NASAA Series 63 — All Questions

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

• a.A commodity futures contract on wheat bought through a futures commission merchant by a speculator seeking a price gain
• b.A rare-coin collection sold outright to a collector who takes possession and makes his own decisions about holding or selling
• c.A fixed annuity issued by a licensed insurer that promises a set sum of money for life, under a contract sold to retirees
• d.An investment contract in a whiskey-warehouse-receipt program marketed to passive outside investors✓

An investment contract, meaning an investment of money in a common enterprise with profits expected from the efforts of others, is a security, and warehouse-receipt programs sold to passive investors have been treated as such. Insurance annuity contracts that promise a fixed sum are expressly excluded from the definition, commodity futures are not listed securities under the Act, and a collectible bought outright by someone who controls it is not an investment contract.Uniform Securities Act (1956, as amended) 401(m)

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, because the definition covers any person who effects trades on behalf of others
• b.The issuer itself when it sells its own shares, because an issuer that sells directly to the public is acting as its own agent
• c.A bank acting as trustee, because a trustee who buys and sells securities for the trust is representing the beneficiaries
• d.Only a natural person (individual) who represents a broker-dealer or issuer in effecting securities transactions✓

'Agent' is defined as an individual other than a broker-dealer who represents a broker-dealer or issuer in effecting purchases or sales of securities. A corporation effecting trades for others is a broker-dealer, an issuer is not its own agent (its individual representatives may be), and a bank is not an individual and is excluded from the broker-dealer definition as well.Uniform Securities Act (1956, as amended) 401(b)

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, because anyone who deals with underwriters on behalf of an issuer is effecting transactions in securities
• b.Is an investment adviser representative, because he helps the issuer arrange its financing and receives a fee for that assistance
• c.Must register as an agent, because anyone who represents an issuer in effecting sales of its securities is an agent, whether or not the buyers are underwriters
• d.Is excluded from the definition of 'agent,' because representing an issuer in certain specified exempt transactions is excluded✓

'Agent' does not include an individual who represents an issuer in effecting transactions exempt under the Act, and the Act exempts transactions between an issuer and an underwriter, or among underwriters. No agent registration is required. He is not a broker-dealer because he is an individual representing the issuer, and arranging transactions with underwriters is not investment advice.Uniform Securities Act (1956, as amended) 401(b) and 402(b)(4)

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 market loss, so that the investor recovers the full purchase price if the security falls in value
• b.A minimum resale price, because the broker-dealer who sold the security promises to buy it back at no less than cost
• c.Payment of principal, interest, or dividends by a person other than the issuer✓
• d.Approval of the security's merits, because the Administrator's registration of the offering vouches for its investment quality

'Guaranteed' means guaranteed as to payment of principal, interest, or dividends, here by someone other than the issuer. It never means a guarantee against market loss, a repurchase promise or resale price from the selling firm, or an assurance of the offering's merit by the Administrator.Uniform Securities Act (1956, as amended) 401(e)

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

• a.The security is sold exclusively to institutional buyers such as banks and insurance companies, with no sales to individuals
• b.Only exempt securities are sold, because an exempt security cannot be part of a distribution by its issuer
• c.The proceeds do not benefit, directly or indirectly, the issuer✓
• d.The issuer receives all of the proceeds, because the sale is made directly by the company that created the security

A non-issuer transaction is one not made directly or indirectly for the benefit of the issuer, typically ordinary secondary-market trading between investors. The buyer's identity does not decide it, the type of security does not decide it, and a sale in which the issuer receives the proceeds is the opposite, an issuer transaction.Uniform Securities Act (1956, as amended) 401(i)

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 that effects customer securities trades through its trust department, because it is in the business of effecting transactions for others
• c.An issuer that sells only its own securities to the public through its own officers, because it is in the business of effecting offers and sales
• d.An agent of a registered firm who takes customer orders and effects trades for the firm, because he is the one who actually handles the trades

A broker-dealer is a person engaged in the business of effecting transactions in securities for the account of others or for its own account; the definition excludes agents, issuers, and banks, savings institutions, and trust companies. A firm with an in-state office serving retail customers must register.Uniform Securities Act (1956, as amended) 401(c)

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 in State K only if it takes custody of client assets or holds discretionary authority over any of those accounts
• b.Must register, because the Act reaches any adviser that directs advice into the state during a twelve-month period, whether or not it has an office there
• 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 advises more than five institutional clients in the state during any twelve months, because the de minimis limit counts every client

An adviser with no place of business in the state is outside the definition of investment adviser if its only clients there are institutions such as insurance companies and investment companies, however many of them there are. Custody or discretion does not change that. Having clients in the state, or more than five institutional clients, does not trigger registration either, because the five-client de minimis limit counts only clients who are not institutions (USA 1956 §401(f)(6)).USA (1956) §401(f)(6)

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, because it advises only one client and that client is itself a regulated fund
• b.A state-registered adviser, because its $30 million of assets is below the $100 million federal threshold
• 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, because those shareholders are its clients

An adviser to a registered investment company registers with the SEC and is a federal covered adviser whatever its assets under management; Advisers Act §203A(a)(2)(A) lets it register federally even in the $25 million to $100 million range. It is not exempt merely because its client is a fund, the $100 million figure is irrelevant to it, and the fund's shareholders are not the adviser's clients, so states may require only a notice filing.Advisers Act §203A(a)(2)(A) (15 U.S.C. 80b-3a)

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

• a.Register with each state in which it has a client, since federal registration is reserved for advisers with $1 billion or more
• 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 state of its principal office, because federal registration adds to state registration
• d.Remain state-registered until its assets reach $150 million, the point at which Dodd-Frank requires SEC registration

At $110 million or more of assets under management an adviser must register with the SEC (17 CFR 275.203A-1) and becomes a federal covered adviser, so states may require only notice filings and fees. Registering state by state ignores the federal threshold, which is far below $1 billion. Dual registration is not required, and $150 million is not the point at which registration moves to the SEC.Advisers Act §203A; 17 CFR 275.203A-1(a)

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 as an investment adviser representative before advising any client in State B
• b.Is not required to register, because he has no place of business in State B✓
• c.Must register in State B because he has clients who reside there, even though he has no office in that state
• d.Must register in State B once he has more than five retail clients there, because the de minimis limit applies to him

A state may register an investment adviser representative of an SEC-registered adviser only if the representative has a place of business in that state (15 U.S.C. 80b-3a(b)(1)(A)). Clients who live in a state where he has no office do not create that place of business, and the five-client de minimis exemption is a rule for advisers without an office, not a registration trigger for a representative. The SEC does not register representatives.Advisers Act §203A(b)(1)(A) (15 U.S.C. 80b-3a); 17 CFR 275.203A-3(b)

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

• a.Revoke the registration for cause, a disciplinary order entered only after notice and an opportunity for a hearing on the agent's conduct
• b.Cancel the registration, a non-punitive action used when a registrant no longer exists, cannot be located, or is mentally incompetent✓
• c.Let the registration lapse at the next renewal date, with no order required, because a registration cannot be ended before it expires
• d.Refer the matter for criminal prosecution under the Act, since a registration ends only through a judicial proceeding against the registrant

Cancellation is a non-disciplinary order the Administrator may enter when a registrant no longer exists, has ceased to do business, is adjudicated mentally incompetent, or cannot be located; a deceased agent is the typical case (USA §204(d)). Revocation requires a finding of wrongdoing after a hearing, a registration does not simply lapse until the Administrator acts, and criminal referral has nothing to do with an agent who has died.USA (1956) §204(d)

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

• a.At the next renewal date, December 31, when the Administrator reviews all pending withdrawal requests together
• b.30 days after filing, or within any shorter period the Administrator determines✓
• c.Immediately upon filing, because a registrant may end its own registration at will without waiting for the Administrator
• d.Only after the Administrator issues an approval order, since a withdrawal without a hearing would let a registrant escape discipline

Withdrawal becomes effective 30 days after the application is received, or sooner if the Administrator sets a shorter period, unless a revocation or suspension proceeding is pending or begins within those 30 days; the Administrator can still act within one year afterward (USA §204(e)). It is not tied to a year-end renewal date, it is not instantaneous, and no approval order is needed when nothing is pending.USA (1956) §204(e)

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 minimum net worth of $35,000, the figure that applies to advisers that have custody of their clients' assets
• b.A minimum net worth (commonly $10,000) or, if it cannot, post a surety bond✓
• c.No financial requirement, because the net-worth rule reaches only advisers that hold custody of any client money
• d.Only a positive net worth, the standard that applies to advisers that accept prepayment of more than $500 six or more months ahead

NASAA Model Rule 202(d)-1 sets three tiers: $35,000 of net worth for an adviser with custody, $10,000 for an adviser with discretion but no custody, and only a positive net worth for an adviser that takes large prepayments six or more months in advance. An adviser with discretion therefore cannot claim no requirement, and neither the custody figure nor the prepayment standard is the one that applies to it. Surety bonding may make up a shortfall, but the Act does not allow any adviser to insure clients against market losses.NASAA Model Rule 202(d)-1(b)

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 a broker-dealer, because a person paid a separate fee for recommending specific securities is in the business of effecting transactions for clients
• b.Is not excluded; advice sold for its own separate fee is not solely incidental to his law practice, so he must consider registration✓
• c.Remains excluded, because the Act excludes every lawyer from the definition regardless of how the advisory service is structured or priced
• d.Is excluded if he advises five or fewer clients in the state during any twelve consecutive months, because of the de minimis limit

The definition of investment adviser excludes a lawyer, accountant, engineer, or teacher only when the advice is solely incidental to the practice of the profession (USA §401(f)(2)). A separately marketed advisory service for a distinct fee is its own business, so the exclusion is lost. He is not a broker-dealer merely for giving advice, the exclusion does not cover a lawyer whatever he does, and the five-client limit is an exception for advisers with no place of business in the state, not a general rule. The 'special compensation' wording belongs to the broker-dealer exclusion (§401(f)(3)).USA (1956) §401(f)(2)

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 where the IAR provides advice there, because the place where advice is received is where the business is conducted
• 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 in which the IAR has clients, whether or not he keeps an office there or holds himself out to the public as having one
• d.Only the firm's principal office, because an IAR's place of business is always the executive office from which the adviser is directed

An IAR's place of business is an office at which he regularly provides advisory services or solicits, meets with, or communicates with clients, and any other location held out to the general public as such (17 CFR 275.203A-3(b)). A client's home, a state that merely has clients, or the firm's principal office does not define it; the principal office and place of business is a separate concept for the adviser (275.203A-3(c)).17 CFR 275.203A-3(b)

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.A circulation that is free to readers rather than paid, so long as the newspaper is distributed to the general public
• b.More than one-half of its circulation outside the state during the most recent twelve-month period, as measured by paid subscribers
• c.More than two-thirds of its circulation outside the state during the past twelve months✓
• d.Fewer than 10,000 paid subscribers inside the state during the past twelve months, whatever its circulation elsewhere

An offer is not made in a state by a bona fide newspaper of general, regular, and paid circulation if the paper is published outside the state, or is published in the state but has had more than two-thirds of its circulation outside the state during the past twelve months (USA §414(e)). One-half is not enough, a small in-state subscriber count is not the test, and the exception depends on a paid circulation rather than a free one.USA (1956) §414(e)

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

• a.As soon as he is hired by a registered broker-dealer, because the firm's own registration covers its employees
• b.After he passes the required examination, even if his registration is not yet effective, because passing shows he is qualified
• 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, even though it is not yet effective, because the Act requires only that it be pending

It is unlawful to transact business as an agent unless registered, and an agent's registration is not effective while he is not associated with a registered broker-dealer or issuer (USA §201(a)-(b)). Being hired, passing the exam, or having an application pending does not authorize him to act; the registration must be effective.USA (1956) §201(a)-(b)

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 itself pass a state qualification examination administered by the Administrator before advising local clients
• c.Full registration in every state where it has clients, in addition to its SEC registration, with all of the state's fees
• d.That the adviser meet the state's minimum net-worth or surety-bond requirements that apply to state-registered advisers

A state cannot register or qualify a federal covered adviser, but may require a notice filing: copies of the documents filed with the SEC, fees, and a consent to service of process; the state keeps its antifraud authority (15 U.S.C. 80b-3a(b)). A state examination, full registration in each state, and state net-worth or bonding rules are all forms of state qualification that federal law preempts for these advisers.Advisers Act §203A(b) (15 U.S.C. 80b-3a)

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 financial plan is general education rather than advice, even if specific securities are named
• b.An investment adviser, because he provides securities advice as a business for compensation✓
• c.A broker-dealer, because he recommends securities to clients and is paid a fee for the plans he prepares
• d.Excluded as a professional whose securities advice is solely incidental to his planning practice, so he need not register

A planner who gives advice about securities, as a business, for compensation meets the three-part definition of investment adviser (USA §401(f)). Putting the advice in a written plan does not make it general education, a planner is not among the professionals whose advice is excluded when solely incidental (lawyers, accountants, engineers, teachers), and recommending securities for a fee is advising, not effecting transactions, so he is not a broker-dealer.USA (1956) §401(f)

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

• a.An outside contractor who maintains the firm's servers and has access to its client records
• b.An operations manager who supervises only the staff that settles trades and reconciles accounts
• c.A bookkeeper who reconciles fee billings against custodian reports
• d.A research analyst whose written recommendations the firm uses to advise clients✓

An investment adviser representative is a person associated with a registered adviser who makes recommendations or renders advice on securities, manages client accounts, determines which advice is given, solicits or sells advisory services, or supervises employees who do any of those things. The research analyst's recommendations determine the advice clients receive, so the analyst qualifies. The server contractor, the operations manager supervising only settlement staff, and the bookkeeper perform none of those five functions, and supervising people who do not give advice does not count.Uniform Securities Act (1956, as amended by NASAA) 401(g)

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

• a.Required in any amount the Administrator sets, since the Act places no ceiling on the amount of a bond
• b.Intended to guarantee customers against losses from investment decisions, provided the firm stays registered
• c.Required of every registrant, even one whose net capital exceeds $25,000, because the Act allows no waiver
• d.May be satisfied by a deposit of cash or securities in lieu of the bond✓

The Administrator may require surety bonds of broker-dealers, agents, and investment advisers in amounts up to $10,000, may not require one of a registrant whose net capital exceeds $25,000, and must accept a deposit of cash or securities in lieu of the bond (USA §202(e)). The bond secures suits by persons with a cause of action under the Act's civil liability section; it does not guarantee against market losses, and it is not limited to out-of-state firms.USA (1956) §202(e)

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

• a.An individual representing an issuer in selling its newly issued stock to an underwriter under a firm-commitment agreement
• b.An individual representing an issuer selling its stock only to the issuer's existing employees, with no commission paid for the sales
• c.An individual representing a broker-dealer in selling registered common stock to retail investors for commissions✓
• d.An individual representing an issuer that sells U.S. government bonds directly to retail investors in the state for a commission

An individual who represents a broker-dealer in effecting securities sales is an agent (USA §401(b)). The definition does not include an individual who represents an issuer in transactions in exempt securities such as U.S. government bonds, in exempt transactions such as a sale to an underwriter, or in sales to the issuer's existing employees when no commission is paid for soliciting.USA (1956) §401(b)

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, and counting only clients who reside in the state
• c.Over the preceding 12 consecutive months, counting every client including institutional clients such as banks and insurers
• d.Over the preceding 24 consecutive months, counting only non-institutional clients who actually pay a fee

The de minimis exception applies to an adviser with no place of business in the state that, during any period of twelve consecutive months, does not direct business communications into the state to more than five clients other than the listed institutions (USA §401(f)(6)(B)). The period is twelve consecutive months, not a calendar year or 24 months, and institutional clients are not counted.USA (1956) §401(f)(6)(B)

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 on Form U4, because agents of broker-dealers are registered at the federal level
• b.Add the agent to its payroll and notify the Administrator within 30 days after he begins soliciting customers
• c.Wait until the annual renewal date, when all of the firm's agents are registered together in a single filing
• d.File the agent's application and have the agent's registration become effective in that state✓

Agents are registered by the state, not approved by the SEC. The firm files the application (Form U4 through CRD) and the agent may act only once his registration is effective; a broker-dealer may not employ an agent unless the agent is registered (USA §201(b)). Notice after the fact and waiting for a renewal date are not substitutes.USA (1956) §201(b)

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, because no separate price was paid for the bonus security
• b.Sold, because it was part of a package given as consideration for value✓
• c.A gift of a security that is not an offer or sale because the buyer pays nothing extra for it
• d.A stock dividend and so outside the definition of sale, since nothing of value is given up for it

A security given with, or as a bonus on account of, a purchase is considered part of the subject of the purchase and to have been offered and sold for value (USA §401(j)(3)). It is therefore not a gift, not a stock dividend (which is excluded only when the shareholder gives nothing of value), and not exempt merely because no separate price was named.USA (1956) §401(j)(3)

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

• a.Stay registered with the state indefinitely, because SEC registration is optional for advisers below $150 million
• b.Do nothing, because an adviser that is registered with a state stays there regardless of later growth in assets under management
• c.Register with both the state and the SEC permanently, because federal registration supplements rather than replaces state registration
• d.Register with the SEC and withdraw its state registrations (states may then require only a notice filing)✓

At $110 million or more of assets under management an adviser must register with the SEC (17 CFR 275.203A-1; the $100-$110 million band is optional) and then withdraw its state registration, becoming a federal covered adviser subject only to state notice filings. Growth in assets does matter, SEC registration is not optional at $120 million, and dual registration is not permanent.Advisers Act §203A; 17 CFR 275.203A-1

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 every state where it has clients, because the lack of home-state examination removes federal preemption of the other states
• b.Registers only with its home state regardless, because mid-sized advisers register with the states unless they exceed $100 million
• c.Is exempt from all registration, because a state that does not examine advisers is treated as having exempted them
• 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 ($25 million to $100 million) is barred from SEC registration only if it is required to register in its home state and would be subject to examination there; if the home state does not examine it, it registers with the SEC instead (Advisers Act §203A(a)(2)(B)). It is not left unregistered, is not driven to register state by state, and the $100 million figure is not an unconditional dividing line.Advisers Act §203A(a)(2) (15 U.S.C. 80b-3a)

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 a security for value, even if the solicitation is never accepted
• b.The offer of a security as a bonus given with the purchase of another security, with no separate charge for it
• c.The sale of a warrant or right attached to a bond and sold together with it as one unit
• d.A stock dividend in which the shareholder gives up nothing of value✓

Sale and offer exclude a stock dividend when stockholders give nothing of value for it other than a right to a cash or property dividend (USA §401(j)(6)(B)). A solicitation of an offer to buy for value is itself an offer (§401(j)(2)), a bonus is considered offered and sold for value (§401(j)(3)), and every sale or offer of a warrant or right is considered to include an offer of the underlying security (§401(j)(5)).USA (1956) §401(j)

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

• a.A prohibited transaction, because a reorganization cannot be carried out without registering the new securities
• b.Not a 'sale,' so no registration of the exchange is required✓
• c.A taxable sale of the old securities that always requires the new securities to be registered before they are issued
• d.An offer made in every state where holders reside, which must be registered in each of those states before the exchange

The definitions of sale and offer do not include any act incident to a judicially approved reorganization in which a security is issued in exchange for outstanding securities, claims, or property interests (USA §401(j)(6)(D)). The exchange is therefore not a sale, and it is neither prohibited, nor automatically a registered taxable sale, nor an offer that must be registered state by state.USA (1956) §401(j)(6)(D)

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

• a.Do nothing beyond notifying the Administrator, because an IAR's registration follows the individual to the new firm
• b.Wait until the next December 31 renewal, when his registration can be transferred in the annual renewal filing
• c.Be registered as an IAR of the new adviser, because his registration does not automatically transfer✓
• d.Register with the SEC instead, because investment adviser representatives are registered federally rather than by the state

An investment adviser representative is registered in connection with a particular adviser, so moving to a new state-registered adviser requires a new registration through that adviser; it does not follow the individual, cannot wait for a year-end transfer, and is not an SEC registration because the SEC does not register representatives.

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

• a.Yes, but only for IARs of federal covered advisers, since IARs of state-registered advisers are tested at the firm level
• b.Yes, the Administrator may require IARs to pass a written or oral examination as a condition of registration✓
• c.No, the Administrator may review an adviser's qualifications but may not impose an examination on individual representatives
• d.Yes, but only if the IAR has custody of client funds or securities, because the examination requirement is tied to custody

The Administrator may require an investment adviser representative to pass a written or oral examination (for example the Series 65 or 66) as a condition of registration. The requirement is not limited to representatives of federal covered advisers, it is not tied to custody, and the Act does not forbid examinations of individuals.

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

• a.Is an agent that must register, because it sells its securities to the public on its own behalf
• b.Is a broker-dealer that must register, because it is in the business of selling securities to the public
• c.Is an investment adviser, because it recommends its own securities to buyers in exchange for the sales proceeds
• d.Is not a broker-dealer, because it does not effect transactions for the accounts of others✓

A broker-dealer is a person engaged in the business of effecting transactions in securities for the account of others or for his own account, and the definition expressly does not include an issuer (USA §401(c)(2)). An issuer selling only its own securities is therefore not a broker-dealer; an agent is an individual, not the issuer itself, and selling its own securities is not advising others for compensation.USA (1956) §401(c)(2)

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, because anyone who regularly recommends securities to others is in the business of effecting transactions
• c.An investment adviser who must register, because the definition turns on giving advice as a business, not on payment
• d.An investment adviser representative, because an individual who gives securities advice must register under that title

The definition of investment adviser requires advising others about securities, as a business, for compensation (USA §401(f)). With no compensation of any kind, the person fails the test, so he is not an adviser and not an adviser representative; advice alone does not make him a broker-dealer, which requires effecting transactions.USA (1956) §401(f)

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

• a.Only a thank-you note or similar token of appreciation that has no economic value to the adviser
• b.Compensation paid only by a third party rather than by the client, since only client-paid fees count
• c.No compensation of any kind, so long as the advice is given regularly and as part of a business
• d.Indirect or economic compensation, such as commissions or other benefits tied to the advice✓

The 'for compensation' element is read broadly to include indirect economic benefits such as commissions or other value received because of the advice, not just a separate advisory fee (USA §401(f)). A token with no economic value, a rule that only client-paid fees count, and no compensation at all each fail to satisfy it.USA (1956) §401(f)

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.Each customer's net worth and investment objectives, collected on the firm's new-account forms over the past year
• c.Only the firm's SEC file number and net capital, since business history and disciplinary matters are federal concerns
• d.The applicant's proposed fee schedule and the commissions it expects to earn from residents in its first year

The Administrator may require, by rule, the applicant's form and place of organization, proposed method of doing business, qualifications and business history (including its principals), injunctions, administrative orders and convictions, and financial condition and history. Customer account data and projected commissions are not application content, and the Administrator is not limited to the SEC file number and net capital, because the disciplinary and business history of the applicant and its principals is exactly what the application is meant to disclose.Uniform Securities Act (1956) §202(a)

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.Disclose it at the next annual renewal, when the registration record is updated, because only convictions require an interim amendment
• b.Promptly amend his registration to disclose the reportable event✓
• c.Wait for the verdict and amend only if he is convicted, since a pending charge is not a final adjudication
• d.Report it only if the felony is securities-related, since other charges are outside the Administrator's concern

A registrant must promptly file a correcting amendment when information on file becomes inaccurate or incomplete in a material respect, and a pending felony charge is a reportable event on the agent's registration record, not just a conviction. Waiting for annual renewal or for a verdict leaves the record inaccurate in the meantime, and the duty is not limited to securities-related felonies.Uniform Securities Act (1956) §203(c)

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

• a.File a separate broker-dealer application and pay a second registration fee, and not open the branch until thirty days have passed
• b.Register the branch only with FINRA through Form BR, because branch offices are outside the state Administrator's jurisdiction
• c.Wait and list the new branch at its next annual renewal, because branch offices are reported only when registration is renewed
• d.File with or notify the Administrator as required (amend its registration) but need not register as a new firm✓

A registered firm that adds an in-state branch keeps its existing registration; it reports the branch to the Administrator (an amendment or branch filing) and does not become a new broker-dealer, so it does not file a second application or fee or wait out a new thirty-day period. Branch registration is not a FINRA-only matter outside state jurisdiction, and the firm cannot sit on the change until renewal, because material changes must be reported promptly.

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

• a.Remain with the SEC, since an adviser moves to state registration only below $25 million in assets
• b.Stay SEC-registered until assets stay below $90 million for two consecutive annual updates
• c.Withdraw from SEC registration and register with the states, because it has fallen below the $90 million buffer for remaining SEC-registered✓
• d.Withdraw from the SEC the day assets dip below $100 million; the $90 million buffer is for entrants only

A mid-sized adviser may register with the SEC at $100 million to under $110 million and need not withdraw unless its assets fall below $90 million. At $85 million it is below that buffer, so when its annual updating amendment reports it is no longer eligible it must file Form ADV-W within 180 days of fiscal year end and register with the states. The $25 million figure is the floor for the mid-sized category, not the point where an adviser leaves, there is no two-year grace rule, and the buffer works in both directions, so withdrawal is not required the day assets cross $100 million.17 CFR §275.203A-1(a)(1), (b)(2)

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.Required to register as a broker-dealer in State Z, because any transaction with a customer physically present in the state counts as transacting business there, regardless of residence
• 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.Excluded only if it files a notice and pays a fee in State Z before the first transaction, because every exclusion from the broker-dealer definition requires a prior notice
• d.Required to register only the agents who deal with those customers in State Z, because the firm is excluded but its individual agents are not covered

A firm with no place of business in the state that deals only with bona fide existing customers who live elsewhere and are merely visiting is outside the registration requirement under the so-called snowbird provision; its agents dealing with those customers fall outside it too. Physical presence of a customer alone does not create a registration duty, no prior notice filing or fee is a condition of the provision, and the agents of such a firm are not required to register separately when the firm is not.

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

• a.Fully refundable if the registration is withdrawn before the Administrator acts, since the fee is only a deposit against processing costs
• b.Set by FINRA at one uniform amount for every state, because registration is processed through the CRD system
• c.Non-refundable, and not returned merely because an application is later withdrawn or denied✓
• d.Waived for out-of-state firms registered in their home state, since the Administrator may rely on that state's registration

Each state sets its own filing fees, and under the uniform acts the Administrator keeps the fee (or the portion the state fixes) when an application is denied or withdrawn, so a withdrawal does not produce a refund of the registration fee. FINRA and the CRD system collect the fees but do not set them, the SEC does not set state fees, and out-of-state firms pay them like everyone else.Uniform Securities Act (1956) §202(b); Uniform Securities Act (2002) §410(a)-(b)

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

• a.Its investment adviser representatives with a place of business in the state are exempt from state registration, because the firm's SEC registration covers them
• 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 every state where it has more than five clients, filing through IARD and paying the same fees as a state-registered adviser
• d.It is subject to state law only through the SEC, so a state administrator may investigate fraud only by referring the matter to the SEC

States may not require a federal covered adviser to register, but may require a notice filing, fees and a consent to service of process, and they keep authority to investigate and bring enforcement actions for fraud or deceit. They may also register investment adviser representatives who have a place of business in the state, so the firm's SEC registration does not cover them. The five-client figure is a de minimis rule for state-registered advisers without an office in the state, and states do not need the SEC to pursue fraud.Investment Advisers Act §203A(b), 15 U.S.C. §80b-3a(b); Uniform Securities Act (2002) §405