NASAA Series 63 — All Questions

The Administrator summarily suspends a broker-dealer's registration pending a hearing and notifies the firm of the order. The firm promptly sends a written request for a hearing. Within what time must the matter be set down for hearing?

• a.Within five business days after the summary suspension order was first entered by the Administrator.
• b.Within fifteen days after the Administrator receives the firm's written hearing request.✓
• c.Within sixty days after the order, the same period that applies to a court petition for judicial review.
• d.Within thirty days after the Administrator receives the firm's written request for a hearing.

Section 204(c) provides that after a summary suspension the registrant is told that the order has been entered, the reasons for it, and that within fifteen days after receipt of a written request the matter will be set down for hearing. If no hearing is requested or ordered, the suspension stays in effect until modified or vacated. Sixty days is the period for seeking court review of a final order under Section 411.Uniform Securities Act §204(c)

An applicant for agent registration was convicted of a securities-related misdemeanor eleven years ago and of a felony unrelated to securities nine years ago. Which statement about the Administrator's authority to deny registration is correct?

• a.Only the misdemeanor can support denial, because the Act lists convictions tied to securities and no other crimes.
• b.Both convictions can support denial, because a conviction involving a security, like any felony, never ages out of the Administrator's reach.
• c.The felony falls within the ten-year period and can support denial if denial is in the public interest, but the older misdemeanor cannot.✓
• d.Neither conviction can support denial, because a felony counts only when it is connected to the securities business.

Section 204(a)(2)(C) allows action if, in the public interest, the applicant has been convicted within the past ten years of any misdemeanor involving a security or any aspect of the securities business, or of any felony. The felony counts even though it is unrelated to securities. The misdemeanor is eleven years old and outside the look-back period.Uniform Securities Act §204(a)(2)(C)

A New Jersey broker-dealer has no office in this state. In the past year it has effected transactions here only with banks, insurance companies, and other broker-dealers. Must it register as a broker-dealer in this state?

• a.Yes, any firm that effects a securities transaction with a buyer located in this state must be registered with the Administrator here.
• b.No, a firm with no place of business here that deals only with institutions and broker-dealers falls outside the definition.✓
• c.Yes, but it may satisfy the Act by a simple notice filing, since every customer it has in this state is an institutional buyer.
• d.No, but only if at least one of the institutional customers it deals with here is itself a broker-dealer registered in this state.

Section 401(c)(4) excludes from the broker-dealer definition a person with no place of business in the state who effects transactions here exclusively with issuers, other broker-dealers, or banks, insurers, investment companies and similar institutional buyers. Because the New Jersey firm falls outside the definition, the registration requirement never applies to it. The antifraud provisions still reach its conduct.Uniform Securities Act §401(c)

A certified public accountant prepares a client's tax returns and, solely as an incidental part of that engagement, remarks that a municipal bond fund is tax-efficient. She charges only her usual accounting fee. How is she treated under the Act?

• a.She is an investment adviser, because anyone who gives advice about securities for compensation of any kind must register in this state.
• b.She is not an investment adviser, because an accountant whose securities advice is solely incidental to accounting practice is excluded.✓
• c.She is an investment adviser, because the professional exclusion covers lawyers and engineers but does not extend to certified public accountants.
• d.She is an investment adviser unless she obtains a waiver from the Administrator for each separate client she advises in this way.

Section 401(f) excludes a lawyer, accountant, engineer or teacher whose performance of advisory services is solely incidental to the practice of the profession. The CPA's remark is incidental to her tax work, and she receives no special compensation for it. Compensation alone does not make someone an investment adviser, and no per-client waiver is needed for an excluded person.Uniform Securities Act §401(f)

An investment adviser registered with the SEC under the Investment Advisers Act of 1940 wants to advise clients in State Q, where it has no state registration. Which requirement applies to the adviser in State Q?

• a.It must post the bond or minimum capital the Administrator sets for state-registered advisers, because the state keeps full authority over the firm.
• b.It needs no filing of any kind, because an SEC-registered adviser is completely exempt from the state securities laws.
• c.It must register as an investment adviser in State Q and pass the state examination, because the SEC does not preempt state licensing.
• d.It must make a notice filing with the Administrator, consisting of the SEC documents the Administrator requires, and pay the fee.✓

A federal covered adviser is registered with the SEC, so a state may not require it to register. Section 202(b) lets the Administrator require the filing of documents submitted to the SEC, and Section 202(c)(3) allows a notice filing fee. The adviser remains subject to the state antifraud provisions, and its investment adviser representatives who have a place of business in the state must register.Uniform Securities Act §202(b)

A Canadian broker-dealer registered in Ontario, with no office in this state, wants to execute orders for a long-time Canadian client who has temporarily moved here for the winter. Which course is open to the firm?

• a.It may trade for the client without registering, because a client's citizenship decides which country's securities law governs the trade.
• b.It may register only if it also opens a physical office in this state, because the limited provision requires a local presence.
• c.It may trade for the client if the client signs a waiver, because the Administrator cannot regulate dealings with a foreign national.
• d.It may register under the limited Canadian provision, because the client was its customer in Canada before entering the United States.✓

Section 201-A allows a Canadian broker-dealer with no office or physical presence in the state to register on a limited basis and deal with a Canadian who is temporarily resident here and was its client before entering the United States. It must file a consent to service of process, be in good standing at home, belong to a Canadian self-regulatory organization, and tell clients it is not subject to the full requirements of the Act. A client's waiver of the Act is void.Uniform Securities Act §201-A

A registered investment adviser filed a document with the Administrator, and one of its officers has since been convicted of a felony, which makes information in that filing materially inaccurate. What must the adviser do?

• a.It must file a correcting amendment only if the Administrator first sends a written request asking it to do so.
• b.It must promptly file a correcting amendment, because material inaccuracies in a filed document must be corrected.✓
• c.It must report the conviction to the SEC alone, because corrections to state filings are made through the federal system.
• d.It may wait and report the conviction on the next annual renewal, because renewal is the only time updates are required.

Section 203(d) requires a registrant to file a correcting amendment promptly when information in a document filed with the Administrator is or becomes inaccurate or incomplete in any material respect. The duty arises without a request and does not wait for renewal. A willful failure to keep filings current can itself be a ground for action against the registration.Uniform Securities Act §203(d)

An agent made unsuitable recommendations to several customers. The Administrator finds that the broker-dealer had no written supervisory procedures and never reviewed the agent's trades. What basis does the Administrator have to act against the broker-dealer's own registration?

• a.The broker-dealer failed reasonably to supervise its agents, which supports an order if the Administrator finds that the order is in the public interest.✓
• b.The broker-dealer's lack of net capital, because the supervisory ground applies only to firms that fail to meet financial requirements.
• c.None, because an agent's misconduct can never be used against the registration of the broker-dealer that employs the agent.
• d.A criminal referral only, because supervision failures are not grounds for administrative orders against a firm's registration.

Section 204(a)(2)(J) makes it a ground for action that a broker-dealer failed reasonably to supervise its agents or employees to assure compliance with the Act, and Section 204(a)(1) adds the requirement of a public interest finding. Proof of the agent's own violation is not a prerequisite. The ground has nothing to do with net capital, which is addressed separately.Uniform Securities Act §204(a)(2)(J)

A registered agent sells shares of a start-up company to a retail client in this state. The shares are not registered, no exemption has been claimed for the security, and the transaction fits no listed exempt transaction. Is the sale lawful?

• a.No, because the security is not registered, exempt or federal covered and the transaction is not exempt, so the sale violates Section 301.✓
• b.Yes, because the agent holds a valid registration, and an agent's registration allows the sale of any security the firm's customers request.
• c.No, but only because the agent failed to give the client a prospectus, since the security itself needs no registration with the state.
• d.Yes, provided the client signs an acknowledgment that the shares are unregistered and that the client accepts the risk of a total loss.

Section 301 makes it unlawful to offer or sell a security in the state unless it is registered, exempt, a federal covered security, or sold in an exempt transaction. The agent's own registration covers the person, not the product. A client's signed acknowledgment cannot create an exemption that the statute does not give, and prospectus delivery is a separate matter from registration.Uniform Securities Act §301

An issuer files a registration statement by coordination on June 1. The federal registration statement becomes effective on June 8, the state filing has been on file for eight days, and the price information has been on file for two full business days. When does the state registration become effective?

• a.On June 8 at the same moment as the federal registration, because registration by coordination always takes effect concurrently with the SEC.
• b.On June 8, because the two business days of price information on file replace the ten-day filing period when the federal statement is effective.
• c.Not on June 8, because the ten-day filing requirement is unmet, so it takes effect only once all the conditions are satisfied.✓
• d.Only when the Administrator signs a written order granting effectiveness, because coordination registrations never become effective automatically.

Under Section 303(c), a coordination registration becomes effective automatically with the federal registration only if no stop order is in effect, the statement has been on file at least ten days, and the price information has been on file for two full business days. Here the ten-day condition is unmet, so effectiveness waits until the conditions are satisfied. The Administrator's order is the route for registration by qualification, not coordination.Uniform Securities Act §303(c)

A small manufacturer wants to sell stock to investors in this state. It has filed nothing with the SEC and does not meet the notification requirements. Which method of registration is available, and when does it take effect?

• a.Registration by coordination, which becomes effective automatically ten days after the manufacturer files with the state.
• b.Registration by qualification, which becomes effective automatically once the filing has been on record with the state for ten days.
• c.Registration by notification, which becomes effective at noon on the thirtieth day after the manufacturer files the statement.
• d.Registration by qualification, which takes effect only when the Administrator issues an order declaring it effective.✓

An issuer with no federal registration statement cannot use coordination, and one that fails the Section 302 eligibility conditions cannot use notification. That leaves qualification, which Section 304(c) says becomes effective only when the Administrator orders it. Automatic effectiveness after a waiting period belongs to coordination and notification, not qualification.Uniform Securities Act §304(c)

Corporation V has registered with the SEC for a public offering and wishes to register by notification in this state. It has operated in the United States for 30 consecutive calendar months before filing its federal statement. May it use notification?

• a.No, because it must have been actively engaged in business operations in the United States for at least 36 consecutive calendar months.✓
• b.Yes, because operating for 30 months is enough when the corporation has already filed a federal registration statement for the offering.
• c.No, because the corporation must have operated for at least 60 consecutive calendar months before the federal registration statement was filed.
• d.Yes, because the 36-month period applies only to companies organized outside the United States, which must also name an agent for service.

Section 302(a)(1) allows registration by notification only if, among other conditions, the issuer has actively engaged in business in the United States for at least 36 consecutive calendar months before filing the federal statement. Thirty months falls short. The foreign-issuer provision concerns appointing a United States agent for service of process, not the length of operation.Uniform Securities Act §302(a)(1)

An issuer with a federal registration statement on file plans an underwritten offering in which the underwriters will receive discounts and commissions equal to 12% of the aggregate public offering price. Can the issuer register the offering in this state by notification?

• a.No, because underwriters' commissions and discounts may not exceed 10% of the aggregate public offering price for notification.✓
• b.No, because underwriters' compensation must not exceed 5% of the aggregate public offering price for a notification filing.
• c.Yes, because notification places no cap on underwriter compensation once the issuer has registered the offering with the SEC.
• d.Yes, because the cap on compensation applies only to the broker-dealers in this state, not to the underwriters of the offering.

One condition for registration by notification under Section 302(a)(1) is that aggregate underwriting commissions and discounts not exceed 10% of the aggregate price to the public. At 12% the offering falls outside notification, and the issuer would have to use coordination or qualification instead. The cap covers the underwriters' total compensation, whoever sells in the state.Uniform Securities Act §302(a)(1)(H)

A broker-dealer registered in this state wants to sell the securities of an out-of-state issuer to local customers. The issuer has not registered the offering here and will not cooperate. May the broker-dealer file the registration statement itself?

• a.Yes, but only for a registration by qualification, since coordination and notification filings need the issuer's own signature.
• b.Yes, because a registered broker-dealer may file, as may the issuer or another person on whose behalf the offering is made.✓
• c.No, because a broker-dealer may file only when it is also the underwriter for the issuer's federally registered offering.
• d.No, because only the issuer of the security has authority to file a registration statement for its own securities in any state.

Section 305(a) lets a registration statement be filed by the issuer, any other person on whose behalf the offering is to be made, or a registered broker-dealer. That allows a local firm to register a security even when the issuer declines to do so. Nothing in the section limits the broker-dealer to one registration method.Uniform Securities Act §305(a)

A registration statement for a continuous offering became effective on March 1. By the following March 1 the issuer is still selling the securities in non-exempt transactions. What is the status of the registration?

• a.It lapses on the first anniversary and must be replaced with a new filing before any more sales to investors in this state.
• b.It stays effective for exactly two years from the effective date, after which a renewal and fee are due regardless of sales.
• c.It stays effective only if the issuer files a renewal application with the Administrator on or before the first anniversary.
• d.It stays effective for as long as the issuer keeps offering or distributing the securities in non-exempted transactions.✓

Under Section 305(i), a registration is effective for one year or any longer period during which the security is still being offered or distributed in a non-exempted transaction by or for the issuer or an underwriter or dealer holding an unsold allotment. The continuing offering here extends the registration. A stop order, not the calendar, is what suspends effectiveness.Uniform Securities Act §305(i)

Six months after its registration became effective, an issuer asks to withdraw the registration. Shares of the same class are still held by investors. What does the Act provide?

• a.The registration may be withdrawn after 30 days from the effective date if the issuer pays a withdrawal fee.
• b.The registration cannot be withdrawn for one year from its effective date while securities of that class are outstanding.✓
• c.The issuer may withdraw once the Administrator holds a hearing, because withdrawal always requires a hearing and findings.
• d.The issuer may withdraw at any time by written request, because registration is a voluntary filing the issuer controls.

Section 305(i) bars withdrawal of a registration statement for one year from its effective date if any securities of the same class are outstanding. After that, withdrawal is possible only in the Administrator's discretion. The 30-day withdrawal period for agents and broker-dealers in Section 204(e) is a different rule.Uniform Securities Act §305(i)

The Administrator reviews a coordination filing for a start-up whose promoters received shares last year for a nominal sum. Which conditions may the Administrator require of this registration by rule or order?

• a.Escrow of all shares for ten years, with proceeds paid to the issuer as each sale is made so that working capital is not delayed.
• b.Escrow of low-priced shares issued to promoters within three years, and impounding proceeds until a set amount is raised.✓
• c.A bond of $50,000 from the issuer, with every sale reported to the Administrator within five days of its execution.
• d.Impounding of proceeds only, because the Act gives the Administrator no authority to require that promoter shares be held in escrow.

Section 305(g) lets the Administrator require, as a condition of registration by qualification or coordination, that securities issued within the past three years to promoters for substantially different consideration be escrowed, and that sale proceeds be impounded until the issuer receives a specified amount. A fixed ten-year escrow and a dollar bond appear nowhere in that subsection.Uniform Securities Act §305(g)

An issuer's registration is effective, and the Administrator wants to keep its information current. What is the most frequent reporting the Administrator may require of the registrant by rule or order?

• a.Reports no more often than quarterly while the registration statement is effective, to keep it current.✓
• b.No reports at all, because after effectiveness the registrant has no duty to update the filing with the Administrator.
• c.Reports once a year only, due on the anniversary of the date the registration statement became effective.
• d.Reports as often as monthly, because the Administrator needs current information to monitor the progress of the offering.

Section 305(j) allows the Administrator to require reports, not more often than quarterly, to keep the registration current and to show how the offering is progressing. This applies so long as the registration statement is effective. A monthly requirement would exceed that limit.Uniform Securities Act §305(j)

The Administrator learns on the day a registration statement becomes effective that a financial figure in it was materially false. Forty-five days later the Administrator tries to start a stop order proceeding based on that figure. Is the proceeding timely?

• a.No, because a proceeding must begin within fifteen days of the effective date, which is the Administrator's hearing deadline.
• b.Yes, because a stop order may be sought at any time while the registration statement remains in effect.
• c.No, because a proceeding based on a fact known when the registration became effective must be started within thirty days.✓
• d.Yes, because the Administrator has sixty days from the effective date to begin a proceeding over a misstatement.

Section 306(a) says the Administrator may not begin a stop order proceeding against an effective registration on the basis of a fact or transaction known when it became effective unless the proceeding starts within the next thirty days. Forty-five days is too late. The fifteen-day figure in the Act concerns scheduling a hearing after a summary order, not the time to begin.Uniform Securities Act §306(a)

A court enjoined the sale of a registered security under another state's law fourteen months ago. May the Administrator now start a proceeding against the effective registration on the ground of that injunction?

• a.No, because an injunction from a court outside this state may never serve as the basis for any stop order here.
• b.Yes, because an injunction from another state's court is a permanent ground for a stop order against any registration.
• c.Yes, because the one-year limit runs from the effective date of the registration and not from the date of the injunction.
• d.No, because a proceeding on the basis of an order or injunction elsewhere cannot start more than one year after that order or injunction.✓

Section 306(a)(2)(C) makes the security's being the subject of a stop order or injunction under another act a stop order ground, but the Administrator may not begin a proceeding against an effective registration on that ground more than one year after the order or injunction. At fourteen months the time has passed. The one-year clock is tied to the injunction, not to the registration.Uniform Securities Act §306(a)(2)(C)

The Administrator summarily postpones the effectiveness of a registration statement and notifies the issuer. The issuer sends a written request for a hearing. Within what time must the matter be set down for hearing?

• a.Within thirty days after the Administrator issued the summary order.
• b.Within five business days after the Administrator receives the request.
• c.Within sixty days after the issuer sends the written request.
• d.Within fifteen days after the Administrator receives the written request.✓

A summary postponement or suspension under Section 306(b) must be accompanied by notice of the reasons and of the right to a hearing, which is to be set within fifteen days after the written request is received. If no hearing is requested or ordered, the order stays in effect until modified or vacated. Other stop orders need prior notice, a hearing and written findings.Uniform Securities Act §306(b)

An offering's underwriters and promoters stand to receive unusually large discounts, commissions and options compared with the proceeds going to the issuer. Does this give the Administrator a basis to deny or stop the registration?

• a.No, because compensation in a registered offering is a matter of contract between the issuer and its underwriters.
• b.Yes, but only if the compensation exceeds 10% of the offering, since that figure is the fixed limit in the Act.
• c.No, because the Administrator may review the accuracy of disclosure but has no authority over the fairness of the offering's terms.
• d.Yes, if the order is in the public interest, because unreasonable underwriter, seller or promoter compensation is a stop order ground.✓

Section 306(a)(2)(F) lets the Administrator, when it is in the public interest, issue a stop order if the offering is made with unreasonable amounts of underwriters' and sellers' discounts, commissions or other compensation, or promoters' profits or options. There is no fixed percentage ceiling in that clause; the ten percent figure belongs to the notification test.Uniform Securities Act §306(a)(2)

An issuer sells securities in a Rule 506 private offering that qualify as federal covered securities. Its first sale in this state occurs on March 3. By when may the Administrator require the Form D notice filing?

• a.No later than 15 days after the first sale in this state, together with a consent to service of process.✓
• b.Never, because Rule 506 offerings are federal covered securities and federal law bars a state from requiring any notice filing, consent or fee.
• c.Before the first offer in this state, because notice filings for covered securities must precede any sales activity.
• d.No later than 60 days after the first sale in this state, and only if the buyer was not accredited.

For securities that are covered under the federal Rule 506 provisions, Section 307(b) allows the Administrator to require a Form D notice and a consent to service of process no later than 15 days after the first sale in the state. The state cannot require registration, but it can require this notice and a fee, so the claim that covered status removes every state filing requirement is wrong. The deadline runs from the first sale, not from the first offer, so a pre-offer filing is not required. A 60-day deadline and an audited balance sheet are not part of the notice requirement.Uniform Securities Act §307(b)

An issuer sells a Rule 506 offering that is a federal covered security, but it never made the Form D notice filing this state requires. The securities cannot be registered here. What action may the Administrator take?

• a.Issue a stop order suspending offers and sales of the covered security if the order serves the public interest.✓
• b.Require the issuer to register the securities by qualification before another sale takes place in the state.
• c.Nothing, because states have no authority over federal covered securities once the SEC has preempted state registration.
• d.Revoke the registration of the securities, because every covered security is registered with the state upon notice filing.

Federal law preempts state registration of covered securities, but Section 307(d) still lets the Administrator issue a stop order suspending offers and sales of a covered security, other than an exchange-listed one, if it finds the order in the public interest and a condition under that section was not met. The remedy is a stop order, not registration or revocation.Uniform Securities Act §307(d)

An agent tells a client that a municipal bond issued by another state's housing authority is safe because the issuer's earnings have never declined. The agent knows that the issuer has missed two interest payments. The bond is an exempt security. Is the agent liable under the Act?

• a.Yes, because exempt securities remain subject to the antifraud provisions on untrue statements and misleading omissions of fact.✓
• b.Yes, but only if the client suffers a loss and sues for rescission, since the Administrator has no power to act before then.
• c.No, because a statement about a government issuer is an opinion about its credit, and opinions cannot be fraud under the Act.
• d.No, because a security exempt from registration is also exempt from every other provision of the Act, including those on fraud.

The exemption in Section 402(a)(1) frees government securities from registration, but the antifraud provisions of Section 101 apply to every offer, sale or purchase of any security, exempt or not. Omitting the missed payments makes the statement misleading. The Administrator can act without waiting for a customer loss.Uniform Securities Act (1956) §101 (antifraud, no exemptions); §402(a)(1) (government-security exemption from registration)

Company R issues a promissory note payable in cash in 6 months. The note is sold in denominations of $25,000 and receives the highest rating from a nationally recognized rating organization. Is the note exempt from registration as commercial paper?

• a.No, because the exemption requires denominations of at least $50,000, even though the maturity and rating requirements are met.✓
• b.Yes, because a rated note maturing within 9 months is exempt regardless of the denominations in which it is sold.
• c.Yes, because any note with the top rating is exempt from registration provided that the issuer is a corporation.
• d.No, because the exemption applies only to notes with maturities of 90 days or less, and a 6-month note exceeds that limit.

Section 402(a)(10) exempts a note, draft, bill of exchange or bankers' acceptance that is payable within nine months, issued in denominations of at least $50,000, and rated in one of the three highest categories. The 6-month term and the rating qualify, but denominations of $25,000 do not. The 90-day figure is not part of this exemption.Uniform Securities Act §402(a)(10)

An agent offers a contract from an insurance company under which the payments vary with the performance of a separate account invested in stocks, and the insurer promises no fixed sum. The agent holds only an insurance license. Is a securities registration needed?

• a.No, because the insurer's state regulation of its products takes the contract outside the registration provisions.
• b.Yes, because a contract whose benefits vary with investment results is a security, unlike a fixed-sum annuity.✓
• c.No, because every contract issued by a licensed insurance company is excluded from the definition of a security.
• d.Yes, but only if the contract is sold to more than ten buyers in a single period of twelve consecutive months.

Section 401(m) excludes from the definition of a security an insurance or endowment policy or annuity contract under which the insurer promises to pay a fixed sum of money. A contract whose payments depend on the results of a separate account makes no such promise, so it is a security and the seller needs securities registration. The ten-buyer limit belongs to a transaction exemption, not to the definition.Uniform Securities Act §401(m)

A church organized exclusively for religious purposes and not for private profit offers bonds to its members to fund a new building. A broker-dealer agent is asked whether the bonds must be registered. What is the correct answer?

• a.The bonds are exempt from registration and from every other provision of the Act, so the antifraud rules do not apply either.
• b.The bonds must be registered because churches are treated like commercial issuers when they offer debt to members of the public.
• c.The bonds are exempt only if the church files a notice with the Administrator thirty days before the first sale to a member.
• d.The bonds are exempt because the church is organized exclusively for religious purposes, but antifraud rules still apply.✓

Section 402(a)(9) exempts securities issued by a person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic or reformatory purposes. The exemption relates to registration, and the Administrator may deny or revoke it for a specific security. The thirty-day notice requirement belongs to employee benefit plans.Uniform Securities Act §402(a)(9)

A company adopts a stock purchase plan for its employees and wants the plan's investment contracts to be exempt. When must the Administrator be notified in writing?

• a.No notice is needed, because such plans are exempt.
• b.In writing, thirty days before the inception of the plan.✓
• c.Within ten days after the first employee enrolls in the plan.
• d.Fifteen days before the first purchase under the plan is made.

Section 402(a)(11) exempts an investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing or similar benefit plan if the Administrator is notified in writing thirty days before the inception of the plan. Without that notice the exemption is not available. The fifteen-day figures elsewhere in the Act relate to hearings and Form D filings.Uniform Securities Act §402(a)(11)

A broker-dealer agent offers bonds issued by a foreign national government. Which fact determines whether the bonds are exempt as a foreign government security?

• a.The bonds are guaranteed by a commercial bank organized under the laws of the United States or of any state.
• b.The United States maintains diplomatic relations with that government and it recognizes the bonds as a valid obligation.✓
• c.The bonds are denominated in United States dollars and are sold only to institutional investors in this state.
• d.The government has an investment-grade rating from a nationally recognized rating organization at the time of the sale.

Section 402(a)(2) exempts securities issued or guaranteed by Canada or a Canadian province, or by any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor. Currency, credit rating and the buyer's identity do not decide the exemption, and a bank guarantee is not a condition.Uniform Securities Act §402(a)(2)

An investor privately sells 300 shares of a company's unregistered stock to a friend in a one-time sale. The investor is not an issuer and is not a dealer. Must the shares be registered for this sale?

• a.No, because an isolated non-issuer transaction is exempt, whether or not it is effected through a broker-dealer.✓
• b.Yes, because every sale of an unregistered security to an individual buyer in this state must be registered by the seller.
• c.Yes, because the exemption for isolated transactions applies only when a registered broker-dealer makes the sale.
• d.No, because a sale to a friend is always exempt, however many such sales the investor makes in a year.

Section 402(b)(1) exempts any isolated non-issuer transaction, whether or not a broker-dealer is involved. The exemption is lost when sales become repeated or the seller is the issuer. A seller who makes many such sales cannot rely on it for each one, so the friend's relationship is irrelevant.Uniform Securities Act §402(b)(1)

A customer phones a broker-dealer and, without any recommendation, asks to buy 100 shares of an unregistered company from another investor. The broker-dealer executes the order as agent. How is the transaction treated?

• a.It is an exempt non-issuer transaction, because a registered broker-dealer executed it on the customer's unsolicited order.✓
• b.It is not exempt, because every purchase of an unregistered security through a broker-dealer requires registration of the security.
• c.It is exempt only if the order is placed in writing at least five business days before the broker-dealer executes it.
• d.It is exempt only if the security is also listed on a national securities exchange at the time of the order.

Section 402(b)(3) exempts a non-issuer transaction effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy. The Administrator may require the customer to acknowledge on a specified form that the order was unsolicited. The exemption would be lost if the agent had recommended the purchase.Uniform Securities Act §402(b)(3)

An issuer sells unregistered notes directly to a bank, an insurance company and a registered broker-dealer, using no public solicitation. Is the transaction exempt from registration in this state?

• a.No, because the notes must be registered whenever more than two buyers purchase from the same issuer.
• b.Yes, but only if each purchaser buys for its own account and does not hold the notes in a fiduciary capacity.
• c.Yes, because an offer or sale to a financial institution or institutional buyer, or to a broker-dealer, is exempt.✓
• d.No, because the exemption for institutional buyers applies only if the sale is made through a registered agent.

Section 402(b)(8) exempts an offer or sale to a bank, savings institution, trust company, insurance company, investment company, pension or profit-sharing trust, other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser acts for itself or in a fiduciary capacity. The number of institutions does not matter, and neither does the form of the sale.Uniform Securities Act §402(b)(8)

An issuer offers its unregistered securities to eight individuals in this state over a six-month period. The issuer reasonably believes each buyer is purchasing for investment, but it pays a finder a commission for locating two of them. Does the limited-offering exemption apply?

• a.Yes, because the offer is directed to no more than ten persons in a twelve-month period and the buyers are investors.
• b.No, because the exemption requires that no commission or other remuneration be paid for soliciting any prospective buyer in this state.✓
• c.No, because the exemption allows no more than five individual buyers in any period of twelve consecutive months.
• d.Yes, because a finder's commission is permitted when the finder is paid only for the two buyers the finder personally located.

Section 402(b)(9) exempts an offer directed to not more than ten persons in the state in twelve consecutive months, if the seller reasonably believes the buyers are purchasing for investment and no commission or other remuneration is paid for soliciting any prospective buyer. The finder's commission defeats the exemption even though the count is within the limit.Uniform Securities Act §402(b)(9)

Promoters plan to sell preorganization certificates to subscribers for a corporation not yet formed. No commission will be paid for soliciting. How many subscribers may there be, and what payment may be taken, to fit the exemption?

• a.No more than ten subscribers, and no subscriber may make a payment before the corporation is formed.✓
• b.No more than ten subscribers, and each subscriber must pay the full price before the corporation is formed.
• c.Any number of subscribers, provided that no commission is paid and no subscriber pays more than $5,000.
• d.No more than twenty-five subscribers, and each subscriber may pay up to ten percent of the price.

Section 402(b)(10) exempts an offer or sale of a preorganization certificate or subscription if no commission or other remuneration is paid for soliciting a prospective subscriber, the number of subscribers does not exceed ten, and no payment is made by any subscriber. A deposit or full payment would defeat the exemption.Uniform Securities Act §402(b)(10)

An issuer offers new shares only to its existing shareholders and pays a commission to a broker-dealer for soliciting them. It files a notice with the Administrator stating the terms, and the Administrator does not disallow the exemption. After how long may the issuer rely on the exemption?

• a.Only after the Administrator affirmatively approves the offering in a written order.
• b.Once thirty days pass without an order from the Administrator disallowing the exemption.
• c.Once five full business days pass without an order from the Administrator disallowing the exemption.✓
• d.Once ten calendar days pass after the notice is filed, whether or not the Administrator acts.

Section 402(b)(11) exempts an offer to existing security holders if no commission other than a standby commission is paid for soliciting them, or if the issuer first files a notice of the terms and the Administrator does not disallow the exemption by order within the next five full business days. Since a solicitation commission is being paid, the notice route applies. The exemption requires no affirmative approval.Uniform Securities Act §402(b)(11)

The executor of an estate sells shares of an unregistered closely held company that were part of the decedent's assets, to settle the estate. Must the shares be registered for the executor's sale?

• a.Yes, unless the executor first obtains a written order from the Administrator approving the sale of the shares.
• b.No, because a sale by an executor, receiver, trustee in bankruptcy or guardian is an exempt transaction.✓
• c.Yes, because the estate becomes an issuer of the shares as soon as the executor offers them to the public.
• d.No, but only if the shares are sold at a price at or above their appraised value on the date of death.

Section 402(b)(6) exempts transactions by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian or conservator. These fiduciaries sell to administer property, not to raise capital, and the Act does not set a minimum price. No prior order from the Administrator is needed.Uniform Securities Act §402(b)(6)

Under the Uniform Securities Act (1956), a registered agent of a registered broker-dealer sells shares of a company that have been outstanding in the hands of the public for 200 days. The issuer is actually in business and has operated continuously for ten years, and a recognized securities manual lists its business description, officers, directors and audited financial statements. The price reasonably relates to the market, and the shares are not an unsold underwriting allotment. Is the transaction exempt from registration?

• a.Yes, because the class has been outstanding over 90 days, the manual information exists and the price is near the market.✓
• b.No, because the exemption covers only isolated non-issuer transactions, and an agent's regular sales for customers are not isolated.
• c.Yes, but only if the issuer also has a class of equity securities listed on a national exchange, since only listed issuers qualify.
• d.No, because only securities outstanding for at least one year in the hands of the public qualify for the agent non-issuer exemption.

Section 402(b)(2) exempts a non-issuer transaction by a registered agent of a registered broker-dealer in a class outstanding in the hands of the public for at least 90 days, provided the issuer is actually in business, the price is reasonably related to the market, the shares are not an unsold underwriting allotment, and a securities manual or an SEC filing on EDGAR carries the required business, officer, director and audited financial information. An issuer with listed equity must also have three years of continuous business or $2 million of audited assets, and the ten-year operating history meets that. Listing is not a requirement, the exemption is not limited to isolated transactions, and the holding period is 90 days, not one year.Uniform Securities Act §402(b)(2)

While its registration statement is pending but not yet effective in this state, a broker-dealer's agent gives preliminary information about the offering to several prospects. The agent accepts no orders and makes no sales. Under the exemptions, what is permitted?

• a.Offers only to institutional buyers, since an offer to individual investors is not allowed until the registration is effective.
• b.Both offers and sales, because filing of the registration statement lets the agent sell once it has been on file ten days.
• c.An offer, but not a sale, of a security registered under both this Act and the federal Act, while no stop order is in effect.✓
• d.Neither offers nor sales, because every communication about the offering is prohibited until the registration is effective.

Section 402(b)(12) exempts an offer, but not a sale, of a security for which registration statements have been filed under both this Act and the Securities Act of 1933, if no stop order or refusal order is in effect and no proceeding looking toward such an order is pending. No sale may close until the registration becomes effective.Uniform Securities Act §402(b)(12)

The Administrator finds that an issuer is using the limited-offering exemption to sell speculative securities to many unsophisticated buyers. May the Administrator act against this specific exemption, and what limits apply?

• a.Yes, but only after the issuer has been convicted of a securities law violation in a court of competent jurisdiction.
• b.No, because an exemption written into the statute cannot be limited by the Administrator for a specific security or transaction.
• c.Yes, by an order that voids every sale the issuer has already made under the exemption, since exemptions are privileges.
• d.Yes, by order after notice and a hearing, or summarily pending a hearing, but no order may operate retroactively.✓

Section 402(c) allows the Administrator to deny or revoke certain exemptions, including those for transactions in subsection (b), with respect to a specific security or transaction. That requires notice, a hearing and written findings, though a summary order may issue pending final determination. An order may not operate retroactively, so earlier sales are not made unlawful by it.Uniform Securities Act §402(c)

In a state proceeding, an issuer claims that its sale to a group of buyers fell within an exempt transaction. The facts are disputed. Who bears the burden of proving the exemption?

• a.The buyers, who must show they were outside the class.
• b.The issuer, because it is the party claiming the exemption.✓
• c.Neither side, since the exemption is presumed when facts conflict.
• d.The Administrator, who must show the exemption fails.

Section 402(d) puts the burden of proving an exemption, or an exception from a definition, on the person claiming it. The Administrator need not disprove the exemption, and the buyers carry no burden. Exemptions are therefore claimed at the claimant's risk.Uniform Securities Act §402(d)

A 74-year-old client of an agent has a conservative account of $90,000 and wants modest income. Over three months the agent places 45 purchases and sales that leave the holdings almost unchanged but generate large commissions. How is this conduct classified?

• a.It is unethical, because it induces trading that is excessive in size or frequency in view of the account's financial resources and character.✓
• b.It is acceptable, because each confirmation was sent to the client, and a client who receives confirmations is deemed to approve the trading.
• c.It is acceptable, because the trading was within the agent's authority as long as every individual purchase or sale was a suitable security.
• d.It is unethical only if the agent shares the profits with the client, since the policy addresses profit sharing rather than account activity.

The Statement of Policy lists inducing trading that is excessive in size or frequency in view of the financial resources and character of the account as a dishonest or unethical practice. The test looks at the pattern of activity and the account's purpose, so a series of individually suitable trades can still be churning. Sending confirmations does not cure it, and profit sharing is a separate prohibition.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.b

A broker-dealer agent recommends a highly speculative, thinly traded stock to a retired client who has told the agent that she lives on a fixed pension and cannot afford to lose principal. The agent made no inquiry beyond that conversation. What is the problem?

• a.The agent should have obtained the client's written discretionary authority before recommending any speculative security.
• b.The agent breached no duty, since a retiree who rejects a recommendation is protected and one who accepts it assumes the risk.
• c.The agent should have waited ten business days after the conversation before making any recommendation of a stock.
• d.The agent lacked reasonable grounds to think the recommendation was suitable for the client's stated goals and finances.✓

The policy treats recommending a security without reasonable grounds to believe it is suitable for the customer, based on reasonable inquiry into objectives, financial situation and needs, as an unethical practice. A recommendation that contradicts what the client has stated fails that test. Discretionary authority is irrelevant to a recommendation the client is free to decline, and the customer's acceptance does not cure unsuitability.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.c

An agent is sure that a stock will rise, and buys 200 shares in a customer's account without calling the customer. The customer, who had not given any discretionary authority, learns of the purchase the next day. The stock then rises. Is the agent's conduct a problem?

• a.Yes, because executing a transaction for a customer without authorization is unethical even if it later profits.✓
• b.Yes, but only if the stock had dropped in value, since a violation requires a loss to the customer's account.
• c.No, because the customer gained from the transaction and so was not harmed by the lack of prior consultation.
• d.No, because an agent may place trades without asking so long as the customer is told about them within one business day.

Executing a transaction on behalf of a customer without authorization is listed as an unethical practice, and no showing of loss is required. A later gain does not supply the missing authority, and after-the-fact notice is not consent. Only authority that the customer has granted can support a trade, whether the authority is for a single order or a discretionary one.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.f

A customer tells an agent by phone, 'Buy whatever you think is best and I will not need to approve each one.' The customer signs nothing. Which statement is correct?

• a.The agent may choose the securities and the amounts without written authority, but not the time or the price of an order.
• b.The agent may begin exercising discretion now and must obtain written authority from the customer within ten business days.
• c.The agent's discretion is valid because a customer's oral instruction is enough for a broker-dealer's agent to trade freely.
• d.The agent needs the customer's prior written discretionary authority, except over the time or price of an order.✓

For broker-dealers and agents, the policy treats exercising any discretionary power without first obtaining written discretionary authority as unethical, with an exception when the discretion relates solely to the time or price for executing orders. The ten-business-day grace period is a rule for investment advisers, not for agents. Choosing securities and amounts is exactly what requires the written authority.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.g

An investment adviser representative begins trading a new client's account on the client's oral discretionary instruction. There is a written discretionary agreement in the file only at 14 business days after the first trade. What is the status under the rule?

• a.It complies, because the written agreement arrived before the client's first account statement was ever sent out.
• b.It complies, because the adviser has until the end of the first calendar quarter to obtain the written authority.
• c.It violates the rule, because written authority has to be in place before the first trade is made on any oral instruction.
• d.It violates the rule, because the written authority was due within ten business days of the first trade on oral authority.✓

Model Rule 102(a)(4)-1(b) treats exercising discretion without written discretionary authority obtained within ten business days after the first transaction placed under oral authority as an unethical practice, unless the discretion concerns only the price or time for an order involving a definite amount of a specified security. Fourteen business days is too late. The advance-writing requirement applies to broker-dealers.NASAA Model Rule 102(a)(4)-1 (b)

An agent opens a margin account for a customer and executes the first margin purchase on Monday. The customer has not yet signed any margin agreement. By when must the agent obtain the executed written margin agreement?

• a.Only when the customer's equity falls below the maintenance level.
• b.Within 30 days after the account's first statement is issued.
• c.Promptly after the initial transaction in the account.✓
• d.Before the first transaction in the account is executed.

The policy lists executing a transaction in a margin account without securing a properly executed written margin agreement promptly after the initial transaction as unethical. The agreement is therefore due promptly after the first trade, not beforehand and not only after a margin call. Timing tied to statements or maintenance levels does not appear in the policy.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.h

A broker-dealer wants to pledge a customer's fully paid securities as collateral for its own bank loan, though it holds no lien on them. What does the policy require?

• a.No consent at all, because securities held in a customer account belong to the firm for margin.
• b.The customer's properly executed written consent, unless SEC rules permit the pledge.✓
• c.Written notice to the Administrator and to the customer within five days after the pledge.
• d.Only the customer's oral approval, given at any time before the firm pledges the securities.

Hypothecating a customer's securities without having a lien on them is unethical unless the broker-dealer secures the customer's properly executed written consent promptly after the initial transaction, or the SEC's rules permit it. Oral approval is not a properly executed consent, and notice to the Administrator does not substitute. Customer securities do not become the firm's property.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.j

To win an account, an agent promises a prospect, 'If the fund you buy loses money in your first year, I will make you whole out of my own pocket.' What does the policy say about this promise?

• a.It is permitted if the agent puts the guarantee in a signed writing and gives the prospect a copy to keep.
• b.It is permitted if the agent's broker-dealer approves the promise in advance and records it in the account file.
• c.Guaranteeing a customer against loss in an account is an unethical practice, regardless of who offers to cover it.✓
• d.It is permitted if the guarantee is limited to losses suffered during the first year the prospect holds the investment.

The policy lists guaranteeing a customer against loss in any securities account or transaction as dishonest or unethical. A written promise, a time limit or firm approval does not change the character of the guarantee. Even a sincere offer to cover losses breaches the standard, which is aimed at the misleading assurance of safety.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §1.q

A customer offers to lend her agent $15,000 for a down payment on a house, and promises that she will not tell the broker-dealer. The customer is not a financial institution. May the agent accept?

• a.No, but only if the loan is secured by securities held in the customer's own account with the agent.
• b.Yes, since the practice is unethical only when the loan is not repaid within the agent's current registration year.
• c.Yes, since the agent may accept loans from customers who are not broker-dealers if the terms are put in writing.
• d.No, because lending or borrowing money or securities from a customer is an unethical practice for an agent.✓

The policy classifies an agent's lending or borrowing money or securities from a customer, or acting as custodian for a customer's money, securities or executed stock power, as unethical. The prohibition does not depend on a writing, a repayment date or collateral. Hiding the loan from the firm only compounds the conflict of interest.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents §2.a