Stock Market Study Comprehesive US stock analysis and high probability investing

May 31, 2012

Series 63 Test One

Filed under: Securities License Exam — Tags: — admin @ 4:00 pm

Question 1

According to the Uniform Securities Act, to determine whether an investment adviser is trading excessively in a customer’s account, regulators primarily examine whether the

adviser received compensation for the trades
transactions matched the investor’s objectives
customer approved the transactions in writing
adviser acted as a principal or an agent

Trading in a customer’s account must not be excessive in terms of size or frequency with respect to the customer’s investment objectives and financial ability. For example, if the client’s objective was speculative trading, a higher than normal volume would be expected. It could also be important to know whether the adviser was receiving trade-based compensation (which could be the reason for the possible churning), but what would be secondary to customer objectives.

Question 2

Aaron Webster is registered as an agent with Maple Leaf Securities, a Cana broker/dealer located in Toronto with no offices in the United States. One of Mr. Webster’s clients has recently made a permanent move to Florida. Which of the following statement with respect to Mr. Webster is CORRECT?

Under no circumstances is Mr. Webster permitted to have any dealings with this client once residence in Florida has been effective for more than 30 days.
Mr. Webster must register with both the NASD and the state of Florida even though Maple Leaf Securities is not registered.
Mr. Webster’s current Canadian registration is sufficient to deal with a client who moves to another country
Mr. Webster’s current Canadian registration is sufficient to deal with a client who moves to another country in the case of a previously established tax-qualified retirement plan

Canadian have their equivalent of our IRA called an RRSP and, as long as the account is opened in Canada with properly registered agent, that agent may continue to handle transactions in that account for clients who move out of the country.

Question 3

In which of the following situations did an agent commit fraud?

A client claims an agent sold him unsuitable securities.
On review of his files, an agent discovered he had sold a nonexempt unregistered security.
An agent sold an excellent growth company to a client by omitting immaterial information, so as to distract the client from purchasing a suitable security.
An agent knowingly sold a nonexempt, nonregistered security to an client who could well afford the risk involved.

Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to provide all information, only material information.

Question 4

According to the Uniform Securities Act, which of the following statements is TRUE?

If an agent is hired away from his broker/dealer by another broker/dealer, only the new broker/dealer must notify the Administrator
If an investment adviser representative is hired away from a federal covered investment adviser by another federal covered adviser, bother adviser and the representative must notify the Administrator
Only the employing adviser, not the investment adviser representative, must register in the state.
An investment Adviser with no place of business in the state, who conducts business exclusively with insurance companies located in the state, need not register in the state.

An adviser with no place of business in the state who conducts business with insurance companies is exempt from registration in the state. The other answer choices are all false. If an agent is hired away from a broker/dealer by another broker/dealer, both broker/dealer and the agent must inform the Administrator. If an investment representative is hired away from a federal covered adviser by another federal covered adviser, only the investment adviser representative must inform the Administrator.

Question 5

Under the Uniform Securities Act, which of the following statements describe federal covered securities?

  1. A security registed under the USA
  2. A security that is registered under the Investment Company Act of 1940
  3. A security of a company regulated by the US Federal Reserve Board
  4. A security issued by the US government
I and II
II and III
II and IV
II, III and IV

A federal covered security has a federally imposed exemption from state registration and is covered by federal legistration. Securities covered by the Investment Company Act of 1940, the US Federal Reserve (Commercial Bank securities), and securities issued by the US government are all covered by federal legislation. Generally, a federal covered security is either an exemption from registration at the federal level and is therefore exempt from registration at the state level; or a security that is required to be registered at the federal level and is therefore exempt from registration at the state level.

Question 6 

A risk-averse investor wants to invest in Treasury securities, and the investor’s agent recommends Treasury notes, pointing out that federal government-backed securities are riskless securities. In the above situation the agent has acted

lawfully because Treasury notes are suitable for a risk-averse customer and are free of all investment risk
lawfully because Treasury notes carry no risk of principal default
unlawfully because Treasury notes are unsuitable for a risk-averse customer
unlawfully because the agent failed to disclose that the investor carries interest rate risk but not default risk

Although Treasury securities such as T-notes issued by the federal government do not carry default risk, the customer who buys them bears interest rate risk because the value of the notes will fall if interest rate rises. The agent has acted unlawfully in not disclosing this to the customer.

Question 7

Which of the following securities are exempt from the registration provision of the Uniform Securities Act?

  1. Issue of a saving and loan association
  2. General obligation municipal bond
  3. Bond issued by a company that has common stock listed on the American Stock Exchange
I and II
I and III
II and III
I, II and III

The USA exempts a number of different issues from registration, including securities issued by a bank, or anything that functions like a bank(e.g., a saving and loan or credit union). Securities issued by a governmental unitare always exempt. Securities listed on the American Stock Exchange are part of a group known as federal covered securities that also include those listed on the New York Stock Exchange and Nasdaq National Market issues. Those listed on the AMEX are called federal covered securities.

Question 8

An agent would be engaged in a prohibited practice if he

  1. shared commission with other agents of his broker/dealer.
  2. sold a nonexempt, unregistered security to a tax-exempt foundation
  3. shared both the gains and loses in a client’s account with written approval in an amount proportionate to the amount invested in the account
  4. aggressively traded a discretionary account on a daily basis with long-term growth as an objective
I and II
I and IV
II and IV
I, II, III and IV

An Agent cannot lawfully sell an unregistered, nonexempt security. Day trading in an account with long-term growth as an objective would constitute an unsuitable transaction and, therefore is prohibited under the USA. Sharing commission is only permitted with agents of the same or affiliated broker/dealer.

Question 9

An investment adviser may not have custody of a customer’s funds and securities under the Uniform Securities Act if

there is a rule barring such custody
the adviser fails to tell the customer that has custody
the adviser is not a registered broker/dealer
the customer has not received a wrap fee brochure

If there is a rule barring custody, under no circumstances may the adviser have custody of customer funds or securities.

Question 10

An agent would be acting illegally if he sold

securities properly registered in a neighboring state but not registered in his home state
federal covered securities not registered in the state
revenue bonds of Illinois in Florida that were not registered in Florida
securities guaranteed by a federal credit union organized under the laws of the state

An agent can not sell securities in a state unless he is registered or exempt from state registration. Federal covered securities, tax-exempt municipal bonds, and securities guaranteed by a federal credit union organized in the state are all exempt from registration.

Question 11

Which of the following is commingling?

Placing customer accounts in a common trust
Placing mutual funds, cash, and securities in the same customer account
Placing the broker/dealer’s funds in the same account with nondescretionary customers
Borrowing money from a client and then putting those funds in the agent’s personal account

Commingling is mixing client’s funds or securities with those of the broker/dealer, whether discretionary or not. Placing funds in a common trust is not commingling and is not prohibited. Accounts holding several types of securities is not considered commingling. Borrowing money from a client is prohibited, but is not commingling.

Question 12

All of the following refer to blue-sky law EXCEPT

state laws that are designed to protect the public against fraud in securities sales within a state
the Securities Act of 1933 and Securities and Exchange Act of 1934
forms requiring issuers selling securities in the state to comply with state securities laws
a state securities law that grants state securities Administrator the power to deny or revoke a broker/dealer or a registered representative’s registration within its state

Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.

Question 13

An investment adviser representative borrows $10,000 from his mother-in-law who is also a client. He signs an agreement to pay her back in 5 years at below market interest. This arrangement is

acceptable because the client is considered an immediate family member.
unacceptable as it is considered an unethical business practice to borrow from a client not in the lending business.
unacceptable as the interest rate is too low.
acceptable interest payments are made in cash

The April 18,2004, NASAA statement of Policy on unethical business practices of investment advisers only permits borrowing from clients when they are in the lending business or are affiliates of the firm.

Question 14

Which of the following statements regarding investment adviser compliance review is TRUE?

An annual compliance review must be performed by a third party that is independent of the adviser.
Quarterly compliance review must be performed by the advisory firm’s chief compliance officer(CCO).
As part of the annual review, the compliance officer should review the adequacy of the firm’s policies and procedures.
At no time will state registered advisers be required to comply with a requirement for internal annual compliance review.

As part of the annual review, the chief compliance officer should review the adequacy of the firm’s policies and procedures. Currently there is no requirement that an advisory’s annual compliance review be performed by the third parties. Quarterly review are not mandated. Annual reviews are required with interim reviewing as circumstances warrant. Many state securities regulators automatically adopt federal rules for investment adviser. However, effective dates may be delayed.

Question 15

An investor purchases shares of a no-load balanced mutual fund. The fund has expenses representing 1.5% of assets. In the year following the purchase, the fund declined by 5% and declares annual dividends of 2%. The investor’s total return is

5%
-5%
-3.5%
-3%

The SEC requires that mutual funds show appreciation or depreciation(reported profit or loss) net of expenses. Thus, the fund fell by 5% after expenses. However, this decline is mitigated(lessened) by the 2% dividend, resulting in total return of -3% for the year.

Question 16

An investor purchases Class A shares in a mutual fund that has stated growth as its investment objective. The investor paid a 3% load on purchasing the fund shares. In the year following the purchase, the fund appreciated by 12% and declared a 2% dividend.What is the investor’s total return on the fund shares?

9%
11%
12%
14%

The investor’s total return of 14%(12% appreciation plus 2% dividend) is reduced by the 3% front-end load to determine its first-year return.

Question 17

Which of the following bonds should experience the greatest price decline if interest rate rise by 1%?

Treasury bond issued at par carrying a 7% yield to maturity
Treasury bond issued at par carrying a 6% yield to maturity
Treasury bond issued at par carrying a 5% yield to maturity
Corporate bond carrying a 5% coupon and a 5% yield to maturity

Bonds of lower safety(quality) and lower coupons experience greater price volatility. Corporate bonds are more uncertain than Treasury securities having the same maturities. The corporate bond having the lower coupon and interest rate will decline the most.

Question 18

If an investment adviser has engaged a web site designer, what may the designer include on the web site?

A general description of the type of investments offered by the firm
Client testimonials
Recommendations on specific stocks
Recommendations on specific managed investment such as mutual funds.

It is permissible to post general information about an investment adviser on a public web site, which comes under the SEC definition of advertising. Advertising implies that the publisher of the material has no control over who may view it. Thus recommendations of specific securities, including managed products, are prohibited because it is not possible to determine the suitability of specific investments for unknown viewers. The SEC prohibits client testimonials in advertising.

Question 19

Which of the following parties is most likely to be considered an investment adviser under the Investment Advisers Act of 1940?

Dow Jones, Inc. publisher of The Wall Street Journal
The trust department of Citibank, which handles hundreds of millions of dollars in trust assets
An expert in fixed income securities who recommends and facilitates the purchase of millions of dollars solely in Treasury securities by individuals
A CPA who manages investment accounts for 50 clients and charges a hourly fees for the service

The Investment Advisers Act of 1940 does not exclude accountants providing investment advice on more than an incidental basis from the definition of investment adviser. A publisher of periodicals of general circulation, regardless whether the publication covers financial matters, is excluded from the definition, as is an adviser whose advice is exclusively limited to government securities. Banks are also excluded from the definition of investment adviser under the act.

Question 20

Which of the following investment analysis tools can be used most efficiently to predict the probability of outcomes of portfolio performance recognizing that variables such as holding periods and rates of return are generally uncertain?

Technical Analysis
Fundamental Analysis
Efficient market hypothesis
Monte Carlo Analysis

Monte Carlo analysis uses simulations to predict the probability of portfolio performance in light of multiple and uncertain variable conditions. Technical analysis focuses on price patterns. Fundamental analysis focuses on economic, industry, and business conditions. The efficient market hypothesis argues that analysis itself as little, if any, value.

Question 21

An investment adviser holds a small position in the common stock of ABC corporation with a current market value of approximately $5,000. ABC corporation will offer additional stock in a subsequent primary offering and the adviser recommends the stock to several clients. Which of the following reflects the most appropriate behavior on the part of the adviser?

It is not necessary for the adviser to disclose that he holds a position in the recommended stock because the adviser’s position is obviously too small to influence the price of the stock.
The adviser should not recommend a stock in which he holds a position because it is a prohibited conflict of interest.
The adviser may recommend the stock provided that he discloses to clients receiving the recommendation that he holds a small position in the stock.
The adviser may continue to recommend the stock to his client provided he liquidates any current holdings in the recommended security.

It is not prohibited of an investment adviser to recommend that clients acquire shares in a corporation in which the adviser holds a position. However, the adviser should disclose to clients receiving the recommendation that he holds the stock in his account.

Question 22

Which of the following would be required to register as an agent under the Uniform Securities Act?

  1. An officer of a broker/dealer who does not deal with customers.
  2. A director of a broker/dealer who is not involved in day-to-day operations.
  3. A trader who is authorized to handle customer orders
  4. A sales representative who makes cold calls and lets a principal in the firm handle all customer trades
I and II
I and IV
III and IV
I, II, III and IV

An agent is an individual, always a human person, who represents a broker/dealer or issuer in effecting or attempting to effect purchases or sales of securities. Officers and directors are not agents if they are not involved in the transactions of securities with the public.

Question 23

Under the Uniform Securities Act, as amended by NSMIA, state securities regulators may require notice filing for

securities sold to qualified purchasers as that term is defined by the SEC
securities issued under Rule 506 of Regulation D (private placement offerings)
securities listed on the American Stock Exchange
securities issued by investment companies registered with the SEC

The changes in market regulation under NSMIA prohibit state securities regulators from requiring notice filing by federal covered issuers whose securities are traded on exchanges or in marketplaces regulated by the SEC. The only federal covered securities that state regulators may require notice filings are investment company securities. All other federal covered securities are exempt from notice filing. Although securities sold to qualified purchasers and securities issued under Rule 506 of Regulation D are covered securities, the states may not require the issuers of such securities to make notice filing.

Question 24

Which of the following is NOT an issuer under the USA?

A corporation that proposes to issue securities but has not done so as of yet
A broker/dealer trading securities as an agent for the account of others
A new company that offers shares to the public in an IPO
A company whose shares trade on the New York Stock Exchange

A broker/dealer that trades securities as an agent for its clients is not acting in the capacity of an issuer. If the broker/dealer were offering its own shares to the public through underwriting, it would then be an issuer. A corporation that proposes to issue securities but has not as yet done so, is for purposes of the Act, an issuer. A company offering its shares to the public in an IPO is an issuer. A company whose shares trade on the NYSE is an issuer whose shares are now trading in the secondary market.

Question 25

Which of the following statements are TRUE?

  1. A federal covered adviser may sell federal covered securities only.
  2. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers.
  3. A federal covered security is exempt from registration with the SEC.
  4. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.
I and II
I and III
II and IV
III and IV

A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security. Federal covered securities are registered with SEC, not with the states.

Question 26

An agent under the USA is a

  1. person who represents an issuer in nonexempt securities
  2. registered broker/dealer that deals in registered securities
  3. person who sells nonexempt securities as a representative of a registered broker/dealer
  4. person who has no place of business in the state and sells securites to an existing client who is not a residence of the state
I and III
I and IV
II and III
II and IV

Agents generally work for and represent a broker/dealer in conducting securities sales or transactions. Agents are excluded from the definition of an agent if they have no place of business in the state and sell securities to an existing client who is not a resident of the state.

Question 27

Which of the following financial instruments are considered securities under the USA?

  1. Collateral truest certificates
  2. Investment contracts, including interests in oil and gas drilling partnerships
  3. Options listed on the Chicago Board of Options Exchange
  4. Commodity options contracts traded on the Chicago Board of Trade
I and II
II and III
II,III and IV
I, II, III and IV

Collateral trust certificate, investment contracts, options, and commodity option contract are identified as securities in the Uniform Securities Act and are subject to its provisions. Commodity futures are not securities, but options on commodities are securities.

Question 28

Under NSMIA, the term covered adviser includes

  1. a person registered with the SEC under the Investment Advisers Act of 1940
  2. a contracted adviser to a private partnership under the Act of 1940
  3. a person excluded from the definition of an adviser under the Act of 1940
  4. a person required to register with the state Administrator
I and III
I and IV
II and III
II and IV

The NSMIA defines a covered investment adviser as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of investment adviser under the act. Registration with the state Administrator is not required of a covered adviser.

Question 29

Which of the following statements regarding Coverdell Education Savings Accounts are TRUE?

  • After-tax contributions of up to $2,000 per student per year are allowed.
  • Contributions may not be made for student over the age of 18, unless they are a special needs beneficiary
  • If the account value is used for educational purposes, it can be rolled over into a traditional IRA.
  • Distribution is always taxable.
I only
I and II
II and III
I, II and IV

Coverdell Eudcation Saving Accounts allow after-tax contribution of up to $2,000 per student, per year, for children younger than 18. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different ESA or another family member.

Question 30

The term investment adviser representative includes which of the following?

  • A receptionist for an adviser
  • Someone who solicits new business for an adviser
  • A supervisor who oversees employees who manage client portfolios for an adviser
  • An investment advisory firm registered in the state of Texas
I and III
II and III
I, II and IV
I, II, III and IV

An investment adviser representative is always an individual person. Persons who solicit business on behalf of investment adviser and those persons who supervise other employees are investment adviser representative.

Question 31

Under the Uniform Securities Act, which of the following persons do NOT have to register as an investment adviser

  • Broker/dealer who gives advice for which he charges a specific fee
  • Agent of a broker/dealer who gives investment advice within the course of his duities for which he charges a fee
  • Broker/dealer who gives investment advice that is incidental to the course of her business
  • Attorney who writes a legal opinion for a municipal indenture.
I and II
I and III
II and IV
III and IV

Broker/dealers need not register as investment advisers unless they charge a separate fee for providing investment advice. Attorneys are not investment advisers provided their investment advice is incidental to their practice. Giving a legal opinion on a municipal security indenture is not investment advice. Persons who charge a specific fee for advice and hold themselves out to the public as providers of investment advice must register as investment advisers.

Question 32

Under the USA, each of the following materials may be distributed if an issuing company has applied for registration but is not cleared for sale EXCEPT

tombstone advertising
a red herring
application with a request for a down payment
preliminary prospectus

Prior to clearance, a red herring or preliminary prospectus(a disclosure document) may be distributed in response to those customers who express interest in the offering. While rare, a tombstone advertisement may be published. The red herring can not be used to solicit indication of interest.

Question 33

The Uniform Securities Act prohibits which of the following?

  • Agents exercising discretion in discretionary accounts
  • Broker/dealers charging larger than ordinary commissions on certain transactions
  • Agents soliciting orders for unregistered nonexempt securities
I and II
II and III
III only
I, II, and III

The USA prohibits soliciting orders from unregistered, nonexempt securities. The act does not prohibit agents from exercising discretion or from charging larger than ordinary commissions when justified.

Question 34

Issuers whose securities are nonexempt can avoid registration in a state because of the way in which its securities are sold. All of the following are exempt transactions involving nonexempt securities EXCEPT

the sale of pre-organization certificates provided that no commission is involved, no payment is made to the issuer for the certificate itself, and the number of subscribers does not exceed 10.
the sale of an initial public offering of a security for which a registration statement has been filed within 7 business days with the Securities and Exchange Commission
a limited offering to 6 non-institutional persons during the previous 12 consecutive months when no commission is paid, no advertising is used, and the seller believes securities are purchased for investment purpose.
the sale an issuer’s securities to the underwriter of those securities.

The sale of an initial public offering of a security for which a registration is in progress with the Securities and Exchange Commission is not an exempt transaction. It is an illegal sale an unregistered security. Offers may be made while a security is in registration with the SEC but sales can not be effected. Sales may only take place legally after the registration is effective. All of the other choices are examples of exempt transactions.

Question 35

In which of the following situations is a person who represents an issuer on a commision basis NOT excluded from the definition of an agent under a state’s securities laws?

When representing an issuer whose securities are exempt from registration.
When representing an issuer in an exempt transaction.
When representing an issuer in a private placement.
When effecting transactions with existing employees of the issuer.

A person receiving sales-based compensation while representing an issuer in selling its securities to existing employees in a state is not excluded from the definition of an agent under the act. Individual who acts as agents on behalf of issuers in exempt securities, exempt transactions, and in private placement are excluded from the definition of agent under the Uniform Securities Act(USA).

Question 36

In which of the following circumstances is a broker/dealer excluded from the definition of broker/dealer in a state under the Uniform Securities Act (USA)?

A broker/dealer conducts exempt transactions with clients residing in the state.
A broker/dealer without a business office in a state conducts numerous underwriting transactions exclusively with other broker/dealers that have offices in the state.
A broker/dealer without a business office in the state routinely conducts securities transactions with only one existing high net-worth customer who is a legal resident of the state.
A broker/dealer without a business office in a state conducts securities transactions in publicly traded federal covered securities with residents of the state.

A broker/dealer without an office in the state that transacts business exclusively with underwriters in the state is excluded from the definition of broker/dealer under Uniform Securities Act. A brokern/dealer with no office in the state that transacts business even with one client resident in the state is not excluded. Unlike investment advisers, the USA provides no di minimus exception for broker/dealers. All the other answer choices fall within the USA’s definition of broker/dealer.

Question 37

Which of the following is NOT a federal covered security?

A Nasdaq-traded security
A private placement of $2 million worth of common stock in a small manufacturing company sold to 5 investors residing in the same state as the new company.
A municipal bond of the City of Springfield Illinois sold only to residents of Springfield
A security of a major bank holding company

In general, municipal bonds are covered securities exempt from state registration. Municipal bonds of the state that issues the bonds are not federal covered securities. To prevent states from regulating securities of other states, federal law exempts municipal securities from out-of-state municipalities. Because federal law allows states to regulate their own securities, municipal securities of the state of issue are not federal covered securities. Municipal bonds of other states are covered securities. The other three securities are federal covered securities exempt from state registration.

Question 38

Under SEC Release IA-1092, an investment adviser does NOT include which of the following?

  • Broker/dealer who charges for investment advice
  • Publisher of a financial news paper
  • Person who sells security analysis
  • CPA, as an incidental part of his practice, who constructs a portfolio of tax-sheltered investments
I and III
I and IV
II and III
II and IV

A publisher of a financial news paper and CPA, as an incidental part of his practice, who constructs a portfolio of tax-sheltered investments are not investment advisers.

Question 39

A security that is exempt from the registration requirement of the Uniform Securities Act is also exempt from which of the following concerning the act?

  • Civil liabilities provisions
  • Antifraud provisions
  • Requirements for filing advertising and sales literature
I and II
I and III
III only
I, II and III

An exempt security is only exempt from the registration requirements and the requirements for filing advertising and sales literature. No security is exempt from the antifraud provisions of the act and the liabilities that arise from the fraudulent practice.

Question 40

Which of the following is unlawful for an investment adviser?

  • To share in the profits of an account in relation to the amount of time devoted to the account
  • To unilaterally transfer an account to another firm if the assets fall below a minimum level
  • To take custody of a client’s securities and funds, in the absence of a rule on custody by the state Administrator
  • To fail to disclose the departure of a general partner of an investment advisory partnership who only had a minority interest in the firm.
I and II
I and IV
I, II and III
I, II and IV

An investment adviser can not share in the profits of an account based on time devoted and may not assign an account without the written permission of the client. An investment adviser must disclose to clients when any partner, minority interest or not, departs from the firm.

Question 41

According to the Uniform Securities Act, which of the following would be an unlawful activity for an investment adviser?

Entering into an investment advisory contract that does not mention the compensation arrangements
Taking custody of a customer’s securities or funds without notifying the Administrator, even though the Administrator has no rule that prohibits such custody.
Entering into an investment advisory contract that provides specifically for compensation based on a share of capital appreciation of the customer’s funds
All of above

Each of the answers listed is an example of an unlawful activity by an investment adviser.

Question 42

Which of the following statements regarding brokerage and advisory activities under the Uniform Securities Act are TRUE?

  • It is not unlawful for an adviser or broker to employ any device, scheme, or artifice to defraud in the sales of securities to institutional investors because the Uniform Securities Act is designed to protect individual investors.
  • Under the USA, it is unlawful for an investment adviser to deceive a person when not providing advice to that person.
  • Sanctions for both advisers and brokers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions.
  • It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities.
I and II
I and III
II and IV
III and IV

Sanctions for violations are administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is also true that any individual, whether technically defined as an adviser or not, may not deceive another person when providing investment advice if he is compensated for providing the advice. As long as there is no advisory client relationship, people can deceive each other, it does not violate the USA.

Question 43

Which of the following is NOT included in the definition of a security in the Uniform Securities Act?

A preorganization certificate in a real estate condominium
Commercial paper issued with an 8-month maturity
A variable annuity
A $100,000 whole life insurance policy

Life insurance and fixed annuities are not listed as securities under the USA, while their variable counter parts are. If the product is supported by a separate account, it will be a security under the USA; those few items that are not a security make it easy to identify those that are. Commercial paper is an exempt security and preorganization certificate is an exempt transaction, but both are securities.

Question 44

An agent in Illinois, Missouri, and Iowa has a client who moves from Chicago to Detroit on July 1, 2002. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On October 1, 2003, the client discovered that the agent’s firm never licensed him in Michigan and therefore, he is subject to civil liability to the purchaser. The statue of limitations for this sale runs out.

September 1, 2004
September 1, 2005
October 1, 2005
October 1, 2006

The statute of limitations for civil liability is the earlier of 3 years after the date of the sale, or 2 years after discovery of the violation. In this case, the earliest date is 3 years after the sale of September 1st, 2002.

Question 45

Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration?

Underwriter
Issuer
State Administrator
There is no need to prove eligibility for an exemption

The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by some one other than the issuer, such as selling stockholders or broker/dealer, that person must prove the claim.

Question 46

Which of the following activities are prohibited by the Uniform Securities Act?

  • A client insistently requests participation in an unsuitable investment, so the agent deliberately underreports the prospect of the investment to deter the client from making the purchase.
  • An agent takes an order from the client’s attorney without written trading authorization
  • An agent takes an order from the secretary of a nondiscretionary client who is too busy to give the order himself.
  • An agent encourages a client to act on a security on the basis of materials inside information but is scrupulously careful not to disclose the source of information to the client
I and III
I and II
II and IV
I, II, III and IV

An agent can not take trading orders from any one but the client unless he has written authorization on file. An agent can not act on the basis of material inside information whether he keeps it confidential or not. While choice I may in fact in the client’s best interest, deliberate misrepresentation is prohibited.

Question 47

Which of the following practices is fraudulent?

Failing to state all the facts related to a security
Selling a security to a customer with a commission that exceeds industry standards
Marking up a security by 10% more than industry standard with the customer’s knowledge and consent
Marking up a security by 5%, but indicating to the client the markup is only 2%

Marking up a security by more than industry practices is prohibited practice but is not necessarily fraudulent. A commission or markup is fraudulent because the agent is knowingly deceived the client by lying.

Question 48

Which of the following activities are prohibited under the Uniform Securities Act?

  • Engaging in a practice not expressly forbidden by the act but defined as unethical by the Administrator in a rule
  • Omitting a material fact when soliciting a client
  • Selling recommended securities to a client from one’s own account without disclosing this fact to the client
I and II
I and III
II and III
I, II and III

A practice that is not expressly forbidden by the act but defined as unethical by the Administrator, the deliberate omission of a material fact when soliciting a client, and selling recommended securities to a client from one’s own account without disclosing this fact to the client are all prohibited.

Question 49

According to the Uniform Securities Act, the investment adviser brochure must include the business background of

each member of the investment committee or group that determines general investment advice to be given to clients
employees of the adviser
an affiliate broker/dealer
institutional clients

The business background of these key individuals must be included in Part II of Form ADV and in the disclosure brochure. The business background of employees, affiliated broker/dealers, and institutional clients need not be included in the brochure.

Question 50

All of the following are exempt transactions EXCEPT a(n)

administrator selling securities to liquidate an estate
client, upon his own initiative, requesting a transaction in a security that is not registered in the state
fiduciary pledging securities to secure a loan for a client
certified financial planner selling Nasdaq securities to numerous high net worth individual clients

A certified financial planner selling unlisted securities to numerous individual clients, regardless their net worth, is engaged in a nonexempt transaction, not an exempt transaction. This would not be true if the financial planner’s clients were all financial institutions rather than individuals. Transactions by an administrator and an executor are exempt transactions, as are unsolicited nonissuer transactions. A pledge of stock as collateral for a loan is also an exempt transaction.

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