employees and receives no commission✓
• d.An investment adviser representative

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.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✓
• b.Transfer automatically to any affiliated firm
• c.Remain fully effective because they were registered individually
• d.Are automatically revoked and must be reapplied for

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.May simply continue to operate under the predecessor's registration indefinitely
• 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.Must file a completely new application and wait thirty days before doing business
• 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.Is completely exempt from all state requirements
• b.Must obtain full broker-dealer registration in the state
• c.May not deal with those clients at all while they are in the United States
• 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 pledge of securities as loan collateral that is never foreclosed
• b.A gift of assessable stock✓
• c.A stock dividend for which shareholders give up nothing of value
• d.A bona fide gift of fully paid, nonassessable stock to a family member

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, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Must register as an agent because he speaks with customers, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.Must register as an investment adviser representative
• d.Need not register, because his functions are clerical and he does not effect or attempt to effect securities transactions✓

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 until it has at least fifteen clients
• c.Must register only if the clients are institutional
• d.Need not register, because it has fewer than six clients in the state, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules

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.An insurance company, which the institutional list in the broker-dealer exclusion expressly enumerates alongside trust companies and savings institutions
• b.An individual investor with a $4 million portfolio✓
• c.A commercial bank
• d.A registered investment company, one of the enumerated institutional buyers whose presence keeps the no-place-of-business exclusion fully intact under the Act

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 she never physically enters the state, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• b.She may solicit up to five State B residents before registering
• c.No registration in State B is needed because her firm is registered there, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• 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 automatically an agent of the individuals who sell its shares
• b.Only corporations can be issuers
• c.An issuer must always register as a broker-dealer before selling its own securities, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.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✓

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 not in effect, because an agent may not act while unassociated with a registered broker-dealer or issuer✓
• c.Automatically converts to an investment adviser representative registration, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Is unaffected because agents register independently of their firms, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

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

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 need not register anywhere because no state has more than five of its clients, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.It must register in all three states because it has clients in each
• c.It must register in State E and State F but may withdraw from State D
• 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 a broker-dealer because she was paid a percentage
• c.Is an investment adviser rather than an agent
• d.Is exempt because she never handled customer funds

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

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 may be used only when a federal registration statement has also been filed
• c.It becomes effective automatically two business days after filing
• d.It is available only to issuers listed on a national exchange

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.Established issuers that meet stated requirements such as a minimum operating history and no default on senior securities✓
• b.Only issuers of exempt securities
• c.Any issuer regardless of operating history, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Only issuers making their very first public offering, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

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.Completely outside the state Administrator's reach for any purpose
• c.Required to be registered by qualification in the state
• d.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✓

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.Both an exempt security and an exempt transaction
• b.Neither exempt nor permissible without state registration
• c.A sale of exempt securities, because institutional buyers were involved, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.An exempt transaction, because sales to institutional investors are exempted from the registration requirement✓

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 must be registered by coordination in each state, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.They are exempt transactions rather than exempt securities, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.They are exempt securities, so the exemption follows the instrument in every transaction✓
• d.They are exempt only when sold to institutional investors, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere

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.A prohibited transaction under the act
• b.A sale of an exempt security
• c.A public offering requiring registration by qualification, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.An isolated non-issuer transaction, which is an exempt transaction✓

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, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Permitted as an unsolicited non-issuer transaction, an exempt transaction the firm may be required to document with a signed customer acknowledgment✓
• c.Permitted only if the customer is an institution
• d.Permitted only after the firm registers the security by qualification, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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

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, a municipal obligation the Act treats as fully subject to state registration in the hands of any ordinary retail purchaser
• b.Bonds issued by a nonprofit religious organization, instruments the statute declines to exempt because charitable issuers are treated exactly like ordinary corporate issuers
• c.A variable annuity contract issued by a licensed insurance company✓
• d.Common stock issued by a commercial bank

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.Required to be registered by coordination
• b.Not securities at all
• c.Exempt transactions, because sales were limited to members, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Exempt securities, because they are issued by a nonprofit religious organization✓

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, ordinary solicited retail business that the Act separately lists among the transactions entitled to the isolated-sale exemption
• b.A mutual fund's continuous offering to the general public, a distribution the statute exempts from transactional requirements because investment company shares are continuously redeemable
• c.A sale of securities by a court-appointed executor settling a decedent's estate✓
• d.An issuer's advertised public offering of common stock

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

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 do not apply because the transaction is exempt, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• b.The antifraud provisions of the act still apply to the offer and the sale✓
• c.The Administrator has no jurisdiction over the sale
• d.The seller may make optimistic projections without qualification, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

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.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✓
• c.Once declared effective it remains effective indefinitely
• d.It may not be amended after the effective date under any circumstances

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.Guarantee the offering by state funds
• b.Prohibit the offering outright without a hearing
• c.Require the underwriter to purchase any unsold shares, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Require as a condition of registration that the proceeds be impounded in escrow until a specified amount is received✓

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, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Guarantee a minimum rate of return to purchasers
• c.Register the securities again in every other state, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.File reports, no more often than quarterly, showing the progress of the offering and the sale of the registered securities✓

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

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.Federal covered securities regardless of where they trade
• b.Exempt transactions in every case
• c.Not automatically exempt, because the exemption covers securities issued by a bank itself, not by a separate holding company✓
• d.Exempt securities, because the underlying subsidiary is a bank, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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.A registration statement must be filed by qualification
• b.At least twenty-five subscribers are required
• c.The subscribers must each invest at least $10,000
• 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.A permissible active management style since the customer never objected, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.Selling away, because the trades were placed outside the firm, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Front-running, because the agent traded ahead of the customer, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

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

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 if the agent later discloses it
• b.Permissible, because the agent's order was small, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• 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 if the client is later refunded
• b.Permitted for any adviser with a surety bond, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.Acceptable because the fee had already been earned on paper, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Commingling of client funds with firm assets, a prohibited business practice✓

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.Merely made a puffing statement with no regulatory consequence, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Acted properly because the promise was voluntary and personal
• c.Violated the prohibition on guaranteeing a customer against loss✓
• d.Acted properly if the firm approves the arrangement in writing

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 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✓
• b.Is prohibited under all circumstances for every registered person
• c.Requires only the branch manager's verbal approval
• d.Is permitted whenever the customer requests it orally

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 if the agent discloses the loan at year end
• b.Permitted because the client is wealthy and the loan is documented
• c.Permitted because the loan is unrelated to securities
• d.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✓

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, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.A suitability violation only
• d.Permitted because the fee came from the sponsor rather than the clients, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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

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.Permitted because both parties consented
• b.Permitted if the trades are reported to the tape, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Legitimate market making
• d.Market manipulation through matched orders creating misleading activity, which is prohibited✓

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.Obtain the Administrator's prior approval of the recommendation
• b.Guarantee that the recommendation will meet the customer's return objective
• c.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✓
• 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.Neither owes any duty beyond executing orders accurately
• b.An adviser owes duties only to institutional clients
• c.A broker-dealer is always a fiduciary and an adviser is not
• d.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✓

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. Series 63 tests this suitability standard at the uniform-law level; separately, the federal SEC Regulation Best Interest now requires broker-dealers to act in a retail customer's best interest, a heightened federal overlay that does not displace the state suitability framework tested here. 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.The firm must disclose that it acted as a principal, and its compensation is a markup rather than a commission✓
• b.None, because the customer received a confirmation of the trade price, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.The firm must disclose only the current market price of the bonds
• d.The firm must obtain the Administrator's approval before acting as principal, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

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.May charge any amount as long as it appears on the confirmation
• b.Must obtain each customer's written consent to every fee
• c.Must give customers notice of the change and may not charge unreasonable or undisclosed fees✓
• d.May implement the change without notice because fees are a business decision, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere

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.Disclose the firm's position and its role as a market maker, and present projections as opinions rather than as fact✓
• b.Say nothing about the firm's position, to avoid influencing readers, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.Guarantee the accuracy of the price target, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.Be filed with the SEC before publication, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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

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 with oral disclosure to the branch manager
• b.Permitted because it protects the customer from a forced sale, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.Permitted if the customer signs a promissory note
• d.Prohibited, because lending money to a customer creates a conflict of interest and is an unethical practice outside narrow exceptions✓

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 properly if the stock later recovers
• b.Acted properly because a partial sale is less risky, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Committed a prohibited practice by failing to follow the customer's instructions and effectively exercising unauthorized discretion✓
• d.Acted prudently in the customer's best interest, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

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, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Acceptable if no customer is harmed
• d.Prohibited, because falsifying or forging records and signatures is an unethical practice regardless of intent✓

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

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.Acceptable because breakpoints apply only to accumulation over several years, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A breakpoint sale, a prohibited practice, because the agent failed to disclose that a slightly larger investment would reduce the sales charge✓
• c.Acceptable if the agent's commission was standard, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Acceptable because the client chose the amount

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.Acceptable because each fund is individually suitable, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Proper diversification across fund sponsors
• 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.Delete the email since the matter is disputed
• b.Promptly forward the written complaint to the firm so it can be reviewed, acted on, and preserved in the firm's records✓
• c.Wait to see whether the customer follows up before reporting it, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.Resolve it privately with the customer and say nothing to the firm, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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.Avoid any recordkeeping beyond a summary ledger
• b.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✓
• c.Send statements only upon client request
• d.Hold the securities in the firm's own name to simplify administration

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.Permitted only for clients who meet defined net worth or assets-under-management standards, with the arrangement and its risks disclosed in writing✓
• b.Permitted only if the adviser also guarantees against loss, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Permitted for any client who signs a waiver
• d.Prohibited for every client without exception

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 overhead payments if the client's returns are positive
• b.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✓
• c.May accept anything of value so long as commissions are competitive
• d.Need not disclose soft dollar arrangements because they cost the client nothing extra

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 only that commissions be reasonable
• c.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✓
• 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, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.The arrangement be in writing and disclosed to the client in writing, so the client knows the referral was compensated✓
• c.The solicitor register as an investment adviser in every state, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.The referral fee be capped at five percent of the first year's advisory fee, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

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

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.Acted properly because no securities were involved in the payment
• 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.Resolved the matter appropriately at his own expense

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.Conduct investigations inside or outside the state, administer oaths, subpoena witnesses and records, and require written statements under oath✓
• b.Require testimony but never demand documents
• c.Compel testimony only after obtaining a criminal indictment, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Act only within the borders of his or her own state

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, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• 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 may be issued only against registered persons
• d.It automatically revokes the recipient's registration, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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 registrant has been convicted of a felony
• b.The registrant has caused a customer to lose money
• c.A majority of the registrant's customers have complained
• d.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✓

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.Have the registrant arrested pending the outcome
• c.Summarily postpone or suspend the registration pending final determination, provided prompt written notice is given and a hearing is promptly scheduled if requested✓
• d.Order the registrant to pay restitution without any hearing

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.Life imprisonment with no fine
• b.A fine imposed directly by the Administrator, with no court involvement, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.A fine, imprisonment, or both, with prosecution generally required to begin within five years of the alleged violation✓
• 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.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✓
• b.Only the difference between the purchase price and the current market price
• c.Triple the amount invested as punitive damages
• 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 offer must be accompanied by a cash payment before the buyer responds
• b.The purchaser may accept at any time within three years
• 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.Demand a jury trial before the Administrator
• 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.Ignore the order until the Administrator brings an enforcement action

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 the transaction was profitable for the seller
• c.Only when both the buyer and the seller reside in the state, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Only when the security involved is registered in the state, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

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 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✓
• c.May inspect records only during an annual audit announced in advance
• d.May require records but may never inspect them outside the state

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.Rules take effect only after approval by the SEC
• b.The Administrator may adopt rules but never prescribe forms
• 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.Issue an injunction or sentence a violator to prison✓
• b.Subpoena records located in another state
• c.Deny an application for registration after notice and an opportunity for hearing
• d.Issue a cease and desist order

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 on the Administrator with the same effect as personal service on the firm, with notice forwarded to the firm✓
• b.Served only at the firm's out-of-state headquarters
• c.Served only if the firm still has clients in the state, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• d.Ignored unless the firm agrees to appear

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.Convene a grand jury without involving prosecutors, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.Do nothing, because criminal violations are exclusively federal, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.Refer the evidence to the attorney general or the appropriate prosecuting attorney, who may institute criminal proceedings✓
• d.Impose a prison sentence directly

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

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

An agent tells a customer that a new corporate bond 'is completely safe because the issuer has never missed a payment,' when the issuer's credit rating was in fact just cut to below investment grade. The agent has:

• a.Made an acceptable statement, because the payment history is factual
• b.Committed a suitability violation but not fraud
• c.Made a material misrepresentation, which is prohibited whether the security is registered or exempt✓
• d.Done nothing wrong, provided the customer signs a risk acknowledgment, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

The antifraud provision makes it unlawful to make an untrue statement of a material fact in connection with the offer or sale of any security, exempt or not. Citing a true payment history while calling the bond 'completely safe' and hiding a recent downgrade renders the whole statement misleading. A signed acknowledgment cannot waive the antifraud provisions, because any condition purporting to waive compliance with the act is void.Uniform Securities Act

In recommending a stock, an agent accurately describes its strong recent earnings but deliberately omits that the company's auditor resigned last week citing accounting concerns. This omission is:

• a.Permissible, because the earnings figures the agent gave were true, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.A prohibited omission of a material fact necessary to make the agent's statements not misleading✓
• c.Permissible if the auditor's resignation was reported in a newspaper, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• d.A violation only if the customer actually loses money, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules

The antifraud provision reaches the omission of a material fact necessary to make statements made, in light of the circumstances, not misleading. An auditor resignation over accounting concerns is material, so leaving it out taints even literally true earnings talk. Reporting elsewhere does not cure the agent's own misleading presentation, and no loss need occur because the law reaches the offer and sale.Uniform Securities Act

An agent markets GNMA (Ginnie Mae) pass-through securities as 'guaranteed investments with no risk of any kind.' Timely payment of principal and interest is backed by the U.S. government. The characterization is:

• a.A prohibited misrepresentation, because interest-rate and prepayment risk remain even though credit risk is federally backed✓
• b.Accurate, because a federal guarantee eliminates every risk, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Acceptable sales puffery
• d.Permissible only for accredited investors

The federal backing on a GNMA covers credit/default risk, not interest-rate risk or prepayment and reinvestment risk. Telling a customer there is 'no risk of any kind' misstates material facts and misrepresents the scope of the guarantee, a prohibited practice. Framing it as puffery or limiting it to accredited investors does not save a false statement about risk.NASAA Model Rule

A 70-year-old retiree whose stated objective is preservation of capital and current income is steered by her agent into placing most of her savings in a pre-revenue, highly speculative biotech stock. This recommendation is:

• a.Proper, because the client can always decline
• b.Proper if the biotech stock later performs well, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.Unsuitable, and making unsuitable recommendations is a prohibited practice✓
• d.A violation only if the agent exercised discretion, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Recommending securities without reasonable grounds to believe they suit the customer's objectives, situation, and needs is an unethical practice. A speculative equity is squarely at odds with a capital-preservation-and-income objective. Suitability is judged when the recommendation is made, so a later gain does not cure it, and the client's ability to decline does not shift the agent's duty; discretion is not required for the violation.NASAA Model Rule

An agent's brother, an officer at a public company, tells him in confidence that the company will announce a surprise takeover tomorrow. The agent buys the stock for his own account before the news is public. This is:

• a.Permissible, because family conversations are private
• b.Permissible if the agent also buys the stock for clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.A suitability issue only
• d.Prohibited trading on material nonpublic information, reached by the act's antifraud provisions✓

Trading on material nonpublic information obtained in breach of a duty of confidence is fraudulent and prohibited under state antifraud law as well as federal insider-trading law. The private setting of the tip is irrelevant, and buying for clients as well would compound the misconduct. It is not a suitability question; it is a fraud and market-integrity question.Uniform Securities Act

To push up the price of a stock he owns, an agent posts on several online forums that the company is 'about to receive a huge government contract,' a claim he invented. This conduct is:

• a.Protected speech unrelated to the securities laws, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.A violation only if someone actually trades on the rumor, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Acceptable if he later deletes the posts
• d.Prohibited, because circulating false rumors to affect a security's price is a manipulative and deceptive practice✓

Circulating false or misleading rumors to influence a security's price or induce trading is a prohibited manipulative and deceptive practice. It is not shielded as ordinary speech when used to manipulate a market. Deleting the posts does not undo the manipulation, and the violation does not depend on proof that a particular person traded.Uniform Securities Act

Without any order from the customer and with no signed discretionary agreement, an agent buys 300 shares of a stock in the customer's cash account because he is confident it will rise. The agent has:

• a.Acted properly, because it is the customer's own money, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Acted properly if the trade is profitable
• c.Effected an unauthorized transaction, a prohibited practice✓
• d.Committed a paperwork error curable by later consent

Entering an order the customer did not authorize, absent prior written discretionary authority, is a prohibited unauthorized transaction. It is the customer's account, but that is precisely why the customer's authorization is required. A profitable result does not cure it, and after-the-fact consent does not retroactively authorize the trade.NASAA Model Rule

An agent wants to pay half of his commissions to a friend who referred several clients. The friend holds no securities registration of any kind. Under the Uniform Securities Act, the agent may:

• a.Not do so, because commissions may be shared only with appropriately registered persons✓
• b.Do so freely, because the money is the agent's own, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Do so if the friend reports the income on his taxes, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Do so up to ten percent of each commission

Splitting transaction-based securities compensation with an unregistered person is effectively paying an unregistered person for securities activity and is prohibited; sharing is generally limited to persons registered with the same broker-dealer or firms under common control. The source of the funds, the friend's tax reporting, and an arbitrary percentage cap do not make it permissible.Uniform Securities Act

Two agents registered with the same broker-dealer agree to split the commission on a joint account they service together. This arrangement is:

• a.Prohibited in all cases
• b.Generally permissible, because both are registered agents of the same broker-dealer✓
• c.Permissible only with the Administrator's prior approval
• d.Permissible only if the customer pays a higher commission, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Commission sharing among agents registered with the same broker-dealer, or affiliated firms under common control, is permitted; the prohibited abuse is sharing with an unregistered person. No Administrator approval is needed, and the customer is not charged more because the split is internal to the compensation.Uniform Securities Act

An agent executes a securities trade for a customer but arranges for it not to appear on the firm's books and records so his manager will not see it. This is:

• a.Acceptable if the customer received the correct shares, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A minor recordkeeping lapse
• c.A prohibited practice, because effecting transactions not recorded on the employing firm's books without its authorization is unlawful✓
• d.Permissible if disclosed to the customer, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

Effecting a securities transaction that is not recorded on the broker-dealer's regular books and records, without the firm's written authorization, is an unethical practice closely related to selling away; it defeats supervision. Delivering the right shares does not cure it, it is not minor, and disclosing to the customer does not substitute for the firm's authorization and recordkeeping.NASAA Model Rule

To make a late trade appear timely, an agent changes the date on the order ticket to the previous business day. This is:

• a.Acceptable because the trade itself was valid, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.A clerical correction
• c.Permissible with the customer's consent
• d.Falsification of records, a prohibited and unethical practice✓

Backdating or otherwise altering firm records falsifies the books and records regulators rely on and is a prohibited practice regardless of whether the underlying trade was otherwise valid. It is not a clerical fix, and no customer consent can authorize a falsified record.NASAA Model Rule

An agent recommends that clients buy a small company's stock without telling them that he personally owns a large block he hopes to unload at a higher price. The failure to disclose his position is:

• a.A prohibited failure to disclose a material conflict of interest✓
• b.Acceptable, because his personal holdings are private
• c.Acceptable if the stock is otherwise suitable
• d.A violation only if he sells while the recommendation is outstanding

An agent's personal position and intent to sell into his own recommendation is a material conflict of interest (a form of scalping) that must be disclosed; concealing it is fraudulent and unethical. His holdings are not simply 'private' once he recommends the stock, suitability does not cure an undisclosed conflict, and the violation lies in the nondisclosure itself.NASAA Model Rule

A customer hands an agent a check and asks him to 'hold onto it for a few weeks.' Under NASAA rules, the agent must:

• a.Deposit the check into his personal account for safekeeping, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Cash the check and hold the currency
• c.Promptly transmit customer funds and securities to the firm or proper party, without holding or diverting them✓
• d.Return the check only after thirty days, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Agents must promptly forward customer funds and securities to the broker-dealer or the appropriate party; holding, diverting, or commingling them is prohibited. Depositing the check to a personal account or converting it to cash to hold would be commingling and conversion, and there is no thirty-day holding rule.NASAA Model Rule

Under the NASAA brochure rule, a state-registered investment adviser must deliver its written disclosure brochure (or Form ADV Part 2) to a prospective client:

• a.Within thirty days after the contract is signed
• b.No later than entering into the advisory contract; if delivered less than 48 hours beforehand, the client generally gets a five-business-day penalty-free withdrawal right✓
• c.Only upon the client's written request
• d.Once every three years

The brochure rule requires delivery at or before entering into the advisory contract. If the brochure is not delivered at least 48 hours in advance, the client must be given the right to cancel within five business days without penalty. The adviser must also deliver or offer the brochure annually, not merely every three years or on request.NASAA Model Rule

An agent sells a customer shares of a new registered offering but never delivers the required prospectus. This omission is:

• a.A violation, because required prospectus delivery is part of a lawful offer and sale✓
• b.Acceptable, because the customer can find the prospectus online, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Acceptable if the customer is sophisticated
• d.Curable only by rescinding the trade

Failing to deliver a prospectus where one is required is a prohibited practice and a violation of the disclosure obligations attached to the offer and sale. The document's availability online and the customer's sophistication do not excuse nondelivery, and rescission is a possible remedy, not the sole way to address the failure.Uniform Securities Act

An agent tells prospects he is a 'certified investment expert approved by the state,' a credential that does not exist. This is:

• a.A prohibited misrepresentation of the agent's qualifications and of the meaning of registration✓
• b.Acceptable self-promotion
• c.Acceptable because he has passed the Series 63, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.A violation only if a client later complains, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Misrepresenting one's qualifications and implying that the state has 'approved' the agent violates the act, which makes it unlawful to represent that registration means the Administrator has approved the registrant's qualifications. Passing an examination does not create the fictitious credential, and no complaint is required for the violation to exist.Uniform Securities Act

An agent describes a mutual fund as 'no-load,' when it in fact charges a 1% 12b-1 distribution fee and a contingent deferred sales charge. Calling it no-load is:

• a.Accurate, because there is no front-end sales charge, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A harmless labeling choice
• c.A misrepresentation, because ongoing distribution fees and a deferred sales charge are inconsistent with a true no-load description✓
• d.Acceptable if disclosed only in the prospectus

A fund carrying a meaningful 12b-1 fee and a contingent deferred sales charge cannot fairly be called no-load; the label misrepresents the fund's cost structure, a prohibited practice. The absence of a front-end load is not the whole picture, and burying the true costs in the prospectus does not cure an affirmatively misleading oral statement.NASAA Model Rule

An agent recommends a stock to many clients based solely on an unverified tip he overheard, having done no analysis of the company. This is:

• a.Acceptable, because acting on tips is part of the business, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.A prohibited practice, because recommendations must rest on a reasonable basis, not on rumor✓
• c.Acceptable if at least some clients profit
• d.A violation only for discretionary accounts, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

A recommendation must have reasonable grounds, meaning a reasonable basis derived from diligence about the security; a recommendation founded on an unverified rumor with no analysis is unethical. The duty applies to all accounts, not only discretionary ones, and some clients profiting does not supply the missing reasonable basis.NASAA Model Rule

A broker-dealer sells a customer a security from its own inventory and adds a markup far out of line with the prevailing market and the services rendered. This is:

• a.Permissible, because principals may set any price they wish
• b.A prohibited practice, because charging unreasonable markups, commissions, or fees is unethical✓
• c.Permissible so long as the markup appears on the confirmation, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• d.Permissible for securities not listed on an exchange

Charging unreasonable or excessive markups, commissions, or service fees, judged against the prevailing market price and the services provided, is an unethical business practice. Acting as principal does not license any price, printing an excessive markup on the confirmation does not make it fair, and there is no exemption for unlisted securities.NASAA Model Rule

An agent recommends a leveraged, complex product and describes only its potential upside, saying nothing about how it can lose value rapidly. This is:

• a.Acceptable, because the customer wanted growth, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Acceptable because the product is registered, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.A minor omission with no consequence, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.A prohibited failure to disclose material facts, including the product's risks✓

Omitting the material risks needed to make a recommendation not misleading is a prohibited practice; a one-sided pitch that hides how a leveraged product can lose value quickly is misleading. Registration of the product and the customer's growth objective do not relieve the agent of the duty to disclose material risks.NASAA Model Rule

A customer instructs, 'Buy 1,000 shares of XYZ today, but you choose the best time and price.' The agent executes later that afternoon without a signed discretionary agreement. The agent has:

• a.Acted properly, because the customer specified the security, the action, and the amount, leaving only time and price✓
• b.Exercised prohibited discretion that required prior written authorization, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Violated the act, because all discretion requires a signed agreement
• d.Acted improperly unless a manager approved the order in writing

Time-and-price discretion, where the customer names the security, the action, and the quantity and leaves only the timing and execution price, does not require a written discretionary agreement and is generally good only for the day given. Discretion over the security, the amount, or whether to buy or sell would require prior written authorization; a manager's sign-off is not the trigger.NASAA Model Rule

A state-registered investment adviser is granted discretion over a client's account. Under NASAA rules, the adviser may generally:

• a.Never exercise discretion without SEC approval
• b.Exercise discretion indefinitely on a purely oral understanding
• c.Rely on oral discretionary authority for a limited initial period, provided written authorization is obtained within a short time (commonly ten business days) after the first discretionary trade✓
• d.Exercise discretion only over institutional accounts

Unlike a broker-dealer agent, who needs prior written authorization before any discretionary trade, an investment adviser may act on oral discretion during a brief initial window but must obtain written authorization within roughly ten business days of the first discretionary transaction. It is not indefinite, not limited to institutional accounts, and needs no SEC sign-off. Note this is a heavily tested BD-versus-IA distinction.NASAA Model Rule

Several traders enter a rapid series of prearranged buy and sell orders in a stock just before the close to create the appearance of heavy demand and a rising price. This is:

• a.Legitimate closing-price discovery, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.Market manipulation, sometimes called painting the tape or marking the close, a prohibited practice✓
• c.Permissible so long as all the orders are reported, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Permissible market making

Prearranged trades designed to create misleading activity or move the closing price (painting the tape, marking the close) are manipulative and prohibited. Reporting the orders does not legitimize the deception, and genuine market making involves bona fide two-sided quotations rather than staged trades intended to mislead other investors.Uniform Securities Act

Regarding written customer complaints, a broker-dealer is generally required to:

• a.Discard complaints once they are resolved
• b.Keep complaints only if litigation is filed
• c.Record, retain, and make available for inspection written customer complaints and the firm's responses✓
• d.Forward every complaint to the SEC within 24 hours, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

Firms must record and retain written customer complaints, and the dispositions of those complaints, for the prescribed retention period and produce them on examination. Complaints are not discarded when resolved, retention does not depend on litigation, and ordinary complaints are not automatically filed with the SEC on a 24-hour clock.NASAA Model Rule

An agent conducts securities business with customers through his personal email account, bypassing the firm's servers. This is:

• a.A violation, because business communications must go through the firm's supervised and retained systems✓
• b.Acceptable, because email is not a firm record
• c.Acceptable if he copies himself on each message, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.A concern only for investment advisers, not broker-dealers, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

Securities-related communications with customers must be conducted through channels the firm can supervise and retain; using an unmonitored personal account defeats the firm's supervisory and recordkeeping obligations. Business email is a firm record, self-copying does not satisfy supervision, and the requirement applies to broker-dealers as well as advisers.NASAA Model Rule

A product sponsor offers an agent an expensive vacation as a reward for selling a large amount of its mutual fund. Accepting this undisclosed compensation:

• a.Is always permissible between professionals
• b.Is permissible if the fund was suitable for the buyers, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Creates an undisclosed conflict of interest and may be a prohibited sales-incentive practice✓
• d.Is a concern only if it exceeds one hundred dollars

Non-cash sales incentives that reward the sale of a particular product create a material conflict of interest that biases recommendations; accepting them without disclosure can be a prohibited practice. Suitability of the fund does not cure the undisclosed conflict, and the hundred-dollar figure confuses this with a separate SRO gift limit.NASAA Model Rule

A state-registered investment adviser is acquired and wants to transfer its existing client contracts to the buyer. Under NASAA rules, the adviser must:

• a.Do nothing, because advisory contracts transfer automatically, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• b.Obtain the clients' consent to the assignment of their advisory contracts✓
• c.Only notify the Administrator of the sale
• d.Refund all prepaid fees before transferring the contracts, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

An investment advisory contract may not be assigned without the client's consent, and a change of control that produces an assignment triggers that requirement. Contracts do not transfer automatically, notifying the Administrator is not a substitute for client consent, and a fee refund is not the mechanism for a valid assignment.NASAA Model Rule

An investment adviser organized as a partnership must, under NASAA rules, ensure its advisory contracts provide that:

• a.Fees will never increase for the life of the contract, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.The adviser guarantees a minimum rate of return
• c.The adviser will notify clients of any change in the membership of the partnership within a reasonable time✓
• d.Clients waive their right to sue the adviser

A partnership adviser's contracts must require that clients be notified of any change in the membership of the partnership within a reasonable time after the change. A fee freeze and a guaranteed return are not required, and a clause purporting to waive a client's rights under the act would itself be void.NASAA Model Rule

Which provision in a state-registered investment adviser's contract would violate NASAA rules?

• a.A clause charging a fee based on a share of capital gains to a client who does not meet the net-worth or assets thresholds✓
• b.A clause stating the advisory fee is $2,000 per year
• c.A clause describing the services the adviser will provide, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.A clause stating the contract's term and renewal date, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

Performance-based fees measured by a share of capital gains or appreciation are prohibited except for qualified clients who meet defined net-worth or assets-under-management thresholds; charging one to an ineligible client violates the rule. A flat annual fee, a description of services, and a term clause are all ordinary, permitted contract provisions.NASAA Model Rule

A state-registered investment adviser collects advisory fees well in advance. Under NASAA rules, if it collects substantial prepaid fees six or more months ahead, it generally must:

• a.Do nothing special
• b.Register with the SEC instead of the state
• c.Include a current balance sheet in its brochure, because collecting more than $500 per client, six or more months in advance, is treated like custody✓
• d.Post a one-million-dollar surety bond

Collecting prepaid fees of more than $500 per client six or more months in advance is treated as a form of custody and triggers the requirement to disclose the adviser's financial condition through a balance sheet in the brochure. It is not an SEC-registration trigger, and the million-dollar bond figure is invented.NASAA Model Rule

A firm offers a 'wrap' program charging one asset-based fee that covers advice and all transaction costs. With respect to this program, the firm must:

• a.Charge separate commissions on each trade in addition to the wrap fee
• b.Disclose the wrap-fee arrangement, because bundling advice and execution into one fee generally brings the program within the advisory rules✓
• c.Do nothing, because a single fee needs no explanation
• d.Obtain the Administrator's approval of the fee amount

Wrap-fee programs bundle advice and execution into a single asset-based fee and generally implicate investment adviser disclosure obligations, including a specialized wrap-fee brochure. Charging separate commissions on top would be double-charging, a single fee still requires disclosure, and the Administrator does not set the fee amount.NASAA Model Rule

A customer sells securities and is owed the proceeds. The agent delays sending the funds and briefly uses them for the firm's short-term needs. This is:

• a.Acceptable if the customer is eventually paid in full
• b.Acceptable because the firm has custody of the account, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.A minor timing issue of no regulatory concern
• d.A prohibited failure to promptly pay funds owed and an improper use of customer money✓

Failing to pay or deliver promptly the funds or securities owed to a customer, and using customer money for the firm's own purposes, are prohibited practices. Eventual payment does not cure the misuse, and holding an account does not authorize borrowing customer funds without permission.NASAA Model Rule

Under the Uniform Securities Act, a person is an investment adviser only if all three parts of a defining test are met. Those three elements are:

• a.Advice, custody, and discretion
• b.Registration, examination, and bonding, the three procedural prerequisites the definition treats as the substantive elements of being an investment adviser
• c.Giving advice about securities, doing so as a business, and receiving compensation for it✓
• d.Advising institutions, using leverage, and charging performance fees, the combination the Uniform Act codifies as the exclusive three-part test for adviser status in every state that adopted it

The definition turns on the three-part test: a person who provides advice about securities, does so as a regular part of a business, and receives compensation for it. All three must be present. Custody, discretion, examinations, bonding, client type, and fee structure are not the definitional elements.Uniform Securities Act

A broker-dealer that gives investment advice will generally avoid the definition of investment adviser only if the advice is:

• a.Solely incidental to its brokerage business and the firm receives no special compensation for the advice✓
• b.Given only to institutional clients, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Approved in advance by the Administrator, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.Limited to exempt securities

The broker-dealer exclusion from the investment adviser definition requires both that the advice be solely incidental to the conduct of brokerage and that the firm receive no special compensation for that advice. Charging a separate advisory fee is special compensation and destroys the exclusion. Client type, security type, and Administrator approval are not the test.Uniform Securities Act

A broker-dealer begins charging some customers a separate, stand-alone fee specifically for financial-planning advice. With respect to those services, the firm:

• a.Remains excluded from the definition of investment adviser
• b.Is exempt because it is already a registered broker-dealer
• c.Loses the broker-dealer exclusion and must consider investment adviser registration, because it now receives special compensation for advice✓
• d.Need only notify its customers of the new fee

Receiving special compensation, a separate fee, for advice removes the broker-dealer exclusion, so the firm must analyze investment adviser registration for that activity. Being a registered broker-dealer does not exempt a firm from the advisory framework once it charges specifically for advice, and mere customer notice does not resolve the registration question.Uniform Securities Act

The publisher of a general-circulation financial newspaper that offers regular market commentary and non-personalized stock suggestions is:

• a.An investment adviser that must register, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• b.Excluded from the definition of investment adviser, because bona fide publications of general and regular circulation are excepted✓
• c.An investment adviser representative
• d.A broker-dealer

A bona fide newspaper, news magazine, or business publication of general and regular circulation is excluded from the investment adviser definition so long as its content is not personalized to a particular client's situation. The exclusion can be lost if the publication begins giving individualized, tailored advice.Uniform Securities Act

An investment adviser managing $60 million in client assets, and not otherwise required to register with the SEC, is generally:

• a.A federal covered adviser barred from state registration, because the Act channels every adviser that manages more than fifty million dollars into exclusive federal oversight under NSMIA
• b.Exempt from all registration
• c.A state-registered adviser, because advisers below the $100 million threshold generally register with the states✓
• d.Required to register with both the SEC and every state in which it operates, a dual-filing obligation the statute imposes on mid-sized advisers until their assets fall back below the reporting threshold

Advisers below the $100 million assets-under-management threshold, in the mid-sized band above $25 million, generally register at the state level rather than with the SEC; federal (covered) registration is generally required at $100 million and above, with a buffer for crossing the line. Such an adviser is neither exempt nor routinely dual-registered.Investment Advisers Act / NSMIA

An individual's only function for a state-registered adviser is to solicit prospective clients to sign advisory agreements, for which he is paid. He is:

• a.An investment adviser representative who must register, because soliciting advisory clients is a covered function✓
• b.Exempt, because he gives no actual investment advice, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.A broker-dealer agent
• d.Exempt, because solicitation is a clerical activity, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere

The investment adviser representative definition includes supervised persons who solicit, offer, or negotiate for the sale of advisory services, not only those who give advice. Solicitation is not clerical, so it triggers IAR registration even though the individual renders no securities advice himself.Uniform Securities Act

An individual wishes to act as an agent for two unaffiliated broker-dealers at the same time. Under the Uniform Securities Act, this is:

• a.Automatically prohibited in every state
• b.Permitted without anyone else's knowledge
• c.Generally allowed only if the individual is registered as an agent of each firm and both firms consent, subject to state variation✓
• d.Permitted only for agents serving institutional clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

An agent must be separately registered for each employing broker-dealer, so acting for two firms requires a registration with each and generally each firm's consent; several states restrict or discourage dual registration with unaffiliated firms, so the answer carries a state-by-state caveat. It is neither automatically barred nor something done secretly, and it is not limited to institutional agents.Uniform Securities Act

With respect to examinations, the Uniform Securities Act provides that the Administrator:

• a.May never require an examination as a condition of registration, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.May require an examination only of investment advisers
• c.Must require every applicant to pass the same national examination, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.May by rule or order require applicants to pass a written or oral examination as a condition of registration✓

The Administrator may, by rule or order, require applicants for registration as broker-dealers, agents, investment advisers, or investment adviser representatives to pass a written or oral examination as a condition of qualification. The authority is discretionary, is not limited to advisers, and does not mandate a single uniform national test.Uniform Securities Act

The Administrator may require a state-registered broker-dealer or investment adviser that has custody of, or discretion over, client assets to:

• a.Guarantee client accounts against investment loss, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Do nothing beyond filing the initial application
• c.Maintain a minimum net capital or net worth and post a surety bond, within limits tied to federal standards✓
• d.Insure client accounts through a private carrier

The Administrator may set minimum net capital or net worth requirements and require surety bonds, particularly where a firm has custody or discretionary authority, though for firms also subject to federal net-capital rules the state may not exceed those federal ceilings. No firm may be required to guarantee accounts against market loss or to privately insure them.Uniform Securities Act

Regarding the books and records of registered broker-dealers, the Administrator may:

• a.Prohibit any recordkeeping at all
• b.Require records but never set a retention period
• c.Impose requirements that exceed the federal standards for firms also registered with the SEC
• d.Require registrants to make and preserve specified records for prescribed periods, not exceeding the federal requirements for firms also registered with the SEC✓

The Administrator prescribes recordkeeping and retention requirements, but for firms also registered with the SEC, state requirements may not exceed the corresponding federal ones, a coordination Congress imposed through NSMIA. Records are mandatory and time-limited, so prohibiting records or refusing to set a retention period misstates the law.Uniform Securities Act

A broker-dealer organized as a partnership has one of its several partners withdraw from the firm. Under the Uniform Securities Act, the firm's registration:

• a.Remains effective, but the firm must promptly notify the Administrator of the change in membership✓
• b.Automatically terminates and must be refiled from scratch, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Is unaffected and requires no notice of any kind, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Converts to the departing partner individually, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

A change in the partners of a partnership registrant does not automatically void the firm's registration, but the firm must promptly file an amendment reporting the material change in its membership. It neither terminates automatically nor requires no notice, and the registration does not follow the departing partner.Uniform Securities Act

A state-registered investment adviser must keep its Form ADV current by:

• a.Refiling a brand-new Form ADV every year
• b.Amending it only when the Administrator specifically asks
• c.Filing an annual updating amendment within 90 days of its fiscal year end and promptly amending any materially inaccurate information✓
• d.Never amending it once the registration is granted

Advisers must file an annual updating amendment to Form ADV within 90 days of the end of their fiscal year and must promptly amend the form whenever information becomes materially inaccurate. They do not refile a new form from scratch, wait to be asked, or leave the form frozen after registration.NASAA Model Rule

A retired engineer gives securities advice to friends a few times a year and never charges for it. Under the Uniform Securities Act, he is:

• a.An investment adviser who must register
• b.Not an investment adviser, because he is neither in the business of advising nor compensated for it✓
• c.An investment adviser representative
• d.A broker-dealer

He fails two prongs of the three-part test: occasional advice to friends is not being in the business of advising, and he receives no compensation. Either failure alone keeps him outside the investment adviser definition, so registration is not required.Uniform Securities Act

An individual will both sell securities for a broker-dealer and provide advisory services for the firm's affiliated state-registered investment adviser. This individual must:

• a.Register only once, in whichever capacity occupies more of his time
• b.Register only as an agent, because that is the higher standard
• c.Register separately as an agent of the broker-dealer and as an investment adviser representative of the adviser✓
• d.Not register at all, because the two firms are affiliated

Agent and investment adviser representative are distinct registration categories tied to distinct functions and distinct firms; performing both roles requires registration in each capacity. Affiliation between the broker-dealer and the adviser does not merge the two registrations, and neither one is a mere subset of the other.Uniform Securities Act

Under the Uniform Securities Act, a civil action to recover for an unlawful sale of securities must generally be brought within:

• a.One year of the sale, with no discovery extension, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.Ten years of the sale under all circumstances
• c.Six years after discovery only
• d.The earlier of three years after the sale (or contract of sale) or two years after discovery of the violation✓

The civil statute of limitations under the act is the earlier of three years after the sale or contract of sale, or two years after the plaintiff discovered the facts constituting the violation. It should not be confused with the five-year limitation for beginning a criminal prosecution. Some states that adopted later versions vary the exact periods.Uniform Securities Act

When a broker-dealer is civilly liable to a purchaser under the act, which other persons may also be held jointly and severally liable?

• a.Only the issuer of the security, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Persons who directly or indirectly control the firm, its partners, officers, and directors, and employees or agents who materially aided the sale✓
• c.No one else, because the liability is personal to the firm, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Only the Administrator

Civil liability extends beyond the seller to persons who directly or indirectly control the seller, and to partners, officers, directors, and materially aiding employees or agents, who are jointly and severally liable unless they can sustain the burden of showing they did not know, and could not reasonably have known, of the facts giving rise to liability.Uniform Securities Act

The term 'fraud' as used in the antifraud provisions of the Uniform Securities Act:

• a.Is limited to common-law deceit and requires proof of intent to defraud, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Applies only to registered securities
• c.Is broader than common-law fraud and is not confined to the elements of common-law deceit✓
• d.Requires proof that the victim actually lost money

The act's concept of fraud, deceit, or manipulation is deliberately broader than common-law fraud and is not limited to its traditional elements. The antifraud provisions reach any security, exempt or not, and apply to offers as well as sales, so proof of a completed loss is not always required.Uniform Securities Act

Under the Uniform Securities Act, no provision imposing liability applies to a person who:

• a.Acted in good-faith conformity with a rule, form, or order of the Administrator, even if it is later amended or rescinded✓
• b.Claims he was simply unaware of the law
• c.Relied on the informal advice of another agent, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Sincerely believed the security was a good investment, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

The act protects a person who acts in good-faith reliance on a currently effective rule, form, or order of the Administrator, notwithstanding a later amendment or rescission. Ignorance of the law, another agent's informal advice, and honest optimism about a security's merits are not defenses to liability.Uniform Securities Act

Which of the following is most likely a 'security' under the Uniform Securities Act?

• a.A commodity futures contract on wheat
• b.A rare-coin collection sold outright to a collector
• c.A fixed, guaranteed annuity issued by a licensed insurer, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.An investment contract in a whiskey-warehouse-receipt program marketed to passive outside investors✓

An investment contract—an investment of money in a common enterprise with profits expected from others' efforts—is a security, and warehouse-receipt programs sold to passive investors have been treated as such. Fixed annuities, commodity futures, and collectibles sold outright are outside the definition (USA §401 'security'; Howey investment-contract test).

Under the Uniform Securities Act, which of the following is NOT a 'person'?

• a.A minor child who has not reached the age of majority✓
• b.A professional corporation
• c.A trust created to hold family assets, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.A government or political subdivision

'Person' is defined broadly but expressly excludes a deceased individual, a minor, and one adjudged mentally incompetent. Trusts, governments, and corporations are all persons (USA §401 'person').

Under the Uniform Securities Act, the term 'agent' may include:

• a.A corporation that acts as a broker-dealer
• b.The issuer itself when it sells its own shares, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.A bank acting as trustee
• d.Only a natural person (individual) who represents a broker-dealer or issuer in effecting securities transactions✓

'Agent' is defined as an individual (natural person); entities are never agents. A corporation effecting trades for others is a broker-dealer, and an issuer is not its own agent (USA §401 'agent').

An individual represents an issuer solely in effecting transactions with underwriters. Under the Uniform Securities Act, this individual:

• a.Must register as a broker-dealer
• b.Is an investment adviser representative
• c.Must register as an agent because compensation is received, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Is excluded from the definition of 'agent,' because representing an issuer in certain specified exempt transactions is excluded✓

The Act excludes from 'agent' an individual representing an issuer in effecting transactions in certain exempt securities or specified exempt transactions, including transactions between the issuer and an underwriter. No agent registration is required (USA §401 'agent' exclusions).

Under the Uniform Securities Act, which of the following is included in the term 'offer' or 'offer to sell'?

• a.A judicially approved transfer of securities in a reorganization
• b.A solicitation of an offer to buy a security for value✓
• c.A bona fide pledge of securities as loan collateral
• d.A stock dividend for which the shareholder gives up nothing of value

'Offer' includes every attempt to dispose of, or solicitation of an offer to buy, a security for value. Pledges, no-consideration stock dividends, and court-approved exchanges are not offers or sales (USA §401 'offer'/'sale').

When the Uniform Securities Act refers to a security as 'guaranteed,' it means guaranteed as to:

• a.Freedom from all market risk
• b.A minimum resale price set by the broker-dealer, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Payment of principal, interest, or dividends by a person other than the issuer✓
• d.Approval of the merits by the Administrator

'Guaranteed' means guaranteed as to payment of principal, interest, or dividends by someone other than the issuer. It never means a guarantee against market loss or a resale price (USA §401 'guaranteed').

A 'non-issuer' transaction under the Uniform Securities Act is one in which:

• a.The security is sold exclusively to an institution, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.Only exempt securities are sold
• c.The proceeds do not benefit, directly or indirectly, the issuer✓
• d.The issuer receives all of the proceeds

A non-issuer transaction is one in which the issuer does not directly or indirectly benefit from the proceeds—typically ordinary secondary-market trading between investors (USA §401 'non-issuer').

Under the Uniform Securities Act, which of the following is a 'broker-dealer' that must register in the state?

• a.A firm with an office in the state that effects securities trades for the accounts of retail customers✓
• b.A bank effecting trades through its trust department, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.An issuer selling only its own securities
• d.An agent of a registered firm

A broker-dealer is a person engaged in effecting securities transactions for the accounts of others; the definition excludes agents, issuers, and banks, savings institutions, and trust companies. A firm with an in-state office serving retail customers must register (USA §401 'broker-dealer').

An investment adviser has no place of business in State K and advises only insurance companies and registered investment companies located there. Regarding State K registration, the adviser:

• a.Must register only if it takes custody of client assets
• b.Must register because it advises clients located in the state
• c.Need not register, because with no place of business there and only institutional clients it is excluded regardless of the number of such clients✓
• d.Must register once it has more than five institutional clients, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere

Like the broker-dealer institutional exception, the adviser exclusion removes a firm with no place of business in the state whose only clients there are institutions such as insurers and investment companies; the five-client de minimis limit counts only non-institutional clients (USA §401; NASAA de minimis rule).

An investment adviser's only advisory client is a registered open-end investment company, and it manages $30 million. This adviser is:

• a.Exempt from registration entirely
• b.A state-registered adviser because it is below $100 million
• c.A federal covered adviser that registers with the SEC regardless of its assets under management✓
• d.Required to register in every state where the fund has shareholders, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

An adviser to a registered investment company must register with the SEC and is a federal covered adviser regardless of assets under management; states may require only a notice filing (Investment Advisers Act §203A; NSMIA).

An investment adviser managing $130 million of client assets is required to:

• a.Register with each state in which it has a client
• b.Register with the SEC as a federal covered adviser, subject only to state notice filing where required✓
• c.Register with both the SEC and the states of its offices, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.Do nothing until it reaches $150 million

An adviser with $100 million or more in AUM may register with the SEC, and at $110 million or more generally must; either way it is federal covered and states may require only notice filings and fees (Advisers Act §203A; NSMIA).

An investment adviser representative of a federal covered adviser works from the firm's office in State A. He has several advisory clients who reside in State B, where he has no office. Regarding State B, he:

• a.Must register with the SEC for his State B activity
• b.Is not required to register, because he has no place of business in State B✓
• c.Must register because he has clients there
• d.Must register once he has more than five clients there, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

An IAR of a federal covered adviser must register only in states where he has a place of business; clients alone in a no-office state do not trigger registration, and the SEC does not register IARs (NSMIA; USA §401 'investment adviser representative').

An Administrator determines that a registered agent has died. The Administrator will most likely:

• a.Refer the matter for criminal prosecution
• b.Cancel the registration, a non-punitive action used when a registrant no longer exists, cannot be located, or is mentally incompetent✓
• c.Suspend the registration pending a hearing, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Revoke the registration for cause

Cancellation is a non-disciplinary action used when a registrant has died, ceased to exist, cannot be located, or is declared mentally incompetent; it implies no wrongdoing, unlike revocation (USA §204; NASAA).

A registered agent files a request to withdraw her registration. Absent a pending proceeding, the withdrawal generally becomes effective:

• a.On the next December 31
• b.30 days after filing, or within any shorter period the Administrator determines✓
• c.Immediately upon filing
• d.Only after the Administrator issues an approval order, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

A withdrawal of registration becomes effective 30 days after filing (or sooner if the Administrator allows) if no proceeding is pending; the Administrator retains jurisdiction for one year afterward (USA §204).

Under NASAA model rules, a state-registered investment adviser that has discretionary authority over accounts but does NOT have custody generally must maintain:

• a.A $1 million surety bond in every case
• b.A minimum net worth (commonly $10,000) or, if it cannot, post a surety bond✓
• c.No financial requirement of any kind
• d.Insurance protecting clients against market losses, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

NASAA's model rule sets a minimum net worth for advisers with discretion (commonly $10,000; custody triggers a higher figure, commonly $35,000). An adviser failing the net-worth test may post a surety bond instead; no firm may insure clients against market loss (NASAA Model Rule on minimum financial requirements).

A consent to service of process must be filed by all of the following EXCEPT:

• a.An issuer registering securities in the state
• b.An investment adviser applying for registration
• c.A customer opening a brokerage account✓
• d.A broker-dealer applying for registration

Applicants for registration (broker-dealers, agents, investment advisers, IARs) and issuers registering securities must file an irrevocable consent to service of process; customers do not (USA §414).

An attorney sets up a separate advisory service and charges clients a distinct fee specifically for securities recommendations, apart from his legal work. Under the Uniform Securities Act, the attorney:

• a.Is automatically a broker-dealer
• b.Is not excluded; charging special compensation for advice defeats the professional exclusion, so he must consider investment adviser registration✓
• c.Remains excluded because he is a lawyer
• d.Is excluded if he advises fewer than six clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

The exclusion for lawyers, accountants, teachers, and engineers applies only when the advice is solely incidental to the profession and no special compensation is received; a separate advisory fee destroys it (USA §401 'investment adviser' LATE exclusion).

A firm, for a fee, regularly issues written analyses and reports advising pension plans on the selection of securities and money managers. This firm is most likely:

• a.A broker-dealer
• b.Excluded as a bona fide publisher
• c.An investment adviser, because it is in the business of issuing securities analyses for compensation✓
• d.Excluded because it advises only institutions, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere

A person who, for compensation and as part of a business, issues analyses or reports concerning securities meets the investment adviser definition; advising institutions does not exclude it (USA §401 'investment adviser'; three-part test).

Which location is a 'place of business' of an investment adviser representative under NASAA rules?

• a.The client's home in every case
• b.Any office where the IAR regularly provides advisory services or meets clients, or any location held out to the public as such✓
• c.Any state the IAR has ever visited, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.Only the firm's principal office

A place of business is any office at which the IAR regularly conducts advisory business or meets clients, and any location held out to the public as a place where he does so (NASAA Model Rule; Advisers Act Rule 203A-3).

Which officer of a registered broker-dealer must also register as an agent?

• a.A silent investor in the firm
• b.An officer listed on the letterhead who never solicits business
• c.An officer who performs only administrative duties with no customer contact
• d.An officer who solicits securities orders from public customers✓

An agent is any individual (including an officer) who effects or attempts to effect securities transactions for the firm; purely administrative officers are not agents, but soliciting orders triggers agent registration (USA §401 'agent').

An offer is NOT considered made in a state under the Uniform Securities Act when it appears in a newspaper published in the state that has:

• a.Any circulation at all within the state, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Only an online edition
• c.More than two-thirds of its circulation outside the state during the past twelve months✓
• d.Fewer than 1,000 subscribers

The publishing exception treats an offer as not made in a state if it appears in a newspaper published out of state, or one published in-state but with two-thirds or more of its circulation outside the state during the past year (USA §401 'offer'/'sale' publishing exception).

A newly hired individual may begin transacting securities business as an agent:

• a.As soon as he is hired, regardless of registration
• b.After he passes the exam, even if registration is not yet effective, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.Only after his registration in the state is effective and he is associated with a registered broker-dealer✓
• d.As soon as the firm files his application, before it is effective

An agent may act only when his registration is effective and he is associated with a registered broker-dealer or issuer; hiring or exam-passing alone does not authorize transacting business (USA §201).

With respect to a federal covered investment adviser, a state Administrator MAY require:

• a.A notice filing consisting of documents filed with the SEC, payment of fees, and a consent to service of process✓
• b.That the adviser pass a state examination
• c.Full registration in the state of the adviser's principal office, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.That the adviser meet state minimum net-worth rules

For federal covered advisers, states may require notice filings (copies of SEC documents), fees, and a consent to service of process, but not registration, exams, or state financial standards; antifraud authority remains (NSMIA; Advisers Act §203A).

A financial planner prepares comprehensive financial plans that include specific securities recommendations and charges a fee for the plans. The planner is:

• a.Exempt because a written plan is not 'advice', on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• b.An investment adviser, because he provides securities advice as a business for compensation✓
• c.A broker-dealer
• d.Excluded as an incidental professional

A financial planner who gives securities advice as part of a business and is compensated meets the three-part investment adviser definition; a fee-based plan with securities recommendations is advisory activity (USA §401; NASAA financial-planner interpretation).

At a state-registered adviser, which supervised person is an investment adviser representative?

• a.An outside contractor who maintains the firm's servers, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.The office manager who handles payroll
• c.The receptionist who schedules meetings
• d.A research analyst whose written recommendations the firm uses to advise clients✓

An IAR includes supervised persons who make or determine recommendations, manage accounts, solicit advisory services, or supervise those who do; a research analyst whose recommendations drive client advice qualifies, while purely clerical staff are excluded (USA §401 'IAR').

If the Administrator requires a broker-dealer to post a surety bond, the bond requirement:

• a.Must be renewed monthly
• b.Guarantees customers against investment losses, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.Applies only to out-of-state firms
• d.May be satisfied by a deposit of cash or securities in lieu of the bond✓

The Administrator may require bonds, and an applicant may deposit cash or qualifying securities in lieu of a surety bond; a bond covers wrongful conduct, not market losses (USA §202).

Which individual must register as an agent under the Uniform Securities Act?

• a.An individual representing an issuer in a transaction with an underwriter
• b.An individual representing an issuer selling stock only to the issuer's employees with no commission, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.An individual representing a broker-dealer in selling registered common stock to retail investors for commissions✓
• d.An individual representing an issuer selling U.S. government bonds

Representing a broker-dealer in effecting retail securities sales for compensation is the core of the agent definition; the other three are excluded issuer-representative situations (exempt securities, transactions with underwriters, no-commission employee sales) (USA §401 'agent').

Which of the following is EXCLUDED from the definition of 'investment adviser' under the Uniform Securities Act?

• a.A financial planner charging fees for securities advice
• b.A pension consultant paid to recommend securities
• c.A bank or bank holding company that is not itself an investment company✓
• d.A person who manages client portfolios for a percentage fee, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

The investment adviser definition excludes banks and bank holding companies (not themselves investment companies), broker-dealers giving incidental advice without special compensation, LATE professionals, and bona fide publishers. Fee-based managers, planners, and pension consultants are advisers (USA §401 'investment adviser').

For the investment adviser de minimis exemption, the five-client limit is measured:

• a.Over the preceding 12 consecutive months, counting only non-institutional (retail) clients✓
• b.Per calendar year, resetting each January 1
• c.By counting every client, including institutions, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.Over the entire life of the firm

The de minimis exemption looks back 12 consecutive months and counts non-institutional clients only; an adviser with no place of business in the state and five or fewer such clients need not register there (NASAA de minimis rule).

A broker-dealer registered in a state hires a new agent. Before the agent may solicit customers, the firm generally must:

• a.Obtain SEC approval of the individual, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Simply add the agent to its payroll
• c.Wait until the annual renewal date
• d.File the agent's application and have the agent's registration become effective in that state✓

Agents register at the state level; the firm files the application (Form U4 via CRD) and the agent may act only once the registration is effective. Payroll status and SEC approval are not the triggers (USA §201).

Under the Uniform Securities Act, a security given as a bonus with the purchase of another security is considered to have been:

• a.An exempt transaction automatically, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• b.Sold, because it was part of a package given as consideration for value✓
• c.A non-security gift
• d.A tax-free stock dividend

A purported gift of a security accompanying the sale of another security (a bonus) is considered part of the subject of the purchase and to have been offered and sold for value (USA §401 'offer'/'sale').

A state-registered adviser's assets grow to $120 million. It generally must:

• a.Remain state-registered indefinitely
• b.Do nothing, because AUM is irrelevant
• c.Register with both the state and the SEC permanently, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Register with the SEC and withdraw its state registrations (states may then require only a notice filing)✓

At $110 million or more, an adviser generally must register with the SEC as a federal covered adviser and withdraw state registrations; states may require notice filings thereafter (Advisers Act §203A; NSMIA).

An adviser with $40 million in AUM would ordinarily register with the states, but its home state does not subject advisers to examination. In that circumstance the adviser:

• a.Must register in all 50 states
• b.Registers only with its home state regardless, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Is exempt from all registration
• d.Must instead register with the SEC, because a mid-sized adviser not subject to examination in its home state registers federally✓

A mid-sized adviser ($25M–$100M) generally registers with the states, but if it would not be subject to examination by its home-state Administrator, it must instead register with the SEC (Advisers Act §203A(a)(2)).

For purposes of the broker-dealer institutional exception, an employee benefit plan qualifies as an institutional client only if it:

• a.Has fewer than 100 participants
• b.Is invested entirely in securities, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.Is a governmental plan
• d.Has assets of not less than $1 million✓

The institutional exception includes employee benefit plans with assets of at least $1,000,000; smaller plans are treated as non-institutional (USA §401 'broker-dealer'; NASAA).

Which of the following is NOT a 'sale' or 'offer' under the Uniform Securities Act?

• a.A solicitation of an offer to buy stock for value
• b.The offer of a security as a bonus with a purchase, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.A sale of a warrant attached to a bond
• d.A stock dividend in which the shareholder gives up nothing of value✓

A stock dividend where nothing of value is surrendered is expressly excluded from 'sale/offer.' Solicitations for value, warrants, and bonus securities are all offers or sales (USA §401 'offer'/'sale').

Under the Uniform Securities Act, an exchange of securities under a reorganization approved by a court or governmental authority is:

• a.A prohibited transaction
• b.Not a 'sale,' so no registration of the exchange is required✓
• c.Always a taxable sale requiring registration
• d.An offer made in every state where holders reside, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

The definition of 'sale' excludes an exchange incident to a judicially or administratively approved reorganization; such exchanges are not sales requiring registration (USA §401 'sale' exclusions).

An investment adviser representative leaves one state-registered adviser to join another. To act at the new firm, he must:

• a.Do nothing, because IAR registration follows the individual, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Wait until the next December 31
• c.Be registered as an IAR of the new adviser, because his registration does not automatically transfer✓
• d.Register with the SEC

IAR registration is tied to a specific adviser; moving firms requires a new IAR registration with the new adviser and notice to the Administrator of the change (USA §201; NASAA).

May a state require an investment adviser representative to pass a qualification examination?

• a.Only for IARs of federal covered advisers
• b.Yes, the Administrator may require IARs to pass a written or oral examination as a condition of registration✓
• c.No, examinations are prohibited for IARs
• d.Only if the IAR has custody of client funds, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

The Administrator may by rule or order require applicants—including IARs—to pass a written or oral examination (e.g., Series 65/66) as a qualification condition (USA §202; NASAA).

Under the Uniform Securities Act, an issuer selling only its own securities to the public:

• a.Is an agent of its purchasers
• b.Is a broker-dealer that must register, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Is an investment adviser
• d.Is not a broker-dealer, because it does not effect transactions for the accounts of others✓

A broker-dealer effects transactions for the accounts of others; an issuer selling only its own securities is expressly excluded from the broker-dealer definition, though its individual sellers may be agents (USA §401 'broker-dealer').

A person gives securities advice regularly as a business but never receives any compensation, direct or indirect. Under the Uniform Securities Act, this person is:

• a.Not an investment adviser, because compensation is a required element of the definition✓
• b.A broker-dealer
• c.An investment adviser who must register, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.An investment adviser representative

The three-part test requires advice about securities, as a business, for compensation. With no compensation of any kind, the person fails the test and is not an investment adviser (USA §401; three-part test).

An 'investment adviser' may exist even where the client pays no separate advisory fee, if the person receives:

• a.Only a thank-you note
• b.Reimbursement of postage only, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.No compensation of any kind
• d.Indirect or economic compensation, such as commissions or other benefits tied to the advice✓

Compensation for the three-part test includes indirect economic benefit—commissions, markups, or other value received because of the advice—not just a direct fee (USA §401; NASAA 'compensation' broadly construed).

Under the Uniform Securities Act, the Administrator may, by rule or order:

• a.Exempt only issuers
• b.Never create additional exemptions
• c.Only expand, never narrow, registration requirements, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Exempt additional persons or securities from registration when consistent with the public interest and the protection of investors✓

The Act authorizes the Administrator to grant exemptions and exceptions by rule or order when consistent with the public interest and investor protection (USA §203/§402(b) exemptive authority).

In an application for broker-dealer registration, the Administrator may require information about the applicant's:

• a.Business history, disciplinary record, financial condition, and qualifications✓
• b.Customers' Social Security numbers, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.Personal religious beliefs
• d.Political affiliations

The Administrator may require applicants to disclose business form and history, injunctions and administrative orders, criminal and securities convictions, financial condition, and qualifications (USA §202 application requirements).

If an application for registration is incomplete or a stop order is pending on the thirtieth day after filing, the registration:

• a.Becomes effective anyway at noon on the thirtieth day, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Does not become effective until the application is complete and no proceeding is pending✓
• c.Becomes effective when the applicant pays a penalty
• d.Is automatically denied

Effectiveness at noon on the 30th day presupposes a complete application and no pending proceeding; a deficient application or a pending order postpones effectiveness (USA §201).

A registered agent is charged with a felony. With respect to his registration record, he generally must:

• a.Report it only at annual renewal
• b.Promptly amend his registration to disclose the reportable event✓
• c.Do nothing unless he is convicted
• d.Report it only if the felony is securities-related, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

Registrants must keep filings current and promptly amend to disclose reportable events, including criminal charges, not merely convictions (USA §203; CRD amendment requirements).

A registered broker-dealer opens an additional branch office within the same state. The firm generally must:

• a.File a brand-new registration for the branch as a separate broker-dealer, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Register the branch with the SEC only
• c.Do nothing at all
• d.File with or notify the Administrator as required (amend its registration) but need not register as a new firm✓

An added in-state branch is reported through amendment or branch filing; the firm does not become a new broker-dealer (USA §203; NASAA branch/recordkeeping rules).

A federal covered adviser's assets decline to $85 million as reported on its annual updating amendment. It generally must:

• a.Do nothing, because AUM changes are irrelevant
• b.Register with every state simultaneously and permanently
• c.Withdraw from SEC registration and register with the states, because it has fallen below the $90 million buffer for remaining SEC-registered✓
• d.Immediately deregister from the SEC the same day it dips, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules

A federal covered adviser that drops below $90 million (the buffer under the $100M threshold) generally must transition to state registration; the buffer prevents constant switching near the line (Advisers Act §203A; Form ADV instructions).

A broker-dealer with no place of business in State Z deals only with its existing customers who are temporarily present in State Z but are residents of other states. In State Z, the firm is:

• a.Prohibited from doing any business at all
• b.Excluded from the broker-dealer definition under the 'snowbird' exclusion, because it has no office there and its only customers are non-resident existing clients✓
• c.Required to obtain full broker-dealer registration, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Required to register only its agents

The snowbird exclusion removes a broker-dealer (and its agents) with no place of business in a state whose only customers there are existing clients who are not residents of that state (USA §401 'broker-dealer' exclusions).

State registration fees paid by a broker-dealer or agent are generally:

• a.Fully refundable if the registration is withdrawn, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.Set by the SEC rather than the state
• c.Non-refundable, and not returned merely because an application is later withdrawn or denied✓
• d.Waived for out-of-state firms

Filing and registration fees are generally non-refundable; withdrawal or denial does not entitle the applicant to a refund, and states, not the SEC, set them (USA §202 fee provisions).

Which statement about a federal covered adviser is TRUE under state law?

• a.Its IARs never register with any state
• b.It is subject to state notice filing, fees, a consent to service of process, and state antifraud jurisdiction, but not state registration✓
• c.It must register in each state where it has a client
• d.It is completely beyond state authority for all purposes, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

States cannot require federal covered advisers to register but may require notice filings, fees, and a consent to service of process, and they retain full antifraud authority; the firm's IARs still register where they have a place of business (NSMIA; USA).

Registration by coordination becomes effective simultaneously with the federal registration if certain conditions are met, including that:

• a.The Administrator personally approves the merits of the offering, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.The offering is limited to intrastate purchasers
• c.The issuer has at least a five-year operating history
• d.No stop order is in effect, no proceeding is pending, and the statement has been on file the required period with the required pricing information✓

Coordination is effective at the same time as the federal registration if no stop order or proceeding is pending, the statement has been on file the specified number of days (e.g., 10), and a statement of the maximum and minimum offering prices and maximum underwriting discounts has been on file (USA §303).

Which of the following is a 'federal covered security' whose registration a state may NOT require?

• a.An intrastate offering by a local bakery
• b.Common stock listed on the New York Stock Exchange✓
• c.A limited partnership interest sold only in one state
• d.Unregistered stock of a private start-up

Securities listed (or senior to securities listed) on the NYSE, Nasdaq, and other qualifying markets are federal covered under NSMIA; states may require only a notice filing and fees, not registration (NSMIA §18; USA §401 'federal covered security').

Securities sold under SEC Rule 506 of Regulation D are:

• a.Prohibited in most states
• b.Exempt from the antifraud provisions of state law
• c.Required to be registered by qualification in each state, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.Federal covered securities; a state may require a notice filing and fee but not registration✓

Rule 506 offerings are federal covered securities under NSMIA; states may require a notice filing (a copy of the SEC Form D) and fees, but not registration, and antifraud authority remains (NSMIA §18; USA).

A general obligation bond issued by a county to build a courthouse is:

• a.Merely an exempt transaction, not an exempt security
• b.An exempt security, because obligations of a state or its political subdivisions are exempt✓
• c.Required to be registered by qualification
• d.A federal covered security requiring a notice filing, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

Securities issued or guaranteed by a state, a political subdivision, or a public agency are exempt securities; the exemption attaches to the instrument in any transaction (USA §402(a)(1)).

Under the Uniform Securities Act, securities issued by a foreign national government are exempt securities when:

• a.The issuer is any country in the world
• b.The bonds are denominated in U.S. dollars
• c.The United States maintains diplomatic relations with that foreign government✓
• d.The bonds are rated below investment grade, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

The exemption covers securities issued or guaranteed by a foreign government with which the United States maintains diplomatic relations (foreign political subdivisions are treated more narrowly) (USA §402(a)(2)-(3)).

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

• a.A promissory note sold door-to-door to retail investors, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• b.Stock of a newly formed technology start-up
• c.A limited partnership interest in a strip mall
• d.Securities of a public utility or common carrier regulated as to rates by a governmental authority✓

Securities issued by regulated public utilities and common carriers subject to rate regulation are exempt securities (USA §402(a)(8) utility/common-carrier exemption).

Common stock issued by an insurance company organized under the laws of a U.S. state and authorized to do business there is:

• a.Never a security of any kind
• b.A federal covered security in all cases
• c.An exempt security under the Uniform Securities Act✓
• d.Required to be registered by coordination, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

Securities issued by a domestic insurance company authorized to do business in the state are exempt securities—note this differs from a variable annuity, which is a non-exempt security (USA §402(a)(6)).

A non-issuer transaction in an outstanding security is exempt when the security and current issuer information appear in a recognized securities manual such as Standard & Poor's or Moody's. This is commonly called the:

• a.Isolated issuer exemption
• b.Commercial paper exemption
• c.Manual (secondary-trading) exemption✓
• d.Private placement exemption, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Many states exempt non-issuer transactions in securities listed in a recognized securities manual with current published financial information—the 'manual exemption' (USA §402(b) non-issuer transactions; NASAA).

An issuer distributes additional shares to its existing shareholders through a rights offering, paying no commission for soliciting the exercise. This is most likely:

• a.A prohibited transaction
• b.An exempt transaction (a transaction with existing security holders)✓
• c.A federal covered security in every case, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Registration by coordination

Transactions under a right, warrant, conversion privilege, or offer to existing security holders are exempt transactions when no commission is paid for soliciting the holder (USA §402(b) existing-holder exemption).

A bank sells stock it holds as collateral after the borrower defaults, in a bona fide effort to liquidate the pledged collateral. This sale is:

• a.A public offering requiring registration, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.An exempt transaction (a bona fide pledgee liquidating collateral)✓
• c.A prohibited transaction
• d.An issuer transaction

A sale by a bona fide pledgee liquidating pledged collateral, with no purpose of evading the Act, is an enumerated exempt transaction (USA §402(b) pledgee exemption).

An unregistered corporate bond is sold only to insurance companies, banks, and registered investment companies. The sale is:

• a.Automatically a federal covered security
• b.An exempt transaction, because sales to institutional and financial buyers are exempt regardless of their number✓
• c.Prohibited because the bond is unregistered
• d.Exempt only if fewer than ten institutions buy, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Transactions with institutional and financial buyers (banks, insurers, investment companies, and the like) are exempt transactions with no numerical cap; the bond itself remains a non-exempt security (USA §402(b) institutional-buyer exemption).

Under the Uniform Securities Act's private-placement exemption, the limit applies to the number of:

• a.States in which the offering is made, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Shares that may be sold
• c.Non-institutional persons to whom offers are directed in a 12-month period (offerees), excluding institutions✓
• d.Purchasers who actually buy

The exemption caps offers to non-institutional persons (commonly ten) in any 12 consecutive months; offers to institutions are not counted, and the cap is on offerees, not purchasers (USA §402(b)(9) limited-offering exemption).

The Administrator may enter a stop order denying, suspending, or revoking the effectiveness of a securities registration statement when:

• a.Investors are dissatisfied with performance, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.The statement is incomplete or misleading, or the offering would work a fraud, after notice and an opportunity for a hearing✓
• c.A competitor of the issuer requests it
• d.The issuer's stock price has fallen

Stop orders rest on statutory grounds—a materially misleading or incomplete statement, fraud, excessive underwriting compensation, or noncompliance—and require notice and an opportunity for a hearing (USA §306).

A securities registration statement in a state is generally effective for:

• a.The entire life of the security, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• b.One year from its effective date, and may be renewed for a continuing offering✓
• c.Thirty days
• d.Five years

A state securities registration is generally effective for one year from its effective date; a continuing offering must be renewed, and post-effective amendments may increase the amount registered (USA §305).

A purely intrastate offering that is not registered with the SEC would be registered in the state by:

• a.Coordination
• b.Notice filing
• c.Notification
• d.Qualification✓

Qualification is the method for offerings with no federal registration, including intrastate deals; coordination requires a concurrent federal (Securities Act of 1933) filing (USA §304).

For an offering sold in the state under Rule 506 (a federal covered security), the Administrator may require the issuer to file:

• a.Nothing at all
• b.A surety bond
• c.A notice filing (a copy of the SEC Form D) with a consent to service of process and a fee✓
• d.A full registration statement by qualification, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

For Rule 506 federal covered securities, states may require a notice filing consisting of the documents filed with the SEC (Form D), a consent to service of process, and a fee—but not registration (NSMIA §18; USA).

The key difference between an 'exempt security' and an 'exempt transaction' is that:

• a.Only exempt securities remain subject to the antifraud rules, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.Exempt transactions never involve securities
• c.Exempt transactions require prior SEC approval
• d.An exempt security's exemption attaches to the instrument in any sale, while an exempt transaction's exemption depends on the circumstances of the particular sale✓

An exempt security (e.g., a Treasury bond) is exempt in the hands of any seller; an exempt transaction (e.g., an unsolicited order) is exempt only because of how, where, or to whom it occurs. Both remain subject to the antifraud provisions (USA §402).

An investment contract issued in connection with an employees' pension or profit-sharing plan is:

• a.An exempt security under the Uniform Securities Act✓
• b.Always a prohibited security
• c.A federal covered security requiring a notice filing
• d.Required to be registered by coordination

The Act exempts investment contracts issued in connection with an employees' stock purchase, savings, pension, or profit-sharing plan (USA §402(a)(11)).

Which of the following is most likely an 'isolated non-issuer transaction' exempt under the Uniform Securities Act?

• a.An issuer's advertised public offering
• b.A dealer continuously making a market in a stock
• c.An individual's one-time private sale of stock she owns to a single buyer, not part of a repeated pattern and not through a dealer✓
• d.A broker-dealer's ongoing secondary-market trading for many customers, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

An isolated non-issuer transaction is an infrequent, one-off resale by a non-issuer; a dealer's regular secondary trading is not 'isolated' (USA §402(b)(1)).

A court-appointed conservator sells securities from the estate of an incapacitated person to pay for the person's care. This sale is:

• a.A prohibited transaction
• b.An exempt transaction, because sales by fiduciaries such as conservators, executors, receivers, and trustees in bankruptcy are exempt✓
• c.An issuer transaction requiring registration, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Automatically a federal covered security

Transactions by executors, administrators, sheriffs, marshals, receivers, trustees in bankruptcy, guardians, and conservators are enumerated exempt transactions (USA §402(b)(3)).

As a condition of registering a speculative offering by qualification, the Administrator may require that:

• a.The state insure the offering against loss
• b.The underwriter purchase any unsold shares
• c.The proceeds be impounded (escrowed) until a specified minimum is raised, and may prescribe the form of subscription✓
• d.The issuer guarantee investors a rate of return, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

The Administrator may condition registration on impounding proceeds until a specified amount is raised and may prescribe the subscription or escrow form; it cannot guarantee returns or force an underwriter to buy shares (USA §305).

An agent tells a client that a low-priced speculative stock 'cannot lose money because it has nowhere to go but up.' This statement is:

• a.A violation only if the customer actually loses money
• b.Acceptable sales enthusiasm with no regulatory consequence, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Acceptable if the stock is registered in the state
• d.A prohibited misrepresentation of the risk of the investment✓

Telling a customer a speculative security 'cannot lose' misstates a material fact about risk; it is not mere puffery, does not depend on registration, and the violation is complete at the offer regardless of any later loss (USA §101 antifraud; NASAA unethical practices).

An agent assures a prospect that a mutual fund 'will earn at least 12% per year, just like it did last year.' This is:

• a.Acceptable, because last year's return is a fact
• b.Acceptable if the prospectus shows the prior year's return, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.Acceptable for accredited investors only
• d.A prohibited practice, because it guarantees or predicts specific future investment results✓

Guaranteeing or predicting specific future returns, or implying past performance assures future results, misrepresents the investment; a true prior-year figure does not license a promise of future performance (NASAA unethical practices; USA §101).

To close a sale, an agent tells a customer 'this stock is certain to be listed on the New York Stock Exchange next month,' although no listing has been approved. This is:

• a.Acceptable if the issuer hopes to list eventually
• b.Acceptable because listing decisions are public
• c.A concern only if the stock is never actually listed, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.A prohibited misrepresentation, because it states an uncertain future event as a certainty✓

Representing that a security will be listed or approved when that is not assured is a prohibited misrepresentation of a material fact; the violation does not depend on whether listing later occurs (NASAA unethical practices; USA §101).

An agent tells clients that because his firm and its securities are registered in the state, 'the state stands behind these investments.' This is:

• a.Accurate for exempt securities
• b.Unlawful, because it is prohibited to represent that registration means the Administrator has approved or guaranteed the securities✓
• c.Accurate, because registration is a form of approval, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Acceptable if disclosed in small print

It is unlawful to represent that registration of a person or the effectiveness of a securities registration means the Administrator has approved or passed on the merits; the state guarantees nothing (USA §404/§101).

An agent recommends the same speculative stock to every client in his book, regardless of their differing objectives and finances. This practice is:

• a.Acceptable because each client can decline
• b.Prohibited, because a blanket recommendation disregards individual suitability✓
• c.Acceptable as long as the stock is registered, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• d.Efficient and therefore encouraged

Recommending the same security to all customers without regard to their individual situations is an unethical practice because it disregards suitability; the ability to decline does not shift the agent's duty (NASAA unethical practices – suitability).

An agent recommends an unregistered stock to a customer, then marks the order ticket 'unsolicited' so the trade appears exempt. This is:

• a.Acceptable, because the customer agreed to buy, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.A minor clerical matter
• c.A prohibited falsification that both misstates records and improperly claims a transaction exemption✓
• d.Acceptable if the customer signs the ticket

Marking a solicited order 'unsolicited' falsifies the firm's records and fraudulently manufactures an unsolicited-transaction exemption; it is a prohibited practice regardless of the customer's agreement (NASAA unethical practices; USA §101).

In selling a bond, an agent omits that it is callable at par next year even though it is trading at a premium. The omission is:

• a.Acceptable, because call features appear in the indenture, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A prohibited omission of a material fact, because a near-term call materially affects yield and return✓
• c.A violation only if the bond is actually called
• d.Acceptable if the customer does not ask

A near-term call on a premium bond is material to yield and return; failing to disclose it renders the presentation misleading, a prohibited omission (USA §101 antifraud; NASAA).

An adviser with discretion over a moderate-growth account trades it so frequently that commissions and costs consume much of the return, out of proportion to the client's objectives. This is:

• a.Churning, an excessive-trading violation judged against the client's objectives and resources✓
• b.Acceptable because the client granted discretion in writing
• c.A violation only in a commission account, never a fee account
• d.Acceptable active management because the adviser has discretion, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Excessive trading relative to the customer's resources and objectives is churning; discretionary authority does not authorize trading that primarily generates costs (NASAA unethical practices – churning).

Knowing his firm is about to publish a strong buy recommendation on a stock, an agent first buys call options on it for his own account. This is:

• a.A suitability issue only
• b.Acceptable, because options are not the underlying stock, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Acceptable if the position is small
• d.Front-running, a prohibited misuse of knowledge of an imminent firm action✓

Trading ahead of an imminent firm recommendation or block order to exploit the expected price move is front-running, prohibited regardless of the instrument or size (NASAA unethical practices; USA §101).

An agent sells promissory notes of a friend's business to several firm customers without notifying his broker-dealer, keeping the commissions. This is:

• a.Permitted because promissory notes are never securities, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Permitted because the customers were satisfied
• c.A recordkeeping issue only
• d.Selling away, a prohibited private securities transaction outside the firm's supervision✓

Effecting securities transactions (notes can be securities) away from the firm without prior written notice and approval is selling away, which deprives the firm of supervision (NASAA unethical practices – private securities transactions).

A customer gives an agent a check payable to the firm; the agent deposits it into his own bank account, intending to forward the money later. This is:

• a.Acceptable if forwarded within 30 days
• b.Prohibited commingling and improper handling of customer funds✓
• c.Acceptable because the agent intends to pay it over, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.A minor timing issue

Customer funds must be promptly transmitted to the firm and never deposited into an agent's personal account; doing so is commingling and conversion, a prohibited practice (NASAA unethical practices – custody/commingling).

An agent borrows $5,000 from a customer who is also his mother, and the firm's written procedures permit borrowing from immediate family. This is:

• a.Prohibited under all circumstances
• b.Permitted only if the loan exceeds $10,000
• c.Permitted only with the Administrator's approval, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Generally permissible, because borrowing from an immediate family member is a recognized exception when firm procedures allow it✓

Borrowing from customers is prohibited except in narrow cases—the customer is in the lending business or is an immediate family member—and only where firm procedures permit; a parent qualifies here (NASAA unethical practices – borrowing/lending).

An agent lends his own money to an unrelated retail customer so the customer can buy more securities. This is:

• a.Prohibited, because lending to a customer creates a conflict of interest outside the narrow exceptions✓
• b.Permitted if the customer repays with interest, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Permitted if a promissory note is signed
• d.Permitted because it is the agent's own money

Lending money to a customer is prohibited except in limited situations (the firm's lending arrangements or an immediate family member with firm approval); documentation and repayment terms do not cure it (NASAA unethical practices – borrowing/lending).

An investment adviser representative wants to share directly in the profits and losses of a client's account. Under NASAA rules for advisers, this is generally:

• a.Restricted to performance-fee arrangements meeting the qualified-client thresholds, not the proportionate sharing allowed to broker-dealer agents✓
• b.Permitted like any agent's proportionate sharing
• c.Freely permitted with only the client's oral consent, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Permitted for any client who signs a waiver

Unlike a broker-dealer agent, who may share proportionately with written consent of the customer and firm, an adviser's compensation from account performance is governed by the performance-fee rules and limited to qualified clients meeting net-worth or AUM thresholds (NASAA – performance fees; sharing in accounts).

A broker-dealer agent pays a flat cash referral fee to an unregistered acquaintance for each new brokerage customer sent to him. This is:

• a.Permitted up to $100 per referral
• b.Permitted because it is a flat fee rather than a commission, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.Prohibited, because transaction-related compensation for securities business may not be paid to an unregistered person✓
• d.Permitted if the acquaintance reports it as income

Paying securities-related compensation to an unregistered person for soliciting or referring brokerage business is prohibited; the flat-fee label and tax reporting do not save it (USA §201; NASAA).

A state-registered investment adviser pays cash referral fees to a third-party solicitor. Under NASAA rules, permissible conditions include all of the following EXCEPT:

• a.The solicitation must be approved in advance by the Administrator for each client✓
• b.Written disclosure to the client of the solicitor's compensation, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.A written agreement between the adviser and the solicitor
• d.The solicitor is not subject to a statutory disqualification

Cash solicitation requires a written agreement, written disclosure of the arrangement to the client, and that the solicitor not be disqualified—but not case-by-case Administrator pre-approval (NASAA/Advisers Act solicitor rule).

Under the NASAA custody rule, an adviser with custody must arrange for client funds and securities to be verified by:

• a.The client's personal accountant only
• b.The adviser's own internal staff each quarter, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.The Administrator on a monthly basis
• d.An independent public accountant through a surprise examination at least annually✓

The custody rule requires an annual surprise verification of client assets by an independent accountant, in addition to using a qualified custodian, notifying the Administrator, and sending account statements (NASAA custody rule).

A state-registered adviser with custody must ensure account statements are sent to clients:

• a.At least quarterly, identifying the funds and securities in custody and the account activity✓
• b.Never, in order to protect confidentiality, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.Only when the client requests them
• d.Only once a year

Under the custody rule, a qualified custodian (or the adviser) must send account statements to clients at least quarterly, identifying the assets held and the transactions in the account (NASAA custody rule).

A client terminates an advisory contract midway through a prepaid annual period. Under NASAA rules, the adviser's contract should provide that:

• a.Refunds require the Administrator's approval
• b.The client owes the full year regardless
• c.Any prepaid but unearned fee will be refunded to the client on a pro-rata basis✓
• d.All prepaid fees are forfeited on termination, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules

Keeping unearned prepaid fees on termination is inequitable; the contract should provide for a pro-rata refund of unearned fees, and advisers collecting large prepayments face added disclosure requirements (NASAA unethical practices – fees).

Under NASAA rules, a performance-based advisory fee may generally be charged only to a client meeting net-worth or assets-under-management thresholds. This restriction exists because performance fees:

• a.Create an incentive for the adviser to take greater risk, so eligibility is limited to clients able to bear it✓
• b.Are illegal for every client without exception, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Reduce the adviser's total compensation
• d.Guarantee the client a profit

Performance (incentive) fees may bias an adviser toward excessive risk, so they are limited to qualified clients meeting net-worth or AUM thresholds, with the conflict disclosed (NASAA/Advisers Act Rule 205-3).

Which soft-dollar benefit would fall OUTSIDE the recognized research safe harbor and be improper without more?

• a.Research reports used in making investment decisions for clients, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.Payment of the adviser's office rent and staff salaries out of client brokerage commissions✓
• c.Seminars on investment research techniques
• d.Software that analyzes client securities portfolios

The safe harbor covers research and brokerage services that aid investment decisions; using client commissions to pay overhead such as rent and salaries falls outside it and benefits the adviser rather than clients (Exchange Act §28(e); NASAA).

In an agency cross transaction, a state-registered adviser may act for both buyer and seller only if, among other conditions:

• a.The adviser recommends the trade to both sides
• b.The Administrator approves each cross trade in advance, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.No disclosure is needed because the interests offset
• d.The adviser did not recommend the transaction to both parties and obtains client consent after disclosing its role and compensation✓

Agency cross transactions require disclosure of capacity and compensation, client consent, periodic reporting, and that the adviser not have recommended the trade to both the buyer and the seller (Advisers Act Rule 206(3)-2; NASAA).

Under the Advisers Act framework adopted at the state level, which event is treated as an 'assignment' of an advisory contract requiring client consent?

• a.Hiring a new junior analyst
• b.Moving the office to a new city, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.A transfer of a controlling block of the adviser, or for a partnership a change in a majority of the partnership interests✓
• d.Raising the advisory fee

An assignment includes a direct or indirect transfer of the advisory contract, including a change in control such as transfer of a controlling block or a change in a majority of a partnership's interests; assignment requires client consent (Advisers Act §205; NASAA).

A minority partner leaves a partnership that is a state-registered investment adviser. Under NASAA rules, the adviser must:

• a.Obtain each client's consent, because any partner change is an assignment, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Notify clients of the change in partnership membership within a reasonable time, because a minority change is not an assignment✓
• c.Do nothing at all
• d.Dissolve all client contracts

A change in a minority of partnership interests is not an assignment, but the adviser must notify clients of the change in membership within a reasonable time; a majority change would be an assignment requiring consent (Advisers Act §205; NASAA).

Under the brochure rule, after the initial delivery a state-registered adviser must deliver to each client annually:

• a.The current brochure, or a summary of material changes with an offer to provide the full brochure, free of charge✓
• b.A brochure only if the fee changes
• c.Nothing further once the contract is signed, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.A brand-new signed advisory contract

Beyond delivery at or before contracting, advisers must annually deliver the current brochure or a summary of material changes with an offer to provide the full brochure, without charge (Advisers Act Rule 204-3; NASAA).

Under NASAA model rules, an investment advisory contract must:

• a.Contain a clause waiving the client's legal rights, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Guarantee the client a minimum return
• c.Be oral so it remains flexible
• d.Be in writing and describe the services, term, and fee, and provide that it will not be assigned without the client's consent✓

NASAA requires advisory contracts to be in writing and to state the services, term, and fee or formula, prohibit assignment without consent, and (for partnerships) require notice of membership changes; waiver clauses are void (NASAA model rule on advisory contracts).

An advisory contract contains a clause stating that the client waives any right of action against the adviser for the adviser's conduct. Under the Uniform Securities Act and NASAA rules, this clause is:

• a.Enforceable if the client initials it
• b.Enforceable for sophisticated clients
• c.Enforceable if disclosed in the brochure, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Void, because any condition purporting to waive compliance with the Act is unenforceable✓

Provisions binding a client to waive compliance with the Act or its rules are void, and misleading hedge clauses suggesting clients give up legal rights are prohibited (USA §411/§509 nonwaiver; NASAA).

A firm sponsoring a wrap-fee program must provide clients with:

• a.Only a trade confirmation
• b.The Administrator's written approval of the fee amount
• c.No disclosure, because a single fee is self-explanatory, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.A specialized wrap-fee brochure disclosing the single bundled fee and the services and conflicts involved✓

Wrap-fee programs require a specialized wrap-fee program brochure (Appendix 1 to Form ADV Part 2) disclosing the bundled asset-based fee, the services, and the conflicts (Advisers Act; NASAA).

An investment adviser directs all client trades to a broker charging higher commissions than comparable brokers, with no offsetting benefit to clients. The adviser has likely violated its duty of:

• a.Registration
• b.Advertising
• c.Best execution, which requires seeking the most favorable terms reasonably available for client transactions✓
• d.Confidentiality, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

An adviser owes a fiduciary duty to seek best execution—the most favorable terms reasonably available under the circumstances; routing trades to a costlier broker without client benefit breaches it (Advisers Act §206; NASAA).

An adviser consistently allocates profitable trades to its own account and its favored clients, giving losing trades to smaller clients. This is:

• a.A prohibited breach of the duty of fair and equitable trade allocation✓
• b.Acceptable portfolio management
• c.Acceptable if disclosed only to the large clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.A concern only for broker-dealers

Advisers must allocate trades fairly among clients; cherry-picking favorable trades for the adviser or favored clients breaches the fiduciary duties of loyalty and fair dealing (Advisers Act §206; NASAA).

A state-registered adviser with discretionary authority learns of a net-worth deficiency that could impair its ability to meet commitments to clients. Under NASAA rules it must:

• a.Keep it confidential to avoid alarming clients, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.Disclose only at the next annual amendment
• c.Promptly disclose the financial condition to clients and notify the Administrator, because it is material to the advisory relationship✓
• d.Disclose only to new clients

An adviser must disclose a financial condition reasonably likely to impair its ability to meet contractual commitments to clients, and must promptly notify the Administrator of net-worth deficiencies (NASAA financial-disclosure rules; Form ADV).

An agent learns material nonpublic information about a pending merger and tells his brother, who then buys the stock. The agent has:

• a.Done nothing wrong because he did not trade himself
• b.Committed only a suitability violation
• c.Engaged in prohibited tipping of material nonpublic information✓
• d.Acted properly because family conversations are private, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Passing material nonpublic information to another who then trades (tipping) is prohibited under the antifraud provisions even if the tipper does not trade personally (USA §101; federal insider-trading law).

A trader repeatedly places sell orders to hold a stock's price down while quietly accumulating shares cheaply, creating a false impression of supply. This practice is:

• a.Permitted if disclosed after the fact
• b.Permitted for registered market makers, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Legitimate price stabilization
• d.Prohibited, because artificially capping or pegging a price through deceptive orders is market manipulation✓

Deceptive orders intended to peg, cap, or fix a price and create a false impression of market activity are prohibited manipulation (USA §101; anti-manipulation principles).

A customer instructs an agent to sell a stock immediately, but the agent waits two days hoping for a rebound, and the price falls. The agent has:

• a.Committed a prohibited practice by failing to follow the customer's instructions✓
• b.Acted prudently in the customer's best interest
• c.Acted properly because timing is the agent's discretion, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• d.Committed no violation because the loss was small

Failing to execute a customer's order as instructed substitutes the agent's judgment for the customer's and is a prohibited practice; the size of the resulting loss is irrelevant (NASAA unethical practices).

A customer authorizes the purchase of 100 shares; the agent buys 500 shares because he is confident in the stock. As to the extra 400 shares, the agent has:

• a.Effected an unauthorized transaction, a prohibited practice✓
• b.Acted properly if the price later rose
• c.Made a curable clerical error
• d.Acted properly because the customer wanted the stock

Buying more than the customer authorized, without prior written discretionary authority, is an unauthorized transaction; a favorable outcome does not cure it (NASAA unethical practices).

Which customer instruction gives an agent discretion that requires prior written authorization?

• a.'Invest $50,000 in whatever stocks you think are best.'✓
• b.'Buy 300 shares of DEF at the market right now.'
• c.'Buy 200 shares of XYZ; you pick the best price today.'
• d.'Sell 100 shares of ABC sometime this morning.'

Discretion over the security, the amount, or the action requires prior written authorization; choosing only time or price (with security, action, and amount specified) is time/price discretion, which does not (NASAA; USA).

Which statement correctly contrasts discretionary authority for a broker-dealer agent versus an investment adviser?

• a.A broker-dealer agent needs prior written authorization before any discretionary trade, while an adviser may rely on oral discretion for a limited period if written authorization is obtained within about 10 business days✓
• b.A broker-dealer agent may use oral discretion, but an adviser may not
• c.Neither may ever exercise discretion
• d.Both may rely on oral discretion indefinitely

This heavily tested distinction: a broker-dealer agent requires written authorization before the first discretionary trade; an adviser may act on oral discretion initially but must obtain written authorization within roughly 10 business days (NASAA; Advisers Act).

To make an unsuitable trade appear appropriate, an agent inflates the customer's net worth and risk tolerance on the new-account form. This is:

• a.Acceptable if the customer approves the trade
• b.Acceptable if the trade turns out profitable
• c.Prohibited falsification of firm records✓
• d.A harmless estimate

Falsifying customer information on firm records to disguise unsuitability is a prohibited practice that corrupts the books regulators rely on (NASAA unethical practices – falsification).

An agent receives a written customer complaint and personally negotiates a settlement, never telling the firm. This is:

• a.A prohibited practice, because complaints must be reported to the firm, which has supervisory and recordkeeping duties✓
• b.Acceptable because the agent used his own money
• c.Required, in order to protect customer privacy
• d.Acceptable if the customer ends up satisfied

Settling a complaint privately conceals it from the firm's supervisory system; written complaints must be forwarded, recorded, and retained (NASAA unethical practices; recordkeeping).

A broker-dealer buys bonds from a customer as principal and applies a markdown far larger than justified by market conditions and services. This is:

• a.A prohibited practice, because unreasonable markdowns are as improper as unreasonable markups✓
• b.Permitted because principals set their own prices
• c.Permitted for unlisted bonds
• d.Permitted if the markdown appears on the confirmation

Charging an unreasonable markdown when buying from a customer as principal is an unethical practice, judged against the prevailing market and the services rendered (NASAA unethical practices – fair prices).

A broker-dealer recommends and sells a security issued by the firm's own parent company without disclosing the affiliation. This nondisclosure is:

• a.A concern only for investment advisers
• b.Acceptable because the price charged was fair
• c.Required to be kept secret from customers
• d.A prohibited failure to disclose a material control or affiliate relationship✓

A firm must disclose a control relationship with the issuer of a recommended security; concealing that the issuer is an affiliate is a material omission and a prohibited practice (USA §101; NASAA).

When a broker-dealer publishes a research report recommending a stock in which it makes a market, it must disclose:

• a.Only the security's current price
• b.That it makes a market in the security, a material conflict of interest✓
• c.The names of its customers who hold the stock
• d.Nothing, to avoid influencing readers

A firm publishing research on a security it makes a market in or holds a position in must disclose that conflict; concealing it is a prohibited practice (NASAA unethical practices – conflicts disclosure).

A broker-dealer receives a valid court subpoena for a customer's account records. The firm:

• a.Must first obtain the customer's consent despite the subpoena
• b.May never release customer records for any reason
• c.May release the records in response to the lawful subpoena, a recognized exception to the confidentiality rule✓
• d.Must release the records to anyone who asks

Customer information is confidential and released only with consent or under proper legal authority such as a subpoena, court order, or regulatory demand; a valid subpoena is a recognized exception (NASAA – confidentiality).

A customer delivers a stock certificate to an agent to sell. The agent must:

• a.Sell it through his own personal account
• b.Store it in his personal safe-deposit box indefinitely
• c.Keep it in his desk until the price improves
• d.Promptly forward the certificate to the firm for handling, not hold or divert it✓

Agents must promptly transmit customer funds and securities to the firm or proper party; holding or diverting them is prohibited (NASAA unethical practices – prompt transmittal).

A mutual fund wholesaler gives an agent expensive sporting-event tickets as a reward for sales. Under prohibited-practice principles, the concern is that:

• a.Undisclosed sales incentives create a conflict of interest that can bias recommendations✓
• b.There is no concern because the customer pays nothing extra
• c.Only cash gifts raise any concern
• d.Gifts are always illegal regardless of value or disclosure

Sales-contest prizes and gifts tied to selling a product create conflicts that may bias recommendations; such compensation must be disclosed and is subject to gift limits and firm supervision (NASAA unethical practices; SRO gift rules).

An agent conducts securities business with customers through a personal messaging app the firm cannot monitor or archive. This is:

• a.A concern only for investment advisers
• b.Acceptable if he screenshots the messages
• c.A violation, because business communications must occur through the firm's supervised, retained channels✓
• d.Acceptable because messaging is informal

Securities communications must run through channels the firm can supervise and retain; using an unmonitored app defeats supervision and recordkeeping (NASAA; recordkeeping rules).

A broker-dealer must send a customer a written confirmation of a securities transaction:

• a.Only for purchases, never for sales
• b.Only if the customer requests it
• c.At or before completion (settlement) of the transaction, disclosing required trade details and the firm's capacity✓
• d.Once a year in a summary statement

Firms must send trade confirmations at or before completion of the transaction, disclosing details such as price, quantity, capacity (agent or principal), and compensation; failure is a recordkeeping and disclosure violation (NASAA; SEC Rule 10b-10).

To reassure a nervous client, a firm promises in writing to repurchase a bond at the client's original cost anytime in the next year. This is:

• a.Permitted because the firm, not the agent, made the promise
• b.Permitted for investment-grade bonds
• c.Permitted because it is in writing
• d.A prohibited guarantee against loss✓

Guaranteeing a customer against loss—including a promise to repurchase at cost—misrepresents investment risk and is prohibited whether made by the agent or the firm (NASAA unethical practices; USA §101).

An agent urges a client to buy a mutual fund in a taxable account right before its year-end capital-gains distribution 'to capture the payout.' This is:

• a.Selling dividends, a prohibited practice, because the price drops by the distribution and the client incurs an immediate tax liability with no economic gain✓
• b.Sound advice, because the client receives cash sooner
• c.Acceptable as long as the fund is suitable
• d.Acceptable because the distribution is publicly announced

Enticing a purchase just before a distribution ('selling dividends') is prohibited: the share price falls by the distribution amount and the investor merely converts principal into a taxable payment (NASAA unethical practices – selling dividends).

A client's mutual fund purchase would reach a reduced sales-charge breakpoint if a letter of intent were used, but the agent never mentions it. This omission is:

• a.Acceptable if the client did not ask about discounts
• b.A prohibited breakpoint-related practice, because the agent must disclose letters of intent and rights of accumulation that reduce sales charges✓
• c.A concern only for purchases over $1 million
• d.Acceptable, because a letter of intent is optional

Agents must inform clients of breakpoints, letters of intent, and rights of accumulation that lower sales charges; steering a client past an available discount is a prohibited breakpoint practice (NASAA unethical practices).

An agent repeatedly recommends replacing one variable annuity with another, generating new sales and surrender charges without a documented client benefit. This is:

• a.An improper switching or replacement practice, because inducing exchanges without reasonable grounds imposes needless charges✓
• b.Proper diversification
• c.Acceptable because each contract is individually suitable
• d.Acceptable if the client signs each form

Recommending replacements that trigger new sales and surrender charges without reasonable grounds is an unethical practice, mirroring improper mutual fund switching (NASAA unethical practices – switching/replacement).

An agent recommends that a conservative client open a margin account to buy more stock but does not explain that losses and required deposits can exceed the original investment. This is:

• a.Acceptable because margin increases buying power
• b.Acceptable if the client is over 21
• c.A prohibited failure to disclose the material risks of margin✓
• d.A concern only if the client actually loses money

Recommending margin without disclosing its material risks—losses exceeding the deposit and maintenance calls—is a prohibited omission and a suitability concern (NASAA unethical practices; USA §101).

A broker-dealer's advertisement highlights only its most successful past stock picks and omits comparable picks that lost money. The advertisement is:

• a.Acceptable because past performance is factual
• b.Acceptable because the winning picks are real
• c.Acceptable if a disclaimer appears somewhere
• d.Misleading, because selectively presenting only favorable past recommendations is deceptive✓

Cherry-picking only profitable past recommendations while omitting losers creates a misleading impression of skill and is a prohibited deceptive practice (NASAA unethical practices; USA §101).

Which advertising practice by a state-registered investment adviser is prohibited?

• a.Stating the adviser's fee schedule
• b.Presenting a chart or formula as able, by itself, to determine which securities to buy or sell without disclosing its limitations✓
• c.Disclosing that advisory services involve risk
• d.Describing the adviser's investment philosophy

Advertising that a graph, chart, or formula can by itself determine what or when to buy or sell, without disclosing its limitations, is a prohibited advertising practice for advisers (NASAA model advertising rule; Advisers Act Rule 206(4)-1 tradition).

An adviser recommends a proprietary product from which it earns extra compensation. To satisfy its fiduciary duty, the adviser must:

• a.Say nothing, because the product is suitable
• b.Disclose the conflict of interest, including the additional compensation, so the client can evaluate the recommendation✓
• c.Avoid all proprietary products entirely
• d.Obtain the Administrator's approval first

An adviser's fiduciary duty of loyalty requires full and fair disclosure of material conflicts, including extra compensation from proprietary products, so the client can give informed consent (Advisers Act §206; NASAA).

A state-registered adviser deposits client funds it holds into the firm's general operating account for convenience. This is:

• a.Prohibited commingling of client assets with firm assets✓
• b.Acceptable if the balance is tracked on a spreadsheet
• c.Acceptable because the adviser is bonded
• d.Acceptable if the funds are refunded later

Client funds must be segregated from firm assets with a qualified custodian; depositing them into the firm's operating account is prohibited commingling and triggers custody violations (NASAA custody rule; unethical practices).

A state-registered investment adviser advertises that its registration means it is 'recommended by' and 'approved by' the state securities regulator. This is:

• a.Acceptable for firms with a clean disciplinary record
• b.Acceptable if placed only in the brochure
• c.Acceptable because the firm is in fact registered
• d.Prohibited, because it misrepresents the meaning of registration✓

Implying that registration is an approval, recommendation, or endorsement by the Administrator is prohibited; registration is not a seal of approval (USA §404; NASAA advertising rule).

An investment adviser borrows money from an advisory client who is not a lending institution or a family member. This is:

• a.Permitted for clients with large accounts
• b.Permitted as long as interest is paid
• c.Permitted if disclosed after the fact
• d.Prohibited, because borrowing from a client outside narrow exceptions breaches the adviser's fiduciary duty✓

An adviser generally may not borrow from a client unless the client is a broker-dealer, an affiliate, or a financial institution in the lending business; borrowing from an ordinary advisory client is a prohibited conflict (NASAA unethical practices for advisers).

A state-registered adviser wants to increase advisory fees for existing clients. It must:

• a.Notify only the Administrator, not the clients
• b.Impose the increase without any notice
• c.Disclose the change and generally obtain the clients' agreement, because the fee is a material term of the advisory contract✓
• d.Do nothing, because fees are purely the adviser's business decision

Fees are a material term of the advisory contract; an adviser must disclose and agree changes with clients rather than impose them unilaterally, and must not charge unreasonable or undisclosed fees (NASAA unethical practices – fees).

An agent begins selling fixed insurance products for an outside insurer for compensation without notifying his broker-dealer. Regarding this outside business activity, the agent:

• a.Must provide prior written notice to his broker-dealer, because undisclosed outside business activity is a supervisory and prohibited-practice concern✓
• b.Must register the insurer with the Administrator
• c.Need not tell the firm because insurance is not securities
• d.May proceed freely because it is on his own time

Engaging in outside business activity for compensation without prior written notice to the employing firm is a prohibited practice; the firm must be able to supervise potential conflicts (NASAA/SRO outside-business-activity rules).

Which of the following is a statutory ground for the Administrator to deny, suspend, or revoke a registration?

• a.The applicant has only a few clients
• b.The applicant is a first-time registrant
• c.The applicant was convicted, within the past 10 years, of a felony or a securities-related misdemeanor✓
• d.The applicant charges low fees

Enumerated grounds include a felony conviction within 10 years or a securities-related misdemeanor, insolvency, injunctions, willful violations, dishonest or unethical practices, and false filings, coupled with a public-interest finding (USA §204).

A broker-dealer's principal ignores repeated red flags that an agent is churning accounts. The firm and principal may be disciplined for:

• a.A criminal offense the Administrator may punish with prison
• b.Failure to reasonably supervise, an independent ground for discipline✓
• c.Nothing, because only the agent violated the rules
• d.A private matter only between the customer and the agent

Failure to reasonably supervise agents and employees is itself a ground for disciplinary action against the firm and supervisors, separate from the underlying violation (USA §204; NASAA).

An applicant for agent registration was recently barred by a self-regulatory organization. The Administrator may:

• a.Deny the registration, because being subject to an SRO or another regulator's disciplinary order is a ground for denial✓
• b.Approve automatically because SRO actions are private
• c.Not consider the SRO action at all
• d.Deny only if the SRO action was criminal

An applicant subject to an order of another state's Administrator, the SEC, an SRO, or a foreign regulator within the past 10 years may be denied registration, after notice and an opportunity for hearing (USA §204).

To obtain an injunction and an order of restitution against a person violating the Act, the Administrator must:

• a.Simply issue the injunction administratively
• b.Wait for a criminal conviction first
• c.Apply to a court, which may grant injunctive relief, restitution, disgorgement, and other equitable remedies✓
• d.Refer the matter to the SEC for an injunction

Injunctions and monetary equitable relief such as restitution and disgorgement are judicial remedies; the Administrator applies to a court for them, distinct from its administrative powers (USA §509/§603).

Under the Uniform Securities Act, a willful violation is a criminal offense. Which statement reflects the model level tested?

• a.There is no time limit at all on beginning a prosecution
• b.Only civil remedies exist; there is no criminal exposure
• c.The Administrator personally sentences violators to prison
• d.It is punishable by a fine and/or imprisonment, with prosecution generally begun within five years; the 1956 Act sets lower maximums (about $5,000 and up to 3 years) than the 2002 Act✓

Willful violations are criminal (fine and/or imprisonment), prosecuted in court within a five-year limitations period. The 1956 Act caps penalties lower (about $5,000 / 3 years) than the 2002 Act (higher fine / up to 10 years)—a tested 1956-versus-2002 difference (USA 1956 §409; USA 2002 §508).

In a criminal prosecution under the Uniform Securities Act for violating a rule or order, the defendant:

• a.May not be imprisoned if he proves he had no knowledge of the rule or order✓
• b.Is automatically acquitted by claiming ignorance of the law
• c.Has no available defenses of any kind
• d.Faces only civil liability, never imprisonment

The Act provides that no person may be imprisoned for violating a rule or order of which he had no knowledge; this is narrower than a general 'ignorance of the law' defense and applies to rules and orders, not the statute itself (USA 1956 §409; 2002 §508).

An investor who was sold securities unlawfully has since sold them at a loss. In a civil action under the Uniform Securities Act, the investor may generally recover:

• a.Only his out-of-pocket loss, with no interest
• b.Nothing, because he no longer owns the securities
• c.The tender remedy (price paid plus interest, less income received) reduced by the amount received on resale, plus costs and reasonable attorney's fees✓
• d.Triple damages as a statutory penalty

If the buyer no longer owns the security, recovery is measured as the tender remedy (consideration plus interest less income received) reduced by the value received on the sale, plus costs and reasonable attorney's fees (USA §410/§509).

A seller sends a proper written rescission offer to a buyer who bought securities in a nonexempt, unregistered sale. If the buyer does not accept within the statutory period, the buyer:

• a.Must accept, because rescission is mandatory
• b.Generally loses the right to bring the civil action based on that violation✓
• c.Automatically receives triple damages
• d.May still sue at any time within ten years

A conforming written rescission offer—disclosing the violation and offering the price paid plus interest, less income—cuts off the buyer's civil claim if not accepted within the statutory response period (USA §410/§510).

A person aggrieved by a final order of the Administrator seeks review. Which statement is correct?

• a.The order is stayed automatically upon filing the petition
• b.Review is obtained by petition to the appropriate court within 60 days, and filing the petition does not automatically stay the order✓
• c.A jury retries the facts before the Administrator
• d.Review is by appeal directly to the SEC

Final orders are reviewed by petition to court within 60 days on the administrative record; filing does not stay the order unless the court so orders, and there is no jury before the Administrator (USA §411/§609).

A securities offer is mailed from outside a state and received by a resident within the state. With respect to that offer, the state's Administrator:

• a.Has jurisdiction only if a sale actually results
• b.Has jurisdiction, because an offer directed into and received in the state is made in the state✓
• c.Has no jurisdiction because the offer originated elsewhere
• d.Has jurisdiction only over the mailing state

Jurisdiction attaches where an offer originates, is directed to and received, or is accepted; an offer received in the state is made there, giving that Administrator authority even without a completed sale (USA §414/§610).

The term 'Administrator' under the Uniform Securities Act refers to:

• a.A self-regulatory organization such as FINRA
• b.The state official or agency charged with administering the state securities act✓
• c.The Securities and Exchange Commission
• d.The federal Department of the Treasury

The 'Administrator' is the state securities regulator—official or agency—responsible for administering the state's Uniform Securities Act, not a federal body or SRO (USA §401 'Administrator').

A person served with the Administrator's subpoena refuses to testify. The Administrator may:

• a.Automatically revoke the person's citizenship
• b.Jail the person directly by administrative order
• c.Do nothing, because subpoenas are voluntary
• d.Apply to a court, which may compel compliance and punish refusal as contempt✓

The Administrator cannot itself punish refusal; upon contumacy it applies to a court, which may order compliance and hold a refusing person in contempt (USA §407/§602).

Which action can the Administrator take directly, without first going to court?

• a.Freeze a defendant's bank accounts by its own order
• b.Issue an injunction
• c.Impose a prison sentence
• d.Issue a cease and desist order to stop an ongoing or threatened violation✓

A cease and desist order is an administrative remedy the Administrator may issue directly (with or without a prior hearing); injunctions, imprisonment, and asset freezes are judicial remedies (USA §604/§411).

While a registration proceeding is pending, the Administrator concludes emergency action is warranted. It may:

• a.Summarily postpone or suspend the registration, provided it promptly gives written notice and grants a hearing if requested✓
• b.Take no action until a final order is entered
• c.Permanently revoke the registration without any notice or hearing
• d.Have the registrant arrested

The Administrator may summarily postpone or suspend a registration pending final determination of a proceeding, balanced by prompt written notice and a hearing on request (USA §204).

Under the Uniform Securities Act, the Administrator:

• a.Is forbidden to issue any interpretive guidance
• b.May honor requests for interpretive opinions and may charge a reasonable fee for them✓
• c.Must guarantee the outcome of every transaction
• d.May issue opinions only to federal covered advisers

The Act allows the Administrator to issue interpretive opinions in its discretion and to charge fees; good-faith reliance on a rule, form, or order is also a defense to liability (USA §413/§605).

A customer signs a statement agreeing that her broker-dealer 'need not comply with the state securities act' for her account. This waiver is:

• a.Enforceable if it is notarized
• b.Enforceable if the customer is warned of the consequences
• c.Void, because any condition binding a person to waive compliance with the Act is unenforceable✓
• d.Enforceable for institutional customers

The Act voids any condition, stipulation, or provision binding a person acquiring a security or receiving advice to waive compliance with the Act or its rules (USA §411/§509 nonwaiver).

A firm's officer is sued as a control person for the firm's unlawful securities sale. The officer can avoid liability by:

• a.Proving that the firm was profitable that year
• b.Demonstrating that the security later rose in value
• c.Sustaining the burden of proving he did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to liability✓
• d.Showing that the customer was wealthy

Control persons, partners, officers, directors, and materially aiding employees are jointly and severally liable unless they prove they did not know and could not reasonably have known of the facts creating liability (USA §410/§509).

Regarding the civil statute of limitations under the Uniform Securities Act, which statement is accurate?

• a.There is no limitations period for civil actions
• b.Both acts allow ten years with no discovery rule
• c.The 1956 Act allows suit within the earlier of three years after the sale or two years after discovery, while the 2002 Act generally uses the earlier of two years after discovery or five years after the violation, so periods differ by version✓
• d.The period is fixed at 30 days in every state

The 1956 Act's civil limitation is the earlier of 3 years after the sale or 2 years after discovery; the 2002 Act revised it to the earlier of 2 years after discovery or 5 years after the violation—a tested 1956-versus-2002 distinction (USA 1956 §410(e); USA 2002 §509(j)).

The antifraud provisions of the Uniform Securities Act apply to:

• a.Only registered broker-dealers and agents
• b.Any person, whether or not registered, in connection with the offer, sale, or purchase of any security, exempt or not✓
• c.Only completed sales, never offers
• d.Only non-exempt securities

The antifraud provisions reach any person in connection with the offer, sale, or purchase of any security—exempt or not, registered or not—and apply to offers as well as sales (USA §101/§501).