NASAA Series 66 — All Questions

A 2x leveraged ETF seeks twice the daily return of an index and starts at $100. The index falls 10% on day one and rises 10% on day two. What is the fund's approximate value after two days?

• a.$99.00
• b.$98.00
• c.$100.00
• d.$96.00✓

The fund returns minus 20% on day one, leaving $80, and then plus 20% on day two, which gives $96. The index itself ended at $99 from a 100-to-90-to-99 path, a 1% loss. Doubling that two-day index change would suggest $98, but daily reset and compounding make the result worse. A flat $100 treats the minus 20% and plus 20% as cancelling, which ignores the smaller base after the loss.FINRA Regulatory Notice 09-31

An investor puts $10,000 in a structured note linked to an index that has a 15% downside buffer: the first 15% of index decline causes no loss, and further declines are lost one-for-one. The index falls 30% by maturity and the issuer is solvent. What does the investor receive at maturity?

• a.$5,500
• b.$7,000
• c.$10,000
• d.$8,500✓

The buffer absorbs the first 15% of the decline, leaving a 15% loss, and 15% of $10,000 is $1,500, so the payout is $8,500. The $7,000 figure ignores the buffer and passes through the full 30% decline. The $10,000 answer treats the note as fully principal protected, but a buffer protects only against part of the loss. The $5,500 answer adds the buffer to the decline, which penalizes the investor instead of protecting them.FINRA Regulatory Notice 12-03

Which statement best describes a reverse convertible note?

• a.It protects principal if held to maturity and pays a set share of any gain in the linked stock
• b.It is convertible into the issuer's common stock at the holder's option at any time before maturity
• c.It pays a below-market coupon in return for unlimited participation in the linked stock's gains
• d.It pays an above-market coupon, and principal is at risk if the linked stock falls below a set barrier✓

A reverse convertible is a short-term structured note whose high coupon is paid in exchange for the investor accepting downside risk on a linked stock or index; if the reference asset breaches the barrier, repayment is in shares or a reduced amount. Principal protection with partial participation describes a different structured note. A conversion option exercisable by the holder describes an ordinary convertible bond; here the form of repayment depends on the stock's performance. The coupon is higher, not lower, and upside is generally capped.FINRA Regulatory Notice 10-09

An investor in the highest tax bracket sells shares of a physically backed gold trust (a grantor trust) after three years, realizing a $10,000 gain. Ignoring the 3.8% net investment income tax, what is the maximum federal rate on this gain?

• a.20%
• b.28%✓
• c.37%
• d.15%

The IRS treats an investor in a physically backed metal trust as owning an undivided interest in the metal, and gain on collectibles held over a year is taxed at a maximum rate of 28%. The 20% rate applies to most other long-term capital gains and 15% to middle brackets. The 37% rate is the top ordinary income rate, which applies to short-term gains, not to long-term collectibles gain.Internal Revenue Code Section 1(h)

An employee was granted incentive stock options on June 1, 2023 and exercised them on March 1, 2025. Which is the earliest of these sale dates that would be a qualifying disposition?

• a.April 15, 2026✓
• b.March 15, 2027
• c.August 15, 2025
• d.January 15, 2026

A qualifying disposition requires holding the shares for more than 2 years from grant (past June 1, 2025) and more than 1 year from exercise (past March 1, 2026), so April 15, 2026 is the earliest listed date meeting both. January 15, 2026 satisfies the grant test but is under a year after exercise. August 15, 2025 passes the 2-year grant test, yet falls only five months after exercise. March 15, 2027 would qualify but is not the earliest, and it reflects the mistaken view that two years must run from exercise.Internal Revenue Code Section 422(a)(1)

An employee exercises 2,000 nonqualified stock options with a $12 exercise price when the stock trades at $40, and keeps the shares. What ordinary income does she generally recognize at exercise?

• a.$28,000
• b.$80,000
• c.$24,000
• d.$56,000✓

The taxable spread is the $40 market value minus the $12 exercise price, or $28 per share, and 2,000 shares times $28 is $56,000 of ordinary income at exercise. The $80,000 figure is the full market value of the shares. The $24,000 figure is only the cost paid to exercise. The $28,000 answer is the per-share spread applied to 1,000 shares, a miscount of the shares exercised.Internal Revenue Code Section 83

An executive receives restricted stock units (RSUs) that vest in three years and will be settled in shares. Which statement about a Section 83(b) election is correct?

• a.No election is available, because the RSUs are only a promise of future shares; income arises at settlement✓
• b.An election is available within 30 days of vesting, fixing the income at the vesting-date value
• c.An election is available only if the RSUs are settled in cash rather than in shares of company stock
• d.An election is available within 30 days of the grant, fixing income at the grant-date value of the shares

Section 83(b) applies to property transferred in connection with services, and an unfunded, unsecured promise to deliver shares later is not property, so RSU holders cannot make the election and are taxed at ordinary rates when the shares are delivered. The 30-day window is real for restricted stock but it runs from the transfer, so it does not rescue RSUs at grant. A vesting-date election is not provided by the Code. Cash settlement does not create an election right either.Internal Revenue Code Section 83(b); Treas. Reg. 1.83-3(e)

A bond with a 7% coupon and ten years to maturity trades at 108 and is callable in four years at 103. How do its yields compare?

• a.The yield to call is higher than the yield to maturity, because the principal is returned sooner
• b.The yield to call equals the current yield, because both ignore the call price and the premium
• c.The yield to call equals the yield to maturity, because both use the same 7% coupon and price
• d.The yield to call is lower than the yield to maturity, so the yield to worst is the yield to call✓

At a price of 108 the bond is a premium bond, and the premium must be amortized over a shorter period to a lower call price, so the yield to call (about 5.4%) is below the yield to maturity (about 5.9%); the lower of the two is the yield to worst. Earlier return of principal raises the yield only for discount bonds. The coupon is the same, but the cash flows and redemption values differ, so the yields differ. The current yield ignores the premium amortization and the call price altogether.

A BBB corporate bond yields 6.35% and a same-maturity Treasury yields 4.60%. Later the corporate yield is 6.85% and the Treasury yield is 4.85%. What happened to the credit spread?

• a.It widened by 25 basis points, from 175 to 200✓
• b.It widened by 50 basis points, from 175 to 225
• c.It narrowed by 25 basis points, from 200 to 175
• d.It was unchanged, because both yields rose

The initial spread is 6.35% minus 4.60%, or 175 basis points, and the later spread is 6.85% minus 4.85%, or 200 basis points, so it widened by 25 basis points. The 50 basis point answer counts only the corporate yield's rise and ignores the Treasury's. Both yields rose, but by different amounts, so the spread did not stay unchanged. A narrowing would require the corporate yield to rise less than the Treasury yield.

A married couple has $300,000 in a joint checking account, $200,000 in a joint CD, and the husband has a $400,000 savings account in his name alone, all at one FDIC-insured bank. Assuming equal withdrawal rights on the joint accounts, how much is uninsured if the bank fails?

• a.$400,000, from the savings and both joint accounts
• b.$150,000, all in the husband's savings account✓
• c.$200,000, in the savings and the joint checking account
• d.$650,000, under one $250,000 limit for the household

Single-ownership deposits are insured to $250,000, so $150,000 of the husband's $400,000 is uninsured. Joint accounts are insured to $250,000 per co-owner, so the couple's $500,000 of joint deposits is fully covered. The $200,000 answer applies a $250,000 limit to each joint account as a whole instead of per owner, and the $400,000 answer treats all joint deposits as one $250,000 account. The $650,000 answer insures only $250,000 for the whole household.12 CFR 330.6 and 330.9

A $300,000 whole life policy has a $45,000 policy loan outstanding and $3,000 of accrued loan interest when the insured dies. What death benefit is paid to the beneficiary?

• a.$255,000
• b.$297,000
• c.$300,000
• d.$252,000✓

Any outstanding loan and unpaid interest are deducted from the proceeds, so $300,000 minus $45,000 minus $3,000 leaves $252,000. The $255,000 answer subtracts only the loan principal and forgets the accrued interest. The $297,000 answer deducts only the interest. The full $300,000 would be paid only if the policy had no loan, since an unrepaid loan reduces the death benefit.

A 45-year-old overfunds a life insurance policy so heavily that it fails the 7-pay test and becomes a modified endowment contract (MEC). How is a policy loan she later takes taxed?

• a.It is taxable only if the policy is later surrendered, and the 10% additional tax applies only then
• b.It is tax-free, because a loan against cash value life insurance is borrowing and not income
• c.It is a distribution taxed as gain first, with a 10% additional tax before age 59 1/2✓
• d.It is taxed on a first-in, first-out basis, so basis comes out first and no penalty applies

Loans from a MEC are treated like distributions, so they are taxed to the extent of gain in the contract, last-in, first-out, and a 10% additional tax applies to the taxable amount before age 59 1/2. Tax-free loans are the benefit of a policy that is not a MEC. First-in, first-out ordering is the treatment of ordinary non-MEC withdrawals, not MEC distributions. The tax is not deferred until surrender, because the loan itself is the taxable event.Internal Revenue Code Sections 7702A and 72(e)(10)

A client's variable annuity has a guaranteed lifetime withdrawal benefit (GLWB) rider with a $400,000 benefit base and a 5% annual withdrawal rate. The account value has fallen to $150,000. What does the rider guarantee?

• a.$20,000 a year for life, even if the account value falls to zero✓
• b.$20,000 a year only for as long as the account value stays above zero
• c.$20,000 a year until $400,000 has been paid out, and then payments end
• d.$7,500 a year for life, because the rate applies to the current account value

The guaranteed withdrawal is the 5% rate times the $400,000 benefit base, or $20,000, and the insurer must keep paying for life even after the account is exhausted. The $7,500 answer wrongly applies the rate to the lower account value. Ending at $400,000 of total payments describes a guaranteed minimum withdrawal benefit, not a lifetime one. Paying only while value remains would remove the guarantee the rider is purchased to provide.

Which statement correctly contrasts a non-traded REIT with an exchange-listed REIT?

• a.The REIT is exempt from the 90% income distribution rule, so its payouts are less certain over time
• b.Shares trade intraday at negotiated prices on an exchange, with liquidity similar to a listed REIT
• c.Redemptions are limited by caps and can be suspended by the REIT, and there is no active secondary market✓
• d.Upfront selling commissions and fees are lower, since no distribution network sells the shares

Non-traded REITs are illiquid: share redemption programs usually limit the amount redeemed and the REIT may suspend or end them, and shares do not trade on an exchange. Intraday trading describes a listed REIT. Non-traded REITs are sold through broker-dealers and typically carry heavy upfront charges, not lower ones. A REIT, listed or not, must distribute at least 90% of taxable income to keep its pass-through status; distributions may still be paid from offering proceeds or borrowings.

An ETF's shares trade at $50.60 while its NAV per share is $50.00. Which action by an authorized participant is expected, and what is its effect?

• a.It buys ETF shares on the exchange and redeems them for the basket of securities, pushing the price toward NAV
• b.It buys shares directly from the fund at $50.60, so the premium widens until the fund adjusts
• c.It delivers the basket of securities for new ETF shares and sells them, pushing the price toward NAV✓
• d.It delivers the basket for new ETF shares and sells them, pushing the NAV up toward the market price

At a premium, an authorized participant buys the basket of securities, deposits it with the ETF in exchange for creation-unit shares, and sells those shares at the higher price, adding supply that pulls the price back toward NAV. Buying shares and redeeming them is the discount trade. NAV is set by the underlying holdings, so selling shares cannot lift it. Authorized participants deal with the fund at NAV, not at the market price.

On December 14, an investor buys 1,000 shares of a mutual fund at a $20.00 NAV. The next day the fund pays a $1.50 per share long-term capital gain distribution, reinvested, and NAV drops to $18.50. What is the tax result in a taxable account?

• a.The $1,500 is taxed as a long-term capital gain distribution, though the shares were held one day✓
• b.The $1,500 is taxed as short-term gain, because the shares were held less than one year
• c.Nothing is taxed this year, because the $1,500 drop in NAV exactly offsets the distribution
• d.The $1,500 is not taxed until the shares are sold, because the distribution was reinvested

Capital gain distributions are reported by the shareholder as long-term gain regardless of how long the shares were held, and reinvesting does not defer the tax. The 1,000 shares were bought just before the distribution, so the investor owes tax on gains earned before ownership and received back part of the purchase price. The NAV drop does not cancel the taxable distribution; it only affects basis.Internal Revenue Code Section 852(b)(3)

An investor owns 100 shares bought at $50 (now $50), buys one 45 put for $1.50, and writes one 55 call for $2.00. What is the maximum loss at expiration?

• a.$500
• b.$5,000
• c.$450✓
• d.$550

The put establishes a floor $5 below the $50 cost, so the stock can lose $5 per share. The net premium is a $0.50 credit ($2.00 received minus $1.50 paid), which reduces the loss to $4.50 per share, or $450 on 100 shares. The $500 answer ignores the credit. The $550 figure adds the credit instead of subtracting it, and $5,000 assumes the stock could fall to zero with no protection.

A cereal manufacturer will buy 50,000 bushels of wheat in four months and fears higher prices. Which approach hedges that risk, and why?

• a.Sell wheat futures, so gains on the contracts offset a higher cash price at purchase
• b.Write wheat call options, so the premium received fully offsets a higher cash price
• c.Buy wheat futures, so gains on the contracts offset a higher cash price at purchase✓
• d.Buy wheat put options, so gains on the puts offset a higher cash price at purchase

A buyer who will need the commodity later is short the physical market and hedges by going long futures; if prices rise, the futures gain offsets the higher purchase cost. Selling futures is the producer's hedge and would add losses if prices rise. A put gains when prices fall, so it does not cover a price rise. Writing calls brings in only a limited premium and leaves the manufacturer exposed to a large increase.

A company reports total debt of $400 million and shareholders' equity of $250 million. What is its debt-to-equity ratio?

• a.0.62
• b.1.6✓
• c.2.6
• d.0.63

Debt-to-equity divides total debt by shareholders' equity: 400 / 250 = 1.6. The 0.63 figure turns the fraction upside down, 0.62 divides debt by total capital (debt plus equity), and 2.6 divides total capital by equity, so neither is the ratio asked for.NASAA Series 66 Content Outline, Topic II

A company generated $180 million in cash flow from operations and spent $65 million on capital expenditures. What is its free cash flow?

• a.$65 million
• b.$180 million
• c.$245 million
• d.$115 million✓

Free cash flow is operating cash flow minus capital expenditures: 180 - 65 = 115. Adding the two instead of subtracting overstates the figure, and reporting either input alone ignores the other.NASAA Series 66 Content Outline, Topic II

An asset has an average annual return of 8% and a standard deviation of 12%. What is its coefficient of variation?

• a.0.96
• b.1.5✓
• c.0.67
• d.4.0

The coefficient of variation is standard deviation divided by expected return: 12 / 8 = 1.5, a measure of risk per unit of return. Flipping the ratio gives 0.67, which is return per unit of risk.NASAA Series 66 Content Outline, Topic II

A project costs $1,000 today and returns $600 at the end of each of the next two years. The required return is 10%. What is its net present value, rounded to the nearest dollar?

• a.$100
• b.$41✓
• c.$200
• d.-$41

Discounting gives 600 / 1.10 + 600 / 1.21, about 545 + 496, or 1,041. Subtracting the 1,000 cost leaves about $41, which is positive, so the project exceeds its required return. Ignoring discounting gives 200.NASAA Series 66 Content Outline, Topic II

Real GDP for a year is $2,000 billion when measured at base-year prices, and nominal GDP is $2,200 billion. What is the GDP deflator?

• a.110✓
• b.90.9
• c.220
• d.10

The GDP deflator is nominal GDP divided by real GDP, times 100: 2,200 / 2,000 x 100 = 110, which indicates prices rose 10 percent from the base year. Inverting the ratio gives 90.9.NASAA Series 66 Content Outline, Topic II

An analyst estimates a stock will return 20% in a strong economy (25% probability), 8% in a normal economy (50%), and -12% in a recession (25%). What is the expected return?

• a.5.3%
• b.6.0%✓
• c.8.0%
• d.10.0%

The expected return weights each outcome by its probability: 0.25 x 20 + 0.50 x 8 + 0.25 x (-12) = 5 + 4 - 3 = 6.0 percent. The middle outcome alone overlooks the asymmetry of the tails, and a simple average of the three outcomes gives 5.3 percent, which ignores the weights.NASAA Series 66 Content Outline, Topic II

A company earns a return on equity of 15% and pays out 40% of its earnings as dividends. Assuming no new equity is issued and the ratios stay constant, what is its sustainable growth rate?

• a.6.0%
• b.9.0%✓
• c.15.0%
• d.25.0%

Sustainable growth equals return on equity times the retention ratio: 15% x (1 - 0.40) = 9.0 percent. Multiplying by the payout ratio gives 6.0 percent, which measures the dividend portion rather than retained growth.NASAA Series 66 Content Outline, Topic II

An issuer offers unregistered shares in a private placement to eight individuals in one state over twelve months. The issuer reasonably believes all eight are buying for investment, but it pays a commission to a finder who is not registered in the state for locating three of them. What is the result under the limited-offering exemption of the Uniform Securities Act?

• a.The exemption holds because only eight offerees were involved, which is under the ten-person limit, and the fee paid to the finder does not affect the count
• b.The exemption holds if the issuer notifies the Administrator within five business days of the first offer, and the remuneration to the finder is disclosed in that notice
• c.The exemption is lost because remuneration was paid for soliciting prospective buyers in the state✓
• d.The exemption holds because the finder, and not the issuer, made the offers to those three buyers

The limited-offering exemption covers offers to not more than ten persons in twelve months only if the seller reasonably believes the buyers are purchasing for investment and no commission or other remuneration is paid, directly or indirectly, for soliciting any prospective buyer in the state, except to a broker-dealer or agent registered under the Act; this finder is not registered. Staying under the headcount does not cure a paid solicitation. Who made the offers does not matter, because the issuer paid for the solicitation. A notice filing is a feature of a different exemption, the one for offers to existing security holders.Uniform Securities Act (1956) Sec. 402(b)(9)

During twelve months an issuer offers its unregistered securities in one state to four banks, three insurance companies and nine individuals, paying no commissions. Which offerees count toward the ten-person ceiling of the limited-offering exemption?

• a.Only those individuals who actually purchase, because an offeree who declines is not counted
• b.The nine individuals and the three insurance companies, because only banks are excluded
• c.Only the nine individuals, because banks and insurance companies are institutional buyers excluded from the count✓
• d.All sixteen offerees, because the ceiling applies to every person who receives an offer

The ten-person limit counts persons other than the institutional buyers covered by the separate institutional exemption, which reaches banks, insurance companies, investment companies, pension trusts and similar buyers without any numerical cap. Here nine individuals are counted, which is within the limit. The count is of persons to whom the offer is directed, not of those who end up buying.Uniform Securities Act (1956) Sec. 402(b)(8) and (9)

An issuer sells a promissory note that matures in eight months, is issued in $100,000 denominations, and is rated in the second-highest category by a nationally recognized statistical rating organization. Under the Uniform Securities Act, how is the note treated?

• a.It is not exempt because exempt notes must be guaranteed by a bank organized under federal law
• b.It is an exempt security because it matures within nine months, has a $50,000 minimum denomination, and carries a top-three rating✓
• c.It is exempt only after the issuer files a notice with the Administrator ten days before sale
• d.It is not exempt because only notes maturing within 90 days qualify as commercial paper, and the longer maturity here disqualifies the instrument

The Act exempts 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 is rated in one of the three highest categories by a nationally recognized rating organization. The note meets all three tests. No bank guarantee or advance notice is required.Uniform Securities Act (1956) Sec. 402(a)(10)

A corporation starts a profit-sharing plan under which employees receive investment contracts, and it wants the contracts exempt from registration. What must the corporation do to qualify for the employee-plan exemption?

• a.Register the plan by qualification and then withdraw the registration after one year
• b.File the plan with the Administrator within thirty days after the first employee enrolls
• c.Notify the Administrator in writing thirty days before the inception of the plan✓
• d.Offer the plan only to employees who are accredited investors with $1,000,000 of net worth

An investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing or similar benefit plan is exempt if the Administrator is notified in writing thirty days before the plan begins. The notice comes before inception, not after enrollment, and no accredited-investor test applies.Uniform Securities Act (1956) Sec. 402(a)(11)

A state Administrator concludes that a particular offering of NYSE-listed stock has features that make the listed-securities exemption inappropriate for that deal. Which statement about the Administrator's power over exemptions is correct?

• a.The Administrator may deny or revoke the exemption for that specific security after notice and an opportunity for hearing✓
• b.The Administrator may revoke it retroactively and void sales that closed before the order was entered
• c.The Administrator has no power to revoke it, because the exemption for listed securities is absolute and no order can reach a listed security
• d.The Administrator may revoke the exemption only if the issuer has been convicted of securities fraud, and then only after the securities have been delisted

The Administrator may by order deny or revoke the exemptions for listed securities, nonprofit issuers and employee-plan contracts, and the exempt transactions, as to a specific security or transaction. Notice and an opportunity for hearing are required, though a summary order is allowed pending a hearing. No order operates retroactively, and a seller who proves it did not know of the order is not in violation. Securities of the United States or a state are not subject to this power.Uniform Securities Act (1956) Sec. 402(c)

In an enforcement proceeding, a seller claims its transaction was exempt from registration. Who bears the burden of proving the exemption?

• a.Neither, because the exemption is presumed once the seller asserts it in good faith
• b.The buyer, because the buyer must show the sale did not qualify
• c.The Administrator, because the state must prove every element of a violation
• d.The seller, because the person claiming an exemption must prove it✓

The Act places the burden of proving an exemption, or an exception from a definition, on the person claiming it. The Administrator does not have to disprove it, and good faith alone does not create a presumption.Uniform Securities Act (1956) Sec. 402(d)

An investment adviser has no place of business in a state. During the preceding twelve months, six individuals who live in that state paid it for advice, and it has no institutional clients there. What is the adviser's registration status in that state?

• a.It need not register, because the limit is ten clients rather than five
• b.It need not register, because it has no place of business in the state
• c.It need only file a consent to service of process and a notice with the Administrator
• d.It must register, because it exceeded five non-institutional clients in twelve months✓

An adviser without a place of business in the state escapes registration only if its in-state clients are institutional, or if it had no more than five other clients during the preceding twelve months. Six individual clients is one too many, so registration is required. Lacking a local office does not by itself excuse registration.Uniform Securities Act (1956) Sec. 201(c)

A state-registered investment adviser asks when its registration lapses if it is never renewed. Under the model Uniform Securities Act, when does a registration or notice filing expire?

• a.On December 31 of the year, unless it is renewed✓
• b.On June 30 of the year following the filing
• c.On the first anniversary of its effective date, whenever that falls
• d.Ninety days after the Administrator's last examination

Under the model Act, every registration or notice filing expires on December 31 unless renewed, regardless of when during the year it first became effective. An anniversary-based expiration is a bracketed alternative some states use, not the standard text.Uniform Securities Act (1956) Sec. 201(e)

An investment adviser applies for state registration on June 1 and the Administrator takes no action and starts no proceeding. On what date does registration become effective?

• a.June 11 at noon, the tenth day after filing
• b.August 1 at noon, the sixtieth day after filing
• c.June 16 at noon, the fifteenth day after filing
• d.July 1 at noon, the thirtieth day after filing✓

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. Thirty days after June 1 is July 1. The Administrator may set an earlier date by rule or order or defer the date by order until thirty days after an amendment.Uniform Securities Act (1956) Sec. 202(a)

A corporation is registered as a broker-dealer in a state. Its president and a vice president, both officers, also sell securities to customers. Must each file a separate agent application?

• a.No, but each must pass a qualifying examination within thirty days of the firm's registration, and the firm must file a separate fee for each
• b.No, because registration of the firm automatically registers any agent who is a partner, officer or director✓
• c.Yes, but only the one who deals directly with retail customers
• d.Yes, because every person who sells securities in the state needs an individual registration in addition to the registration of the firm itself

Registration of a broker-dealer automatically constitutes registration of any agent who is a partner, officer or director, or who occupies a similar position. The same rule applies to an investment adviser and its representatives who are partners, officers or directors. Other employees who sell still need their own registration.Uniform Securities Act (1956) Sec. 202(a)

An applicant for investment adviser registration was convicted of a felony unrelated to securities eight years ago. The Administrator finds that denying registration is in the public interest. May the Administrator deny registration on that ground?

• a.No, because a felony conviction is a ground only if it occurred within five years
• b.No, because only felonies involving securities can support a denial
• c.Yes, because any felony conviction within the past ten years is a ground for denial✓
• d.Yes, but only after the applicant has also been enjoined by a court

Among the grounds for denial, suspension or revocation is a conviction within the past ten years of any felony, or of a misdemeanor involving a security or any aspect of the securities business. The felony need not relate to securities, and the order must also be in the public interest. An injunction is a separate, independent ground.Uniform Securities Act (1956) Sec. 204(a)(2)(C)

An investment adviser's representatives repeatedly churned client accounts, and the firm's principals never reviewed the activity or set any procedures. On which ground may the Administrator act against the firm itself?

• a.Failure reasonably to supervise its representatives to assure compliance with the Act✓
• b.Failure to pay the proper filing fee, which supports a suspension of the registration
• c.Insolvency, because churning shows the firm cannot meet its obligations as they mature
• d.Conviction of the representatives, which is imputed to the firm automatically

Failing reasonably to supervise representatives and employees to assure compliance is a stated ground for action against an investment adviser. Insolvency requires an actual finding about the firm's finances. A fee deficiency supports only a denial order, which must be vacated once the deficiency is corrected. Nothing in the facts describes a conviction.Uniform Securities Act (1956) Sec. 204(a)(2)(J)

A final court order against an applicant was disclosed in the application before registration took effect. When may the Administrator begin a suspension or revocation proceeding based solely on that disclosed order?

• a.Only after the first renewal, when the order can be reexamined
• b.Only within the ninety days following the effective date of the initial registration✓
• c.At any time during the life of the registration, because a disclosed order remains a continuing ground for denial, suspension or revocation
• d.Never, because disclosure on the application waives the order permanently

The Administrator may not institute a suspension or revocation proceeding solely because of a final judicial or administrative order that the applicant made known before the registration took effect, unless the proceeding begins within ninety days after registration. Orders that are stayed or under appeal do not count, and the limit does not apply to renewals.Uniform Securities Act (1956) Sec. 204(a)

An applicant for registration as an investment adviser representative has only one year of experience, but the Administrator finds the applicant well qualified by education and knowledge of the securities business. May the Administrator deny registration on the ground of insufficient experience alone?

• a.Yes, because experience is the only measure of qualification the Act permits
• b.No, because an order may not rest solely on lack of experience if the applicant is qualified by training or knowledge✓
• c.Yes, because every applicant must show at least three years of supervised experience
• d.No, because qualification can never be a basis for denying a representative

The Act bars an order based solely on lack of experience when the applicant is qualified by training, knowledge, or both. Lack of qualification can be a ground, but the Administrator must also consider that a representative working under a registered adviser's supervision need not have the same qualifications as the adviser.Uniform Securities Act (1956) Sec. 204(b)(3)

A buyer pays $20,000 for a nonexempt, unregistered security, receives $1,500 of income on it, and later sells it for $12,000. Ignoring interest, costs and attorneys' fees, what damages can the buyer recover under the civil liability provision?

• a.$18,500, the consideration less the income received, because a tender is always required
• b.$10,500, the amount realized on disposal less the income received
• c.$8,000, the consideration less the amount realized on disposal
• d.$6,500, the consideration less the income received and less the amount realized on disposal✓

A buyer who no longer owns the security recovers what would have been recoverable on a tender, less the value of the security when disposed of. A tender would return the consideration less income received: $20,000 - $1,500 = $18,500. Subtracting the $12,000 realized gives $6,500. Interest, costs and fees would be added.Uniform Securities Act (1956) Sec. 410(a)

A seller who violated the Act mails a buyer a written offer to refund the consideration with interest, less income received. The buyer, who still owns the security, ignores the offer for 45 days and then sues. What is the likely outcome?

• a.The suit proceeds, because a refund offer never affects the buyer's statutory rights and the buyer may reject it and sue within the full limitation period
• b.The suit is barred, because the buyer did not accept the written offer within thirty days of receiving it✓
• c.The suit proceeds, because the buyer has sixty days to respond to a refund offer
• d.The suit is barred only if the buyer also signed a waiver of the Act when the original purchase was made, regardless of any later refund offer

A buyer may not sue if, before suit and while owning the security, the buyer received a written offer to refund the consideration with interest, less income received, and failed to accept within thirty days. A buyer who no longer owned the security must instead reject the offer in writing within thirty days. This is the Act's rescission-offer defense.Uniform Securities Act (1956) Sec. 410(g)

A brokerage account agreement contains a clause stating that the customer waives all rights under the state securities act. How does the Uniform Securities Act treat that clause?

• a.It is valid for registration claims but void for anti-fraud claims
• b.It is valid if the customer initials it separately from the signature page
• c.It is void, because any provision binding a buyer or advice recipient to waive compliance with the Act is void✓
• d.It is valid for sophisticated customers but void for retail customers

The Act voids any condition, stipulation or provision binding a person who acquires a security or receives investment advice to waive compliance with the Act or any rule or order under it. The protection does not depend on the customer's sophistication, on the claim asserted, or on separate initials.Uniform Securities Act (1956) Sec. 410(i)

A salesman employed by a broker-dealer materially aids the firm in selling securities by means of misleading statements. The firm is liable to the buyer under the civil liability section. Can the employee also be held liable?

• a.No, because liability reaches only partners, officers and directors of the firm, and an employed salesman is never personally answerable to the buyer
• b.No, because only the firm that sold the security can be sued by the buyer
• c.Yes, but only for the commission he personally earned on the sale, and not for the consideration the buyer paid, interest or attorney's fees
• d.Yes, jointly and severally, unless he proves he did not know and could not have known the facts through reasonable care✓

Persons who control a liable seller, including partners, officers, directors, those performing similar functions, employees who materially aid the conduct, and broker-dealers and agents who materially aid it, are jointly and severally liable to the same extent. The defense is that they did not know and, with reasonable care, could not have known of the facts.Uniform Securities Act (1956) Sec. 410(c)

The Administrator subpoenas an agent to testify in an investigation. The agent refuses on the ground that the testimony may incriminate him. What is the effect of the Act's investigative provision?

• a.He must testify, but his testimony may be used against him in a later criminal case, because compelled testimony carries no protection against prosecution
• b.He must testify only if the Administrator first obtains a court order of immunity
• c.He may refuse to answer, because the Fifth Amendment privilege overrides the Administrator's subpoena and no statute can compel the testimony
• d.He must testify, and he may not then be prosecuted for the matter he was compelled to testify about, except for perjury or contempt✓

No one is excused from testifying or producing records on self-incrimination grounds, but an individual compelled to testify after claiming the privilege may not be prosecuted or penalized for the matter, apart from perjury or contempt committed in testifying. The model Act's immunity does not depend on a separate court order.Uniform Securities Act (1956) Sec. 407(d)

The Administrator learns that a firm is offering securities in violation of the Act. Which action does the Act authorize the Administrator to take without a prior hearing?

• a.Order each buyer to rescind and return the securities
• b.Issue a cease and desist order directed to the persons engaged in the prohibited activity✓
• c.Revoke the registration of every agent of the firm automatically
• d.Impose a criminal fine of $5,000 on the firm directly

The Administrator may issue a cease and desist order with or without a prior hearing, or may sue to enjoin the conduct. A court, on a proper showing, may also order rescission, restitution or disgorgement, and the Administrator need not post a bond. Criminal fines come only from a conviction obtained through a prosecutor.Uniform Securities Act (1956) Sec. 408

An established company wants to register its equity securities by filing, the notification method, in a state. Which requirement must the company meet?

• a.It sells only through underwriters that contract as agents rather than as principals
• b.It has reported a profit in each of its last ten fiscal years without interruption and has paid dividends in at least five of those years
• c.It prices the stock below $5 per share so that the offering stays small
• d.It has been subject to Exchange Act reporting, and has filed all required material, for at least 36 calendar months✓

Registration by filing requires, among other things, that the issuer has been subject to Section 12 of the Exchange Act and has filed all required material under Sections 13 and 14 for at least 36 calendar months, that underwriters contract to purchase in a principal capacity, and that an equity security be offered at not less than $5 per share.Uniform Securities Act (1956) Sec. 302(a)

A certified public accountant gives investment advice to some audit clients, charges a separate fee for it, and advertises herself as a financial planner. Is she an investment adviser under the Uniform Securities Act?

• a.No, because every accountant is excluded from the definition regardless of the activity
• b.No, because she advises fewer than six clients
• c.Yes, because holding herself out as giving investment advice for compensation takes her outside the accountant exclusion✓
• d.Yes, but only if her advice involves securities listed on an exchange

The definition excludes a lawyer, accountant, engineer or teacher only when the advisory services are solely incidental to the practice of the profession. It also includes financial planners and others who hold themselves out as providing investment advice for compensation. Separate fees and a financial planner label are incompatible with the exclusion.Uniform Securities Act (1956) Sec. 401(f)

A broker-dealer agent recommends securities to customers as part of his normal brokerage duties and receives only his customary commissions. Is he an investment adviser under the Act?

• a.Yes, because any recommendation of a security makes a person an investment adviser, whatever the circumstances in which the recommendation is made
• b.Yes, because commissions are a form of compensation for advice
• c.Yes, because commissions are a form of compensation for advice, and any compensation of that kind makes the person an investment adviser
• d.No, because advice that is solely incidental to brokerage and earns no special compensation is excluded✓

A broker-dealer or its agent is excluded if its advisory services are solely incidental to its brokerage business and it receives no special compensation for them. Ordinary commissions are not special compensation. The exclusion is lost if the firm charges separately for advice.Uniform Securities Act (1956) Sec. 401(f)

A partnership adviser is preparing its standard client contract. Which provisions must the contract contain, unless the Administrator allows otherwise?

• a.No compensation based on a share of capital gains, no assignment without the client's consent, and notice of partnership membership changes✓
• b.A guarantee of minimum returns, arbitration of all disputes, a term of one year, and a clause waiving the client's rights under the Act and state law
• c.A performance fee of at least 20% of profits, no assignment of the contract, annual renewal by the client, and a clause permitting the adviser to hold client securities
• d.Arbitration of disputes, assignment on thirty days' notice, and a custody waiver

The model Act makes it unlawful for an adviser to enter, extend or renew a contract unless it provides in writing that the adviser will not be paid a share of capital gains or appreciation, that the contract cannot be assigned without the client's consent, and, for a partnership, that membership changes will be reported. Fees based on total asset value averaged over a period remain allowed.Uniform Securities Act (1956) Sec. 102(c)

An investment adviser takes custody of a client's securities, and no state rule prohibits custody. What must the adviser do to comply with the Act's custody provision?

• a.Post a bond equal to twice the value of the assets in custody
• b.Hold the securities only in the adviser's own name for safekeeping
• c.Notify the Administrator that it has or may have custody✓
• d.Obtain written approval from the Administrator before taking custody

Taking or having custody of client securities or funds is unlawful if the Administrator by rule prohibits it, or, absent a rule, if the adviser fails to notify the Administrator that it has or may have custody. Bonds may be required by rule or order, but the statute sets no multiple.Uniform Securities Act (1956) Sec. 102(e)