NASAA Series 65 — All Questions

A forward contract differs from an exchange-traded futures contract because a forward is:

• a.Standardized in size and guaranteed by a central clearing organization
• b.Listed on an organized exchange and marked to market on a daily basis
• c.Privately negotiated and carries the credit risk of the counterparty✓
• d.Required to be settled in cash rather than by physical delivery of goods

Forwards are customized private agreements between two parties, so the terms fit the users but each side depends on the other's ability to perform. Futures are standardized in size, quality, and delivery date, trade on an exchange, and are novated to a clearinghouse that guarantees performance and requires daily mark-to-market variation margin. That counterparty guarantee is the defining difference.

A portfolio manager using a top-down approach begins the analytical process by:

• a.Analyzing the macroeconomy and then selecting the favored sectors✓
• b.Reviewing each holding's chart patterns and trading volume history
• c.Screening individual company financial statements for undervaluation
• d.Ranking securities strictly by their historical dividend payout ratios

Top-down analysis moves from the general to the specific: first the economic and interest rate outlook, then the industries expected to benefit, and only then individual securities within those industries. Bottom-up analysis reverses the order, starting with company fundamentals and largely ignoring the macro view. Chart and volume work is technical analysis, a different discipline entirely.

The point in the business cycle at which output stops declining and begins to recover is called the:

• a.Peak, the turning point that ends an expansion
• b.Recession, two consecutive quarters of falling output
• c.Trough, the turning point that ends a contraction✓
• d.Plateau, a period of entirely unchanging real output

The four phases of the business cycle are expansion, peak, contraction, and trough. The trough is the low point where activity bottoms and the next expansion begins. The peak is the opposite turning point. A recession is a phase of decline, not a turning point, and 'plateau' is not a recognized phase of the cycle.

Under Regulation D, a natural person qualifies as an accredited investor by having a net worth exceeding:

• a.$1 million, including the primary residence
• b.$5 million, excluding the primary residence
• c.$1 million, excluding the value of the primary residence✓
• d.$300,000 jointly with a spouse, including retirement plan account balances

The net worth test is more than $1 million, individually or jointly with a spouse or spousal equivalent, calculated without counting the primary residence as an asset. Counting the home is the older rule that no longer applies. Five million dollars is a threshold for certain trusts and entities, not for a natural person's net worth. The $300,000 figure belongs to the alternative joint income test, which looks at income in each of the two most recent years, not at net worth. Certain professional certifications also qualify.17 CFR 230.501(a)(5)

An investor holding a corporate zero-coupon bond in a taxable account must:

• a.Report no income until the bond is sold or reaches its stated maturity
• b.Pay tax only on the coupon payments actually received during the year
• c.Treat the entire gain received at maturity as a long-term capital gain
• d.Report the annual accretion of the discount as taxable interest income✓

A corporate zero pays no cash, but the Internal Revenue Code requires the holder to accrete the original issue discount and report it as interest income each year. Because tax is owed on income never received, this is called phantom income, and it is the reason corporate zeros are often recommended for tax-deferred accounts. Accretion on a municipal zero is generally tax-exempt, following the character of the underlying interest.

Tracking error in an index fund measures the:

• a.Total volatility of the benchmark index over the same measured period
• b.Divergence between the fund's return and its benchmark index's return✓
• c.Portion of the fund's return that is attributable to manager skill
• d.Difference between the fund's market price and its net asset value

An index fund aims to replicate a benchmark, so the relevant quality measure is how closely it does so. Tracking error captures the dispersion of the fund's returns around the index's returns and arises from expense ratios, cash balances, sampling rather than full replication, and trading costs. Price-versus-net-asset-value gaps describe premiums and discounts on exchange-traded products, not tracking error.

On a corporation's statement of cash flows, cash spent to repurchase the company's own common stock is classified as:

• a.A noncash item, because no funds actually leave the corporation
• b.An operating activity, because it arises from day-to-day business
• c.A financing activity, because it changes the firm's capital structure✓
• d.An investing activity, because it involves a purchase of securities

The statement of cash flows has three sections. Financing activities cover transactions with owners and lenders: issuing or repurchasing stock, paying dividends, and borrowing or repaying debt. Investing activities cover the purchase and sale of long-term assets and of securities of OTHER issuers. Operating activities cover the cash effects of running the business.

The NASAA model rule on business continuity and succession planning requires a state-registered adviser to:

• a.Maintain a written plan addressing disruptions and the loss of key personnel✓
• b.Purchase key-person life insurance on each of the firm's named principals
• c.Hold six months of operating expenses in a segregated bank account
• d.Name a successor firm that will assume all advisory contracts automatically

The model rule requires every state-registered adviser to establish, implement, and maintain written procedures for a business continuity and succession plan, based on the facts and circumstances of its business. The plan must provide for at least the protection, backup, and recovery of books and records, alternate means of communicating with clients, personnel and regulators, office relocation, assignment of duties to qualified persons if key personnel die or become unavailable, and otherwise minimizing service disruption and client harm. It does not require key-person insurance, a segregated reserve of operating expenses, or an automatic successor firm.NASAA Model Rule 203(a)-1A (2002 Act Rule 411(c)-1A)

A $1,000 par convertible debenture has a conversion price of $40. Its conversion ratio is:

• a.25 shares✓
• b.2.5 shares
• c.4 shares
• d.40 shares

Conversion ratio = par value / conversion price = $1,000 / $40 = 25 shares per bond. Parity (conversion value) is then 25 shares multiplied by the market price of the stock, so at a $44 share price the bond's parity value is $1,100. Conversion is attractive only when parity exceeds the bond's market price.

Under a tolerance-band rebalancing policy, a portfolio is rebalanced when:

• a.An asset class drifts beyond a preset percentage from its target weight✓
• b.The client deposits or withdraws any amount of cash from the account
• c.A fixed calendar interval such as the end of each quarter has elapsed
• d.The manager's economic forecast changes for the coming twelve months

Tolerance-band (percentage-of-portfolio) rebalancing triggers on drift: if equities have a 60% target and a 5-point band, a move past 65% or below 55% prompts trades. Calendar rebalancing trades on the date regardless of drift. Bands respond to actual market moves and can reduce unnecessary trading and taxes, but they require ongoing monitoring rather than a simple schedule.

A government or retail money market fund seeks to maintain which of the following characteristics?

• a.A floating net asset value that moves each day with market prices, as an equity mutual fund's does
• b.Principal insured up to $250,000 per depositor by the FDIC, as in a bank savings account
• c.A stable net asset value, typically $1.00 per share, with high liquidity✓
• d.Higher income from long-term corporate bonds with maturities of ten to thirty years

Under Rule 2a-7(c)(1), a government or retail money market fund may use amortized cost or penny rounding to keep a stable net asset value, typically $1.00 per share, while holding short-term, high-quality instruments that stay highly liquid. Other money market funds, such as institutional prime funds, must float their net asset value, which is why the stem names government or retail funds. An equity-style floating value is therefore not the goal of the funds described. Money market fund shares are neither FDIC-insured nor guaranteed by the government, so deposit-style insurance is wrong. The funds hold very short-term paper, not long-term bonds.17 CFR 270.2a-7(c)(1)

The Capital Asset Pricing Model (CAPM) calculates the expected return of a security as which of the following?

• a.The risk-free rate plus the security's standard deviation times the market's excess return
• b.The risk-free rate plus beta times the market risk premium✓
• c.The market return multiplied by beta, with no adjustment for the risk-free rate
• d.The security's dividend yield plus its expected earnings growth rate, as in the dividend growth model

CAPM states that a security's expected return equals the risk-free rate plus its beta multiplied by the market risk premium (the market return minus the risk-free rate). It links expected return to systematic risk as measured by beta. Using standard deviation, which measures total risk, in place of beta is not CAPM. Multiplying beta by the market return alone omits the risk-free rate, and dividend yield plus growth is the dividend growth model, which does not use beta.

An agent of a broker-dealer who engages in 'selling away' is doing which of the following?

• a.Executing excessive trades in a client's account to generate commissions
• b.Trading for the agent's own account ahead of a customer's pending order
• c.Selling securities transactions outside the scope of employment without the firm's knowledge or approval✓
• d.Recommending a security without reasonable grounds to believe it is suitable

Selling away means participating in private securities transactions outside the employing firm without giving it prior written notice and obtaining its approval where required; FINRA Rule 3280 prohibits it because the firm cannot supervise what it does not know about. Executing excessive trades to generate commissions is churning, trading ahead of a customer's order is front running, and recommending a security without a suitable basis is an unsuitable recommendation. Each is a separate violation, not selling away.FINRA Rule 3280

Under the NASAA model recordkeeping rule (Rule 203(a)-2) that implements the Uniform Securities Act, how long must a registered investment adviser generally preserve its required books and records?

• a.Three years from the end of the fiscal year of the last entry, with only the latest year kept on site
• b.At least five years from the end of the fiscal year of the last entry, the first two in the principal office✓
• c.Five years from the date each client account is closed, all of it kept in the adviser's principal office
• d.Six years from the date of each entry, held by the client's qualified custodian rather than the adviser

The NASAA model rule requires an adviser to preserve required books and records for not less than five years from the end of the fiscal year in which the last entry was made, with the first two years kept in the adviser's principal office. A shorter three-year period, counting the period from account closing, a six-year period, and leaving the records with a custodian are all wrong. The adviser itself is responsible for keeping the records.NASAA Model Rule 203(a)-2

Under NASAA's model rule on unethical business practices, what must an investment adviser obtain when it exercises discretion over a client's account, and by when?

• a.Written discretionary authority from the client within ten business days after the first discretionary trade✓
• b.Written discretionary authority signed by the client before each separate discretionary trade is placed
• c.Written approval of the Administrator before the account is opened, with a copy sent to the client
• d.Oral authority from the client, which remains sufficient for the life of the account if the adviser records it

The model rule treats exercising discretion without written discretionary authority from the client as an unethical practice, but allows the adviser ten business days after the first trade placed under oral authority to obtain it. Authority is not required for each individual trade, the Administrator does not approve discretionary accounts, and oral authority alone is never enough for lasting discretion. Discretion limited to the price or time of an order for a definite amount of a named security does not need written authority.NASAA Model Rule 102(a)(4)-1(b)

Under the Uniform Securities Act, which firm is excluded from the definition of a 'broker-dealer' in a given state?

• a.A firm with an office in the state that solicits retail clients throughout the state
• b.A firm with no office in the state that directs offers to dozens of individual residents
• c.A firm with an office in the state that deals with members of the public
• d.A firm with no place of business in the state that deals there only with other broker-dealers and institutions✓

Section 401(c) excludes a person with no place of business in the state if the person effects transactions there exclusively with issuers, other broker-dealers, or financial institutions and institutional buyers (or directs no more than 15 offers in twelve consecutive months to anyone else). An office in the state triggers registration whether the firm solicits retail clients or simply deals with the public, and directing offers to dozens of individual residents exceeds the 15-offer limit.Uniform Securities Act (1956) Section 401(c)(4)

Under the NASAA model brochure rule for state-registered investment advisers, if an adviser delivers its Part 2A brochure at the time the advisory contract is signed rather than at least 48 hours before, the client must have:

• a.A five-business-day right to terminate the contract without penalty✓
• b.A ten-business-day right to terminate, less a pro rata charge for services already rendered
• c.A signed waiver of the 48-hour period, after which the contract is fully binding at once
• d.A second copy of the brochure at the first annual review, within 120 days of fiscal year-end

The NASAA model brochure rule (Model Rule 203(b)-1(b)(1)) lets a state-registered adviser deliver the Part 2A brochure either at least 48 hours before the advisory contract is entered into, or at the time of signing if the client may terminate the contract without penalty within five business days. The federal Advisers Act rule, 204-3(b), only requires delivery before or at the time of the contract and has no 48-hour period, which is why the stem names the state rule. A ten-business-day window is the wrong length, a waiver is not an alternative the rule offers, and the annual delivery within 120 days is a separate requirement that does not cure late initial delivery.NASAA Model Rule 203(b)-1(b)(1) (Investment Adviser Brochure Rule; cf. 17 CFR 275.204-3(b))

Under the SEC Marketing Rule (Advisers Act Rule 206(4)-1), when an adviser pays a cash fee to a third-party solicitor for endorsing the adviser to prospective clients, the arrangement generally requires:

• a.Disclosure of the compensation on Form ADV only, with nothing disclosed to the referred client
• b.A written agreement with the solicitor, but client disclosure only if the solicitor is a current client
• c.A written agreement and disclosure of the solicitor's compensation to the client✓
• d.Disclosure to the client, but a written agreement only when annual payments exceed $10,000

Rule 206(4)-1(b) allows a paid endorsement only if the adviser has a written agreement with the endorser describing the scope of the activities and the compensation, and the client is told, clearly and prominently, that compensation was provided and the material terms of that compensation, along with any material conflicts. This replaced the old cash solicitation rule, 206(4)-3, which was rescinded. Disclosure on the adviser's own Form ADV does not substitute for telling the referred client, and disclosure is not limited to solicitors who are clients. The written-agreement requirement is waived only for de minimis compensation of $1,000 or less in twelve months, not $10,000.17 CFR 275.206(4)-1(b)

Under NASAA's model rule on minimum financial requirements for investment advisers, an adviser that has custody of client funds or securities, or discretion without custody, must generally do which of the following?

• a.Keep a fixed $100,000 net worth, with no bonding alternative available to the adviser
• b.Register as a broker-dealer instead once it takes custody of any client assets
• c.Keep client funds in its own operating account as long as a ledger shows each share
• d.Meet minimum net worth or bonding requirements set by the Administrator, or provide required notice✓

The NASAA model rule sets minimum net worth levels ($35,000 for an adviser with custody, $10,000 for discretion without custody), and an adviser that falls below its minimum must notify the Administrator by the close of the next business day; some states add bonding requirements. There is no single $100,000 figure, and no bonding-only alternative is mandated by the model rule. An adviser does not become a broker-dealer by taking custody of client assets. Commingling client funds in the adviser's own operating account is a separate prohibited practice that a ledger does not cure.NASAA Model Rule 202(d)-1

Which of the following is an example of an exempt transaction under the Uniform Securities Act (1956)?

• a.An unsolicited order from a customer to buy a specific security✓
• b.A solicited sale of an unregistered security to a retail customer
• c.A public advertising campaign for a new issue
• d.A cold-call solicitation of the general public

A non-issuer transaction effected through a registered broker-dealer on the customer's unsolicited order is exempt from registration because the customer initiated it. Other exempt transactions include isolated non-issuer sales and sales to banks and other institutional buyers. Exemption turns on how the sale occurs, so a solicited retail sale of an unregistered security, a public advertising campaign, and cold calling the public are not exempt.Uniform Securities Act (1956) Section 402(b)(3)

Under the Uniform Securities Act of 1956, a buyer's right to bring a civil suit under the civil-liability section is generally subject to a limitation period of:

• a.Three years after the buyer discovers the violation, but not more than ten years after the sale
• b.The earlier of two years after the buyer discovers the violation or five years after the violation
• c.Ten years after the contract of sale, extended for any period during which the seller concealed it
• d.Two years after the contract of sale, regardless of when the buyer discovers the violation✓

Section 410(e) of the 1956 Act provides that no person may sue under the civil-liability section more than two years after the contract of sale, with no extension for later discovery. The earlier of two years after discovery or five years after the violation is the rule of the 2002 Act, section 509(j)(2), so it is the wrong Act here. A three-year discovery period and a ten-year period extended for concealment appear in neither Act, and the Act does set a definite outside limit rather than leaving suits open.Uniform Securities Act (1956) s. 410(e); cf. USA (2002) s. 509(j)(2)

Under the Uniform Securities Act of 2002, a broker-dealer with no place of business in a state is registered in the home state of a bona fide preexisting customer. The customer is on vacation in that state for two weeks, and the firm deals only with that customer there. In the vacation state, the firm:

• a.Is exempt from broker-dealer registration for transactions with a bona fide preexisting customer who resides in another state✓
• b.Must register there before the first transaction, because a customer physically present in the state makes every transaction a transaction in that state
• c.Must file an application to register within 45 days after the first transaction there and may not trade more than 75 days after filing
• d.Is exempt only while it has no more than three customers in the state during the previous 12 months, counting this customer toward that limit

Under Section 401(b)(1)(E) of the 2002 Act, a broker-dealer is exempt from registration for transactions with a bona fide preexisting customer whose principal residence is not in the state, provided the firm is registered in the state where the customer resides. Where the customer is temporarily visiting, the customer's physical presence does not by itself require registration. The 45-day and 75-day sequence applies to a customer who lives in the state but was not present there when the relationship began, and the three-customer exemption is a separate, additional allowance that does not count this preexisting customer.Uniform Securities Act of 2002, Section 401(b)(1)(E)

An agent proposes to share in the profits and losses of a customer's account. Under the NASAA model rule on dishonest or unethical business practices of broker-dealers and agents, this is generally permitted only if:

• a.The agent and customer both agree to the arrangement in writing, without any approval from the firm that employs the agent
• b.The broker-dealer's compliance department approves the arrangement in writing, without any need to obtain authorization from the customer
• c.The agent obtains written authorization from both the customer and the broker-dealer the agent represents✓
• d.The agent personally guarantees the customer against any loss, and the customer agrees to the guarantee in writing

Under the NASAA model rule on dishonest or unethical business practices, an agent may share directly or indirectly in the profits or losses of a customer's account only with the written authorization of both the customer and the broker-dealer the agent represents. An agreement with the customer alone, or approval from the firm alone, is not enough, and an arrangement made verbally does not meet the written requirement. Guaranteeing a customer against loss is a separate prohibited practice that written consent does not cure.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, Section 2.d

In textbook monetary analysis, lowering the reserve requirement ratio (which the Federal Reserve has set at 0% since March 26, 2020) would most likely:

• a.Increase the money supply by allowing banks to lend a larger share of deposits✓
• b.Leave lending unchanged, since banks fund their loans from capital rather than from deposits
• c.Reduce the money supply, because banks would have to hold a larger share of each deposit in reserve
• d.Raise the federal funds rate by reducing the supply of reserves available to banks

A lower reserve requirement frees a larger share of each deposit for lending, so the money multiplier rises, the money supply expands, and interest rates tend to fall. This is an expansionary tool. The Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020, so today it steers rates mainly through other tools, but the textbook effect is unchanged. Claiming no effect ignores that banks lend out deposits beyond the reserves they must hold. Holding more in reserve and shrinking the supply of reserves describe a higher requirement, not a lower one.Federal Reserve Board, Reserve Requirements (federalreserve.gov/monetarypolicy/reservereq.htm)

Under FINRA Rule 2341, the maximum aggregate sales charge on shares of an open-end fund that has no asset-based sales charge is:

• a.8.5% of the public offering price✓
• b.6.25% of the public offering price
• c.9.0% of the net asset value
• d.5.0% of the net asset value

FINRA Rule 2341(d)(1) caps aggregate front-end and deferred sales charges at 8.5% of the offering price for a fund without an asset-based sales charge; the cap drops to 8.0%, 7.75% or 7.25% if the fund lacks rights of accumulation, quantity discounts, or pays a service fee. 6.25% is the cap that applies to funds with an asset-based sales charge. The charge is measured against the public offering price, not NAV, and 5% of NAV is not the rule.FINRA Rule 2341(d)

When two risky assets are combined, the portfolio's standard deviation is reduced the most when the assets have:

• a.Equal weights in the portfolio, whatever their correlation
• b.The lowest possible correlation with each other✓
• c.A correlation of +1.0, so that they move together
• d.A beta of exactly 1.0 relative to the market index

The lower, or more negative, the correlation between two assets, the greater the risk reduction from diversification, and a correlation of +1.0 provides none. Equal weights do not remove the effect of correlation, and a beta of 1.0 only describes market sensitivity. Portfolio risk is not a simple weighted average precisely because of correlation effects.

An investor selling part of a position in a taxable account can generally minimize the current tax by using which cost-basis method?

• a.Average cost per share, the IRS default method for individual stocks
• b.Specific identification of the highest-cost shares, if properly identified at the time of sale✓
• c.First-in, first-out, the default that sells the oldest, usually lowest-cost, shares first
• d.Last-in, first-out, applied automatically because the newest shares carry the highest cost

By specifically identifying and selling the highest-cost lots at the time of sale, an investor realizes the smallest gain and the lowest current tax. If the shares sold are not adequately identified, the basis of the shares acquired first is used (first-in, first-out), which usually means the oldest, lowest-cost shares and a larger gain. Average cost is available only for certain mutual fund shares, not individual stocks, and last-in, first-out is not an automatic default.IRS Publication 550, Stocks and Bonds (identifying stock or bonds sold)

Under the Uniform Securities Act (1956), the term person includes all of the following EXCEPT:

• a.A deceased individual✓
• b.A joint-stock company or an unincorporated organization
• c.A trust where the interests of the beneficiaries are evidenced by a security
• d.A government or a political subdivision of a government

The 1956 Act's definition of person lists an individual, a corporation, a partnership, an association, a joint-stock company, a trust where the beneficiaries' interests are evidenced by a security, an unincorporated organization, a government, and a political subdivision of a government. A deceased individual has no legal capacity to act or contract and is not treated as a person for these purposes.Uniform Securities Act (1956) Section 401(i)

Under the Uniform Securities Act of 1956, if no denial order or proceeding is pending, an application for registration as an agent or investment adviser generally becomes effective:

• a.At noon on the 30th day after a complete application is filed✓
• b.At noon on the 45th day after the application is filed, as the 2002 Act provides
• c.On the day the Administrator receives the filing fee, once no denial order is pending
• d.Only when the Administrator issues an order affirmatively granting the registration

Under the Uniform Securities Act of 1956, if no denial order is in effect and no proceeding is pending, a registration becomes effective at noon on the 30th day after the application is filed, though the Administrator may by rule or order set an earlier effective date. The 45th-day timing belongs to the 2002 Act, registration does not take effect on receipt of the fee, and no affirmative grant order is required.Uniform Securities Act (1956) Section 202(a)

Under the NASAA model rule on minimum financial requirements for investment advisers (Model Rule 202(d)-1), an adviser whose net worth falls below the required minimum must generally:

• a.Notify the Administrator within thirty days and include the shortfall in its next annual updating amendment
• b.Notify only its clients in writing by the next business day, then continue operating unless the Administrator objects
• c.Post a surety bond for the amount of the shortfall and file a financial report only if the Administrator requests one
• d.Notify the Administrator by the next business day and then file a report of its financial condition✓

Model Rule 202(d)-1(d) requires an adviser whose net worth is below the minimum ($35,000 with custody, $10,000 with discretionary authority only) to notify the Administrator by the close of business on the next business day, and then to file a report of its financial condition by the close of business on the next business day, including a trial balance, a statement of unsegregated client funds, the aggregate client ledger debit balances, and the number of client accounts. A thirty-day notice through an annual amendment is far too slow. Telling only clients does not satisfy the duty to notify the regulator. The current rule contains no surety-bond cure, and the financial report is mandatory rather than on request.NASAA Model Rule 202(d)-1(d)

Under the Uniform Securities Act of 2002, registrations of broker-dealers, agents, and investment advisers:

• a.Expire on December 31 each year and must be renewed with payment of fees✓
• b.Expire one year from their effective date, so each registrant renews on its own anniversary
• c.Remain effective for two calendar years before any renewal is required
• d.Renew automatically each December 31 with no filing or fee due unless the Administrator objects

Under the Uniform Securities Act of 2002, a registration is effective until midnight on December 31 of the year for which the application is filed, and it may be renewed each year by filing the required records and paying the fee. The one-year-from-effective-date rule is the 1956 Act's approach, registrations are not valid for two years, and renewal is not automatic without a filing and fee.Uniform Securities Act (2002) Section 406(d)

Under the Uniform Securities Act of 1956, which of the following is considered an offer or sale of a security?

• a.A gift of assessable stock, and a bonus of stock given as an inducement to buy another security✓
• b.A bona fide pledge of securities as collateral for a loan
• c.A bona fide gift of securities with nothing given in return
• d.A stock dividend distributed to existing shareholders, who give nothing of value for the shares received

The Uniform Securities Act of 1956 treats a gift of assessable stock as an offer and sale, and a security given or delivered with, or as a bonus on account of, a purchase as part of the thing offered and sold for value. A bona fide pledge or loan, a bona fide gift for which nothing of value is given, and a stock dividend for which stockholders give nothing of value are not offers or sales.Uniform Securities Act (1956) Section 401(j)

Under the National Securities Markets Improvement Act (Securities Act Section 18), which of the following is a federal covered security exempt from state registration?

• a.Shares of a company that trades only on the OTC Pink market and is not listed on an exchange
• b.A stock listed on the New York Stock Exchange or Nasdaq, and securities senior to it✓
• c.A security sold in an intrastate offering to residents of the issuer's home state
• d.Stock of a start-up sold to ten investors in the state under that state's own private placement exemption

Under Section 18 of the Securities Act of 1933, as amended by the National Securities Markets Improvement Act, securities listed or authorized for listing on a national securities exchange such as the NYSE or Nasdaq, along with securities of the same issuer that are equal or senior to them, are federal covered securities, so state registration is preempted (notice filings and antifraud authority remain). Over-the-counter stocks, intrastate offerings and offerings sold under a state's own exemption are still subject to state law.15 U.S.C. 77r(b)(1) (Securities Act of 1933, Section 18(b)(1))

Under the Uniform Securities Act of 1956, the private placement exemption from state registration generally applies to an offer directed to no more than:

• a.25 purchasers in the state during any 12 consecutive months, with no general solicitation or advertising and no commissions paid
• b.35 purchasers who are not accredited investors, counted over any 12 consecutive months, as under the federal Regulation D limit
• c.10 non-institutional persons in the state during any 12 consecutive months, with no commissions on non-institutional sales and buyers purchasing for investment✓
• d.10 persons of any type, counting institutional buyers, in any 12 consecutive months, if the seller files a notice with the Administrator

The 1956 Act's limited-offering exemption covers an offer directed to not more than ten persons in the state, other than institutional buyers, during any 12 consecutive months, if the seller reasonably believes the buyers are purchasing for investment and no commission is paid for soliciting buyers in the state (other than institutions). The figure 25 is the 2002 Act's count of purchasers, 35 is a federal Regulation D count, and institutional buyers are not counted toward the ten.Uniform Securities Act (1956) Section 402(b)(9)

Registration by qualification under the Uniform Securities Act (1956) is:

• a.Used only with a simultaneous SEC registration, becoming effective automatically when the federal registration becomes effective
• b.Limited to established issuers with a record of earnings, who register by a short notice-style filing
• c.The most detailed state registration method, used for securities not registered federally, effective when the Administrator so orders✓
• d.The method used exclusively by federal covered securities sold in the state

Any security may be registered by qualification, the fullest-disclosure method, used mainly for securities that are not registered with the SEC. A qualification registration becomes effective when the Administrator so orders. Automatic effectiveness with the federal registration describes registration by coordination, a short filing for established issuers with a record of earnings describes registration by notification, and federal covered securities are not registered by the states at all.Uniform Securities Act (1956) Section 304

Under the Uniform Securities Act (1956), which action is beyond the Administrator's own authority and instead requires a court?

• a.Denying, suspending, or revoking a registration
• b.Conducting investigations and issuing subpoenas
• c.Issuing an injunction to stop a violation✓
• d.Issuing a stop order on a registration

The Administrator may investigate and subpoena witnesses, deny, suspend, or revoke registrations by order, and issue stop orders against registration statements, but an injunction can be granted only by a court on the Administrator's application. Confusing an administrative order with a court injunction is the common trap.Uniform Securities Act (1956) Section 408

Under the Uniform Securities Act of 1956, a person convicted of a willful (criminal) violation is subject to a maximum penalty of:

• a.A fine of up to $10,000 and/or imprisonment of up to five years
• b.A fine of up to $5,000 and/or imprisonment of up to 3 years✓
• c.A fine of up to $1,000 and imprisonment of up to one year, as for a misdemeanor
• d.A fine of up to $5,000 only; imprisonment is available only after a second conviction

Section 409(a) of the 1956 Uniform Securities Act sets the criminal penalty for a willful violation at a fine of not more than $5,000, imprisonment of not more than three years, or both, with an optional five-year limit on bringing charges. A $10,000 fine with five years, or a $1,000 fine with one year, are not the Act's figures, and imprisonment is available on a first conviction, so the penalty is not limited to a fine. Some states have enacted larger penalties, so the question names the 1956 Act.Uniform Securities Act (1956) s.409(a)

Under the Uniform Securities Act (1956), a buyer who still owns the security receives, before suing, a written offer to refund the price plus 6% interest less income received (a rescission offer). The buyer:

• a.Keeps the right to sue even if the offer is ignored, because only a court can order rescission
• b.Has 90 days to accept, after which the offer lapses but all of the buyer's remedies are unaffected
• c.Loses the right to sue unless the buyer rejects the offer in writing within the 30-day period
• d.Loses the right to sue if the buyer does not accept the offer within 30 days of receiving it✓

The Act bars a civil suit if the buyer, while still owning the security, received a written refund offer and failed to accept it within thirty days of receipt. The reject-in-writing rule applies instead to a buyer who no longer owns the security. Ignoring the offer, relying on a longer acceptance window, or rejecting in writing while still owning the security does not preserve the suit.Uniform Securities Act (1956) Section 410(e)

An investment adviser's failure to disclose to a client, before a transaction is completed, whether it is acting as principal (trading from its own account) or as agent (broker) is:

• a.Acceptable if the capacity is disclosed orally after the transaction settles
• b.A concern only for federal covered advisers, not state-registered advisers
• c.A prohibited practice, because clients must know the capacity in which the firm acts✓
• d.Required only when the client asks which capacity the firm used

An adviser acting as principal in a trade with a client, or as broker for someone else in a trade for the client, must disclose its capacity in writing before the transaction is completed and obtain the client's consent. Nondisclosure is a prohibited practice. Late oral disclosure does not satisfy the requirement, the requirement does not depend on the adviser's registration category, and it applies whether or not the client asks.Investment Advisers Act of 1940 Section 206(3)

Under SEC rules implementing the Investment Advisers Act of 1940, an adviser with discretionary authority over client assets, custody, or a requirement of substantial prepaid fees (more than $1,200 per client, six months or more in advance) whose financial condition is reasonably likely to impair its ability to meet commitments to clients must:

• a.Promptly disclose that financial condition to affected clients✓
• b.Deliver an audited balance sheet to every client, whether or not it holds client assets
• c.Report it to the state Administrator but not to clients
• d.Disclose it only in the next annual updating amendment

Item 18 of Form ADV Part 2A requires an adviser with discretion, custody, or large prepaid fees to disclose any financial condition reasonably likely to impair its ability to meet its commitments to clients, and the fiduciary duty of full and fair disclosure calls for telling affected clients promptly. The audited balance sheet is required only of advisers that require prepayment of more than $1,200 per client six months or more in advance, not of every adviser. Telling only a regulator, or waiting for the next annual update, leaves clients exposed in the meantime.Form ADV Part 2A, Item 18 (SEC Release IA-3060, 2010)

An investment adviser's advertisement stating that a strategy is guaranteed to earn at least 10% per year is:

• a.Allowed if the adviser is SEC-registered, since registration vouches for the claim
• b.Permitted if it is sent only to qualified clients or accredited investors
• c.A prohibited, misleading practice, because advisers may not guarantee investment results✓
• d.Acceptable if it carries a disclosure that past performance is no guarantee of future results

A promise of a guaranteed return is an untrue or misleading statement that the SEC's marketing rule prohibits in an advertisement, and NASAA's model rule also lists guaranteeing a client that a specific result will be achieved as an unethical practice. Registration status, a limited audience, and a generic past-performance disclaimer do not cure a guarantee.17 CFR 275.206(4)-1(a); NASAA Model Rule 102(a)(4)-1(l)

Under SEC Rule 205-3, as adjusted by the Commission's order effective June 29, 2026, an adviser may charge performance-based fees to a qualified client, which includes a natural person with:

• a.At least $1.4 million under the adviser's management, or a net worth exceeding $2.7 million✓
• b.At least $1.1 million under the adviser's management, or a net worth exceeding $2.2 million
• c.At least $2.7 million in assets under management with the adviser, or a net worth exceeding $1.4 million
• d.A net worth exceeding $1 million, not counting the primary residence, or annual income above $200,000

Rule 205-3 lets an adviser charge a performance fee to a qualified client. By SEC order IA-6961, effective June 29, 2026, the assets-under-management test rose from $1.1 million to $1.4 million and the net worth test from $2.2 million to more than $2.7 million (primary residence excluded). The earlier figures apply only to contracts entered into before the effective date. Swapping the two figures reverses which test uses which amount. A net worth over $1 million excluding the home, or $200,000 of income, is the accredited investor standard, a different test.Advisers Act s.205(a)(1); 17 CFR 275.205-3(d)(1); SEC Release IA-6961

Under the SEC's brochure rule, if there are material changes, an investment adviser must deliver to each client annually either an updated brochure or a summary of material changes within:

• a.120 days of the end of the adviser's fiscal year✓
• b.90 days of the end of the adviser's fiscal year, the deadline for the annual updating amendment
• c.30 days after the end of the calendar year in which the changes occurred
• d.60 days after the annual updating amendment is filed with the SEC

The brochure rule requires delivery, free of charge, within 120 days after the end of the adviser's fiscal year, of either a current brochure or a summary of material changes that offers the full brochure, when there are material changes since the last annual updating amendment. The 90-day period is the deadline for filing the annual updating amendment, not for delivering it to clients. Calendar-year-end and filing-based periods are not the rule.17 CFR 275.204-3(b)(2)

Under NASAA's model rules, an investment adviser that requires prepayment of more than $500 per client, six or more months in advance, generally must:

• a.Register with the SEC regardless of its size
• b.File an unaudited balance sheet, as an adviser with discretion but no custody would
• c.File an audited balance sheet with the Administrator✓
• d.File its balance sheet within 30 days after receiving each prepayment

An adviser that requires prepayment of more than $500 per client six months or more in advance must file with the Administrator an audited balance sheet as of the end of its fiscal year, prepared under GAAP and audited by an independent CPA, within 90 days after the fiscal year ends. An unaudited balance sheet is the standard for an adviser with discretion but no custody. SEC registration depends on assets under management, not on prepaid fees, and the filing is tied to the fiscal year, not to each prepayment.NASAA Model Rule 203(c)-1(a)

Under the Uniform Securities Act (1956), the Administrator has jurisdiction over an offer to sell a security when the offer:

• a.Reaches the state only through a radio or television program that originates outside the state
• b.Originates in the state, is directed into the state, or is accepted in the state✓
• c.Is never subject to state jurisdiction if the issuer is located out of state
• d.Is published in a bona fide out-of-state newspaper of general, regular, and paid circulation that is distributed in the state

An offer is made in the state, and the Act applies, when the offer originates from the state or is directed to the state and received there; an offer to buy can also be accepted in the state. A radio or television program that originates outside the state, and an out-of-state newspaper of general, regular, and paid circulation, do not make an offer in the state. The issuer's location does not remove an offer that is directed into the state.Uniform Securities Act (1956) Section 414

Under the Uniform Securities Act (1956), an isolated nonissuer transaction is:

• a.A transaction that is exempt only when the customer's order was unsolicited
• b.An exempt transaction involving infrequent, isolated trades not made by the issuer✓
• c.A limited sale of new shares by the issuer to a few investors
• d.A transaction that is exempt from the antifraud provisions as well as from registration

An isolated nonissuer transaction, meaning an infrequent secondary trade that does not benefit the issuer, is exempt from registration. The unsolicited-order exemption is a separate exemption, a sale by the issuer is not a nonissuer transaction, and no exemption in the Act removes a transaction from the antifraud provisions.Uniform Securities Act (1956) Section 402(b)(1)

A long-term, fixed-rate U.S. Treasury bond is generally considered:

• a.Free of purchasing power risk but exposed to reinvestment risk
• b.Free of default risk and of interest rate risk, but exposed to purchasing power risk and reinvestment risk
• c.Free of interest rate risk because the coupon rate is fixed, but exposed to default risk
• d.Free of default risk but still exposed to interest rate risk and purchasing power risk✓

Treasuries carry the full faith and credit of the U.S. government, so default risk is treated as negligible. A long-term bond still has substantial duration, so its market price falls when yields rise, and its fixed coupons lose purchasing power if inflation accelerates. A fixed coupon does not remove interest rate risk, and Treasuries are not free of purchasing power risk. Treasury interest is taxable federally but exempt from state and local income tax.

An advisory contract with a retail client contains a provision stating that the adviser is not liable for any client losses except in cases of gross negligence. Such a provision is generally:

• a.A misleading hedge clause that may violate the antifraud provisions✓
• b.Acceptable whenever the client initials the paragraph at account opening
• c.Valid if the clause is fully described in Form ADV Part 2A
• d.An enforceable limitation permitted for all state-registered advisers

Section 215(a) of the Advisers Act voids any provision binding a person to waive compliance with the Act. In its 2019 fiduciary interpretation the SEC withdrew the Heitman no-action letter and said there are few if any circumstances in which a hedge clause in an agreement with a retail client is consistent with the antifraud provisions, even if the agreement says the client keeps its non-waivable rights. A client's initials do not cure the problem, disclosure of the clause in Form ADV does not make it valid, and state registration does not create an exception.Investment Advisers Act ss.206(1)-(2), 215(a); SEC Release IA-5248 (2019)

An investment adviser inadvertently receives client funds in the mail, such as a check made payable to the client. Under the SEC custody rule, the adviser avoids being deemed to have custody by:

• a.Holding it until the client's next quarterly review meeting, then returning it to the sender
• b.Forwarding it to the client's custodian within ten business days of receiving it
• c.Returning it to the sender promptly, and in any case within three business days of receipt✓
• d.Depositing it in a client-titled bank account over which the adviser has signing authority

Custody includes possessing client funds or securities, unless the adviser receives them inadvertently and returns them to the sender promptly, and in any case within three business days of receiving them. Holding the check until a quarterly meeting blows through that deadline, and forwarding it to a custodian on a ten-business-day schedule uses both the wrong recipient and the wrong period. Depositing it in an account the adviser can sign on is itself custody, because the adviser then has authority over the client's money.17 CFR 275.206(4)-2(d)(2)(i)

Under SECURE 2.0, the owner of a traditional IRA who was born in 1955 must generally begin required minimum distributions after reaching age:

• a.73✓
• b.59 1/2
• c.75
• d.70 1/2

SECURE 2.0 set the required beginning age at 73 for people who reach 72 after 2022 and 73 before 2033, which covers a person born in 1955. The age rises to 75 only for those born in 1960 or later. Age 70 1/2 was the rule before 2020, and 59 1/2 is when the early-distribution penalty generally stops applying, not when distributions become mandatory. Roth IRAs have no lifetime required distributions.IRC 401(a)(9)(C)(v) (SECURE 2.0 Act s.107)