NASAA Series 63 — All Questions

Under the Uniform Securities Act of 1956, which of the following would NOT meet the definition of a 'person'?

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

The 1956 Act defines a person as an individual, corporation, partnership, association, joint-stock company, trust whose beneficiaries' interests are evidenced by a security, unincorporated organization, government, or political subdivision of a government. A deceased individual is none of these (the 2002 Act separately adds estates, which is why the stem names the 1956 Act). A city fits government or political subdivision, a limited partnership fits partnership, and an investment club that is not incorporated fits unincorporated organization.Uniform Securities Act (1956) §401(j)

A broker-dealer licensed in State A, where it has its only place of business, has an agent who telephones a long-standing client. The client lives in State A but is visiting State B for two weeks. Neither the firm nor the agent has a place of business or a registration in State B. The agent recommends a bond purchase and the client agrees. Under the Uniform Securities Act, which statement is correct?

• a.The agent must register in State B before making the call, because an offer is made in the state where it is received, wherever the client's home may be
• b.The agent may complete the trade only if the firm first files a consent to service of process in State B
• c.No registration in State B is required, because the client remains a resident of State A and is only temporarily present in State B✓
• d.The agent must register in State B, because the sale is accepted there when the client says yes while physically in the state

The Act's definition of broker-dealer excludes a firm that has no place of business in the state, is licensed in a state where it does maintain a place of business, and sells to an existing customer whose residence is not in the state. The client's residence, not where she happens to be on the day of the call, drives the analysis, so the call does not require registration in State B. It is true that an offer is made in the state where it is received, but that rule does not override the exclusion. No consent-to-service filing, notice fee or waiver is needed, and nothing requires the agent to postpone the order until the client is home.Uniform Securities Act (1956, as amended by NASAA) 401(c)(4)(B); 414(c)

Under the 1956 Uniform Securities Act, absent a denial order or pending proceeding, and unless the Administrator specifies an earlier date, an application for registration as a broker-dealer, agent, investment adviser, or investment adviser representative becomes effective:

• a.At the close of business on the tenth day after the application is filed with the Administrator
• b.Immediately upon filing, as soon as the application and the fee are received by the Administrator
• c.Only when the Administrator issues a written order approving the application, with no automatic effective date
• d.At noon on the thirtieth day after a complete application is filed✓

The Act provides that, if no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after the application is filed, and the Administrator may by rule or order specify an earlier date. It does not become effective immediately on filing, and it does not wait for an affirmative approval order; passing the examination is a qualification the Administrator may impose but does not itself trigger effectiveness. The tenth-day rule is not in the Act.Uniform Securities Act

Under the Uniform Securities Act, a state-registered investment adviser maintains custody of client funds and securities. Regarding financial requirements, the Administrator may:

• a.Require a minimum net worth and a surety bond, though an adviser that meets the state's net worth standard may be excused from posting the bond✓
• b.Require a surety bond or a cash deposit in lieu of one, but never a minimum net worth or other financial requirement
• c.Require the adviser to insure client accounts against market losses, because custody makes the adviser a guarantor of performance
• d.Require nothing, because the Investment Advisers Act sets the only financial requirements an adviser may be held to

The Act lets the Administrator set minimum financial requirements for investment advisers, which may differ for those with custody or discretionary authority, and require bonds from advisers with custody, accepting a cash or securities deposit in lieu of a bond. No bond may be required of a registrant whose financial requirements exceed the amounts the Administrator requires, so an adviser meeting the net worth standard may be excused from the bond. The Administrator may set financial requirements as well as bonds, the Act does not make an adviser a guarantor against market loss, and federal law limits rather than replaces the states' authority.Uniform Securities Act

Under the 1956 Uniform Securities Act, unless renewed, the registration of a broker-dealer, agent, investment adviser, or investment adviser representative expires:

• a.On the last day of the registrant's fiscal year
• b.On December 31 of each year✓
• c.Only when the Administrator revokes it or the registrant stops doing business there
• d.On the anniversary of the original effective date

The Act provides that every registration or notice filing expires December 31 unless renewed. It does not follow the registrant's fiscal year, it does not run from the anniversary of the original effective date, and it does not continue indefinitely until revoked or abandoned; a registrant that stops doing business must withdraw rather than let the file lapse.Uniform Securities Act

An individual represents a state government, as issuer, in selling only the state's own general obligation bonds to the public. Under the Uniform Securities Act, this individual:

• a.Is excluded from the definition of agent because he represents an issuer in transactions in specified exempt securities✓
• b.Must register as an agent, because the exclusion applies only when no commission or other remuneration is paid for the sales
• c.Must register as an agent, because the exemption for government bonds covers the securities but not the person selling them
• d.Must register as a broker-dealer instead of an agent, because he sells directly to members of the public

The Act excludes from the definition of agent an individual who represents an issuer in effecting transactions in securities exempted under the Act, and securities issued by a state or its political subdivisions are exempt. The no-commission condition belongs to the separate exclusion for sales to an issuer's own employees, partners or directors, not to this one. Exemption of the securities does carry over to the person selling them for the issuer, and a natural person representing an issuer is never a broker-dealer.Uniform Securities Act

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

• a.Is acting as an unregistered agent, because transaction-based compensation for effecting securities sales points squarely to agent status✓
• b.Is a broker-dealer, because a person paid a percentage of the amount invested is in the business of effecting transactions
• c.Is an investment adviser rather than an agent, because she recommends the company's offering to the investors she introduces
• d.Is exempt from registration, because she never held or handled any of the investors' funds

An agent is an individual who represents a broker-dealer or an issuer in effecting or attempting to effect sales, and she is doing that for the company. Commission-style pay is the clearest marker of that role, and it also defeats the private-placement exemption, which is lost when any commission is paid for soliciting buyers, so the agent exclusion for exempt transactions is unavailable. Never touching investor money creates no exemption. The broker-dealer definition expressly excludes agents and issuers, and she is paid for selling rather than for advice, so she is not an adviser either.Uniform Securities Act

Under the 1956 Uniform Securities Act, which of the following is NOT an exempt security?

• a.A general obligation bond issued by a school district located in the state
• b.Bonds issued by a nonprofit religious organization to finance a new building
• c.A variable annuity contract issued by a licensed insurance company✓
• d.Common stock issued by a state-chartered commercial bank

Under the 1956 Act, securities issued by an insurance company are exempt, but the exception in the model text removes an annuity or similar contract whose promised payments depend on the investment results of a segregated fund. A variable annuity is exactly that, so it is not exempt. Obligations of a state's political subdivisions such as a school district, securities of banks, and securities of nonprofit religious and charitable organizations all appear on the exempt security list, so none of them is the answer.Uniform Securities Act (1956) §402(a)(5)

Under the Uniform Securities Act of 1956, a corporation issues short-term notes to raise working capital. For the notes to fall within the commercial paper exemption, they must generally:

• a.Mature within nine months, be rated in one of the three highest categories by a nationally recognized rating agency, and be issued in denominations of at least $50,000✓
• b.Mature within twelve months, be rated in one of the three highest categories by a nationally recognized rating agency, and be issued in denominations of at least $50,000
• c.Mature within nine months, be rated in one of the three highest categories, and be issued in denominations of at least $1,000
• d.Mature within nine months, be issued in denominations of at least $50,000, and be registered by notice filing with the Administrator

Under Section 402(a)(10) of the 1956 Act, the exemption covers a note, draft, bill of exchange or bankers' acceptance that is payable within nine months of issuance, is issued in denominations of at least $50,000, and carries a rating in one of the three highest categories from a nationally recognized statistical rating organization. A twelve-month maturity is too long, a $1,000 denomination is far below the minimum, and the exemption depends on a rating rather than on registering a notice with the Administrator. The large denominations are what keep the paper in the institutional market.Uniform Securities Act (1956) §402(a)(10)

An investment adviser that has custody of a client's investment funds deposits them into the firm's general operating account and uses part of them to pay office rent. This conduct is:

• a.Acceptable, as long as the adviser later restores the money to the client in full
• b.Permitted for any adviser that carries a surety bond covering client assets, because the bond protects the client
• c.Acceptable, because the adviser has discretionary authority over the account and that authority extends to the use of the cash
• d.Commingling of client funds with firm assets, a prohibited business practice✓

Client funds and securities must be kept separate from firm assets, and mixing them exposes clients to the firm's creditors and obscures the audit trail. Money entrusted to the adviser for the client's account belongs to the client, so spending it on the firm's rent is misuse as well as commingling. Neither a later repayment, a surety bond, nor discretionary authority over the account makes commingling permissible. (An advisory fee paid in advance is a different matter, governed by the advisory contract and its refund terms.)NASAA Model Rule

An agent proposes to share in the profits and losses of a customer's account. Under the NASAA model rule on unethical practices and FINRA Rule 2150, this arrangement:

• a.Is permitted for an agent only with the written authorization of both the customer and the employing broker-dealer, and generally only in proportion to the agent's own capital contribution✓
• b.Is permitted for an agent with only the customer's written authorization, since the employing broker-dealer has no role in an agent's arrangement with a customer
• c.Is permitted with the written authorization of both parties, and the agent may take whatever share of the profits the customer agrees to, regardless of the agent's own contribution
• d.Is prohibited outright for every agent, because a registered person may never share in the profits or losses of a customer's account

The NASAA model rule treats an agent's sharing in the profits or losses of a customer's account as unethical unless both the customer and the employing broker-dealer have authorized it in writing, and FINRA Rule 2150(c) adds that the sharing must be in direct proportion to the financial contributions made to the account (with an exception for the agent's immediate family). The customer's consent alone is not enough, because the employing broker-dealer must also approve in writing. Written consent from both sides does not let the parties pick any ratio they like. The arrangement is not banned outright, since the rules set the conditions under which it is allowed.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.d; FINRA Rule 2150(c)(1)

Under the Uniform Securities Act of 1956, an agent tells a prospect, 'My state registration means the Administrator has reviewed my qualifications and approved the investments I recommend.' This statement is:

• a.Accurate, because registration requires the agent to pass an examination that the Administrator reviews
• b.Prohibited, because it is unlawful to represent that registration means the Administrator has approved the registrant's qualifications or the merits of any security✓
• c.Accurate as to the agent's qualifications, but prohibited as to the investments recommended
• d.Accurate if the firm is also registered, because the Administrator reviews the firm and the agent together

Section 405 of the 1956 Act says that neither the filing of an application nor the fact that a person or security is effectively registered means the Administrator has passed on the merits or qualifications of, or recommended or approved, any person or security, and Section 405(b) makes a contrary representation to a prospective customer unlawful. The agent's statement therefore breaks the Act. Passing an examination does not turn registration into an endorsement, the rule covers the agent's qualifications and the recommended investments alike, and the firm's own registration does not change the analysis.Uniform Securities Act (1956) §405(a)-(b)

A broker-dealer decides to raise its account maintenance and transfer fees substantially. Under the NASAA dishonest or unethical practices rule, the firm:

• a.May charge any amount it chooses for these services, provided the new fee schedule is disclosed to customers in advance of the change
• b.Must obtain each customer's signed written consent to every fee before it may begin charging the higher amount
• c.May not charge unreasonable and inequitable fees for services, even if the new fee schedule has been disclosed to customers✓
• d.Is subject to no limit on its fees, because fee levels are a matter of contract between the firm and each customer, who may take the account elsewhere

The rule lists charging unreasonable and inequitable fees for services performed, including transfer, safekeeping, and similar services, as an unethical practice. Disclosure alone does not make an excessive fee reasonable, so a firm cannot raise its fees to any level merely by announcing the change or printing the charge on a confirmation. Written consent for every fee is not required, and fees are not unregulated just because they are set by contract.NASAA Broker-Dealer and Agent Dishonest or Unethical Business Practices Model Rule, §1.m

An investment adviser pays an accountant a cash fee for every client the accountant refers. Under the NASAA model rule on solicitors (Rule 401(g)(4)-1 under the 1956 Act), this arrangement requires that:

• a.Nothing be disclosed, because the client pays no fee beyond the normal advisory fee
• b.The arrangement be in writing and disclosed to the client in writing, so the client knows the referral was compensated✓
• c.The accountant register as a broker-dealer agent in each state where a referred client lives, because the fee works like a commission on a securities sale
• d.The accountant be an employee or officer of the adviser, because the rule bars an adviser from paying outside solicitors for client referrals

Under the NASAA model solicitor rule the fee must be paid under a written agreement between the adviser and the solicitor, and the client must receive the adviser's disclosure document and a separate written statement of the solicitor's compensation, acknowledged in writing. Disclosure is required even when the client pays nothing extra, because the statement must say whether any added charge exists and describe the referral fee. The rule sets no percentage cap, and it does not bar outside solicitors. The solicitor must be registered as an investment adviser representative (or be exempt), not as a broker-dealer agent; the written-agreement and disclosure steps are waived only for the adviser's own partners, officers and employees.NASAA Model Rule 401(g)(4)-1(b), (c) (solicitors)

Under the Uniform Securities Act of 2002, which statement about a cease and desist order is correct?

• a.It may be issued only after the respondent has received notice and a full hearing on the merits, and it takes effect only when the order becomes final
• b.The Administrator may issue it with or without a prior hearing, but must go to court to obtain an injunction enforcing it✓
• c.It may be issued only against registered persons
• d.It automatically revokes the recipient's registration in the state and bars the person from reapplying for the period the order specifies

Under the Uniform Securities Act of 2002, the Administrator may issue a cease and desist order without a prior hearing; it is effective on issuance, and the recipient may request a hearing afterward. If the person does not comply, the Administrator must petition a court to enforce the order and the court may impose civil contempt and further penalties. The order is not delayed until a hearing is held, it does not itself revoke a registration, which is a separate proceeding, and it reaches unregistered persons as well as registrants.Uniform Securities Act of 2002 §604

Under the NASAA model rule on dishonest or unethical business practices, an agent who wants to pay half of his commissions to a friend who referred several clients, and who holds no securities registration of any kind, may:

• a.Not do so, because commissions may be shared only with appropriately registered persons✓
• b.Do so freely, because commissions are the agent's own compensation, and the registration rules apply only to payments made by the broker-dealer
• c.Do so if the payments are limited to the clients the friend actually referred, because a referral fee is not a division of securities compensation
• d.Do so up to ten percent of each commission

Dividing or splitting an agent's commissions or other securities compensation with a person who is not also registered as an agent for the same broker-dealer, or for a broker-dealer under common control, is a prohibited practice. Splitting transaction-based compensation with an unregistered person is effectively paying that person for securities activity. The source of the funds, the fact that the friend referred clients, and an arbitrary percentage cap do not make it permissible.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.e

Under Form ADV Part 2A Item 18, a state-registered investment adviser that collects substantial prepaid fees six or more months in advance generally must:

• a.Include a balance sheet in its brochure only if prepayments exceed $1,200 per client, the same threshold that applies to SEC-registered advisers
• b.Register with the SEC instead of the state, because collecting prepaid fees six months or more ahead is an SEC registration trigger
• c.Include an audited balance sheet for its most recent fiscal year in its brochure, because prepaying more than $500 per client six or more months ahead triggers Item 18.A✓
• d.Disclose any impairing financial condition but omit the balance sheet, since the balance sheet applies only to advisers with custody

Form ADV Part 2A Item 18.A requires an adviser that requires or solicits prepayment of more than $1,200 per client, six months or more in advance, to include a balance sheet for its most recent fiscal year, audited by an independent public accountant. For advisers registered with state securities authorities the threshold is more than $500 per client. The $1,200 figure therefore does not apply to a state-registered adviser, collecting prepaid fees is not a trigger for SEC registration, and the separate Item 18.B disclosure of an impairing financial condition does not replace the balance sheet.Form ADV Part 2A, Item 18.A and 18.B (SEC Form 1707, 08-22)

An agent registered with one broker-dealer leaves that firm to join another registered broker-dealer. Under the Uniform Securities Act, his registration:

• a.Carries over to the new firm automatically for the rest of the calendar year, with no notice to the Administrator because he remains registered
• b.Stays effective only if the former firm consents in writing to the transfer, and the new firm alone notifies the Administrator within thirty days
• c.Lapses while he has no registered broker-dealer employer, and he and the firm must promptly notify the Administrator of the change✓
• d.Terminates permanently, so he must file a new application and pass the examination again before he may act for the new firm

An agent's registration is tied to a particular registered broker-dealer or issuer and is not effective during any period when he is not associated with one. When an agent begins or ends a connection with a firm, both the agent and the firm must promptly notify the Administrator. The registration does not move to the new firm on its own, it does not depend on the former firm's consent, and it is not permanently destroyed by leaving a firm.Uniform Securities Act (1956, as amended) 201(b)

Under the Uniform Securities Act (the 1956 Act as amended), a civil action to recover for an unlawful sale of securities must generally be brought within:

• a.Two years after the sale, with no extension for violations the buyer did not discover until after that period had passed
• b.Five years after the violation or two years after discovery, whichever is earlier, as under the later 2002 version of the act
• c.Three years after the buyer first discovered the violation, with no outer limit measured from the date of the sale
• d.The earlier of three years after the sale (or contract of sale) or two years after discovery of the violation✓

Under the 1956 Act as amended, the civil statute of limitations is the earlier of three years after the sale or contract of sale, or two years after the plaintiff discovered the facts constituting the violation. A flat two-year period with no discovery rule is the older text, a five-year outside limit is the 2002 version, and discovery alone without an outer limit from the sale is not the rule. Do not confuse any of these with the five-year limit for beginning a criminal prosecution.Uniform Securities Act (1956, as amended) 410(f)

Under the 1956 Uniform Securities Act, which of the following is NOT a 'person'?

• a.A minor child who has not yet reached the age of majority and holds securities through a custodian
• b.A professional corporation organized by licensed practitioners
• c.A trust created to hold family assets, in which the beneficiaries' interests are not evidenced by a security✓
• d.A municipality or other political subdivision of a government

The Act defines a person as an individual, corporation, partnership, association, joint-stock company, unincorporated organization, government or political subdivision, and a trust only where the interests of the beneficiaries are evidenced by a security. A family-asset trust whose beneficial interests are not securities falls outside the list. A minor is still an individual, and the Act contains no exclusion for minors. A professional corporation is a corporation, and a municipality is a political subdivision of a government.Uniform Securities Act (1956, as amended by NASAA) 401(j) 'person'

Under the Uniform Securities Act of 1956, 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 collateral for a bank loan
• d.A stock dividend for which the shareholder gives up nothing of value

Section 401(k)(2) of the 1956 Act defines an offer to include every attempt to dispose of a security for value and any solicitation of an offer to buy a security for value. A bona fide pledge or loan of securities, a stock dividend for which the shareholder gives up nothing of value, and a transfer approved by a court in a reorganization are excluded from the definitions of sale and offer, so none of them is an offer.Uniform Securities Act (1956) §401(k)

A firm with an office in the state, 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, because it recommends securities to institutional clients that then place their orders through it
• b.Excluded as a bona fide publisher, because it issues written reports on a regular basis and charges a subscription-style fee
• c.An investment adviser, because it is in the business of issuing securities analyses for compensation✓
• d.Excluded, because the Act exempts any firm whose only clients are pension plans and other institutional investors

A person who, for compensation and as part of a regular business, issues analyses or reports concerning securities meets the investment adviser definition (USA §401(f)). The publisher exclusion covers only a bona fide publication of general, regular, and paid circulation, not reports tailored to particular plans. The institutional-clients exclusion is available only to a firm with no place of business in the state, which is why the stem gives this firm an office there. Giving advice does not make a firm a broker-dealer.USA (1956) §401(f)

Which of the following is EXCLUDED from the definition of 'investment adviser' under the 1956 Uniform Securities Act?

• a.A financial planner paid fees for plans recommending securities
• b.A pension consultant paid to recommend securities to plans
• c.A bank, savings institution, or trust company✓
• d.A portfolio manager who charges a percentage-of-assets fee

The 1956 Act excludes from the definition of investment adviser a bank, savings institution, or trust company; a lawyer, accountant, engineer, or teacher whose advice is solely incidental to the profession; a broker-dealer whose advice is solely incidental to its business and who receives no special compensation; and a bona fide publisher (USA §401(f)). Fee-based financial planners, pension consultants, and portfolio managers who charge percentage fees are investment advisers.USA (1956) §401(f)(1)

Under the 1956 Uniform Securities Act, for purposes of the institutional exceptions for firms with no place of business in the state, an employee benefit plan qualifies as an institutional client only if it:

• a.Has at least 100 participants in the plan
• b.Invests only in exchange-listed securities
• c.Is a governmental plan of any size
• d.Has assets of not less than $1 million✓

Under the 1956 Act's institutional exceptions, an employee benefit plan counts as an institutional buyer only if its assets are at least $1,000,000. The number of participants, a plan's investments, and its governmental status do not by themselves make it institutional.

Under the Uniform Securities Act of 2002, the Administrator may, by rule or order:

• a.Add new exemptions to the Act only after the legislature amends the statute to authorize each specific exemption
• b.Exempt persons or securities from the antifraud provisions whenever the public interest allows it
• c.Deny or revoke statutory exemptions by rule for a whole class of securities, but never create a new exemption of its own
• d.Exempt additional persons or securities from registration when consistent with the public interest and the protection of investors✓

Under the 2002 Act a rule or order may exempt a security, transaction or offer from the registration requirements (Sections 301 through 306 and 504), when the public interest and investor protection allow it. It does not wait for the legislature to amend the Act, it is not limited to narrowing or revoking exemptions, and it never reaches the antifraud provisions, which apply to exempt securities and exempt transactions alike.Uniform Securities Act (2002) §203

If an application for registration is materially incomplete or a denial proceeding is pending on the thirtieth day after filing, the registration:

• a.Becomes effective on day thirty anyway; the Administrator can only revoke it later
• b.Does not become effective until the application is complete and no proceeding is pending✓
• c.Becomes effective on the sixtieth day unless a denial order was entered earlier
• d.Is deemed denied on day thirty, and the applicant must refile and pay a second fee

Registration becomes effective at noon on the thirtieth day only if no denial order is in effect and no proceeding is pending under the denial provisions. A materially incomplete application is itself a ground for denial, and the Administrator may defer the effective date after an amendment. The registration is therefore not effective while a proceeding is pending, it is not effective automatically on day thirty anyway, there is no sixty-day default, and it is not deemed denied or subject to a second fee.Uniform Securities Act (1956) §202(a); §204(a)(2)(A)

A non-issuer transaction through a registered agent of a registered broker-dealer, in a security outstanding in the public's hands at least 90 days, is exempt when the issuer's business, officer and audited financial information appears in a nationally recognized securities manual or an EDGAR filing. This is commonly called the:

• a.Isolated-transaction exemption for a one-time sale by an investor who is not a dealer
• b.Unsolicited-order exemption for trades the customer initiated without any recommendation
• c.Manual (secondary-trading) exemption✓
• d.Limited-offering exemption for offers to ten or fewer non-institutional persons

This is the manual exemption for secondary trading: a non-issuer transaction by a registered agent of a registered broker-dealer in a security outstanding at least 90 days, where the issuer is actually operating, the price is reasonably related to market, and current issuer information appears in a recognized securities manual or in an EDGAR filing. The isolated-transaction exemption covers a single sale by someone who is not a dealer, the unsolicited-order exemption turns on who initiated the trade, and the limited-offering exemption caps offers to non-institutional persons in a twelve-month period.Uniform Securities Act (1956, as amended by NASAA) 402(b)(2)

Under the 1956 Uniform Securities Act's limited-offering (private-placement) exemption, the numerical limit applies to the number of:

• a.Purchasers who actually buy in the state, as the 2002 Act counts them
• b.Non-accredited investors who purchase, as under federal Regulation D
• c.Non-institutional persons to whom offers are directed in a 12-month period (offerees), excluding institutions✓
• d.Dollars raised from residents of the state, with a cap on the aggregate amount of the offering in any twelve months

Under the 1956 Act the exemption covers offers directed to not more than ten persons in the state, other than institutions, in any twelve consecutive months, so the count is of offerees and institutional offerees are left out. The count is not of purchasers who actually buy: counting purchasers (not more than 25) is how the 2002 Act's limited-offering exemption works, and the 1956 Act's other conditions are no commission for soliciting and purchase for investment. The exemption does not count non-accredited investors as the federal Regulation D rule does, and it sets no dollar ceiling.Uniform Securities Act (1956) 402(b)(9); cf. 2002 Act 202(14)

Under FINRA Rule 3240 (not the NASAA model rule on agents' dishonest or unethical practices), a registered person borrows $5,000 from a customer who is his mother, and the firm's written procedures allow borrowing from immediate family. This arrangement is:

• a.Prohibited in all circumstances, because the NASAA model rule bars borrowing from any customer
• b.Permitted only if the mother is a financial institution or other person who regularly makes loans in the ordinary course of business
• c.Permitted only if the Administrator approves the loan in writing before the funds change hands
• d.Generally permissible, because borrowing from an immediate family member is a recognized exception when firm procedures allow it✓

FINRA Rule 3240 bars a registered person from borrowing money from or lending money to a customer unless the member has written procedures allowing it and the arrangement fits a listed condition. One condition is that the customer is a member of the registered person's immediate family, which includes parents, and the member's procedures may even waive notice and approval for family loans. The NASAA model rule on agents' unethical practices has no family exception and bars borrowing from any customer, which is why an absolute prohibition is the right answer under that rule but not under this one. The lender-in-business condition is a separate category that does not apply to a parent, and no state Administrator approval is part of the FINRA rule.FINRA Rule 3240(a)(1), (a)(2)(A), (b)(2); NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, 2.a

An investment adviser representative wants to be paid a share of the capital gains in a client's account. Under NASAA rules for advisers, this is generally:

• a.Restricted to performance-fee arrangements meeting the qualified-client thresholds, not the proportionate sharing allowed to broker-dealer agents✓
• b.Permitted like any agent's proportionate sharing, because the 1956 Act treats advisers and broker-dealer agents the same way for sharing in client profits
• c.Permitted with only the client's oral consent, because the written-authorization requirement applies to broker-dealer agents and not to advisers or their representatives
• d.Permitted for any client who acknowledges the risks in writing, since the qualified-client thresholds apply only to private funds and pooled vehicles

A broker-dealer agent may share in a customer's profits and losses only with the written authorization of the customer and the firm. An adviser who wants a share of capital gains or appreciation is governed by the performance-fee rule: the client must be a qualified client and must receive written disclosure of the risks, including the incentive toward riskier investments. Oral consent and a signed risk acknowledgment do not meet that rule, and its thresholds are not limited to pooled vehicles.NASAA Model Rule 102(f)-3; Uniform Securities Act (1956) Section 102(c)(1)

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

• a.Permitted if the total paid to that person stays at or below $1,000 in a 12-month period, the de minimis threshold for compensating endorsements
• b.Permitted because it is a flat fee rather than a commission, and the rule against splitting compensation reaches only percentage-based commission sharing
• c.Prohibited, because transaction-related compensation for securities business may not be paid to an unregistered person✓
• d.Permitted if the acquaintance reports it as income and the agent discloses the referral arrangement to each new customer in writing

An agent may not split commissions, profits or other compensation from securities transactions with anyone who is not also registered as an agent of the same broker-dealer (or one under common control). A flat referral fee paid for each brokerage customer is still compensation for securities business, so labeling it a flat fee, capping it, reporting it as income or disclosing it to customers does not make it permissible.NASAA Model Rule: Dishonest or Unethical Business Practices of Broker-Dealers and Agents (2.e)

A state-registered investment adviser pays cash referral fees to a third-party solicitor. Under the NASAA model solicitor rule (Rule 401(g)(4)-1 under the 1956 Act), permissible conditions include all of the following EXCEPT:

• a.The solicitation must be approved in advance by the Administrator for each client✓
• b.The solicitor gives each client a separate written disclosure statement describing the solicitor's compensation
• c.A written agreement between the adviser and the solicitor describing the referral activities and the fee to be paid
• d.The solicitor has not been convicted of a felony within the previous ten years or become subject to a securities-industry bar order

The model solicitor rule lets an adviser pay a cash referral fee when the solicitor is registered as an investment adviser representative or exempt, is not disqualified, and acts under a written agreement with the adviser, and when the client receives the adviser's disclosure document and a separate written statement of the solicitor's compensation. Nothing in the rule requires the Administrator to approve each solicitation in advance, so that is the one item that is not a condition.NASAA Model Rule 401(g)(4)-1(b), (c) (solicitors)

Under the NASAA custody rule, an adviser with custody of client funds and securities (and no exception such as fee-deduction-only custody) must arrange for them to be verified by:

• a.The client's own personal accountant, who reviews the quarterly statements and reports any discrepancy to the Administrator
• b.The adviser's own compliance staff through a quarterly internal reconciliation that is then filed with the Administrator
• c.The Administrator's own examiners, who must examine the adviser's custody of client assets once every calendar year
• d.An independent public accountant through a surprise examination at least annually✓

Under the custody rule an adviser with custody must have client funds and securities verified by actual examination at least once each calendar year by an independent certified public accountant, at a time chosen by the accountant without prior notice and irregular from year to year. A client's personal accountant, the adviser's own staff and the regulator's examiners are not the required independent verifier.NASAA Model Rule 102(e)(1)-1(a)(6)

A state-registered adviser with custody must have a reasonable basis for believing that the qualified custodian sends each client account statements:

• a.At least quarterly, identifying the funds and securities in custody and the account activity✓
• b.At least annually, listing the securities held at year-end and the advisory fees the adviser deducted during the year
• c.Only when the client requests them in writing, because delivery is optional once the adviser has notified the Administrator of its custody
• d.Semiannually, listing each security held at period-end but not the individual transactions that occurred during the period

The custody rule requires the adviser to have a reasonable basis, after due inquiry, for believing that the qualified custodian sends each client an account statement at least quarterly, identifying the amount of funds and of each security at period-end and setting out all transactions in the period. Annual or semiannual statements, statements omitting the transactions, and statements only on request all fall short.NASAA Model Rule 102(e)(1)-1(a)(4)

Under the brochure rule, after the initial delivery, if there have been material changes since the last annual updating amendment, a state-registered adviser must deliver to each client annually:

• a.The current brochure, or a summary of material changes with an offer to provide the full brochure, free of charge✓
• b.Only a revised fee schedule, since a change in fees is the one material change that triggers annual delivery of the brochure
• c.Nothing further once the contract is signed, because the brochure must be delivered only at or before the time the client signs
• d.A new signed advisory contract plus a brochure supplement for every supervised person, whether or not anything has changed

After the initial delivery, the adviser must deliver annually, within 120 days after fiscal year-end and without charge, either a current brochure or a summary of material changes that offers the full brochure, when there have been material changes since the last annual updating amendment. A fee change is not the only trigger, delivery is not limited to the signing, and a new contract and unlimited supplements are not required.17 CFR 275.204-3(b)(2)

Under the Uniform Securities Act of 1956, a state-registered investment adviser advertises that its registration means it is 'recommended by' and 'approved by' the state securities regulator. This is:

• a.Acceptable for firms with a clean disciplinary record, since they have in effect been approved
• b.Acceptable if it appears only in the brochure delivered to clients and not in public advertising
• c.Acceptable because the firm is in fact registered and the statement is therefore literally true
• d.Prohibited, because it misrepresents the meaning of registration✓

Section 405 of the 1956 Act says that being registered does not mean the Administrator has passed on the merits or qualifications of, recommended or approved a person, and Section 405(b) makes any contrary representation to a prospective customer or client unlawful. A clean disciplinary record does not turn registration into approval, limiting the claim to a brochure does not help because the rule reaches any representation to a client, and the claim is not literally true merely because the firm is registered, since the point is what registration means.Uniform Securities Act (1956) §405(a)-(b)

Under the Uniform Securities Act of 1956, which of the following is a statutory ground for the Administrator to deny, suspend, or revoke a registration?

• a.The applicant was convicted, eight years ago, of a misdemeanor unrelated to any aspect of the securities business
• b.The applicant was convicted of a felony fifteen years ago and has had a clean record since that conviction
• c.The applicant was convicted, within the past 10 years, of a felony or a securities-related misdemeanor✓
• d.The applicant operates a newly formed firm that has not yet established an operating history

Under the 1956 Act, the Administrator may deny, suspend or revoke a registration if the order is in the public interest and the applicant has been convicted, within the past ten years, of any felony or of a misdemeanor involving a security or any aspect of the securities business. A misdemeanor that has nothing to do with securities is not a ground, and a felony that is older than ten years falls outside the look-back period. Operating a newly formed firm with no operating history is not an enumerated ground either, since the Act lists specific misconduct such as false filings, willful violations, injunctions, insolvency and dishonest or unethical practices.Uniform Securities Act (1956) §204(a)(2)(C)

Under the Uniform Securities Act of 1956, a broker-dealer's principal ignores repeated red flags that an agent is churning accounts. The firm and principal may be disciplined for:

• a.A violation of FINRA rules only, because a state Administrator cannot discipline a principal for supervision
• b.Failure to reasonably supervise, an independent ground for discipline✓
• c.Nothing, because only the agent who churned the accounts violated the Act and supervisors answer for none of it
• d.A civil dispute between the customer and the firm only, which the Administrator has no power to act on

Under Section 204(a)(2)(J) of the 1956 Act, a broker-dealer that has failed reasonably to supervise its agents or employees to assure their compliance with the Act can be denied, suspended or revoked, and that ground applies in addition to the agent's own violation. A state Administrator does not have to wait for FINRA to act, discipline of the firm does not depend on a conviction or injunction against the agent, the firm is not shielded because only the agent churned, and a customer's civil claim does not displace the Administrator's authority.Uniform Securities Act (1956) §204(a)(2)(J)

Under the Uniform Securities Act of 2002, an applicant for agent registration was recently barred by a self-regulatory organization. The Administrator may:

• a.Deny the registration, because being subject to an SRO or another regulator's disciplinary order is a ground for denial✓
• b.Approve automatically, because an SRO bar binds only the SRO's own members and carries no weight with the state
• c.Deny only if the bar came from another state's Administrator or the SEC, because an SRO's disciplinary action is not an order against the applicant
• d.Deny only if the SRO action was criminal in nature, because only criminal conduct is a ground for denial under the Act

Under Section 412 of the 2002 Act, the administrator may deny an application if it is in the public interest and the applicant is the subject of an order, after notice and an opportunity for hearing, by the SEC or a self-regulatory organization suspending or expelling the person from membership, or of a regulator's order denying, revoking, barring or suspending registration. An SRO bar is therefore a ground for denial. It is not a private matter that forces approval, the ground is not limited to orders from another state's administrator, and it does not need to be criminal in nature.Uniform Securities Act (2002) §412(a), (d)(5)

Under the Uniform Securities Act of 1956, a willful violation is a criminal offense. Which statement reflects the model Act?

• a.It is punishable by fine or imprisonment, but the Administrator may impose the sentence directly in an administrative order without a court conviction
• b.It is punishable only by civil remedies such as rescission and a cease-and-desist order, since criminal exposure arises under the federal securities laws alone
• c.It is punishable by a fine of not more than $5,000 or imprisonment of up to three years, but only after the Administrator has first issued a cease-and-desist order
• d.It is punishable by a fine of not more than $5,000, imprisonment of not more than three years, or both, with the model text optionally barring indictments after five years✓

Section 409(a) of the 1956 Act makes a willful violation punishable on conviction by a fine of not more than $5,000, imprisonment of not more than three years, or both, and an optional bracketed sentence bars an indictment more than five years after the violation. The Administrator does not sentence anyone; criminal proceedings are brought by the attorney general or district attorney in court, with or without a reference from the Administrator. Criminal liability does not depend on a prior cease-and-desist order, and civil remedies exist alongside the criminal provision rather than replacing it. The 2002 Act's Section 508 leaves the fine and term blank for each state to fill in.Uniform Securities Act (1956) §409(a)

Under the Uniform Securities Act of 1956, while a proceeding against an agent's registration is pending, the Administrator concludes emergency action is warranted. It may:

• a.Summarily postpone or suspend the registration, provided it promptly gives written notice and grants a hearing if requested✓
• b.Postpone or suspend the registration only after a full hearing, since the Act permits no interim order
• c.Summarily suspend the registration only if a court has first enjoined the registrant from continuing the conduct
• d.Summarily suspend the registration, then wait until the registrant requests a hearing before giving any notice of the reasons for the order

Section 204(c) of the 1956 Act lets the Administrator summarily postpone or suspend a registration pending final determination of a proceeding. On entering the order, the Administrator must promptly notify the applicant or registrant, and the employer if the registrant is an agent, of the order and the reasons, and the matter will be set for hearing within fifteen days of a written request. The Administrator therefore need not wait for a final order, may act before a full hearing, and must give notice promptly rather than waiting for the registrant to ask. No court order or injunction has to come first.Uniform Securities Act (1956) §204(c)

An investment adviser based in Ohio has no office or other place of business in this state. During the preceding twelve months it advised four individual clients who live in this state and no institutional clients here. What is its registration status in this state?

• a.It must register here, because the limit for non-institutional clients of an out-of-state adviser is three in the preceding twelve months.
• b.It need not register here, because it has no place of business in the state and has had no more than five non-institutional clients in twelve months.✓
• c.It need only file a notice with the Administrator, because an adviser based in another state is automatically a federal covered adviser.
• d.It must register here, because any individual client residing in the state requires the adviser to be registered with the Administrator.

Section 201(c) lets an adviser with no place of business in the state operate unregistered if its only clients there are institutions or it had no more than five other clients in the preceding twelve months. Four individual clients is within that limit. Federal covered adviser status depends on SEC registration rather than on where the adviser is located, and the adviser stays subject to the antifraud provisions of Section 102.Uniform Securities Act §201(c)

A Texas investment adviser with no office in this state advised seven individual clients living here during the past twelve months and has no institutional clients in this state. May it keep advising them without registering here?

• a.No, seven exceeds the limit of five non-institutional clients, so the adviser must register in this state before it advises any further clients here.✓
• b.Yes, an adviser with no place of business in the state is exempt from registration here regardless of the number of clients it serves.
• c.Yes, because the five-client limit is counted per calendar year, and this adviser has not yet reached that count in the current year.
• d.No, but the adviser may satisfy the Act by obtaining each client's signed consent to being advised by an unregistered adviser.

The de minimis exemption in Section 201(c) is lost once an out-of-state adviser whose clients are not all institutional has had more than five other clients in the preceding twelve-month period. That period is rolling, not a calendar year. Having no place of business here helps only up to the limit, and no client consent can stand in for registration.Uniform Securities Act §201(c)

In State K, a corporation's treasurer sells newly issued shares of the corporation to its own employees under a stock purchase plan and receives no commission or other pay for soliciting them. Is the treasurer an agent who must register?

• a.Yes, because only individuals who sell securities already exempt from registration fall outside the definition of agent, and these shares are not exempt.
• b.No, representing an issuer in sales to its own employees with no pay for soliciting takes an individual outside the agent definition.✓
• c.Yes, any individual who represents an issuer in effecting sales of that issuer's own securities must be registered as an agent in this state.
• d.No, but only after the treasurer files a written notice with the Administrator thirty days before starting to sell to employees.

Section 401(b) excludes from the term agent an individual who represents an issuer in effecting transactions with existing employees, partners or directors of the issuer if no commission or other remuneration is paid for soliciting anyone in the state. The treasurer fits that exclusion. The thirty-day notice belongs to a different provision, the exemption for employee benefit plan securities, and does not condition this exclusion.Uniform Securities Act §401(b)

Dana is a registered agent of Broker-Dealer A. She resigns and joins Broker-Dealer B, which is also registered in the same state. Who must promptly notify the Administrator of the change?

• a.Dana, Broker-Dealer A, and Broker-Dealer B must each give the Administrator prompt notice of the change in her employment.✓
• b.Broker-Dealer A and Broker-Dealer B must notify the Administrator, while Dana has no filing duty because the firms are the registrants.
• c.Only Broker-Dealer B must notify the Administrator, because the new employer registers her with its own firm.
• d.Only Dana must notify the Administrator, because an agent's registration belongs to the individual, not an employer.

Section 201(b) requires the agent and the broker-dealer or issuer to notify the Administrator promptly when an agent begins or ends a connection with a firm. When an agent changes firms, that means the agent, the old firm and the new firm all have the duty. Leaving any one of the three out leaves the Administrator's records incomplete.Uniform Securities Act §201(b)

Marcus's employment with a registered broker-dealer ended on March 1, and he has not yet joined another firm. On March 15 a friend asks him to place an order to buy stock for her. What is the status of his registration?

• a.It is not effective while he has no employing broker-dealer, so he may not take the order until he is associated with a registered firm.✓
• b.It stays effective for thirty days after termination, so he may take the order at any time up to March 31.
• c.It stays effective until December 31, so he may take the order and have a new employer ratify the trade once he is hired.
• d.It remains effective for unsolicited orders from people he already knows, because those orders fall within an exemption available to agents.

Under Section 201(b), an agent's registration is not effective during any period when the agent is not associated with a particular registered broker-dealer or issuer. The Act gives no grace period, and the December 31 expiration is unrelated. An unsolicited-order exemption protects the transaction from the securities registration requirement but does not give an unassociated agent authority to act.Uniform Securities Act §201(b)

A broker-dealer and its agents last renewed their registrations in February of this year. When will those registrations expire if they are not renewed again?

• a.On the anniversary of the February renewal, because each registration lasts one year from the date it became effective.
• b.On December 31 of next year, because a registration renewed early in the year is carried through the following calendar year.
• c.On December 31 of this year, since every registration expires on that date unless it has been renewed.✓
• d.On the date the firm's next annual financial report is due, because renewal is tied to the firm's reporting cycle.

Section 201(e) provides that every registration or notice filing expires on December 31 unless renewed, which matches the annual renewal cycle of the Central Registration Depository. The one-year-from-effectiveness rule belongs to registered securities in Section 305(i), not to firms and individuals. The date of the last renewal does not change the expiration date.Uniform Securities Act §201(e)

An applicant files a complete application for registration as a broker-dealer on March 1. No denial order is in effect, no proceeding is pending, and the Administrator has not set an earlier date. When does the registration become effective?

• a.At noon on the thirtieth day after the application was filed, unless the Administrator accelerates the date or defers it by order.✓
• b.At noon on the fifteenth day after the application was filed, because that is the period allowed for the Administrator's review.
• c.On the first business day after the filing, because a complete application is registered as soon as it is received.
• d.On the day the Administrator issues a written approval, because no registration takes effect without an affirmative order.

Section 202(a) makes registration effective at noon of the thirtieth day after an application is filed if no denial order is in effect and no Section 204 proceeding is pending. The Administrator may specify an earlier date or defer the date until noon of the thirtieth day after an amendment. The wait for an affirmative order applies to registration of securities by qualification, not to dealers.Uniform Securities Act §202(a)

A registered agent files an application to withdraw her registration, and no revocation or suspension proceeding is pending or begun. When does the withdrawal take effect?

• a.Sixty days after receipt, because that period gives the Administrator time to investigate the agent.
• b.Immediately on receipt, because an agent may stop being registered whenever she chooses, subject only to a later proceeding.
• c.On the next December 31, because a registration can end only at the annual expiration date and not before.
• d.Thirty days after the Administrator receives the application, or sooner if the Administrator allows a shorter period.✓

Under Section 204(e), withdrawal becomes effective thirty days after the Administrator receives the application, or sooner if the Administrator so determines, unless a proceeding is pending or is instituted within those thirty days. In that case the Administrator's order sets the time and conditions. Neither immediate withdrawal nor waiting until year end is provided.Uniform Securities Act §204(e)

Forty days ago Lena's withdrawal as an agent took effect automatically. The Administrator has now learned that she willfully violated the Act before she withdrew. May the Administrator still act against her registration?

• a.No, once a withdrawal has taken effect the Administrator has no further authority over the former registrant for any violation.
• b.Yes, but only if the proceeding began within the thirty days that followed the filing of her withdrawal application.
• c.Yes, a revocation or suspension proceeding may begin within one year after the withdrawal became effective.✓
• d.Yes, but only through a criminal referral, because a withdrawn registrant is no longer subject to administrative orders.

Section 204(e) lets the Administrator begin a revocation or suspension proceeding for a willful violation within one year after an automatic withdrawal becomes effective, and enter the order as of the last date registration was effective. Withdrawal does not shield earlier conduct. The thirty-day period governs only whether withdrawal becomes effective automatically, and an administrative order does not depend on a criminal referral.Uniform Securities Act §204(e)