NASAA Series 63 — All Questions

After the administrator summarily suspends an agent's registration pending a proceeding, the Act says that within 15 days after receipt of a written request, the matter will be:

• a.Set down for hearing, and the suspension lapses on its own if no hearing has begun within thirty days
• b.Decided by the administrator on the written file alone, with no hearing unless a court orders one to be held
• c.Set down for hearing, and without a request or order for one the suspension stays in effect until modified or vacated✓
• d.Reviewed by a court, which must approve the suspension within fifteen days or the order becomes void

A summary order carries notice of the reasons and of the right to a hearing within fifteen days after a written request. If no hearing is requested or ordered, the order remains in effect until modified or vacated. The Act does not substitute a paper decision, does not make the suspension lapse after thirty days, and does not route the order to a court for approval.Uniform Securities Act (1956) §204(c)

A broker-dealer applies to withdraw its registration on June 1, and no revocation or suspension proceeding is pending or begun within the next 30 days. What follows?

• a.The withdrawal takes effect 30 days after receipt, and any later proceeding is then barred for all time
• b.The withdrawal takes effect immediately on filing, and the administrator loses all authority over the firm
• c.The withdrawal takes effect 30 days after receipt, and the administrator may proceed within one year✓
• d.The withdrawal takes effect after 90 days, and the administrator may proceed within two years

Withdrawal becomes effective thirty days after the application is received unless a proceeding is pending or begun within that period. Even after it takes effect, the administrator may institute a revocation or suspension proceeding within one year and make the order effective as of the last day of registration. Immediate effect, a permanent bar, and the ninety-day and two-year figures are all not in the section.Uniform Securities Act (1956) §204(e)

An applicant for broker-dealer registration has a clean record and has passed the required examination, but has never worked in the securities business. May the administrator deny registration solely for lack of experience?

• a.Yes, because at least two years of securities experience are required of every broker-dealer applicant
• b.No, because an order may not rest on lack of experience alone if the applicant is qualified✓
• c.No, but only if the applicant also posts a bond equal to the net capital the administrator requires
• d.Yes, because qualification is judged on experience alone, and an examination result carries no weight

The administrator may not enter an order solely on lack of experience if the applicant is qualified by training or knowledge or both. The Act sets no minimum number of years, and examinations are an accepted measure of qualification. A bond may be required of some registrants under other provisions, but it is not a condition that rescues an applicant from a lack-of-experience denial.Uniform Securities Act (1956) §204(b)(3)

Agent Roy was convicted of a securities-related misdemeanor 8 years ago and, separately, of an unrelated felony 12 years ago. Under §204(a)(2)(C), which conviction supports denying registration?

• a.Only the misdemeanor, since the conviction must fall within ten years and the felony does not✓
• b.Only the felony, since felonies carry no time limit while misdemeanors age out after five years
• c.Both, since any felony or any securities misdemeanor can be used, whatever the age of the conviction
• d.Neither, since the administrator may act only on a conviction within the past three years

A ground for action exists if the person has been convicted, within the past ten years, of a misdemeanor involving a security or of any felony. The eight-year-old securities misdemeanor is inside that period and the twelve-year-old felony is outside it. The time limit applies to felonies too, it is ten years rather than five or three, and age is not ignored.Uniform Securities Act (1956) §204(a)(2)(C)

Assuming no other exclusion applies, which of the following must register as an investment adviser?

• a.A lawyer who gives securities advice solely incidental to the practice of law, and charges a fee for it
• b.A publisher of a bona fide financial newsletter whose content is not tailored to each reader's situation
• c.A broker-dealer's agent whose advice is solely incidental to brokerage, with no special compensation
• d.A financial planner who, as part of a regular business, is paid to advise clients on buying and selling securities✓

Investment adviser includes financial planners and others who, for compensation and as part of a business, advise on securities. The definition excludes a lawyer, accountant, engineer, or teacher whose advice is solely incidental to the profession, the publisher of a bona fide publication that is not tailored to each client's situation, and a broker-dealer or agent whose advice is solely incidental to brokerage without special compensation.Uniform Securities Act (1956) §401(f)

A New York dealer has no place of business in State A and effects transactions there only with other broker-dealers and banks. In State A the dealer:

• a.Falls outside the definition, having no state office and dealing only with listed institutions✓
• b.Must register, since any dealer that solicits a state resident must register there first
• c.Must register, since banks are excluded from the definition but other broker-dealers are not excluded
• d.Must register unless it has fewer than ten customers in State A in any twelve-month period of time

The definition of broker-dealer excludes a person with no place of business in the state who deals there exclusively with issuers, other broker-dealers, banks, and similar institutions. The ten-customer idea comes from a different test, the private-offering exemption for transactions, and has no role in the definition.Uniform Securities Act (1956) §401(c)

An employee of a private company sells company stock to existing employees and receives no commission or other remuneration for soliciting anyone. Is the employee an agent?

• a.Yes, unless the stock has also been registered by qualification in the state, in which case the exclusion applies
• b.Yes, since any individual who represents an issuer in selling its own stock is an agent, whatever the buyers
• c.No, since dealing only with existing employees, partners, or directors without remuneration is excluded from the definition✓
• d.No, since an employee of an issuer is excluded once the stock itself has been registered in the state

Agent does not include an individual who represents an issuer in transactions with existing employees, partners, or directors if no commission or other remuneration is paid for soliciting. Representing an issuer is not enough alone to make someone an agent. Registration of the stock does not decide the point; a registered security sold by an issuer's employee generally does fall within the definition.Uniform Securities Act (1956) §401(b)

An applicant's registration application is complete but the filing fee is deficient. The administrator may enter which order, and when must it be vacated?

• a.A revocation order, vacated only after a hearing and written findings
• b.A bar from employment, vacated only when the next renewal fee is paid
• c.A suspension of up to 30 days, vacated automatically when the period ends
• d.A denial order only, vacated once the fee deficiency has been corrected✓

For failure to pay the proper filing fee the administrator may enter only a denial order, and must vacate it when the deficiency is corrected. Revocation, a timed suspension, and a bar from employment are not available for this ground.Uniform Securities Act (1956) §204(a)(2)(K)

A newly formed company with no operating history and no federal registration statement wants to sell stock to the public in the state. Which registration method remains available?

• a.Qualification, which any security may use and which is the only route open to this issuer✓
• b.Registration by filing, which is open to any issuer able to show net worth of at least $4,000,000
• c.Coordination, which needs only a state prospectus and a statement of maximum and minimum prices
• d.Registration by filing, which is open to any issuer once its charter is on file with the administrator

Qualification is available for any security, and it is the route when neither of the others fits. Coordination requires a federal registration statement already on file for the same offering, and filing requires that statement too, along with 36 months of operations, 500 holders of record, and the net worth test. A charter on file or a large net worth cannot stand in for the missing federal statement.Uniform Securities Act (1956) §§302-304

A registration statement filed by coordination becomes effective automatically at the moment the federal registration statement becomes effective if:

• a.The filing has been on file five business days and the issuer has paid the fee for a pre-effective hearing on the offering
• b.The administrator has completed a merit review and the underwriters have contracted to buy the entire issue as principals
• c.No stop order is pending, the filing has been on file ten days, and the price and discount statement has been on file two full business days✓
• d.No stop order is pending, the filing has been on file thirty days, and the administrator has approved the prospectus in writing

Section 303(c) sets three conditions: no stop order or Section 306 proceeding pending, the registration statement on file for at least ten days, and a statement of the maximum and minimum offering prices and maximum underwriting discounts on file for two full business days, unless the administrator shortens the periods. Thirty days is the period that applies to an application to register an agent or firm, and the administrator does not approve prospectuses. No hearing fee exists in this process. Merit review and a firm-commitment underwriting are not conditions of coordination.Uniform Securities Act (1956) §303(c)

An issuer filed its state registration by coordination 8 days ago, and the price and commission statement has been on file 3 business days. The federal registration statement goes effective today. When does state registration become effective?

• a.Today, since federal effectiveness alone triggers state effectiveness, whatever the length of the state filing period
• b.As soon as the ten-day filing period is met, which is two days from today, if no stop order is then pending✓
• c.Only when the administrator issues a written order granting registration, since nothing here is automatic
• d.Thirty days after the federal effective date, because the administrator needs time to review the filing

Under coordination, if the federal registration statement becomes effective before the state conditions are satisfied and they are not waived, the state registration becomes effective automatically as soon as they are. The filing has been on file 8 days, so the ten-day condition is met in two more days; the price statement condition is already satisfied. Federal effectiveness alone does not trigger state effectiveness while a condition is open, there is no thirty-day state delay, and the automatic mechanism applies to coordination, with a written order being the route for qualification.Uniform Securities Act (1956) §303(c)

An issuer has a federal registration statement for an equity offering at $3 per share. It has operated 40 months, has 600 holders of record of a Section 12 class, and has net worth of $5,000,000. Why can it not register by filing?

• a.The equity securities must be offered to the public at a price of not less than $5 per share✓
• b.Its net worth is below the $4,000,000 needed, since intangibles are deducted in full
• c.Its operating history is under the 36 months required, since only public-company months count
• d.Its record holders fall short of the 500 needed, since only holders who live in this state count

Filing eligibility requires, among other conditions, that an equity security be offered to the public at not less than $5 per share, and $3 fails that test. The issuer has 40 months of operations against 36 required, 600 record holders against 500, and $5,000,000 of net worth against $4,000,000, so the holder count, the operating history, and the net worth explanations each cite a test the issuer actually passes.Uniform Securities Act (1956) §302(a)(1)

Underwriters will receive total discounts of 12 percent of the aggregate public offering price of an offering that is otherwise eligible for registration by filing. What is the effect?

• a.The offering is not eligible by filing, since underwriting commissions and discounts may not exceed 10 percent✓
• b.The offering is eligible, but only after the administrator holds a hearing on the level of the commissions
• c.The offering is eligible, since the ceiling for filing is 15 percent of the net proceeds to the issuer
• d.The offering is not eligible, since commissions must not exceed 5 percent of the aggregate offering price

One condition for registration by filing is that the aggregate commissions or discounts to underwriters not exceed 10 percent of the aggregate public offering price. Twelve percent is above that limit, so another method such as coordination or qualification must be used. Fifteen percent and 5 percent are not the test, and the filing method has no hearing that can substitute for the ceiling.Uniform Securities Act (1956) §302(a)(1)(H)

An open-end investment company qualified its shares by coordination 20 months ago and has made no material change in its terms or selling method. Which statement is correct?

• a.It must use coordination again, since an investment company may not use filing under any condition
• b.It must qualify again, since filing is limited to issuers with 36 months of operating history
• c.It may register by filing only if it has 500 holders of record and underwriting discounts of 10 percent or less
• d.It may register by filing, since it qualified within the preceding 24 months and has not materially changed✓

An open-end investment company or unit investment trust may register by filing if it has qualified within the previous 24 months and there has been no material change in its terms, selling method, investment practices, or terms of sale. The 36-month, 500-holder, and 10 percent conditions are the tests for an ordinary operating issuer under the first paragraph and do not apply here.Uniform Securities Act (1956) §302(a)(2)

Which item is required in a registration statement by qualification?

• a.A balance sheet dated within ninety days before filing and unaudited statements for the last fiscal year only
• b.Audited statements for the five preceding fiscal years and a pro forma balance sheet dated within the prior year
• c.A balance sheet under four months old and profit and loss statements for the three preceding fiscal years✓
• d.A copy of the federal registration statement and the SEC's order declaring that statement effective

Qualification requires the issuer's balance sheet as of a date within four months before filing, plus a profit and loss statement and analysis of surplus for each of the three preceding fiscal years. Five years of audited statements, a ninety-day balance sheet with one year of unaudited figures, and a copy of an SEC effective order are not the statutory items, and an issuer that qualifies because it has no federal registration would have no SEC order to supply.Uniform Securities Act (1956) §304(b)(16)

A registration statement became effective on March 1 and the issuer's offering ended in April. May the issuer withdraw the registration in July if securities of that class remain outstanding?

• a.No, since it cannot be withdrawn for two years after its effective date under any circumstances
• b.Yes, since the registration lapses and may be withdrawn once the issuer completes the offering
• c.Yes, if it gives the administrator notice and the withdrawal takes effect thirty days after receipt
• d.No, it may not be withdrawn within one year of its effective date while securities of the class are outstanding✓

A registration statement may not be withdrawn for one year from its effective date if any securities of the same class are outstanding. The thirty-day withdrawal period belongs to the withdrawal of a person's registration, not a securities registration. The bar is one year, not two, and it applies only while securities of the class are outstanding.Uniform Securities Act (1956) §305(i)

Who may file a registration statement for a security?

• a.The issuer, an underwriter, or any registered investment adviser that recommends the security
• b.The issuer or its lead underwriter, but never a broker-dealer acting on its own
• c.Only the issuer, since nobody else has the information needed to sign the statement
• d.The issuer, another person on whose behalf the offering is made, or a registered broker-dealer✓

Section 305(a) allows a registration statement to be filed by the issuer, any other person on whose behalf the offering is to be made, or a registered broker-dealer, which lets a local broker-dealer register a security even if the issuer will not. Restricting filing to the issuer, or to the issuer and its underwriter, is narrower than the Act, and a registered investment adviser is not on the list.Uniform Securities Act (1956) §305(a)

As a condition of registering by qualification, the administrator requires that shares issued to promoters at one-tenth of the public price be held in escrow. This requirement is:

• a.Permitted, since securities issued to promoters within three years at a different price may be escrowed✓
• b.Permitted only if the issuer is in default on an earlier registered offering in the state
• c.Permitted only for shares issued to promoters within the six months before the offering is filed
• d.Prohibited, since the administrator may regulate the price of the offering only through a stop order proceeding

The administrator may by rule or order require, for qualification or coordination, that securities issued within the past three years, or to be issued to a promoter for a consideration substantially different from the public price, or to anyone for a consideration other than cash, be deposited in escrow, and that proceeds be impounded until a specified amount is raised. A stop order is a separate remedy that has nothing to do with this power, the look-back is three years rather than six months, and no earlier default is required.Uniform Securities Act (1956) §305(g)

Which of the following is a ground for a stop order against a registration statement?

• a.The issuer's earnings in the most recent fiscal year were lower than in the year before
• b.The offering has worked or would work a fraud upon the purchasers of the security✓
• c.The administrator disagrees with the issuer's judgment about the merits of its business plan
• d.The offering price of the security is lower than the price of comparable listed securities

Fraud upon purchasers is among the listed stop-order grounds, as are incomplete or misleading statements, willful violations, illegal business activity, unreasonable underwriting compensation or promoters' profits, ineligibility for filing, and failure to honor a coordination undertaking. Declining earnings, a lower price than comparables, or disagreement over business merit are not listed grounds.Uniform Securities Act (1956) §306(a)(2)

Which of the following correctly describes the administrator's procedure in a stop-order case?

• a.A stop order can be issued only by a court on petition of the administrator, with no administrative hearing held
• b.Stop orders need prior notice, a hearing, and written findings, but a summary postponement may come first✓
• c.A stop order takes effect only after a criminal conviction of the issuer or one of its officers
• d.A stop order may be entered at once without notice or hearing for any ground, since it is an emergency remedy

Except for the summary postponement or suspension in the first sentence of §306(b), a stop order requires appropriate prior notice, an opportunity for hearing, and written findings of fact and conclusions of law. After a summary order, the person may request a hearing within fifteen days after receipt of the notice. The administrator, not a court, enters the order, so the court-petition description is wrong, and no criminal conviction is needed. Entering an order at once for any ground would skip the hearing the Act requires for everything but the summary step.Uniform Securities Act (1956) §306(b)-(c)

An annuity contract issued by a state-authorized insurance company promises payments that vary with the results of a segregated investment account. Is it an exempt security under the insurance company exemption?

• a.Yes, if the insurer is organized in the same state as the purchaser and files a notice with the administrator
• b.No, because the exemption reaches only life insurance policies and never annuity contracts of any kind
• c.No, because the exemption excludes variable contracts tied to a separate securities account✓
• d.Yes, since any security issued by an insurer authorized in the state is exempt, whatever its terms

The exemption for securities issued by an authorized insurance company excludes an annuity, investment contract, or similar security whose payments are not fixed in dollars but depend substantially on the results of a segregated account invested in securities, which is how variable products are treated. The exemption is therefore not unlimited, a notice filing and a home-state insurer do not change the exclusion, and fixed annuities are within the exemption, so it does reach annuity contracts.Uniform Securities Act (1956) §402(a)(5)

Which commercial paper qualifies as an exempt security?

• a.A note payable within 9 months, issued in denominations of at least $50,000, and rated in one of the 3 highest categories✓
• b.A note payable within 9 months, issued in denominations of at least $25,000, with no rating needed if a bank guarantees it
• c.A note payable within 6 months, issued in any denomination, and sold only to investment companies and banks
• d.A note payable within 12 months, issued in denominations of at least $10,000, and rated in the single highest category

The commercial paper exemption covers an obligation to pay cash within 9 months, issued in denominations of at least $50,000, and rated in one of the 3 highest categories by a nationally recognized statistical rating organization. A 12-month maturity, a $10,000 or $25,000 minimum, and a requirement of only the top category all miss one of the conditions, and the paper is not exempt merely because buyers are institutions.Uniform Securities Act (1956) §402(a)(10)

A company's common stock is listed on the New York Stock Exchange. Its separate class of preferred stock is not listed, but ranks senior to the common. Is the preferred an exempt security?

• a.Yes, since a security senior or substantially equal in rank to an exchange-listed security is also exempt✓
• b.No, since only the listed class itself is exempt and every other class of the same issuer must register before sale
• c.No, since an unlisted class is exempt only if it has been outstanding for at least 90 days before the sale in the state
• d.Yes, but only for resales by registered agents on the exchange, and not for original sales by the issuer

The exchange-listed exemption extends to any other security of the same issuer that is of senior or substantially equal rank to the listed one, and to securities called for by listed rights or warrants. A senior unlisted preferred therefore qualifies. The 90-day outstanding period relates to the manual exemption for transactions, and this is an exemption of the security, so it is not limited to resales.Uniform Securities Act (1956) §402(a)(8)

A nonprofit organized and operated exclusively for charitable purposes offers its securities in the state. Which statement is correct?

• a.The securities are not exempt, since only government and bank securities are exempt without conditions
• b.The securities are exempt, and no notice or filing is needed to claim that exemption✓
• c.The securities are exempt only if every buyer qualifies as an accredited investor under Regulation D
• d.The securities are exempt only if the organization first files a notice thirty days before the offering

Securities of an organization operated not for private profit and exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes are exempt from registration, with no filing required to claim the exemption. The thirty-day notice is a condition of the employee benefit plan exemption, not this one, accredited-investor status is a federal Regulation D idea that the state exemption does not use, and the list of unconditional exemptions is far broader than government and bank securities. The burden of proving the exemption rests on the person claiming it.Uniform Securities Act (1956) §402(a)(9)

An employer wants its profit-sharing plan's investment contract to be exempt. What must the employer do?

• a.Notify the administrator in writing within thirty days after the first employee joins the plan
• b.Obtain a written order from the administrator granting the exemption before any employee joins
• c.Notify the administrator in writing at least thirty days before the plan begins✓
• d.File a registration statement by qualification and deliver a prospectus to each employee who joins

An investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar plan is exempt if the administrator is notified in writing thirty days before the inception of the plan. A registration statement and prospectus delivery are not needed, notice given after an employee joins is late, and the administrator need not issue an order granting the exemption.Uniform Securities Act (1956) §402(a)(11)

Which of these is an exempt security under §402(a)?

• a.A revenue bond issued by a city to finance construction of a municipal water plant✓
• b.A bond of a foreign government with which the US has no diplomatic relations
• c.A bond of a private water company whose payments depend on a contract with the city
• d.A promissory note of a foreign corporation that is guaranteed by its parent corporation

Securities issued or guaranteed by the United States, a state, a political subdivision, or their agencies, including revenue obligations, are exempt. Foreign government securities are exempt only for Canada, its provinces, or governments with which the US currently has diplomatic relations, so a government without relations is not covered. A private company's note or bond, whether guaranteed by a parent or tied to a city contract, has no government issuer and gains no exemption.Uniform Securities Act (1956) §402(a)(1),(2)

Which statement about the administrator's power over exemptions is correct?

• a.The administrator has no power to revoke any exemption, since every exemption arises automatically from the statute itself
• b.Only certain exemptions, such as the 10-offeree and existing-holder ones, may be revoked, and not retroactively✓
• c.The administrator may revoke an exemption on summary order without notice and without a right to a hearing
• d.The administrator may revoke any exemption, retroactively, once a buyer has filed a written complaint

The administrator may by order deny or revoke the exemptions in §402(a)(8), (9), and (11) and in subsection (b), as to a specific security or transaction. Notice, hearing, and written findings are required, though a summary order is allowed with a fifteen-day hearing right. An order may not operate retroactively, so a revocation triggered by a complaint is wrong, and revocation without any hearing right is wrong too. The power does exist, so the view that statutory exemptions are untouchable fails as well.Uniform Securities Act (1956) §402(c)

A customer calls a registered broker-dealer and, without any recommendation, asks to buy shares of a non-exempt unregistered security from the firm's inventory. The transaction is:

• a.Exempt only if the customer is an institutional buyer, since individuals cannot waive registration
• b.Exempt only if the broker-dealer sold the shares as principal from its own inventory
• c.Prohibited, since any sale of a non-exempt unregistered security violates the registration requirement
• d.Exempt as an unsolicited non-issuer transaction handled through a registered broker-dealer✓

A non-issuer transaction effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy is exempt, although the administrator may require the customer to acknowledge in writing that the order was unsolicited. The exemption is not restricted to institutions or to principal trades. Because it applies, the transaction is not simply a violation of the registration rule.Uniform Securities Act (1956) §402(b)(3)

An issuer sells unregistered stock only to two insurance companies and a bank in the state. Which statement is correct?

• a.Exempt only if each institution signs an investment letter and holds the stock for ninety days
• b.Exempt only if the issuer sells to no more than ten buyers in any twelve consecutive months
• c.Not exempt, since the exemption protects only sales that go through registered broker-dealers
• d.Exempt, because sales to financial institutions are exempt whatever the number of buyers✓

An offer or sale to a bank, savings institution, trust company, insurance company, investment company, pension or profit-sharing trust, or other financial or institutional buyer, or to a broker-dealer, is exempt whether it buys for itself or as a fiduciary. The ten-person limit excludes these institutions, so it does not cap the number here. Neither a holding period nor an investment letter is a condition, and the exemption does not depend on the use of a broker-dealer.Uniform Securities Act (1956) §402(b)(8)

In 12 consecutive months an issuer directs offers to 8 individual investors in the state and 4 insurance companies in the state, with no commissions, and the individuals buy for investment. Is the limited-offering exemption available?

• a.Yes, but only if the issuer first files a notice with the administrator at least five days in advance
• b.No, because all 12 offerees count toward the limit, which cannot exceed 10 persons
• c.No, because the exemption requires that the offerees all be institutions or accredited investors
• d.Yes, because only the 8 individuals count toward the limit of 10, not the insurance companies✓

The exemption allows offers directed to not more than ten persons in the state in twelve consecutive months, excluding the institutional buyers named in §402(b)(8), provided the seller reasonably believes the buyers are purchasing for investment and no commission is paid for soliciting. Counting 8 persons, the issuer is within the limit. Counting all 12 is wrong, and no advance notice is required for this exemption.Uniform Securities Act (1956) §402(b)(9)

An issuer offers new shares to its existing shareholders and pays a standby commission to an underwriter who agrees to purchase any shares the holders do not take. No other commission is paid for solicitation. What is the status of the transaction?

• a.It is exempt only for sales to the shareholders who are officers or directors of the issuer
• b.It is exempt, since a standby commission is permitted when the offer is made to existing security holders✓
• c.It is not exempt, since any commission paid in connection with the offer defeats the exemption
• d.It is exempt only if the shareholders each purchase at least 90 percent of their pro rata share

An offer to existing security holders is exempt if no commission or remuneration other than a standby commission is paid for soliciting, or if the issuer files a notice and the administrator does not disallow the exemption within five full business days. A standby commission is permitted, so the existence of that commission does not defeat the exemption. The exemption has no minimum take-up and is not limited to insiders.Uniform Securities Act (1956) §402(b)(11)

A shareholder in the state sells 100 shares of a small private company's stock to a neighbor in a single sale, not through a broker-dealer, and expects no further sales. The transaction is:

• a.Not exempt, since sales by shareholders of an unregistered private company must always be registered
• b.Not exempt, since the exemption applies only when a registered broker-dealer effects the sale
• c.Exempt as an isolated non-issuer transaction, whether or not it is made through a broker-dealer✓
• d.Exempt only if the neighbor is an accredited investor and signs an investment letter

Any isolated non-issuer transaction is exempt whether or not it is effected through a broker-dealer. A shareholder who is not the issuer is not selling for the issuer's benefit. Requiring a broker-dealer or accredited-investor status adds conditions the Act does not contain. A private company's shareholder is not barred from a single resale.Uniform Securities Act (1956) §402(b)(1)

A court-appointed bankruptcy trustee sells shares of a debtor's portfolio company to a buyer in the state. The sale is:

• a.An exempt transaction, since transactions by trustees in bankruptcy, executors, and guardians are exempted✓
• b.Not exempt, since a fiduciary acting under court order must always register the securities first
• c.Exempt only if the trustee files a notice with the administrator within thirty days after the sale
• d.Exempt only if the buyer is a registered broker-dealer buying for its own account as principal

Transactions by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator are exempt from the registration requirement. No registration, no broker-dealer buyer, and no notice filing are required for the exemption.Uniform Securities Act (1956) §402(b)(6)

Under federal law, which of these offerings could a state administrator NOT make the issuer register?

• a.A security sold only to residents of the issuer's state under the intrastate offering exemption
• b.A security listed on the New York Stock Exchange or another national securities exchange✓
• c.A security sold under Rule 504 of Regulation D in an offering of $400,000 to 25 investors
• d.A security of a company that has a federal registration statement pending but not yet effective

Under the National Securities Markets Improvement Act, securities listed on national exchanges, along with securities of the same issuer that are senior or equal, are covered, as are securities of registered investment companies and securities sold under SEC rules such as Rule 506. Rule 504 offerings and the intrastate exemption are not covered, so the states may still register them. A pending, ineffective federal registration statement does not make a security covered.NSMIA, 15 U.S.C. §77r(b); Uniform Securities Act (1956) §307

An issuer sells securities under Rule 506 in a state. The administrator requires a notice filing. What may the state require, and by when?

• a.A registration statement by coordination, filed before the first offer in the state
• b.A merit review of the offering and an annual report, whatever the date of the first sale
• c.A copy of the Form D and a fee, no later than 30 days before the first offer in the state
• d.A copy of Form D and a fee, due no later than 15 days after the first sale in the state✓

A Rule 506 security is a federal covered security, so the state may not register it, but the administrator may require a notice filing consisting of a copy of the Form D and a fee, no later than 15 days after the first sale in the state. A state registration, a pre-offer filing 30 days earlier, and a merit review all go beyond what is permitted for covered securities.Uniform Securities Act (1956) §307(b); 17 CFR 230.503

Which statement about Rule 506(b) and Rule 506(c) is correct?

• a.Under 506(b) general solicitation is permitted and unlimited non-accredited purchasers may buy
• b.Under 506(c) general solicitation is permitted and up to 35 non-accredited purchasers may buy
• c.Under 506(c) general solicitation is permitted but every purchaser must be accredited and verified✓
• d.Under 506(b) every purchaser must be accredited and the issuer must verify each one's status

Rule 506(b) bars general solicitation but allows up to 35 non-accredited purchasers in any 90-day period, who must be sophisticated alone or with a purchaser representative. Rule 506(c) allows general solicitation but all purchasers must be accredited and the issuer must take reasonable steps to verify. Each wrong option swaps features of the two paragraphs.17 CFR 230.506(b),(c)

An individual has a home worth $900,000 with a $400,000 mortgage, other assets of $700,000, and other liabilities of $100,000. Does the person meet the net worth test for an accredited investor, and why?

• a.Yes, since the mortgage is ignored but the home is counted, giving net worth of $1,500,000
• b.Yes, since the full value of the home counts, giving net worth of $1,100,000 against a $1,000,000 test
• c.No, since the test excludes the home and counts the mortgage as a liability, giving a net worth of $200,000
• d.No, since net worth excluding the primary residence is $600,000 and the test requires more than $1,000,000✓

The net worth test excludes the value of the primary residence and, as to its mortgage, excludes debt secured by it up to the home's fair market value. Here the assets other than the home are $700,000, less other liabilities of $100,000, giving $600,000, which falls short of the required more than $1,000,000. Counting the home, with or without the mortgage, produces $1,100,000 or $1,500,000, which the test does not allow, and $200,000 subtracts the mortgage even though debt secured by the home is excluded.17 CFR 230.501(a)

After a security becomes a federal covered security, what authority do the states retain over its offer and sale?

• a.They retain antifraud authority and may require notice filings and fees, but not registration✓
• b.They keep full registration authority, but must apply the same standards as the SEC
• c.They keep only the power to require registration of its agents, with no antifraud or notice powers
• d.They lose all authority over the security, including the power to investigate or take action for fraud

Preemption under NSMIA bars states from registering covered securities but leaves their authority to investigate and bring enforcement actions for fraud or deceit, and to require notice filings and fees. The states do not retain registration authority, do not lose antifraud authority, and are not limited to agent registration.NSMIA, 15 U.S.C. §77r(c); Uniform Securities Act (1956) §§307, 101

An issuer's securities are exempt under §402(a). May the administrator require it to file its sales and advertising literature under §403?

• a.No, because §403 reaches only securities and transactions that are neither exempt under §402 nor federally covered✓
• b.No, but only if the advertising reaches fewer than ten persons in the state in any twelve months
• c.Yes, because advertising is regulated separately from registration and exempt issuers must file all of it
• d.Yes, but only advertising that makes a statement about the issuer's earnings, dividends, or prospects

Section 403 lets the administrator require filing of sales and advertising literature, but not for a security or transaction that is exempt under §402 or a federal covered security. The ten-person figure comes from the limited offering exemption and plays no role in §403, and the limitation to earnings statements is not in the section.Uniform Securities Act (1956) §403

An agent tells a customer, "This stock is registered with the state, so the securities administrator has looked it over and endorsed it." The statement is:

• a.Unlawful only if the agent receives a commission on the sale of the stock to this customer
• b.Lawful if the agent adds that investors should read the whole prospectus before they buy
• c.Lawful, since registration means the administrator reviewed the offering and found it fair to buyers
• d.Unlawful, since the fact of registration does not mean the administrator approved the security✓

Neither the fact that a security is registered or exempt nor the fact that a filing was made means that the administrator has passed on its merits, and a contrary representation is unlawful. A prospectus reminder does not cure a misleading statement, and the violation does not depend on whether the agent is paid a commission.Uniform Securities Act (1956) §405

A registration statement by qualification must include which item relating to advertising?

• a.Copies of the prospectus, circulars, and advertisements intended for use in the offering✓
• b.Only the final printed prospectus, since advertisements are reviewed only when a complaint arises
• c.A certification from the underwriter that the advertising was cleared by the SEC in advance
• d.A schedule of the newspapers and broadcast stations in which the advertising will run each quarter

A registration statement by qualification must include a copy of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature intended for use in connection with the offering as of the effective date. The other options describe items that the section does not call for.Uniform Securities Act (1956) §304(b)(12)

An agent describes a new bond issue to a customer and leaves out that the issuer defaulted on its previous bond. Which provision does the omission violate?

• a.The advertising provision, which bars oral statements about a security before a prospectus is sent
• b.The agent-supervision provision, which makes the firm liable for any statement an agent makes to customers
• c.The registration provision, which bars any offer of a security before the issuer's default history is filed
• d.The antifraud provision, which bars omitting a material fact needed to keep a statement from misleading✓

Section 101 makes it unlawful, in connection with an offer, sale, or purchase of a security, to make an untrue statement of material fact or to omit a material fact needed to make the statements made not misleading. Registration deals with whether a security may be sold, and the filing rules in §403 deal with literature, so neither is the source of the violation. Firm supervision is a separate duty and does not define the omission itself.Uniform Securities Act (1956) §101

A registered agent borrows $5,000 from a long-time customer and signs a note. This conduct is:

• a.Permitted if the customer has traded through the agent for more than a year and raised no complaint
• b.Prohibited only when the amount borrowed is greater than the balance in the customer's account at the firm
• c.Permitted if the loan is documented in a signed note and repaid at the prevailing bank rate of interest
• d.A dishonest or unethical practice, because an agent may not lend or borrow money or securities from a customer✓

The policy lists as unethical an agent lending or borrowing money or securities from a customer, or acting as a custodian for the customer's money, securities, or an executed stock power. A signed note and a market interest rate, a long relationship without complaints, and the size of the loan relative to the account balance do not remove the problem, because the conflict arises from the debtor relationship itself.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.a

An agent places an order for a customer through an outside account and does not record it on the books of the firm. When is this acceptable?

• a.Whenever the agent reports it to the firm within thirty days after settlement
• b.Only if the broker-dealer authorizes the transaction in writing before it is executed✓
• c.Whenever the transaction is smaller than the firm's minimum commission schedule
• d.Whenever the customer consents in writing after the transaction has been executed

An agent may not effect transactions that are not recorded on the regular books of the employing broker-dealer unless the firm authorizes them in writing before execution. Later consent, a small transaction size, or a delayed report to the firm does not cure an unrecorded trade.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.b

An agent proposes to share in 20 percent of the profits and losses in a customer's account. The customer agrees in writing. What else is required?

• a.Nothing more, since the customer's written agreement alone permits the arrangement
• b.Written authorization from the broker-dealer, in addition to the customer's✓
• c.Advance approval from the administrator, who reviews each profit-sharing agreement
• d.A written opinion from the firm's counsel that the arrangement suits the customer

An agent may share in the profits or losses of a customer's account only with the written authorization of both the customer and the broker-dealer. The customer's consent alone is not enough, and the Act does not require advance administrator approval or a legal opinion.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.d

Agent Park wants to split commissions on a customer account with a friend who has a securities license but works for an unaffiliated broker-dealer. Is that permitted?

• a.No, because commissions may never be divided between individual agents, even at the same firm, under any facts
• b.Yes, since any person holding a securities license in the state may share in the commissions
• c.No, because splitting is allowed only with agents of the same broker-dealer or a commonly controlled one✓
• d.Yes, if Park first discloses the split to the customer in writing and the firm keeps a copy

The policy prohibits dividing an agent's commissions, profits, or other compensation with any person who is not also registered as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control. A securities license at an unrelated firm does not qualify, and written disclosure to the customer does not substitute for common registration. Splitting is not banned outright, because it is allowed among agents of the same firm.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.e

A broker-dealer's agent has no written discretionary authority from a customer, but the customer says, "Buy 500 shares of ABC whenever the price drops to $40." The agent buys at $40. This is:

• a.Unethical, since every trade that the agent initiates requires prior written discretionary authority
• b.Acceptable, since discretion limited to the time or price of an order needs no written authority✓
• c.Unethical unless the firm's compliance officer approves the order in advance of its entry
• d.Acceptable only if the customer signs written authority within ten business days after the trade occurs

A discretionary power exercised without written authority is unethical unless it relates solely to the time or price at which an order is executed. The customer chose the security and quantity, and the agent only chose the moment, so no written authority is needed. The ten-business-day signature rule belongs to the investment adviser model rule and does not apply to this exception, and a compliance officer's approval is not the test.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.g

A customer gives an agent a hot tip and says, "I may want to buy 200 shares of Zeta tomorrow." The next morning, without calling, the agent buys 200 shares. This conduct is:

• a.Acceptable, since the customer had clearly signaled interest in the exact stock bought
• b.Unethical, because expressing interest in a purchase is not authorization to trade✓
• c.Unethical only if the stock declines in value by the time the customer reviews the confirmation
• d.Acceptable if the confirmation is sent promptly and the customer does not object within five days

Executing a transaction on behalf of a customer without authorization is listed as unethical. Interest in a possible purchase is not an order, and a confirmation or silence afterward does not supply the missing authority. The violation occurs when the trade is placed and does not depend on the stock's later price.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.f

A customer with a $40,000 account and modest income has an agent who places 60 trades in a month, generating $3,000 in commissions. Which practice does this describe?

• a.Cross trading, meaning a match of two customer orders at the same price outside the market
• b.Hypothecation, meaning the pledge of a customer's securities to secure a broker-dealer's own loan
• c.Front running, meaning trading for the firm's own account ahead of a large pending customer order
• d.Excessive trading, meaning trading that is excessive in size or frequency for the account's resources✓

Inducing trading that is excessive in size or frequency in view of the customer's financial resources and the character of the account is listed as unethical, commonly called churning. Sixty trades and $3,000 in commissions on a $40,000 account fit that description. Pledging a customer's securities, trading ahead of a customer order, and matching two customer orders are different practices that the facts do not describe.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.b

An agent assures a customer, "If this fund loses money in the first year, I will make up the difference." The statement is:

• a.Allowed, if the agent's firm confirms the assurance to the customer in writing
• b.Prohibited only if the fund actually loses money during its first year of ownership
• c.Allowed, because the agent personally assumes the risk and the customer is protected from loss
• d.A prohibited guarantee against loss, which is unethical whether or not the agent can honor it✓

Guaranteeing a customer against loss in an account or a transaction is listed as unethical for a broker-dealer, and agents are bound by the same item. The promise is improper when made, whether or not the agent could pay, and does not depend on the fund's result. Firm confirmation does not make a guarantee proper.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.q