NASAA Series 63 — All Questions

A trustee bought a stock after careful analysis, and two years later it has fallen 40%. The beneficiaries claim the purchase was imprudent. How does the Uniform Prudent Investor Act determine compliance?

• a.By the results the investment produced over the whole period in which the trust held it
• b.By the facts and circumstances existing when the trustee decided, and not by hindsight✓
• c.By whether the loss exceeded the risk tolerance the trust had when the stock fell
• d.By whether the trustee's returns trailed a broad market index over those two years

Section 8 states that compliance is determined in light of the facts and circumstances existing at the time of the trustee's decision or action, not by hindsight. Later performance, index comparisons and conditions at the time of the loss are hindsight measures.Uniform Prudent Investor Act (1994) §8

A trustee hires an outside manager after careful selection, sets the scope of the work in writing, and reviews the manager's results every quarter. The manager then makes an imprudent trade. What is the trustee's liability under the Uniform Prudent Investor Act?

• a.Liability for the loss, because a trustee may not delegate investment functions to an outside agent
• b.Liability shared equally with the manager, whatever care the trustee had taken in choosing the agent
• c.None, since the trustee used reasonable care in selecting, scoping and monitoring the agent✓
• d.Liability for the loss, since a trustee acts as guarantor of every decision made by a delegate

Section 9 permits delegation of investment functions and protects a trustee who exercises reasonable care, skill and caution in selecting the agent, setting the scope and terms, and periodically reviewing the agent's performance. The old rule against delegation was reversed, and the trustee is not a guarantor of the agent's decisions.Uniform Prudent Investor Act (1994) §9

An analyst learns on Monday that her firm's client will be acquired at a large premium. She had planned for months to sell shares of that client to pay a tuition bill, and she sells them on Tuesday under no written plan or contract. Under Rule 10b5-1, how is the sale treated?

• a.It is not on the basis of the information, because the tuition plan shows she did not use it
• b.It is not on the basis of the information, because she learned of the deal only a day earlier
• c.It is on the basis of the information only if the SEC proves the news caused her to sell
• d.It is on the basis of the information, because she was aware of it when she sold✓

Rule 10b5-1(b) treats a purchase or sale as on the basis of material nonpublic information if the person was aware of it when trading, subject only to the affirmative defenses. The defenses need a binding contract, instruction or written plan adopted before she became aware, and she had none. A personal reason for selling, the short time since learning the news, and a causation burden on the SEC are not the test.17 CFR 240.10b5-1(b)

A company director and the director's brother, who is neither an officer nor a director, each adopt a Rule 10b5-1 trading plan to rely on the affirmative defense. Which statement describes the cooling-off period before trading may begin under each plan?

• a.Both: 30 days after adoption, the cooling-off period for any person other than the issuer itself
• b.Director: later of 90 days or two business days after the 10-Q or 10-K, up to 120 days; brother: 30 days✓
• c.Both: the later of 90 days or two business days after the 10-Q or 10-K, capped at 120 days, as for any filer
• d.Director: 30 days after adoption; brother: the later of 90 days or two business days after the 10-Q or 10-K

For a director or officer, trading may not start until the later of 90 days after adoption or two business days after the issuer discloses results for the fiscal quarter in which the plan was adopted in a Form 10-Q or 10-K, subject to a 120-day maximum. A person who is neither the issuer nor a director or officer waits 30 days. The other pairings apply one period to both people or swap the two.17 CFR 240.10b5-1(c)(1)(ii)(B)

A man learns from his sister, who works at a public company, that the company is about to be acquired, and he buys shares. They have no agreement to keep information confidential. How does Rule 10b5-2 treat the information he received?

• a.A duty is presumed, and he may rebut it by showing he neither knew nor should have known she expected confidentiality✓
• b.No duty arises from kinship alone, so the SEC must show an express written agreement to keep it confidential
• c.The duty is conclusive for a sibling, so evidence about their history or the lack of an agreement is irrelevant
• d.The presumption reaches only a spouse or a parent, so a sibling is treated like any stranger to the company

Rule 10b5-2(b)(3) provides a duty of trust or confidence whenever a person receives material nonpublic information from a spouse, parent, child or sibling. The recipient may rebut it by establishing that he neither knew nor reasonably should have known the source expected confidentiality, given the parties' history, pattern or practice and the absence of any agreement. The rule does not require a written agreement, does not make the duty conclusive, and lists siblings alongside spouses and parents.17 CFR 240.10b5-2(b)(3)

An insider sells 6,000 shares at $50 shortly before an announcement that drops the price to $38. The loss avoided is $72,000 (a $12 drop on 6,000 shares). What is the maximum civil penalty a court may impose on the insider under Section 21A of the Exchange Act?

• a.$216,000, which is three times the loss avoided✓
• b.$72,000, which equals the loss avoided
• c.$900,000, which is three times the sale proceeds
• d.$144,000, which is twice the loss avoided

Section 21A caps the penalty on the person who committed the violation at three times the profit gained or loss avoided. Here that is 3 x $72,000 = $216,000. The penalty is measured by the loss avoided, not the sale proceeds ($300,000 x 3 = $900,000), and the multiple is three, not two or one.15 U.S.C. 78u-1(a)(2) (Exchange Act Section 21A)

On Monday an insider sells shares while aware of material nonpublic information. An investor buys the same stock that day. A second investor bought it a month earlier. Who may sue the insider under Section 20A of the Exchange Act, and for how much?

• a.Only the SEC, because Section 20A creates no private right of action and leaves recovery to penalties
• b.The investor who bought a month earlier, because that purchase came first, for any loss on the stock
• c.The investor who bought the same day, for up to the profit the insider gained or the loss avoided✓
• d.Both investors, because each owned the stock when the insider sold, for up to three times the profit

Section 20A gives a private right of action to a person who traded the same class of securities contemporaneously and on the opposite side. Total damages are limited to the profit gained or loss avoided. The investor who bought a month earlier did not trade contemporaneously, the treble figure is the SEC's civil penalty ceiling under Section 21A, and the private action does exist.15 U.S.C. 78t-1(a), (b)(1) (Exchange Act Section 20A)

An agent sells a customer $40,000 of notes issued by a friend's start-up, taking the customer's check directly. The transaction never appears on the broker-dealer's books, and the firm was not told. How does the NASAA policy classify the agent's conduct?

• a.Acceptable, because privately issued notes are not listed on an exchange and the customer paid the issuer
• b.Acceptable, if the agent discloses the sale to the firm on the next quarterly compliance questionnaire
• c.A transaction off the firm's regular books, effected without the firm's prior written authorization✓
• d.Acceptable, if the customer signs a statement that the firm took no part in recommending the notes

The policy lists effecting securities transactions not recorded on the regular books or records of the firm the agent represents as unethical, unless the firm authorized them in writing before execution. Exchange listing, the customer's disclaimer and after-the-fact reporting do not substitute for that authorization.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.b

An agent obtains his supervisor's oral approval and then executes a transaction that is not on the firm's books. The firm's written approval arrives a week later. How does the NASAA policy treat the transaction?

• a.It is unethical, because the firm's authorization had to be in writing before the transaction was executed✓
• b.It is acceptable, because a supervisor's oral approval binds the firm and the writing only confirms it
• c.It is unethical, because off-book transactions are barred even when the firm approves them in writing
• d.It is acceptable, because the written approval ratified the trade within a week of its execution

Off-book transactions are excepted only when the broker-dealer authorizes them in writing prior to execution. A supervisor's oral approval and a written approval after execution both fail that timing and form requirement. The exception does exist, so the transaction is not barred even with the firm's written approval.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.b

A day trader places visible limit sell orders at several price levels just above the best offer in a thinly traded stock, with no intention of letting them execute. After other participants lower their offers, he buys, then cancels the sell orders within seconds. The SEC has described this pattern as:

• a.Front running a customer's order
• b.Spoofing and layering of sell orders✓
• c.Marking the close with late purchases
• d.Painting the tape with matched trades

The SEC charged this conduct as a spoofing and layering scheme: non-bona fide visible orders meant to create a false appearance of interest, trading on the other side at the induced price, and canceling the orders before execution. Painting the tape and marking the close are other manipulative practices, and front running is trading ahead of a customer's order.SEC Release Nos. 33-10989 and 34-93131 (Sept. 27, 2021), In the Matter of Xuepeng Xie, Admin. Proc. File No. 3-20599

What distinguishes spoofing from an ordinary cancellation of a limit order?

• a.The order was entered with no intention of letting it execute against any counterparty✓
• b.The order was routed to a different broker-dealer than the one used for the later trade
• c.The order was visible to the other participants through the displayed quotation, not hidden
• d.The order was canceled before it executed, whatever the trader's reason for canceling it

Spoofing turns on non-bona fide orders, entered to create a false appearance of interest and then canceled before execution. A trader with a genuine order may cancel it for any reason, and displayed orders are visible by design. Routing through a different broker-dealer is not an element of the practice.SEC Release 33-10989 (In re Xuepeng Xie)

Two accounts controlled by the same trader are used so that one sells 5,000 shares of a thinly traded stock at $12.00 while the other buys 5,000 shares at $12.00, with no change in beneficial ownership. The aim is to make the stock look active. How is this treated?

• a.Prohibited only when a third party actually buys shares in reliance on the volume the trades show
• b.Acceptable, since the trader bore the commission on both sides, so the trades were bona fide executions
• c.Prohibited manipulation, because a trade without any change in beneficial ownership creates false activity✓
• d.Acceptable, since both accounts are carried at one broker-dealer and each order is entered at the prevailing price

The NASAA policy lists effecting a transaction that involves no change in beneficial ownership as a manipulative device, and Exchange Act Section 9(a)(1) reaches wash sales used to create a false appearance of active trading. Using one broker-dealer, paying commissions, or the prevailing price does not make the trade legitimate, and the prohibition does not wait for a third party to be misled.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.p(1)

A broker-dealer receives a customer's order to buy 1,000 shares and another customer's order to sell 1,000 shares of the same stock at the same price, and crosses them as agent for both. Under the NASAA policy on matched orders, this is:

• a.Prohibited unless both customers approve the cross in writing before it is executed
• b.Permitted only if the firm takes the other side of each order for its own account
• c.Prohibited, because the two orders match in size, time and price and the firm knew of both
• d.Not prohibited, because bona fide agency crosses for customers are excepted✓

The matched-order provision bars entering orders known to match in size, time and price for the purpose of creating a false appearance of active trading, and it expressly excepts bona fide agency cross transactions for customers. Matching size, time and price is not enough without that purpose, and the exception has no written-consent condition and does not require the firm to trade as principal.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.p(2)

Over three days an investor buys a thinly traded stock in small lots, each at a slightly higher price than the last, so that it looks active and rising. He then posts bullish messages about it and sells his shares. How is this treated?

• a.Acceptable, because the investor held no position in the stock before the buying began
• b.Prohibited only if the investor is an officer, director or large shareholder of the issuer
• c.Acceptable, because every trade was executed and reported at the then-prevailing market price
• d.Prohibited, since a series of trades that raises the price to induce others to buy is manipulative✓

Section 9(a)(2) and the NASAA policy prohibit a series of transactions, alone or with others, that creates actual or apparent active trading or raises the price, for the purpose of inducing others to buy or sell. The trades being real and reported does not cure the purpose, prior ownership is irrelevant, and the prohibition reaches any person.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.p(3); 15 U.S.C. 78i(a)(2)

A dealer tells a prospect that an issuer has signed a major contract, a statement the dealer has reasonable ground to know is false, in order to induce a purchase. The prospect does not buy. Under Exchange Act Section 9(a)(4), the dealer's statement is:

• a.Lawful, because the statement concerned an issuer's contract rather than the security's price
• b.Unlawful, since it was a false material statement made to induce a purchase✓
• c.Lawful, because the dealer made the statement orally rather than in a written communication
• d.Lawful, because the prospect did not buy, so no one relied on the statement or suffered a loss

Section 9(a)(4) makes it unlawful for a dealer, broker or other person selling or offering a security to make, for the purpose of inducing a purchase or sale, a statement that was false or misleading as to a material fact and that the person knew or had reasonable ground to believe was so. The provision turns on the false statement and its purpose, not on a completed sale, reliance, the form of the statement, or whether it concerns price.15 U.S.C. 78i(a)(4)

Exchange Act Section 9(a)(6) prohibits which of the following?

• a.Any purchase by a member of the underwriting syndicate while a distribution is in progress
• b.Offering a security at the market when the only market is one the dealer itself controls
• c.Publishing a quotation for a security that is not a bona fide bid or offer by the dealer
• d.Transactions to peg, fix or stabilize a security's price contrary to the SEC's rules✓

Section 9(a)(6) bars a series of transactions for the purpose of pegging, fixing or stabilizing a price in contravention of SEC rules, so stabilization that complies with the rules is not barred. Representing an offering as at the market when only a dealer-controlled market exists, and publishing quotations that are not bona fide, are separate provisions of the NASAA policy. A blanket ban on syndicate purchases is not what the section says.15 U.S.C. 78i(a)(6)

A buyer learns on November 18, 2026 that the price he paid was affected by a manipulative series of trades effected on March 4, 2024. Section 9(f) of the Exchange Act requires suit within one year after discovery and within three years after the violation. What is the last date to sue?

• a.March 4, 2027✓
• b.March 4, 2029
• c.November 18, 2027
• d.November 18, 2029

Both limits apply, so the earlier controls. One year after discovery is November 18, 2027, and three years after the violation is March 4, 2027, which comes first. March 4, 2029 uses five years after the violation, and November 18, 2029 uses three years after discovery.15 U.S.C. 78i(f)

What does Section 204A of the Investment Advisers Act require of an investment adviser?

• a.Written policies limited to trades in the adviser's own proprietary accounts, not trades by its personnel
• b.Written policies to prevent the adviser and its associated persons from misusing material nonpublic information✓
• c.A prohibition on every supervised person owning any security the adviser recommends to its clients
• d.Written policies on personal trading that the adviser files with the SEC for approval before using them

Section 204A requires every adviser to establish, maintain and enforce written policies and procedures reasonably designed, considering the nature of its business, to prevent the misuse of material nonpublic information by the adviser or any person associated with it. It does not ban personal trading, require SEC approval of the policies, or limit them to the adviser's own accounts.15 U.S.C. 80b-4a (Advisers Act Section 204A)

An access person of an adviser executed trades during the quarter ending September 30. Under Rule 204A-1, by what date must the quarterly transaction report be submitted?

• a.December 29, 90 days after quarter-end
• b.October 30, 30 days after quarter-end✓
• c.November 14, 45 days after quarter-end
• d.October 10, 10 days after quarter-end

Rule 204A-1(b)(2)(ii) requires each access person to submit a transaction report no later than 30 days after the end of each calendar quarter, covering all transactions in the quarter, so September 30 plus 30 days is October 30. The 10-day and 45-day figures come from the holdings-report timing (due 10 days after becoming an access person, with data current within 45 days), and a 90-day deadline does not appear in the rule.17 CFR 275.204A-1(b)(2)(ii)

Which arrangement is a wrap fee program under the Advisers Act brochure rule?

• a.A program charging a percentage of assets for advice, with each trade billed separately by ticket
• b.A brokerage account charging a commission on each trade with no separate fee for advice
• c.A program charging a fee only if account returns exceed a stated benchmark over the year
• d.A program charging one specified fee, not based on transactions, for advice and execution✓

A wrap fee program charges a specified fee or fees not based directly on transactions in the client's account for investment advisory services and the execution of client transactions, so the one fee covers both. Billing trades separately, charging only for outperformance, or charging commissions with no advisory service describes other fee structures.17 CFR 275.204-3(g)(5)

Two advisers sponsor the same wrap fee program, and sponsor B already delivers to clients a wrap fee program brochure containing everything Part 2A, Appendix 1 of Form ADV requires. What must sponsor A deliver to those clients under the brochure rule?

• a.Its own wrap fee program brochure, because each sponsor must deliver one to the clients it advises
• b.A Part 2B brochure supplement alone, which takes the place of the wrap fee program brochure
• c.No wrap fee program brochure, since another sponsor already delivers one with Appendix 1 information✓
• d.Its ordinary Part 2A brochure, with a section added that describes the wrap fee arrangement

A sponsor need not deliver a wrap fee program brochure if another sponsor of the program delivers one containing all the information in Part 2A, Appendix 1. The rule's note says a wrap fee brochure does not take the place of any required brochure supplements, and a supplement cannot stand in for the wrap brochure either.17 CFR 275.204-3(d)(2)

A customer of a SIPC member firm has two accounts: an individual account holding $620,000 of stocks and a joint account with her spouse holding $410,000 of stocks. The firm fails and none of the securities can be located. What is the most SIPC can restore across the two accounts?

• a.$910,000✓
• b.$1,030,000
• c.$500,000
• d.$750,000

The individual account and the joint account are different capacities, so each is tested against its own limit: the individual account is protected up to $500,000 of its $620,000, and the joint account is protected in full at $410,000, for $910,000. Treating all accounts as one pool yields $500,000, which wrongly merges separate capacities. The full $1,030,000 ignores the $500,000 cap on the individual account. $750,000 mixes up the $250,000 cash sub-limit with the overall limit.Securities Investor Protection Act, 15 U.S.C. 78fff-3(a)

One individual brokerage account at a SIPC member holds $330,000 in cash awaiting investment plus securities worth $140,000. The firm fails and all of the assets are missing. What is the most SIPC can restore for this account?

• a.$390,000✓
• b.$500,000
• c.$250,000
• d.$470,000

SIPC protects up to $500,000 per separate capacity, but no more than $250,000 of that may be cash. Cash is therefore limited to $250,000, and the $140,000 of securities is added in full: $250,000 + $140,000 = $390,000. $470,000 ignores the cash cap and simply adds the two balances, which is under $500,000. $250,000 treats the cash limit as the cap for the whole account. $500,000 assumes the overall limit alone governs.Securities Investor Protection Act, 15 U.S.C. 78fff-3(a)

Which of these customer losses falls within SIPC's protection?

• a.A failed member firm cannot return fully paid shares held for a customer✓
• b.A mutual fund position drops by a third during a broad market sell-off
• c.A rep's stock tip at a solvent firm falls 40% soon after the customer buys
• d.A regional bank holding a customer's savings deposit is closed by regulators

SIPC steps in when a member broker-dealer fails and customer cash or securities are missing from the firm. It does not insure against a decline in market value, and it does not compensate for poor advice from a solvent firm; that remedy is a claim through arbitration or a lawsuit. Bank deposits are covered by FDIC insurance, not SIPC.Securities Investor Protection Act of 1970, 15 U.S.C. 78aaa et seq.

A SIPC member firm is placed in liquidation. Which of the following assets in a customer's account falls outside SIPC protection?

• a.A Treasury note purchased through the member and held there
• b.Shares of a money market mutual fund held in the account
• c.A listed corporate bond that the member holds in street name
• d.A commodity futures contract carried in the account✓

Under the Securities Investor Protection Act the term 'security' excludes commodity or futures contracts, so those positions are not protected even at a SIPC member. Money market fund shares, Treasury securities and corporate bonds are all securities that SIPC protects, up to the limits, when they are missing from a failed member.Securities Investor Protection Act, 15 U.S.C. 78lll (definition of 'security')

SIPC membership is required of broker-dealers registered under Section 15(b) of the Exchange Act, with limited exclusions. Which firm is excluded?

• a.A firm that executes orders solely for institutional accounts and nobody else
• b.A firm whose entire business is distributing registered open-end fund shares✓
• c.A firm that introduces retail accounts and clears them through another firm
• d.A firm whose only retail business is taking orders in listed options

The statute excludes broker-dealers whose business consists exclusively of distributing registered open-end fund or unit investment trust shares, selling variable annuities, the business of insurance, or rendering investment advisory services. An introducing firm, an institutional-only firm and an options-only firm are ordinary registered broker-dealers outside those categories, so they must belong to SIPC.Securities Investor Protection Act, 15 U.S.C. 78ccc(a)(2)(A)

A client asks whether SIPC works like FDIC insurance backed by a government agency. Which statement about SIPC is accurate?

• a.A self-regulatory organization that examines member firms and imposes fines
• b.A private insurer that sells coverage to broker-dealers for annual premiums
• c.A bureau within the SEC that pays customer claims from appropriated federal funds
• d.A nonprofit corporation the statute says is not a U.S. government agency✓

SIPC is a congressionally created nonprofit membership corporation whose members are most registered broker-dealers; the Act states it is not an agency or establishment of the United States government. It is not part of the SEC, it does not examine or discipline firms as FINRA does, and it is not a commercial insurer selling policies.Securities Investor Protection Act, 15 U.S.C. 78ccc(a)(1)(A)

A retail customer files a claim with FINRA Dispute Resolution against a member firm and its rep over a disputed trade. Her account agreement contains no arbitration clause. Must the firm and the rep arbitrate?

• a.Only the firm must arbitrate, since the rep is not a member of FINRA itself
• b.No, because arbitration needs a submission agreement signed after the dispute arises
• c.No, because the Customer Code applies only under a written pre-dispute agreement
• d.Yes, because the customer's request makes arbitration required for the dispute✓

Rule 12200 requires a member or associated person to arbitrate a customer dispute connected with its business when arbitration is required by a written agreement or requested by the customer. A signed submission agreement is the route for elective arbitration under Rule 12201 and is not needed here. The rule covers associated persons as well as members, and a written agreement is only one of two triggers.FINRA Rule 12200

A customer bought a limited-partnership interest from a rep on April 3, 2018, and did not learn it was misrepresented until 2023. On October 15, 2024 she files a statement of claim with FINRA arbitration. What is the likely result?

• a.It is eligible because the six years run from her discovery of the problem in 2023
• b.It is eligible because FINRA defers to the state's statute of limitations here
• c.It is ineligible, and dismissal ends the claim in every forum, court included
• d.The panel may dismiss it as ineligible, though she may still sue in court✓

Rule 12206 makes a claim ineligible once six years have passed from the occurrence or event giving rise to it, here the April 2018 sale, with no discovery rule. Dismissal under the rule does not prevent the customer from pursuing the claim in court, where the applicable statute of limitations governs. The rule does not defer to state limitations periods for eligibility.FINRA Rule 12206(a)

A FINRA Hearing Panel bars a registered representative, and he wants to challenge the decision. What is the correct order of review?

• a.The Board of Governors, then the SEC, then a federal court of appeals
• b.The SEC first, then a federal district court, with no appeal inside FINRA
• c.National Adjudicatory Council, then the SEC, then a federal court of appeals✓
• d.National Adjudicatory Council, then a federal court of appeals, bypassing the SEC

A hearing decision is appealed within FINRA to the National Adjudicatory Council. A NAC decision can then be reviewed by the SEC under Exchange Act Section 19(d), and an SEC order is reviewable in a federal court of appeals. The SEC does not hear the case first, the Board is not the first appellate step, and a court of appeals reviews the SEC's order rather than FINRA's directly.FINRA Rules 9311 and 9370; Securities Exchange Act of 1934 Section 19(d)

Customers sue a brokerage firm and its president under the Exchange Act for a branch manager's Rule 10b-5 violation. The president controlled the manager. Under Section 20(a), he avoids joint and several liability only by showing that he:

• a.received no personal compensation from the branch's transactions
• b.did not know of the facts and could not have known with reasonable care
• c.acted in good faith and did not directly or indirectly induce the violation✓
• d.had assigned branch supervision in writing to a designated principal

Section 20(a) makes a person who controls a violator jointly and severally liable unless the controller acted in good faith and did not directly or indirectly induce the act. The 'did not know and could not have known' test is the Uniform Securities Act standard, not the federal one. Delegating supervision on paper and lack of personal profit are not statutory defenses under Section 20(a).Securities Exchange Act of 1934 Section 20(a), 15 U.S.C. 78t(a)

Investors sue a broker-dealer for damages under Section 10(b) and Rule 10b-5, alleging that it carelessly failed to check a false statement in a sales brochure. To win, they generally must show that the firm acted with:

• a.negligence, because broker-dealers owe customers a duty of care
• b.a material misstatement alone, as under Section 11 registration liability
• c.a prior SEC enforcement finding that the same statement was false
• d.scienter, meaning intent to deceive, manipulate or defraud investors✓

The Supreme Court held in Hochfelder that a private damages action under Section 10(b) and Rule 10b-5 requires scienter; negligence is not sufficient. A material misstatement without a culpable state of mind is the Section 11 style of liability, which does not apply to Rule 10b-5. A private plaintiff does not need a prior SEC action.Securities Exchange Act of 1934 Section 10(b) and Rule 10b-5; Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)

A buyer purchased stock on June 8, 2019, from a broker-dealer that made a fraudulent misstatement in the sale. She discovered the fraud on January 15, 2022. Under the federal limitations period for private securities-fraud claims, what is the last day to sue?

• a.January 15, 2027
• b.June 8, 2021
• c.January 15, 2024✓
• d.June 8, 2024

A private action for securities fraud must be brought by the earlier of two years after discovery of the facts or five years after the violation. Two years after discovery is January 15, 2024; five years after the sale is June 8, 2024; the earlier date controls. June 8, 2021 measures two years from the sale and January 15, 2027 measures five years from discovery, which swaps the anchors of the two periods.28 U.S.C. 1658(b)

A promoter sells one-acre vineyard parcels for $30,000 each, with a service agreement under which the promoter plants, tends, harvests and markets the grapes and pays each owner a share of pooled net proceeds. Which feature most directly satisfies the 'efforts of others' element of the Howey test?

• a.Net proceeds from all parcels are pooled and divided in proportion to acreage owned
• b.The promoter does all planting, harvesting and marketing; owners do no work✓
• c.Each buyer pays $30,000 in cash and receives a deeded one-acre parcel
• d.The promoter's brochure forecasts yearly returns of 8% to 10% for each owner

Howey asks whether a person invests money in a common enterprise expecting profits from the efforts of the promoter or a third party. The owners' reliance on the promoter to farm and sell the crop is the efforts-of-others element. The cash payment is the investment of money, the pooling supports a common enterprise, and the forecast shows an expectation of profits.SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

A company sells vending-machine units to retail buyers and operates the units itself, promising each buyer a fixed 12% annual payment. A salesperson says the units cannot be securities because the payout is fixed rather than variable. How does the Howey test treat the fixed return?

• a.Only resale appreciation in the value of the units counts as profits
• b.Profits exist only if the payout varies with the operator's earnings
• c.A fixed payment is still profits, so the units may be securities✓
• d.A fixed payment is loan interest, so the profits element is missing

In SEC v. Edwards the Supreme Court held that the profits Howey refers to are the return investors seek on their money, which can include fixed payments, so a fixed rate does not take a scheme outside the investment-contract definition. Limiting profits to variable payouts or to resale appreciation is the narrower reading the Court rejected, and a promised fixed return is not automatically a loan.SEC v. Edwards, 540 U.S. 389 (2004)

A resident pays for shares in a nonprofit housing cooperative solely to obtain an apartment to live in; the shares cannot be sold at a gain. Applying Howey as the Supreme Court did in Forman, are the shares securities?

• a.No, because buyers take the shares to live in the apartment, not for profit✓
• b.Yes, because the interest is labeled stock in the cooperative housing corporation
• c.Yes, because residents share building costs, which makes a common enterprise
• d.No, because investment contracts are limited to sales of land and crops

In Forman the Court looked to economic reality rather than labels and held that shares bought to obtain a place to live, not for profit, are not securities. Calling the interest stock does not decide the question, and shared costs among residents do not supply an expectation of profit. Investment contracts are not limited to land sales; Howey itself involved citrus groves, and many schemes outside real estate qualify.United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975)

Before any registration statement has been filed, an issuer's CFO tells dinner guests in conversation that the company will soon sell two million shares at about $12 and invites them to call to be put down for some. What is the result?

• a.A Section 5(c) violation, because no offer may be made before the filing✓
• b.A Section 5(b)(1) violation, because the talk is a prospectus that fails Section 10
• c.No violation, because oral offers are allowed at every stage before effectiveness
• d.A Section 5(a) violation, because the CFO has already sold the shares

Section 5(c) prohibits any offer to sell or buy, in writing or orally, before a registration statement is filed. Oral offers become permissible only once the filing is made, in the waiting period. No sale occurred, so Section 5(a) is not the provision breached, and Section 5(b)(1) concerns written prospectuses, which a spoken pitch is not.Securities Act of 1933 Section 5(c)

A registration statement has been filed but the SEC has not declared it effective. Which action by a selling-group rep is permitted?

• a.Handing a prospect the preliminary prospectus and talking through the offering orally✓
• b.Collecting a customer's full payment and holding it until the effective date
• c.Accepting a customer's order now and confirming it once the statement takes effect
• d.Mailing a letter of projected returns that is not a Section 10 prospectus

In the waiting period oral offers are allowed, and written offers must come through a Section 10 prospectus, such as the preliminary prospectus, or a compliant free writing prospectus. Selling or confirming a sale before effectiveness violates Section 5(a), and accepting payment would be part of an unlawful sale. A projection letter outside those forms is an impermissible written offer under Section 5(b)(1).Securities Act of 1933 Section 5(a) and Section 5(b)(1)

A broker-dealer will recommend units in a Regulation D private placement to accredited clients. The PPM includes audited financials, but the issuer refuses to hand over customer contracts and bank records, saying its counsel's due diligence memo is enough. What should the firm do?

• a.Proceed on the audited financials, since audited numbers end the need for checks
• b.Proceed because every purchaser is an accredited investor who can judge the risks alone
• c.Treat the refusal as a possible red flag and decide whether other sources suffice✓
• d.Rely on counsel's due diligence memo rather than making the firm's own inquiry

Notice 10-22 says a broker-dealer must follow up on red flags and may not rely on the issuer or its counsel in place of its own reasonable investigation. An issuer's refusal to supply needed information can itself be a red flag, and audited statements do not excuse follow-up when red flags exist. The buyers' sophistication or accredited status does not relieve the firm of its duty to investigate.FINRA Regulatory Notice 10-22

A broker-dealer completed diligence on a company for its 2023 Regulation D offering. The company launches a second private offering in 2025, again sold only to wealthy accredited investors. What does the firm need to do before recommending it?

• a.Update only the parts of the PPM that changed, since issuer and management are unchanged
• b.Rely on the issuer's record of paying investors in 2023 as proof of reliability
• c.Rely on the 2023 file, because accredited investors can evaluate the risks themselves
• d.Conduct a reasonable investigation of the new offering, since the 2023 work does not carry over✓

Notice 10-22 states that a broker-dealer must conduct a reasonable investigation in connection with each offering, even when a later offering is by the same issuer, and that sophisticated customers do not remove the duty. A prior offering that met its obligations is no guarantee the next will, particularly where the issuer depends on raising new capital.FINRA Regulatory Notice 10-22

Under a firm commitment agreement, a managing underwriter buys 2,000,000 shares from an issuer for resale to the public at $15.00 with a spread of $0.90 per share. The underwriters place only 1,650,000 shares with investors. How much does the issuer receive?

• a.$30,000,000
• b.$24,750,000
• c.$23,265,000
• d.$28,200,000✓

In a firm commitment the underwriter purchases the whole issue and bears the risk of unsold shares, so the issuer receives 2,000,000 x ($15.00 - $0.90) = $28,200,000 regardless of the 350,000 shares left unsold. $30,000,000 ignores the spread, $24,750,000 is the public price on only the shares sold, and $23,265,000 is the net on shares sold, which is how a best efforts deal would work out.Securities Act of 1933 Section 2(a)(11)

An adviser tells a client that a recommendation was prepared by an independent research boutique, which is true. Another adviser, who consults a widely published research report while forming his own advice, says nothing about it. Which statement reflects the NASAA model rule?

• a.The rule requires disclosure when a report is prepared by someone else and handed over as part of the service, but not when the adviser merely uses published research to form advice.✓
• b.Both advisers violate the rule, because every use of outside research must be disclosed in writing.
• c.Neither adviser violates the rule, because outside work is never a disclosure issue for advisers.
• d.Only the second adviser violates the rule, because published reports cannot be used for client advice at all.

Model Rule 102(a)(4)-1(i) makes it unethical to provide a client a report or recommendation prepared by someone other than the adviser without disclosing that fact. It carves out an adviser who uses published research reports or statistical analyses to render advice, or who orders a report in the normal course of providing service. Using published research silently is therefore allowed.NASAA Model Rule 102(a)(4)-1(i)

To execute orders that her firm would otherwise block, an agent opens an account in a fictitious name for a friend. What is the consequence under the NASAA model rule?

• a.It is permitted if the friend is the true beneficial owner of the assets and provides all of the funds used to trade in the account, since nothing is hidden.
• b.It is a violation only if the account actually trades in low-priced securities, because the rule is aimed at penny-stock manipulation by agents.
• c.It is a violation only if the agent receives a commission on the trades.
• d.Establishing or maintaining an account containing fictitious information to execute otherwise prohibited transactions is a ground for discipline.✓

Section 2.c identifies establishing or maintaining an account containing fictitious information in order to execute transactions that would otherwise be prohibited as a practice contrary to high standards of commercial honor. Beneficial ownership, the type of security and whether a commission was earned are not part of the test.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.c

The securities Administrator of State F asks the State G Administrator to issue a subpoena to a witness in State G for an investigation of conduct in State F. Under Section 407(e), when may the State G Administrator do so?

• a.If the activities alleged would be a violation of State G's Act had they occurred in State G✓
• b.Only if the witness has already been charged with a crime in State F or is a resident of State F, in which case the subpoena may issue
• c.Only if both states' Acts have identical registration requirements for the person involved, which the Administrator must first certify
• d.Never, because subpoenas may be used only for violations within the state issuing them, and not for any outside conduct

Section 407(e) lets the Administrator issue and enforce subpoenas in the state at the request of the securities administrator of another state if the activities alleged to be a violation would be a violation of the Act had they occurred in the state. Criminal charges or identical statutes are not required.Uniform Securities Act (1956, as amended by NASAA) §407(e)

An adviser's assistant signs in to a client's online brokerage account with the client's own username and password to look at holdings before a review meeting. No trade is placed. Under the model rule, how is this conduct treated?

• a.It is allowed for advisers holding discretionary authority over the account, but not for others
• b.It is an unethical business practice, because accessing a client's account with the client's own unique identifying information is listed✓
• c.It is allowed, because the client handed over the credentials willingly and nothing was traded
• d.It is allowed if the assistant records each login in the adviser's books and records

The rule lists accessing a client's account by using the client's own unique identifying information, such as a username and password, as an unethical practice. The client's willingness to share the credentials does not cure it, and viewing without trading is still access. Discretionary authority and logging do not change the result; the only carve-out is the narrow data aggregation arrangement described in the rule.NASAA Model Rule 102(a)(4)-1(v)

An adviser uses data aggregation software that displays clients' outside accounts in one view. Which condition must be true for the software to fall outside the prohibition on using a client's own login credentials?

• a.The adviser has filed a notice with the Administrator
• b.The software company has an agreement with the custodian that permits the access, and the adviser can only view the data✓
• c.The software can place trades for the client whenever the client has signed a written trading authorization with the adviser
• d.The adviser keeps each client's password in encrypted form so that it can reconnect to the account after any outage, with no manual login

The footnote carves out data aggregation only where the adviser neither knows nor has access to the client's passwords, the aggregator and the custodian have an agreement permitting the back-door access, and the data is read-only. Storing the passwords, even encrypted, gives the adviser access, and trade capability defeats the read-only condition. No notice filing is part of the carve-out.NASAA Model Rule 102(a)(4)-1(v) and footnote

An adviser's advertisement shows the results of only the three best-performing holdings taken out of a client's portfolio. What does the model rule require for this presentation?

• a.The client who owns the portfolio must consent in writing
• b.The advertisement must also show a broad market index over the same period
• c.The Administrator must approve the extracted figures in writing at least ten days before the advertisement is first used by the adviser in any mailing
• d.The advertisement must provide, or offer to provide promptly, the performance of the total portfolio from which the holdings were taken✓

Extracted performance is the result of a subset of investments taken from a portfolio. The rule bars it unless the total portfolio's results accompany it or are offered promptly, so the reader can see what the highlighted subset left out. A benchmark, client consent or regulatory approval is not the requirement, and the rule also forbids any statement that the Administrator reviewed performance.NASAA Model Rule 102(a)(4)-1(m)(4)(v)

An adviser plans to publish projected returns for a model portfolio in a mailing to retail prospects. Which step is required before the figures can be used?

• a.Showing the projections only for periods in which markets rose, with a note that downturns are excluded
• b.Submitting the projections to the Administrator at least ten days before the mailing
• c.Adopting policies reasonably designed to ensure the figures are relevant to the likely financial situation and objectives of the intended audience✓
• d.Restricting the mailing to prospects who have signed a discretionary agreement

Hypothetical performance includes model portfolio results, backtested results and targeted or projected returns. The adviser must adopt and implement policies to make it relevant to the audience, explain the criteria and assumptions used, and explain the risks and limitations of relying on it. Pre-filing and discretionary agreements are not conditions, and showing only rising markets would make the presentation unfair and unbalanced.NASAA Model Rule 102(a)(4)-1(m)(4)(vi)

Which presentation in an adviser's advertisement is hypothetical performance under the model rule?

• a.The net results of one real client account over the last five years, after deduction of all advisory fees paid
• b.Results from a predecessor firm's accounts that are shown in compliance with the predecessor performance conditions
• c.Results produced by applying a strategy to past data from periods when the strategy was not actually in use✓
• d.The combined results of all client accounts that were actually managed in the strategy, shown as one composite

Hypothetical performance means results no portfolio of the adviser actually achieved, and the rule lists model portfolios, backtested results and targeted or projected returns. A composite of real accounts and a real account's net results were actually achieved. Predecessor performance shown in compliance with its own conditions is expressly excluded from the hypothetical category.NASAA Model Rule 102(a)(4)-1(m)(5)(ix)-(x)

An adviser's website lets visitors run simulations showing the likelihood of various investment outcomes under different strategies. To avoid treating the tool's output as hypothetical performance, which disclosure is required?

• a.That the outputs have been tested against the adviser's actual client accounts for at least five years
• b.That results may vary with each use and over time, plus a description of the tool's criteria, methodology, limitations and key assumptions✓
• c.That the tool's results are guaranteed to fall within the range displayed
• d.That each visitor must be an accredited investor before running a simulation

An interactive analysis tool is outside the hypothetical performance definition if the adviser describes the criteria, methodology, limitations and key assumptions, explains that results may vary with each use and over time, describes the investment universe and any favoured investments, and discloses that outcomes are hypothetical. Guaranteeing a range would itself be misleading, and neither backtesting against client accounts nor investor status is required.NASAA Model Rule 102(a)(4)-1(m)(5)(x)(A)