NASAA Series 66 — All Questions

A wealthy individual buys and sells stocks for her own account, sometimes several times a day. She has no customers, quotes prices to no one and holds herself out to no one. Must she register as a dealer under the Exchange Act?

• a.Yes, because she executes every trade through a broker, not directly
• b.Yes, because dealer status turns on the number of trades a person makes each day
• c.Yes, because anyone buying and selling for her own account is a dealer
• d.No, because own-account trading that is not a regular business is excluded✓

Section 3(a)(5)(A) defines a dealer as a person engaged in the business of buying and selling securities for her own account through a broker or otherwise, and Section 3(a)(5)(B) excludes a person who buys or sells for her own account but not as a part of a regular business. A dealer is in the business of dealing with others. This investor has no customers, makes no quotes and holds herself out to no one, so her trading, however frequent, is investing for herself and not the business of dealing. The number of trades in a day is not the test. The definition itself reaches own-account trading through a broker or otherwise, so using a broker is not the test either, and own-account trading is not enough on its own to make someone a dealer.Securities Exchange Act Sec. 3(a)(5)(A)-(B)

Which dealer is a market maker in a security under the Exchange Act definition?

• a.One that sells the security as agent for its customers and is paid a commission on each trade
• b.One that buys the security for its own account only after receiving a customer order to buy
• c.One that bought the security from the issuer in a public offering and resold it to investors
• d.One that holds itself out to buy and sell it for its own account on a continuous basis✓

Section 3(a)(38) defines a market maker, in part, as a dealer who holds himself out, by entering quotations in an inter-dealer system or otherwise, as willing to buy and sell the security for his own account on a regular or continuous basis. Buying only to fill a customer order already in hand is riskless principal trading, which involves no standing quotation. Acting as agent for a commission is the role of a broker. Buying from an issuer in an offering is the activity of an underwriter.Securities Exchange Act Sec. 3(a)(38)

Which of the following persons is NOT within the Exchange Act definition of a person associated with a broker-dealer for registration purposes?

• a.A receptionist whose duties are solely clerical or ministerial✓
• b.A director who sits on the board but takes no part in selling securities
• c.A holding company that controls the broker-dealer through ownership
• d.A branch manager who supervises sales staff but never takes orders

Section 3(a)(18) covers any partner, officer, director or branch manager, any person controlling, controlled by or under common control with the broker-dealer, and any employee, but it excludes persons whose functions are solely clerical or ministerial from the registration provisions of Section 15(b). The branch manager, the controlling corporation and the director are each named in the definition whether or not they sell.Securities Exchange Act Sec. 3(a)(18)

A broker-dealer agrees to offer and sell an issuer's new shares to the public on a best-efforts basis, buying none of them for itself. How is the firm treated under the Securities Act of 1933?

• a.As neither, because a firm with no unsold-share risk is only a selling agent
• b.As a dealer only, because it never took title to any of the shares
• c.As an underwriter only if it later buys the unsold shares from the issuer
• d.As an underwriter, because it sells for the issuer in a distribution✓

Section 2(a)(11) defines an underwriter as anyone who purchases from an issuer with a view to distribution, or who offers or sells for an issuer in connection with the distribution, or who participates in such an undertaking. A best-efforts selling agent offers and sells for the issuer, so it qualifies without buying any shares. Taking title and bearing the risk of unsold shares are features of a firm-commitment underwriting, not requirements of the definition.Securities Act of 1933 Sec. 2(a)(11)

An individual, operating alone with no firm behind him, regularly effects securities transactions for customers in a state where he has a place of business. How does the Uniform Securities Act classify him?

• a.As both a broker-dealer and an agent, so he must file two separate registrations
• b.As a broker-dealer, since the agent definition excludes individual broker-dealers✓
• c.As an agent, because the definition of agent covers any individual who effects sales
• d.As neither, because a one-person operation has no employer or principal to represent

Section 401(c) defines a broker-dealer as any person, which includes an individual, engaged in the business of effecting transactions for others or for his own account. Section 401(b) defines an agent as an individual other than a broker-dealer who represents a broker-dealer or issuer, so a sole proprietor is the broker-dealer and not an agent. One registration covers him. The lack of an employer does not take him outside the definition of broker-dealer.Uniform Securities Act Sec. 401(b), 401(c)

A bank lets a registered broker-dealer sell securities on its premises. For the bank not to be treated as a broker, which payment to a teller who is not a registered representative is permitted for referring a customer?

• a.A nominal one-time cash fee of a fixed amount, paid whether or not a trade follows✓
• b.A fixed fee paid only when the referred customer completes a securities purchase
• c.A quarterly bonus based on the number of referred customers who buy securities
• d.A share of each commission the broker-dealer earns on the referred customer's trades

Under Section 3(a)(4)(B)(i)(VI), bank employees who are not qualified associated persons of the broker-dealer may be paid for a referral only if the fee is a nominal one-time cash fee of a fixed dollar amount and payment is not contingent on whether the referral results in a transaction. A fee paid only on a purchase, a share of commissions and a bonus tied to purchases are each incentive compensation tied to a brokerage transaction.Securities Exchange Act Sec. 3(a)(4)(B)(i)(VI)

A registered agent of a broker-dealer is moved into a compliance role on June 1 and from then on no longer effects or attempts to effect any securities sales. Whose duty is it to tell the Administrator?

• a.Only the agent, who reports the change when renewing on December 31
• b.Both the agent and the broker-dealer must promptly notify the Administrator✓
• c.Only the broker-dealer, since the agent is still its employee
• d.Neither, because the agent stays employed by the same registered firm

Section 201(b) provides that when an agent begins or terminates a connection with a broker-dealer, or begins or terminates the activities that make him an agent, the agent as well as the broker-dealer must promptly notify the Administrator. Ceasing all sales activity ends the activities that make him an agent, so notice is due from both even though employment continues. Waiting for the annual renewal is not prompt notice, and the duty is not limited to the firm or to the agent.Uniform Securities Act Sec. 201(b)

A broker-dealer hires an individual who files an agent application on June 2. The individual begins soliciting customers on June 10, with no denial order or proceeding pending. Who has violated the Uniform Securities Act?

• a.Only the broker-dealer, because the individual was relying on its employment
• b.Only the individual, because the broker-dealer is itself registered with the state
• c.Neither, because a pending application permits the agent to begin soliciting
• d.Both the individual, for acting unregistered, and the firm, for employing him✓

Registration becomes effective at noon of the thirtieth day after filing, which here is July 2 unless the Administrator acts earlier. On June 10 the individual was not registered. Section 201(a) makes it unlawful for the individual to transact business as an agent unregistered, and Section 201(b) makes it unlawful for the broker-dealer to employ an agent who is not registered. The firm's own registration does not cover its agents, and a pending application confers no authority to solicit.Uniform Securities Act Sec. 201(a), 201(b)

The president of a registered broker-dealer handles only administrative operations and has never solicited a customer or taken an order. Is she an agent under the Uniform Securities Act?

• a.Yes, because registering the firm automatically registers its officers as agents
• b.No, because an officer is an agent only if she otherwise meets the definition✓
• c.No, but only if she holds no ownership interest in the firm or its parent
• d.Yes, because every officer of a registered broker-dealer is an agent of it

The last sentence of Section 401(b) states that a partner, officer or director of a broker-dealer is an agent only if he otherwise comes within the definition, meaning he represents the firm in effecting or attempting to effect purchases or sales. The president does not. Section 202(a) registers an officer automatically only if the officer is an agent, so it does not turn her into one. Ownership is irrelevant to the test.Uniform Securities Act Sec. 401(b)

An agent of a registered broker-dealer is convicted of a felony. The agent is not a partner, officer or director. Can the Administrator revoke the broker-dealer's registration on that ground alone?

• a.No, because the Administrator may act only against the agent's own registration
• b.No, but the Administrator may act if the firm failed to supervise reasonably✓
• c.Yes, if the felony occurred within ten years of the Administrator's order
• d.Yes, because a firm answers for every conviction of one of its agents

The official comment to Section 204(a) says an ordinary agent's disqualification may not automatically be used against the broker-dealer, but when it traces to inadequate supervision the Administrator may proceed against the firm under clause (J), with a finding that action is in the public interest. The ten-year look-back in clause (C) bears on the person convicted, not on imputing the conviction to the firm. The firm is not shielded entirely, because clause (J) reaches it directly.Uniform Securities Act Sec. 204(a)(2)(J)

The Administrator summarily suspends an agent's registration pending a proceeding. Who must promptly be notified, and when is the hearing set?

• a.The agent and the employer, with a hearing within 15 days after a written request✓
• b.The agent and the employer, with a hearing within 30 days after a written request
• c.The agent and the employer, with no hearing unless the Administrator orders one
• d.The agent alone, but not the employer, with a hearing within 15 days after a written request

Section 204(c) requires the Administrator to notify promptly both the registrant and, for an agent, the employer or prospective employer, of the order and the reasons, and to set the matter down for hearing within fifteen days after receiving a written request. The 30-day period belongs to withdrawal under Section 204(e). The agent may demand a hearing, so the order does not stand without one.Uniform Securities Act Sec. 204(c)

An issuer's treasurer, paid a $1,500 bonus for each employee who enrolls, offers company stock to existing employees under a purchase plan. Assume no other exclusion applies. Is the treasurer an agent under the Uniform Securities Act?

• a.No, because the treasurer represents the issuer and not a registered broker-dealer
• b.No, because every sale to existing employees is excluded from the definition of agent
• c.No, because the Act regulates offers to the public and not offers to employees
• d.Yes, because paying for solicitation removes the employee exclusion✓

Section 401(b) defines an agent to include an individual who represents an issuer in effecting sales. Clause (1)(D) excludes sales to existing employees, partners or directors only if no commission or other remuneration is paid directly or indirectly for soliciting anyone in the state. The per-enrollment bonus is such remuneration, so the exclusion is lost. Representing an issuer is itself within the definition, and the Act applies to employee offerings.Uniform Securities Act Sec. 401(b)(1)(D)

An applicant for agent registration has never worked in the securities industry but has passed the required examination and completed the sponsoring broker-dealer's training. May the Administrator deny registration solely for lack of experience?

• a.No, since training or knowledge can qualify an applicant without experience✓
• b.Yes, because an applicant with no prior industry employment fails the experience standard
• c.Yes, because an agent must show the same experience that a broker-dealer must show
• d.No, because passing the examination ends the Administrator's review of qualifications

Section 204(b)(3) bars an order solely on lack of experience when the applicant is qualified by training or knowledge or both, and Section 204(b)(4) tells the Administrator that an agent working under a registered broker-dealer's supervision need not have the same qualifications as the firm. Passing the examination does not end review, because the Administrator may still consider other qualification factors.Uniform Securities Act Sec. 204(b)(3), 204(b)(4)

A registered broker-dealer organized as a partnership incorporates in July and files an application for the new corporation as its successor. What does the Uniform Securities Act provide about the filing fee?

• a.A half-year fee is due, prorated for the unexpired portion of the year
• b.A reduced fee is due only if the same individuals control the corporation
• c.The full annual fee is due again, since the corporation is a new legal person
• d.No fee is charged for the successor's registration for the rest of the year✓

Section 202(d) lets a registered broker-dealer, federal covered adviser or investment adviser file an application for registration of a successor, whether or not the successor yet exists, for the unexpired portion of the year, and states there is no filing fee. The Act has no proration or ownership-continuity condition.Uniform Securities Act Sec. 202(d)

An agent files to withdraw from registration on June 1. On June 20 the Administrator institutes a proceeding to revoke the registration. When does the withdrawal take effect?

• a.Never, because a registrant cannot withdraw once a proceeding begins
• b.On July 1, thirty days after the application was filed with the state
• c.On June 20, the date the proceeding was instituted against the agent
• d.At the time and on the conditions the Administrator sets by order✓

Withdrawal normally takes effect thirty days after the application is received, but Section 204(e) provides that if a proceeding is pending, or is instituted within thirty days after filing as here, withdrawal takes effect at the time and on the conditions the Administrator determines by order. June 20 falls inside the thirty days, so the automatic July 1 date does not apply. The rule does not set the date of the proceeding as the effective date and does not forbid withdrawal.Uniform Securities Act Sec. 204(e)

After a reasonable search, the Administrator cannot locate an agent whose registration is still in effect. What may the Administrator do under the Uniform Securities Act (1956)?

• a.Revoke the registration, but only after proof of a willful breach of the Act
• b.Suspend the registration until the agent is located and re-files the application
• c.Cancel the registration by order, as an unlocatable registrant may be cancelled✓
• d.Leave it in place until December 31, then deny the renewal application

Under Section 204(d) of the 1956 Act the Administrator may cancel a registration by order when the registrant has ceased doing business, no longer exists, has been adjudicated incompetent or cannot be located after reasonable search. Cancellation does not depend on any violation. Revocation is the disciplinary route and needs one of the Section 204(a) grounds, such as a willful violation. Suspension is a disciplinary sanction for a registrant who can be found, and nothing requires the Administrator to wait for the year-end renewal before acting.Uniform Securities Act (1956) Sec. 204(d)

An agent's registration becomes effective June 1. Before that date the agent disclosed a final order from another state's regulator. What is the last day the Administrator may institute a suspension or revocation proceeding based solely on that order?

• a.August 30, 90 days later✓
• b.July 1, 30 days later
• c.November 28, 180 days later
• d.September 29, 120 days later

Under the closing paragraph of Section 204(a), the Administrator may not institute a suspension or revocation proceeding solely on the basis of a final order the applicant made known before the effective date unless the proceeding begins within the next ninety days following registration. June has 29 days after the first, July adds 31 and August 30 more, which reaches August 30. The provision does not apply to renewal registrations. The other dates correspond to 30, 120 and 180 days.Uniform Securities Act §204(a), final paragraph (NASAA-updated text, 90 days)

Hale Advisory is a state-registered adviser in State A with no office, employee or agent in State B. In the past 12 months it advised four individuals who live in State B and no institutional clients there. Under the Uniform Securities Act (1956), must Hale register in State B?

• a.Yes, because serving clients in State B moves Hale under SEC registration
• b.No, since it has no office there and no more than five retail clients✓
• c.Yes, because even one individual client in State B requires registration there
• d.No, but only after filing an exemption notice with State B

The 1956 Act excludes from the investment adviser definition a person with no place of business in the state who, during any twelve consecutive months, does not direct business communications into the state to more than five clients other than institutions. Four individuals is within that limit, so Hale need not register in State B, although the antifraud provisions still apply to it. A single resident client does not trigger registration. Federal covered status turns on SEC registration, not on where clients live. The exclusion carries no notice-filing condition.Uniform Securities Act (1956) Sec. 401(f)(6)(B)

Brook Capital, a state-registered adviser in State A, has no place of business in State B. In the past 12 months it advised six individuals living in State B, a bank and a $2 million employee benefit plan there. Must Brook register in State B?

• a.Yes, because six clients other than institutions exceeds the limit of five✓
• b.No, because the bank and the plan are institutions and offset the individuals
• c.Yes, because the eight State B clients exceed the limit when counted together
• d.No, because an adviser with no place of business in State B is exempt there

Under Section 201(c)(2), an adviser with no place of business in the state may skip registration there only if its sole clients are listed institutions, or if in the preceding twelve months it had no more than five clients other than those institutions. The bank and the benefit plan with assets of at least $1 million do not count, but the six individuals do, and six exceeds five. The lack of a place of business is a necessary condition, not a sufficient one. Counting all eight clients would wrongly include the institutions.Uniform Securities Act Sec. 201(c)(2)

Cedar Wealth, a state-registered adviser in State A, opens a one-person office in State B and serves two individual clients there. Must Cedar register in State B?

• a.Yes, because the exemption is unavailable to an adviser with an office in the state✓
• b.No, because two clients is fewer than the five-client limit that applies in the state
• c.No, because its registration in State A covers its advisory activity in every state
• d.Yes, but only after it advises a third client there from its new State B office

Section 201(c)(2) makes the exemption from registering available only to a person who has no place of business in the state, and then only if its clients fit the institutional or five-client tests. An office in State B removes Cedar from the exemption regardless of how few clients it has there. Registration in one state does not carry over to another state. No minimum client count applies once the adviser has a place of business in the state.Uniform Securities Act Sec. 201(c)(2)

Sable Partners is SEC-registered with its headquarters in State A. Maya, one of its supervised persons, works from an office in State B and advises 14 clients, all natural persons and none a qualified client. What does State B require?

• a.Registration of Sable as an adviser in State B, and registration of Maya
• b.Registration of Maya only, since a federal covered adviser needs no filing
• c.A notice filing by Sable only, since representatives of federal covered advisers are exempt
• d.A notice filing by Sable, and registration of Maya as an investment adviser representative✓

Sable is a federal covered adviser, so State B may not require it to register, but Section 202(b) lets the state require a notice filing and fee. Section 201(d)(ii) bars a federal covered adviser from employing a representative who has a place of business in the state unless she is registered or exempt. Maya has an office in State B and more than five natural-person clients making up over 10% of her clients, so she meets the Rule 203A-3(a) test and must register there. Having a federal covered adviser as employer does not exempt her.Uniform Securities Act Sec. 201(d)(ii), 202(b); 17 CFR 275.203A-3(a)

Northgate Securities, a broker-dealer registered in State A with its only office there, executes trades in State B exclusively with a bank and an insurance company. Must Northgate register as a broker-dealer in State B?

• a.No, but only if Northgate also registers its principal as an agent in State B
• b.Yes, because trading with a bank in State B requires its own agent registration
• c.No, because it has no office there and trades only with institutions✓
• d.Yes, because any securities business with a State B firm requires registration

Section 401(c)(4)(A) excludes from the broker-dealer definition a person with no place of business in the state who effects transactions in the state exclusively with issuers, other broker-dealers, or banks, insurance companies and similar institutions. Northgate's counterparties are a bank and an insurance company, so it falls within the exclusion and registration in State B is not required. Dealing with a local firm triggers nothing by itself. An agent is an individual representing a broker-dealer, and none is needed here.Uniform Securities Act Sec. 401(c)(4)(A)

Ridge Brokerage is licensed in State A, where it has its only office. A longtime State A customer, still a State A resident, is on vacation in State B and places an order with Ridge. Must Ridge register in State B?

• a.Yes, because the sale took place while the customer was physically in State B
• b.Yes, because a firm must register in every state its customers travel to
• c.No, since it has no office there and sells only to its out-of-state existing customer✓
• d.No, because a sale to any customer of a home-state licensed firm is excluded

Section 401(c)(4)(B) excludes a person without a place of business in the state who is licensed under the securities act of a state where it keeps a place of business, and who sells in the state to an existing customer whose residence is not in the state. Ridge qualifies on each element. The customer's physical location does not control because the exclusion focuses on residence. Existing-customer status without a home-state license and out-of-state residence would not suffice.Uniform Securities Act Sec. 401(c)(4)(B)

Ridge Brokerage, licensed in State A with its only office there, keeps recommending trades to a longtime customer who has now moved her residence to State B. Ridge has no office in State B. What is the position of the firm and its agent?

• a.The exclusion is lost because she now lives in State B, so firm and agent must register✓
• b.Only the agent must register in State B, because the firm is licensed in State A
• c.Neither must register there, because a move cannot change a past customer relationship
• d.The exclusion still applies because she was already a customer of the firm before moving

The existing-customer exclusion in Section 401(c)(4)(B) covers only customers whose residence is not in the state. Once the customer lives in State B, Ridge sells there to a resident and no longer fits the exclusion, nor the institutional-counterparty exclusion in (A), so the firm is a broker-dealer in State B and its agent must register under Section 201(a). Existing-customer status alone is not enough, and a home-state license does not extend to State B.Uniform Securities Act Sec. 401(c)(4)(B), 201(a)

A CPA tells her tax clients which stocks she likes during their annual meetings. She charges only her usual accounting fee and holds herself out as an accountant, not as an adviser. Must she register as an investment adviser?

• a.No, because the definition reaches only advice that is published in writing
• b.Yes, because she is paid and her advice names specific securities for clients
• c.No, because advice solely incidental to her accounting practice is excluded✓
• d.Yes, because accountants are required to register when they discuss securities

Section 401(f)(3) excludes from the investment adviser definition a lawyer, accountant, engineer or teacher whose advisory services are solely incidental to the practice of the profession. The CPA charges only her ordinary fee and does not hold herself out as an adviser, so she remains within the exclusion. Receiving a fee and mentioning specific securities does not by itself make her an adviser. The definition also covers individualized advice, not merely publications.Uniform Securities Act Sec. 401(f)(3)

An agent of a state-registered broker-dealer charges a client a separate $1,500 fee for a written financial plan that recommends specific securities. Neither the firm nor the agent is registered as an adviser. Is registration needed?

• a.No, because the plan is a one-time written product and not ongoing advice
• b.No, because a broker-dealer agent may give advice of any kind to its clients
• c.Yes, because a separate fee is special compensation that voids the exclusion✓
• d.Yes, but only the agent needs to register, since the firm is a broker-dealer

Section 401(f)(4) excludes a broker-dealer or its agent only if the advice is solely incidental to its brokerage business and no special compensation is received. The separate planning fee is special compensation, so the exclusion fails and the activity falls under the investment adviser definition. The firm then needs investment adviser registration and the agent registration as an investment adviser representative. A one-time plan is still advice for compensation, and registration as a broker-dealer does not substitute for the adviser registration.Uniform Securities Act Sec. 401(f)(4)

Bellweather Press sells paid monthly newsletters containing general stock commentary to subscribers in many states. The content does not rest on any subscriber's specific investment situation. Must the publisher register as an investment adviser?

• a.No, but only if every subscriber to the newsletter is an institutional investor
• b.Yes, because charging subscribers for stock commentary is advice for compensation
• c.Yes, in every state where it has subscribers, because it is a federal covered adviser
• d.No, because a bona fide publication with no advice tailored to the reader is excluded✓

The investment adviser definition excludes the publisher of a bona fide newspaper, news magazine or business or financial publication of general, regular and paid circulation. Impersonal commentary sold by subscription fits that exclusion no matter how many subscribers or states are involved. Charging for the commentary does not by itself make the publisher an adviser. Federal covered status comes from SEC registration, and the exclusion does not depend on who the subscribers are.Uniform Securities Act (1956) Sec. 401(f)(4); Investment Advisers Act Sec. 202(a)(11)(D)

A company sells rows of orchard trees to out-of-state buyers. Each buyer signs a contract under which the company plants, tends, harvests and markets the fruit and pays the buyer a share of the sale proceeds. The buyers never visit the orchard. Under the Howey test, these contracts are:

• a.Securities only if the company also issues certificates that evidence each buyer's rows of trees
• b.Investment contracts, because buyers put up money in a common enterprise expecting profits from the company's efforts✓
• c.Not securities, because the company sells fruit, which is a commodity rather than a financial product
• d.Not securities, because each buyer receives title to particular trees, which are real property

Howey asks whether there is an investment of money in a common enterprise with an expectation of profit from the efforts of others. The buyers supply the money, the pooled grove operation is the enterprise, and the company does all the work, so the contracts are investment contracts, a form the Act lists in its definition of security. Title to the trees does not change the result, because the economic reality of the deal controls over the form of the land interest. The company is selling a profit stream, not produce, so the commodity argument fails. No certificate is needed, since the Act reaches any investment contract whatever its paper form.Uniform Securities Act §401(m); SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

A retail chain sells uncollateralized demand notes to the general public to fund new stores, advertising them as an investment that pays more than bank deposits. No insurance or other regulatory scheme covers the notes. Under the Reves 'family resemblance' test, the notes are:

• a.Not securities, because a note is a loan, and a loan contract falls outside the Act's definition of security
• b.Securities only if the notes can later be converted into shares of the chain's common stock
• c.Securities, because notes are presumed securities and these fit no recognized non-security category✓
• d.Not securities, because a note that is payable on demand is excluded from the Act's definition

Under Reves every note is presumed to be a security. The presumption is rebutted only when the note closely resembles a recognized non-security category, judged by the motivations of buyer and seller, the plan of distribution, the public's reasonable expectations, and whether another regulatory scheme reduces the risk. The chain is raising business capital, buyers want a return, the notes are offered broadly as an investment, and nothing else protects holders, so the presumption stands. The Act lists 'note' in its definition, and being a loan does not remove it. Convertibility is not required, and a demand feature is not an exclusion.Uniform Securities Act §401(m); Reves v. Ernst & Young, 494 U.S. 56 (1990)

Twelve investors send money to a manager, who pools it in one account and credits each investor with a pro rata share of every gain and loss. Which element of the Howey test does this pooling most directly establish?

• a.A common enterprise, because all the investors' results rise and fall together pro rata✓
• b.An investment of money, because each investor contributed cash to the manager's pooled account
• c.An expectation of profit, because each investor hopes the account will increase in value
• d.Efforts of others, because the manager alone decides how the pooled money is invested

Pooling investors' money and sharing results pro rata ties each investor's outcome to the others', which is horizontal commonality and satisfies the common-enterprise element. The cash contributed shows the separate element of an investment of money, the manager's control shows reliance on the efforts of others, and the hope of gain shows the expectation of profit. Each of those is proved by different facts, not by the pooling itself.Uniform Securities Act §401(m); SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

A start-up sells 'utility tokens' in a presale, says it will use the proceeds to build a trading platform, and promotes that the tokens will gain value as its team develops the platform. Which statement best describes the legal analysis?

• a.The tokens are not securities, because the issuer calls them utility tokens rather than stock shares
• b.The tokens are securities only if the start-up has first registered itself as a reporting company with the SEC
• c.The label does not control; if buyers invest expecting profit from the team's efforts, the tokens are investment contracts✓
• d.The tokens are not securities, because they exist only on a blockchain and never as paper certificates

Howey looks at substance, not names. Buyers who pay money into a common enterprise expecting profit from the promoter's development work hold investment contracts, whatever the product is called. Whether the asset lives on a blockchain or on paper is a matter of form and does not decide the question. The start-up's own registration status does not decide it either, because the definition turns on the economic reality of what is offered, not on who the seller is.Uniform Securities Act §401(m); SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

Under the Uniform Securities Act, who is the 'issuer' of a certificate of interest in an oil lease, or in payments out of production under that lease?

• a.The depositor who assembles the certificates and offers them to the public
• b.No one, because the Act treats such interests as having no issuer✓
• c.The operator that drills the wells and holds title to the production
• d.The person who owns the lease and sells the interests to investors

Section 401(h)(2) states that for certificates of interest or participation in oil, gas or mining titles or leases, or in payments out of production, there is not considered to be any issuer. The lease owner and the operator may sell or manage the interests, but the definition does not name either as issuer. The depositor or manager is treated as issuer for other pooled instruments, such as voting-trust certificates and unit-type investment trusts, but not for oil, gas and mining interests.Uniform Securities Act §401(h)(2)

A corporation offers convertible debentures in a state. The debentures are registered there, but the common stock into which they convert is neither registered nor exempt. Under the Act's definitions of offer and sale, what is the result?

• a.There is no problem, because the stock is not sold until a holder actually converts the debentures
• b.The debenture offer also offers the underlying stock, which needs registration or exemption✓
• c.There is no problem, because a debt security and an equity security are registered separately
• d.There is a violation only if conversion is at the issuer's option rather than the holder's

Section 401(k)(5) provides that every offer or sale of a security giving the holder a present or future right to convert into another security is considered to include an offer of the other security. The stock is therefore being offered now and needs its own registration or exemption. Waiting for conversion does not help, because the offer already exists. Separate treatment of debt and equity does not remove the underlying stock from the offer. The statute applies to a conversion right held by the holder; it does not turn on who holds the option.Uniform Securities Act §401(k)(5)

Which of the following is excluded from the Act's definitions of 'offer' and 'sale'?

• a.A purported gift of assessable stock to a friend of the issuer's president
• b.A bona fide pledge of securities to a bank as collateral for a new loan✓
• c.A sale of warrants that give holders the right to subscribe to another security
• d.Delivery of free shares to buyers of an issuer's bonds as a bonus for buying the bonds

Section 401(k)(6)(A) excludes any bona fide pledge or loan from the terms sale and offer. A bonus security given with a purchase is considered part of the subject of the purchase and sold for value under 401(k)(3). A sale of a warrant or right to subscribe is a sale, and it also counts as an offer of the underlying security under 401(k)(5). A purported gift of assessable stock is considered an offer and sale under 401(k)(4), because the recipient may be assessed.Uniform Securities Act §401(k)(3)-(6)

An insurer issues a variable annuity whose payments rise and fall with the results of a separate account invested in stocks. How is the contract treated under the Act's definition of security?

• a.It is a security only if the owner withdraws the money before the annuity payout period first begins
• b.It is not a security, because every kind of annuity contract is excluded from the definition of security
• c.It is a security, because the insurer does not promise a fixed sum and the contract owner bears the investment risk✓
• d.It is not a security, because it is issued by an insurance company regulated by the state insurance department's rules

Section 401(m) excludes an insurance or endowment policy or annuity contract under which the insurer promises to pay a fixed sum, either in a lump sum or periodically. A variable annuity has no such promise, because the amount paid depends on separate-account investment results borne by the owner, so it falls within the definition of security. Insurance regulation of the issuer does not remove it, since the test looks at the contract. Only fixed-sum annuities are excluded, not all annuities, and the timing of withdrawals plays no role.Uniform Securities Act §401(m); SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959)

A corporation's common stock is listed on the New York Stock Exchange. The corporation sells a new series of unlisted preferred stock that ranks ahead of the common stock for dividends and in liquidation. Under Section 18(b) of the Securities Act of 1933, the preferred stock is:

• a.A federal covered security only if it carries the same voting rights as the listed common stock
• b.A federal covered security, because it is senior to a listed security of the same issuer✓
• c.Covered only if the preferred stock is also approved for listing on an exchange within one year
• d.A security a state may still register by qualification, because only listed classes are covered

Section 18(b)(1)(B) makes a security covered if it is of the same issuer and is equal in seniority to, or senior to, a security that is listed on a national securities exchange and qualified for the national market system. The preferred stock outranks the listed common stock, so it is covered without being listed itself. Voting rights are irrelevant to seniority, and there is no future-listing requirement. A state therefore cannot require registration of it.Securities Act of 1933 §18(b)(1)(B), 15 U.S.C. §77r(b)(1)(B)

An issuer relies on Rule 506(b) of Regulation D. Its first sale to a resident of a state occurs on September 10. The state, applying the Uniform Securities Act of 2002, requires a notice filing of Form D. By what date must the state notice be filed?

• a.October 10, thirty days after the first sale to a state resident
• b.September 25, fifteen days after the first sale in the state✓
• c.September 9, one day before the first sale takes place
• d.September 17, seven days following the first sale

Rule 506 securities are federal covered securities, so the state may not require registration, but it may require a notice filing and fee. Section 302(c) of the 2002 Act allows a state rule to require the Form D notice no later than 15 days after the first sale in the state. Fifteen days after September 10 is September 25. The seven-day and thirty-day answers are not the statutory period, and the notice need not be filed before the first sale. (The federal Form D under Rule 503 also runs 15 calendar days from the first sale.)Uniform Securities Act (2002) §302(c); Securities Act of 1933 §18(b)(4)(F); 17 CFR 230.503

A state Administrator wants to collect a notice-filing fee on every kind of federal covered security sold in the state. On which of the following may the state NOT require a filing or fee?

• a.Shares of a mutual fund registered under the Investment Company Act of 1940
• b.Securities sold in a federal Tier 2 offering made under Regulation A
• c.Common stock of an issuer that is listed on a national securities exchange✓
• d.Securities sold in an offering made under Rule 506 of Regulation D

Section 18(c)(2)(A) lets a state require a notice filing and fees for covered securities, but 18(c)(2)(D) bars any filing or fee for a security covered because it is exchange-listed or is senior or equal to a listed security of the same issuer. Registered investment companies, Rule 506 offerings and Regulation A Tier 2 offerings are covered under other paragraphs, and states may still collect notice filings and fees on them.Securities Act of 1933 §18(c)(2)(D), 15 U.S.C. §77r(c)(2)(D)

A county in State X sells general obligation bonds that are exempt from federal registration under Section 3(a)(2). The bonds are offered to investors in State X and also to investors in State Y. Which statement is correct?

• a.The bonds are covered in State X, but not in State Y, where the county is a stranger
• b.The bonds are covered in both states, so neither state may regulate their sale
• c.The bonds are covered in State Y, but not in State X, where the county is located✓
• d.The bonds are not covered in either state, because municipal bonds are never covered

Section 18(b)(4)(E) makes securities exempt under Section 3(a) covered, but it carves out a municipal security as to offers and sales in the state where the issuer is located. State X therefore keeps its own law over its county's bonds, which will usually be an exempt security under that state's act, while State Y is preempted from requiring registration. The other statements reverse the home-state carve-out or ignore it.Securities Act of 1933 §18(b)(4)(E), 15 U.S.C. §77r(b)(4)(E)

An issuer raises $15 million in a Regulation A Tier 1 offering. The securities are not listed and are not sold only to qualified purchasers. For purposes of state registration, the securities are:

• a.Not covered, so a state may require registration or an exemption before sales there✓
• b.Covered securities, but only in the state where the issuer has its main office
• c.Not subject to state review, because every Regulation A offering is exempt from the Act
• d.Covered securities, so a state may require only a notice filing and a fee there

Section 18(b)(4)(D) covers Regulation A securities only when they are listed on a national securities exchange or sold to qualified purchasers, which in practice means Tier 2 offerings. A Tier 1 offering, capped at $20 million, is neither, so the securities are not covered and a state may require registration (often through coordinated review) or an exemption. No home-state rule makes Tier 1 securities covered, and state exemption does not follow from the federal exemption alone.Securities Act of 1933 §18(b)(4), 15 U.S.C. §77r(b)(4)

An issuer sells $4 million of stock to residents of one state under Rule 504 of Regulation D. The stock is not listed. For state securities law purposes, the stock is:

• a.Exempt from state law, because the issuer sold only to residents of a single state
• b.A federal covered security, because every Regulation D rule creates covered securities
• c.Not a federal covered security, so it must be registered in the state or qualify for a state exemption✓
• d.A federal covered security, because the offering stays below the $10 million Rule 504 cap

Section 18(b)(4)(F) of the Securities Act makes a security covered when it is offered under SEC rules issued under Section 4(a)(2), which is how Rule 506 qualifies. Rule 504 is different: it was adopted under Section 3(b) and fits none of the covered-security paragraphs of Section 18(b)(4), so Rule 504 stock is not covered and the state may require registration or an exemption. Staying under the $10 million cap matters for the federal exemption but not for covered status. A one-state offering is the reverse of a preemption argument, because the state has full authority over it.Securities Act of 1933 §18(b)(4); 17 CFR 230.504

An issuer sells securities in a state under Rule 506. Weeks after its first sale there, it still has not filed the required notice or paid the fee. What may the state Administrator do?

• a.Take no action unless investors in the state prove that the issuer committed fraud
• b.Require registration by qualification, because the security has lost its covered status
• c.Suspend the offer and sale of the security in the state until the filing and fee are made✓
• d.Void the issuer's federal exemption, so that every sale becomes a Securities Act violation

A Rule 506 security is covered, and failure to make a notice filing does not strip that status. Section 18(c)(3) preserves a state's power to suspend offers and sales within the state because of a failure to submit a filing or fee that the state is allowed to require, and Section 307(b) of the Uniform Securities Act gives the Administrator that power. The state cannot cancel the federal exemption, which belongs to federal law. A state does not need to prove fraud to enforce its notice filing requirement.Securities Act of 1933 §18(c)(3), 15 U.S.C. §77r(c)(3)

An issuer with a class of equity registered under the Exchange Act has filed a federal registration statement and seeks registration by filing under Section 302 of the Uniform Securities Act. It has operated for 8 years and has a net worth of $5 million. Which additional fact would defeat its eligibility?

• a.The shares will be offered to the public at a price of exactly $5.00 per share
• b.The class of equity is held of record by exactly 500 persons, all of them individuals
• c.Four market makers have quoted the class for each of 30 days in the last three months
• d.Underwriters' discounts and commissions would be 12% of the offering price✓

Registration by filing requires, among other things, that underwriters' aggregate commissions or discounts not exceed 10% of the public offering price (302(a)(1)(H)), so 12% fails. A class held of record by 500 or more persons meets 302(a)(1)(C). An offering price of not less than $5 per share meets 302(a)(1)(J). At least 4 market makers for at least 30 days in the three months before the offering meets 302(a)(1)(F). Each of those facts sits exactly on the line and still qualifies.Uniform Securities Act §302(a)(1)

An issuer is registering its offering by coordination. Which of the following is NOT a condition for the state registration to become effective automatically when the federal registration statement becomes effective?

• a.The statement of maximum and minimum prices and discounts has been on file for two full business days
• b.The registration statement has been on file with the Administrator at least ten days
• c.No stop order is in effect and no proceeding is pending under Section 306 of the Act
• d.The Administrator has entered a written order declaring the state registration effective✓

Section 303(c) makes the state registration effective automatically at the moment the federal registration becomes effective, so no order from the Administrator is required. The conditions are that no stop order or Section 306 proceeding is pending, that the registration statement has been on file at least ten days, and that the price and underwriting-discount statement has been on file for two full business days (or a shorter period the Administrator permits), with the offering made within those limits.Uniform Securities Act §303(c)

A registrant using registration by coordination fails to notify the Administrator of the price amendment and does not file the required post-effective amendment. What action may the Administrator take?

• a.Refuse future registrations by coordination, but leave the current registration undisturbed
• b.Impose a monetary penalty at the next renewal, leaving the registration effective until then
• c.Enter a stop order without notice or hearing, void if the registrant later proves it complied✓
• d.Enter a stop order only after notice, a hearing and written findings, as for any other ground

Section 303(c) lets the Administrator, upon failure to receive the required notification and post-effective amendment about the price amendment, enter a stop order without notice or hearing that retroactively denies or suspends effectiveness until compliance. The Administrator must promptly notify the registrant, and if the registrant proves compliance the order is void from entry. The usual notice-hearing-findings procedure of Section 306(c) does not apply to this ground. No renewal penalty or forward-looking bar is provided.Uniform Securities Act §303(c)

A registration statement became effective on March 1, 2026. On September 1, 2026, the issuer asks to withdraw it, although shares of the registered class are outstanding. What is the result?

• a.Withdrawal is permanently barred because securities of the class remain outstanding
• b.Withdrawal is barred until March 1, 2027, and after that it rests in the Administrator's discretion✓
• c.The withdrawal takes effect on the thirtieth day after filing, unless the Administrator objects
• d.The withdrawal is allowed because the issuer has stopped selling anywhere in the state

Section 305(i) provides that a registration statement may not be withdrawn for one year from its effective date if any securities of the same class are outstanding, and otherwise may be withdrawn only in the Administrator's discretion. Here the one-year bar runs to March 1, 2027. The thirty-day rule describes withdrawal of a broker-dealer, agent or adviser registration, not of a securities registration. Ceasing sales does not lift the bar, and the bar is not permanent; it ends after one year.Uniform Securities Act §305(i)

A registrant has sold all the shares it registered. On May 4 it sells 10,000 more shares of the same class at the same price and with the same underwriting discounts. On October 20 it files a post-effective amendment to increase the registered shares and pays the late fee and additional filing fee. What is the effect?

• a.The amendment relates back only if the price and discounts are raised to match the market
• b.The May 4 sales remain unregistered, because an amendment cannot cure sales already made
• c.The amendment relates back only if it is filed within thirty days of the date of that sale
• d.It relates back to May 4, as filing and fees fall within six months of that sale✓

Section 305(k) allows an effective registration statement to be amended to increase the securities offered if the offering price and underwriters' discounts are unchanged. The amendment becomes effective when the Administrator so orders, and it relates back to the date of the sale of the additional securities if the amendment is filed and the late fee and additional filing fee are paid within six months of that sale. October 20 is within six months of May 4. A change in price or discounts would defeat the amendment, and no thirty-day limit applies.Uniform Securities Act §305(k)

A registration statement became effective on September 1. The Administrator already knew of a material omission in it on that date. On October 20 she institutes a stop order proceeding based on the omission. May she proceed?

• a.No, because every stop order proceeding must be started before the registration statement takes effect
• b.No, since a fact known at effectiveness must be acted on within 30 days, here by October 1✓
• c.Yes, because a stop order proceeding can be begun at any time while the registration is effective
• d.Yes, because she has one year from the effective date to act on an omission she already knew

The last paragraph of Section 306(a) bars the Administrator from instituting a stop order proceeding against an effective registration statement on the basis of a fact or transaction known to her when the statement became effective unless the proceeding is instituted within the next thirty days. Thirty days after September 1 is October 1, so October 20 is too late. The one-year limit is a different rule, found in the injunction ground. Stop order proceedings can be brought after effectiveness, within the limits stated, so they are not limited to the period before it.Uniform Securities Act §306(a)

A court enjoined an offering under another federal act on February 10, 2026. The offering's state registration statement is effective. On March 1, 2027, the Administrator wants to start a stop order proceeding relying only on that injunction. May she do so?

• a.Yes, because an injunction is a ground for a stop order and no time limit applies to when she must act on it
• b.No, because only an injunction entered under that state's own act can support a state stop order
• c.No, because a proceeding based on an injunction must start within one year of the order, by February 10, 2027✓
• d.Yes, because she has two full years from the order to start a proceeding that is based on an injunction

Section 306(a)(2)(C) allows a stop order where the registered security is the subject of an order or injunction under another federal or state act applicable to the offering, but the Administrator may not institute a proceeding against an effective registration statement on that ground more than one year from the date of the order or injunction. One year from February 10, 2026 expired on February 10, 2027, before March 1, 2027. The injunction is a valid ground within that year, so the third statement is wrong, and the period is one year, not two or unlimited.Uniform Securities Act §306(a)(2)(C)

The Administrator summarily suspends the effectiveness of a registration statement pending a final determination. The registrant's written request for a hearing is received on September 1. By what date must the matter be set down for hearing?

• a.October 1, thirty days after the request is received
• b.October 31, sixty days after the request is received
• c.September 1, on the very day the written request arrives
• d.September 16, fifteen days after the request is received✓

Under Section 306(b), the Administrator's summary order must tell the affected persons that within fifteen days after receipt of a written request the matter will be set down for hearing. Fifteen days after September 1 is September 16. The thirty-day and sixty-day periods are not the hearing period; sixty days is the time to petition for judicial review of a final order under Section 411. A same-day hearing is not required.Uniform Securities Act §306(b)