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Series 63 study materials
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Series 63 practice questions

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Question 1Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Under state securities law, which of the following is excluded from the definition of broker-dealer?

  1. A firm that executes customer orders on an exchange in return for commissions
  2. A firm that regularly quotes bid and ask prices to retail customers
  3. An issuer selling only its own newly issued securities to the public Correct answer.
  4. A firm that holds customer securities in street name and clears trades

Explanation

The definition of broker-dealer covers firms that effect securities transactions for the accounts of others; a person that sells only its own securities is an issuer and falls outside the definition. The issuer exclusion does not extend to affiliated entities that make markets in, or trade, other issuers' securities.

Question 2Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An individual employed by a broker-dealer whose job is to solicit and effect securities transactions for customers must be registered in the state as:

  1. an investment adviser representative
  2. a control person
  3. an agent Correct answer.
  4. an investment adviser

Explanation

An agent is any individual who represents a broker-dealer in effecting or attempting to effect transactions in securities, or who is an associated person engaged in the securities business of the firm. Registration follows the individual and is tied to the employing broker-dealer.

Question 3Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A federal covered adviser that maintains an office in this state must:

  1. limit its state clients to institutional investors
  2. make a notice filing with the administrator and pay the required fee Correct answer.
  3. register as an investment adviser with the state administrator
  4. register each of its investment adviser representatives with the state

Explanation

Because federal law preempts state registration of advisers registered with the SEC, a federal covered adviser doing business in a state makes a notice filing, consisting of the required filing fee, a consent to service of process, and the documents the administrator requires. Full state registration is not permitted.

Question 4Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Which person is an investment adviser under state law?

  1. A columnist who writes general commentary about market trends for a newspaper
  2. A planner who charges a fee to recommend which mutual funds a client should buy Correct answer.
  3. A bank trust department that manages customer portfolios
  4. An accountant who gives securities advice only as an incidental part of his practice

Explanation

An investment adviser is a person who, for compensation, engages in the business of advising others about securities. A planner who is paid to make personalized securities recommendations fits that definition and must register unless an exclusion applies.

Question 5Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A broker-dealer files a complete registration application with the state on March 1. The administrator neither accelerates nor denies the application. The registration becomes effective:

  1. thirty days after the application is filed Correct answer.
  2. immediately on the date the application is filed
  3. only after each of the firm's agents has been registered
  4. on the date the administrator grants approval at a hearing

Explanation

Under the Uniform Securities Act, registration becomes effective thirty days after the application is filed, unless the administrator accelerates the effective date or institutes a proceeding to deny it. The waiting period gives the administrator an opportunity to review the filing.

Question 6Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An out-of-state broker-dealer applies for registration in this state. Its application must include:

  1. an irrevocable consent appointing the administrator to receive service of process Correct answer.
  2. a lease for a business office located in this state
  3. a list of every security the firm has ever sold
  4. a surety bond equal to ten percent of the firm's net capital

Explanation

Every applicant for registration as a broker-dealer, agent, investment adviser, or investment adviser representative files an irrevocable consent appointing the administrator as attorney to receive service of process in any action arising out of the person's securities activities. This ensures that a nonresident registrant cannot evade state jurisdiction by leaving the state.

Question 7Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An agent registered in this state resigns from her broker-dealer and joins another firm. Which statement is correct?

  1. Her registration remains effective for the rest of the calendar year
  2. The former firm must notify the administrator, and she must apply for registration through the new firm Correct answer.
  3. Her registration moves automatically to the new firm when she begins work
  4. She may continue to do business for 90 days while the new application is pending

Explanation

Registration as an agent is not transferable between firms. The terminating broker-dealer must promptly notify the administrator of the termination, and the agent must file a new application through the new employing firm before transacting business.

Question 8Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A registered agent meets clients by appointment in a hotel conference room. No sign identifies the firm, and she does not hold the room out as an office. This location is:

  1. an office of convenience that generally need not be registered Correct answer.
  2. an unregistered office that makes every transaction void
  3. a branch office that must be registered before use
  4. a principal office requiring a separate license fee

Explanation

A location used occasionally to meet clients, which is not held out to the public as an office of the firm, is treated as an office of convenience rather than a branch office. Only a true branch office, where business is regularly conducted and the location is represented as a firm office, triggers a separate notice filing.

Question 9Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An adviser has its only office in State A and had four retail clients who are residents of State B during the past 12 months. Under the typical state de minimis rule, the adviser:

  1. must register in State B only if it has custody of client funds
  2. must file a notice filing in State B as a federal covered adviser
  3. is exempt from registration in State B Correct answer.
  4. must register in State B because it has clients there

Explanation

Most states exempt an adviser that has no place of business in the state and had fewer than six clients resident in the state during the preceding twelve months. With four resident clients and no State B office, the adviser falls within the exemption.

Question 10Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Which professional is excluded from the definition of investment adviser, provided any securities advice is solely incidental to the practice?

  1. A firm whose only business is managing client portfolios
  2. A publisher of a newsletter that tells subscribers which stocks to buy and sell
  3. A consultant paid to recommend money managers to pension plans
  4. A lawyer who gives securities advice while settling an estate Correct answer.

Explanation

Lawyers, accountants, engineers, and teachers are excluded when their securities advice is solely incidental to their professional practice and they do not hold themselves out as advisers. The exclusion depends on both the incidental nature of the advice and the absence of separate advisory compensation.

Question 11Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An investment adviser registered in this state has custody of client funds. The adviser must:

  1. tell clients about the custody arrangement only if a client asks
  2. post a surety bond equal to the total value of all client accounts
  3. keep client funds with a qualified custodian and meet the related notice and recordkeeping requirements Correct answer.
  4. hold the funds in its own operating account and reconcile that account monthly

Explanation

An adviser with custody must maintain client funds and securities with a qualified custodian, such as a bank or registered broker-dealer, and must satisfy notice, statement delivery, and recordkeeping obligations. Commingling client assets with the adviser's own funds is prohibited.

Question 12Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An adviser pays an unaffiliated solicitor for client referrals. Under the typical state rule, the adviser must:

  1. cap the solicitor's fee at one percent of the client's assets
  2. disclose the arrangement to a client only if the client requests it
  3. register the solicitor as an investment adviser representative in every case
  4. use a written agreement and require the solicitor to disclose his compensation to the client Correct answer.

Explanation

Cash solicitation arrangements require a written agreement between the adviser and the solicitor, delivery of the adviser's brochure, and disclosure to the client of the solicitor's compensation and any disciplinary history. The solicitor must also not be subject to statutory disqualification.

Question 13Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An adviser proposes to charge a client a fee equal to a share of the account's capital gains. Such a fee is permitted only if:

  1. the client is a qualified client and the arrangement is disclosed Correct answer.
  2. the account is a retirement account
  3. the administrator approves the fee in advance
  4. the client signs a waiver of the adviser's fiduciary duty

Explanation

Performance-based compensation is allowed only when the client meets the qualified-client standard and the arrangement is fully disclosed, because such fees can tempt an adviser to take excessive risk. Absent those conditions, the fee conflicts with the adviser's fiduciary duty.

Question 14Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Under the brochure rule for state-registered advisers, Part 2A of Form ADV must be delivered to a new client:

  1. only to clients whose accounts exceed $100,000
  2. within 30 days after the advisory contract is signed
  3. at least 48 hours before signing, or at signing with a five-day cancellation right Correct answer.
  4. once each year together with the annual amendment

Explanation

The adviser must give the client the brochure at least 48 hours before the client enters the advisory contract, or deliver it at the time of signing if the client is given five business days to cancel without penalty. The rule ensures the client can evaluate fees, conflicts, and disciplinary history before being bound.

Question 15Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Control of a state-registered investment adviser changes hands. Which is required with respect to the existing advisory contracts?

  1. Client consent must be obtained, because a change of control is an assignment Correct answer.
  2. Only the administrator's written approval is needed
  3. Nothing; the contracts continue unchanged without client involvement
  4. The contracts end, and clients must wait 30 days before signing new ones

Explanation

A change of control is treated as an assignment of the advisory contract, and an assignment requires the client's consent. Without consent, the adviser may not enforce the contract or continue managing the account under it, so advisers typically seek consent by written notice.

Question 16Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An agent applicant was convicted eight years ago of a felony involving securities fraud. The administrator may:

  1. deny the application, after notice and an opportunity for a hearing Correct answer.
  2. refer the matter to the SEC, which has final authority over state registration
  3. must register the applicant if the applicant passes the qualification examination
  4. not consider the conviction because it is more than five years old

Explanation

A securities-related felony conviction is a ground for statutory disqualification, and the administrator may deny, suspend, or revoke registration on that basis. The action must be preceded by appropriate notice and an opportunity for a hearing.

Question 17Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A registered agent of a broker-dealer defrauds a customer while soliciting an order. The administrator may:

  1. sanction the agent and also sanction the firm for failing to supervise reasonably Correct answer.
  2. sanction only the agent, because the firm had no actual knowledge
  3. sanction the firm only if the customer's loss exceeds $10,000
  4. not act, because the agent's conduct was outside the scope of employment

Explanation

The administrator may proceed against the agent for the fraudulent conduct and against the broker-dealer when the firm failed to supervise the agent reasonably. Firms have an affirmative supervisory duty and cannot rely solely on ignorance of the agent's conduct.

Question 18Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Which statement about the books and records of a state-registered investment adviser is correct?

  1. Records must be preserved for the period set by rule and provided to the administrator on request Correct answer.
  2. Records may be kept only in paper form at the adviser's principal office
  3. Records must be destroyed 12 months after the end of each fiscal year
  4. Only records showing fee income must be retained

Explanation

State rules require advisers to make and keep specified books and records, including records of advice, orders, and client accounts, for a set retention period, and to make them available to the administrator for inspection. Records may be maintained electronically if they are readily accessible.

Question 19Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A state-registered investment adviser files an application to withdraw its registration. The withdrawal:

  1. requires the written consent of a majority of the firm's clients
  2. is void as long as the firm has any client in the state
  3. takes effect 30 days after filing, unless the administrator delays it, and pending actions may still proceed Correct answer.
  4. takes effect at once and ends the administrator's authority over the firm

Explanation

Withdrawal becomes effective thirty days after the application is filed, or at a later date the administrator sets, and it does not cut off proceedings based on conduct that occurred while the firm was registered. The administrator retains jurisdiction to finish pending matters.

Question 20Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An agent may accept compensation for securities activity from:

  1. any person, as long as the customer is told about the payment
  2. both the broker-dealer and the issuer, without disclosure
  3. the issuer whose securities were sold to the customer
  4. only the broker-dealer with which the agent is registered Correct answer.

Explanation

An agent may not be compensated for securities activity by anyone other than the broker-dealer that employs the agent, unless state law provides a specific exception. This rule prevents undisclosed payments from issuers or others that could improperly influence the agent's recommendations.

Question 21Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An investment adviser representative is an individual who:

  1. performs only clerical or administrative duties for an adviser
  2. gives investment advice to clients or solicits advisory business for a registered adviser Correct answer.
  3. is any employee of an investment adviser, whatever the duties
  4. trades securities in the adviser's own account

Explanation

An investment adviser representative is an individual associated with an adviser who makes recommendations about securities, manages client accounts, or solicits advisory business, and who has a place of business in the state. The test looks at the individual's duties rather than at the employment relationship.

Question 22Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Which individual is excluded from the definition of agent?

  1. A clerical employee who takes no part in any securities transaction Correct answer.
  2. A person who solicits new retail accounts for the firm
  3. A person who accepts customer orders over the telephone
  4. A person who trains new agents and also opens customer accounts

Explanation

The agent definition reaches individuals who effect or attempt to effect securities transactions or who are associated persons engaged in the firm's securities business. Purely clerical and administrative employees who have no role in transactions are excluded.

Question 23Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Registrations of broker-dealers, agents, and investment advisers in most states:

  1. end only if the registrant fails to pay the fee
  2. continue for five years without renewal
  3. expire each December 31 unless renewed Correct answer.
  4. run for two years from the effective date

Explanation

State registration is annual: the registration expires on December 31 of each year unless the registrant renews it and pays the required fee. Renewal filings must be current and accurate before the expiration date.

Question 24Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An adviser that is also a broker-dealer recommends that a client buy a bond from the firm's own inventory. The adviser must:

  1. report the transaction to the administrator within ten days
  2. disclose its principal capacity and obtain the client's consent Correct answer.
  3. complete the trade without comment because the client gave discretionary authority
  4. charge no commission on the transaction

Explanation

When an adviser sells a security from its own inventory, it acts as a principal and faces a conflict of interest. The adviser must disclose its principal capacity and obtain the client's consent before completing the trade, so the client knows the firm stands on the other side of the transaction.

Question 25Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An applicant for investment adviser registration intends to take discretionary authority over client accounts. The administrator may require the adviser to:

  1. obtain SEC approval before doing business
  2. register each client's account with the state
  3. keep client securities in the adviser's own vault
  4. maintain a minimum net worth or file a surety bond Correct answer.

Explanation

Where an adviser has discretionary authority or custody, state rules commonly impose a minimum net worth requirement or, in the alternative, a surety bond to protect clients. The requirement addresses the heightened risk that accompanies control over client assets.

Question 26Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A firm has no office in this state and effects securities transactions in this state exclusively with other broker-dealers and with banks. Under the Uniform Securities Act, the firm is:

  1. excluded from the definition of broker-dealer in this state Correct answer.
  2. required to file a consent to service of process but nothing more
  3. required to register as a broker-dealer before any of these transactions
  4. required to register only if it also begins dealing with individual retail investors

Explanation

The definition of broker-dealer excludes a person that has no place of business in the state and effects transactions there only with issuers, other broker-dealers, banks, savings institutions, or other institutional buyers. Because every counterparty here is a broker-dealer or a bank, the firm falls outside the definition and no state registration is required.

Question 27Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An investment adviser files a complete application for state registration. Unless the Administrator acts sooner, the registration becomes effective:

  1. on the date the applicant pays its annual registration fee
  2. 30 days after the application is filed, unless the Administrator acts sooner Correct answer.
  3. only after the applicant's principals pass a qualifying examination
  4. when the Administrator mails a certificate of registration to the applicant

Explanation

Under the Uniform Securities Act a completed application becomes effective 30 days after filing unless the Administrator accelerates effectiveness or enters an order denying the application. The Administrator need not issue a certificate, and payment of fees or examination results are separate conditions the Administrator may impose by rule.

Question 28Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Which of the following is excluded from the definition of investment adviser under the Uniform Securities Act?

  1. A partnership whose only advisory clients are employee benefit plans
  2. A corporation that charges retail clients a percentage of assets for portfolio management
  3. A national bank that gives investment advice through its trust department Correct answer.
  4. A sole proprietor who advises individual clients on securities for an annual fee

Explanation

The definition of investment adviser expressly excludes banks, savings institutions, and trust companies, including a bank providing advice through its trust department. The other choices are ordinary advisory businesses that receive compensation for advising others about securities.

Question 29Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A firm registered with the SEC as an investment adviser maintains its principal office in this state. To conduct advisory business here, the firm must:

  1. register with the state in addition to maintaining its SEC registration
  2. take no action, because federal registration eliminates every state requirement
  3. file a notice filing with the Administrator and pay the required fee Correct answer.
  4. withdraw its SEC registration and register as an investment adviser with the state

Explanation

A federally registered adviser is a federal covered adviser, and states may not require it to register. A state may, however, require a notice filing consisting of the Form ADV documents it specifies, together with a fee, and it retains antifraud authority.

Question 30Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An adviser registered in another state moves its only office into this state but keeps all of its clients, who live elsewhere. As a result, the adviser must:

  1. register here only if the Administrator sends it a written request
  2. register in this state, because the firm now has a place of business here Correct answer.
  3. register in this state only after it obtains a client who lives here
  4. remain unregistered here, because all of its clients live elsewhere

Explanation

An adviser must register in a state in which it maintains a place of business, regardless of where its clients reside. The limited exclusion for out-of-state advisers applies only to firms with no place of business in the state that keep their client counts below the statutory threshold.

Question 31Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

Under the unethical-practice rules commonly applied to state-registered advisers, which statement about advertising is correct?

  1. Advertisements need not be retained in the adviser's records.
  2. Advertisements must be approved by the Administrator before first use.
  3. An advertisement may not contain a client's testimonial about the adviser's performance. Correct answer.
  4. Testimonials are permitted if the client who gives one is not compensated.

Explanation

State rules on unethical business practices prohibit adviser advertising that contains a client testimonial or that refers to past specific recommendations. Compensation of the client is irrelevant, and no pre-use approval by the Administrator is required, although records of advertisements must be kept.

Question 32Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An investment adviser representative wants to borrow money from one of her advisory clients. Under the unethical-practice provisions typically applied by the states, the loan is:

  1. permitted if the loan is documented and carries a market rate of interest
  2. prohibited in every case, with no exceptions
  3. permitted if the client consents in writing after full disclosure
  4. prohibited unless the client is a broker-dealer or an affiliate of the adviser Correct answer.

Explanation

Borrowing from a client is an unethical practice for advisory personnel unless the client is a broker-dealer or an affiliate of the adviser, or the loan is made under a lending arrangement with a financial institution. Disclosure and client consent do not cure the conflict.

Question 33Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An agent tells a hesitant customer, "I personally guarantee that you will not lose money on this bond." Under the Uniform Securities Act, this statement is:

  1. acceptable because the agent promised personally rather than on behalf of the firm
  2. acceptable if the broker-dealer approves the guarantee in writing
  3. acceptable if the agent is financially able to honor the guarantee
  4. prohibited, because guaranteeing a customer against loss is an unethical practice Correct answer.

Explanation

Promising a customer against loss is expressly identified as a dishonest or unethical practice in the securities business. Neither personal capacity to pay nor firm approval cures the prohibition, and it makes no difference whether the promise is framed as personal.

Question 34Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A firm charges clients a fee to advise them on buying and leasing commercial real estate, and it never gives advice about securities. Under the Uniform Securities Act, the firm is:

  1. an investment adviser, because it is paid for giving advice
  2. a broker-dealer, because it is compensated for arranging transactions
  3. not an investment adviser, because it gives no advice about securities Correct answer.
  4. an investment adviser, but one that is exempt from registration

Explanation

Investment adviser status requires being in the business of advising others about securities for compensation. Advice confined to real property, with no securities component, falls outside the definition, so neither registration nor an exemption analysis is needed.

Question 35Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A registered agent wants to be registered as an agent of two unrelated broker-dealers at the same time. Under the Uniform Securities Act, this arrangement is:

  1. permitted if both broker-dealers know of and consent to the arrangement Correct answer.
  2. permitted only if every client of the agent is an institutional investor
  3. permitted only if the Administrator approves it in writing for each state
  4. prohibited, because an agent may represent only one broker-dealer at a time

Explanation

An individual may be registered as an agent of more than one broker-dealer, provided each firm is aware of the dual relationship and consents to it. Both firms must themselves be registered where the agent does business.

Question 36Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An advisory client signs a contract containing a clause stating that the client waives all claims against the adviser under the state securities act. Under the Uniform Securities Act, the clause is:

  1. enforceable, provided the adviser disclosed the clause in its brochure
  2. enforceable only if the client qualifies as an institutional investor
  3. enforceable, because the client accepted the contract voluntarily
  4. void, because the Act prohibits waivers of compliance with its provisions Correct answer.

Explanation

The Act makes void any condition or provision that binds a person to waive compliance with any provision of the Act or of a rule or order under it. Voluntary acceptance and disclosure cannot validate such a waiver, and the rule applies to all clients.

Question 37Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An individual holds a state insurance license and wants to sell variable annuities, whose values fluctuate with a securities portfolio. With respect to those sales, the individual:

  1. must be registered as a securities agent, because a variable annuity is a security Correct answer.
  2. may sell them under the insurance license alone, because annuities are insurance products
  3. must register as an investment adviser representative before selling them
  4. may sell them without registration if the issuer has registered the contract

Explanation

Variable annuities are securities because their value depends on an underlying securities portfolio, so sales require registration as an agent of a broker-dealer in addition to any insurance license. Issuer registration of the contract does not relieve the individual of registration.

Question 38Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A state-registered adviser hires an individual whose only duties are to contact prospective clients and urge them to engage the firm. She gives no securities advice. Under the Uniform Securities Act, she must:

  1. obtain a separate solicitor's license issued by the Administrator
  2. register only as an agent of a broker-dealer, because she is paid for sales efforts
  3. take no action, because she never renders investment advice to anyone
  4. register as an investment adviser representative, because she solicits advisory clients Correct answer.

Explanation

The definition of investment adviser representative includes individuals who solicit, offer, or negotiate the sale of advisory services, not just those who give advice or manage accounts. Because she is employed by the adviser and solicits clients, she must be registered as an IAR.

Question 39Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

A firm registered with the SEC as an investment adviser has an office in this state. Its investment adviser representatives who meet with clients in this state:

  1. must register with this state but are excused from any examination requirement
  2. are not required to register with this state, because the firm is a federal covered adviser Correct answer.
  3. must each register with this state before their first client meeting
  4. must register with this state only if they manage more than five client accounts

Explanation

Federal law preempts state registration of an adviser that is registered with the SEC and of the persons associated with it. The state retains authority over notice filings, fees, and antifraud enforcement, but it cannot require the firm's IARs to register.

Question 40Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives

An agent of a broker-dealer wholly owns a separate firm that, for an annual fee, tells its clients which mutual funds to buy. The agent personally prepares every recommendation. Which registrations are required?

  1. Only the agent's existing securities registration, because she is already registered
  2. Only the advice firm needs to register, and it must register as a broker-dealer
  3. No additional registration is needed, because fund recommendations are incidental to brokerage
  4. The advice firm must register as an investment adviser, and the agent must register as an IAR Correct answer.

Explanation

The separate firm is compensated for advising others about securities, so it is an investment adviser and must be registered. The agent, who prepares the recommendations for that firm's clients, is an investment adviser representative and must be registered in that capacity as well.

Question 41Regulation of Securities and Issuers

Which method of state securities registration is designed for an offering that is being registered simultaneously with the SEC under the Securities Act of 1933?

  1. Registration by preemption
  2. Registration by qualification
  3. Registration by notification
  4. Registration by coordination Correct answer.

Explanation

Registration by coordination is used when the same offering is being registered with the SEC; the state filing becomes effective when the federal registration becomes effective, assuming required documents have been filed. Notification is a simplified method for seasoned issuers, and qualification is the catch-all method.

Question 42Regulation of Securities and Issuers

Which security is exempt from state registration under the Uniform Securities Act?

  1. Common stock of a newly organized technology company
  2. Corporate bonds issued by a manufacturing company
  3. Limited partnership interests in a real estate development
  4. General obligation bonds issued by a municipality Correct answer.

Explanation

The Uniform Securities Act exempts securities issued by the U.S. government, its agencies, and state and municipal governments, along with certain others such as bank and insurance company securities and qualified commercial paper. Corporate stock, limited partnership interests, and ordinary corporate bonds must be registered unless an exemption applies.

Question 43Regulation of Securities and Issuers

A broker-dealer that has no office in a state may transact business with residents of that state without registering there if it:

  1. effects trades only with institutional investors Correct answer.
  2. uses an unregistered agent who lives in the state
  3. maintains a website that residents can access
  4. places advertisements in local newspapers

Explanation

The Uniform Securities Act exempts a broker-dealer with no place of business in the state whose only transactions with state residents are with institutional investors, other broker-dealers, or issuers. A website or advertising does not by itself create an exemption, and using an unregistered agent is not permitted.

Question 44Regulation of Securities and Issuers

Which person is excluded from the definition of investment adviser under the Uniform Securities Act?

  1. An attorney who gives investment advice only incidentally to legal practice Correct answer.
  2. A person who manages a hedge fund and receives a performance fee
  3. A person who publishes a newsletter containing specific investment recommendations
  4. A financial planner who charges a fee for investment advice

Explanation

The Uniform Securities Act excludes certain professionals, including lawyers, accountants, and engineers, when their investment advice is incidental to their professional practice and they receive no special compensation for it. Fee-based planners, publishers of specific recommendations, and hedge fund managers generally fall within the definition.

Question 45Regulation of Securities and Issuers

An individual must register as an agent in a state if the individual:

  1. works as a receptionist at a broker-dealer's office
  2. represents a broker-dealer in securities sales Correct answer.
  3. performs only clerical work for a broker-dealer
  4. prepares advertising materials for a broker-dealer

Explanation

An agent is an individual who represents a broker-dealer or issuer in effecting or attempting to effect securities transactions. Clerical, ministerial, and administrative employees are excluded from the definition.

Question 46Regulation of Securities and Issuers

Under the Uniform Securities Act, a securities registration by qualification becomes effective:

  1. immediately upon the filing of the registration statement
  2. 5 days after the filing
  3. 30 days after filing unless accelerated Correct answer.
  4. only when the SEC declares a federal registration effective

Explanation

Registration by qualification is the catch-all method; it becomes effective 30 days after the filing unless the administrator accelerates the effective date. Coordination ties to the SEC effective date, and notification is a simplified method for seasoned issuers.

Question 47Regulation of Securities and Issuers

Which statement about federal covered securities under NSMIA is correct?

  1. They may be sold only to institutional investors.
  2. They must be registered by qualification in each state where they are offered.
  3. They are completely exempt from state antifraud enforcement.
  4. States cannot require registration but may require notice filings. Correct answer.

Explanation

NSMIA preempts state registration and merit review for federal covered securities, such as exchange-listed securities and securities sold under Rule 506. States retain antifraud authority and may require notice filings and fees.

Question 48Regulation of Securities and Issuers

Which of the following is an exempt transaction under the Uniform Securities Act?

  1. An isolated nonissuer transaction effected by a broker-dealer Correct answer.
  2. A broker-dealer's sale of newly issued securities as an underwriter
  3. An issuer's sale of securities to 100 residents in a 12-month period
  4. A public offering of common stock to 500 retail investors

Explanation

The Uniform Securities Act exempts certain transactions, including isolated nonissuer transactions, private placements to no more than 10 persons in 12 months, and transactions with underwriters. A broad public offering or a sale to 100 residents does not qualify for the private placement exemption.

Question 49Regulation of Securities and Issuers

An issuer seeks to register securities by notification in a state. Which condition is generally required for this method?

  1. The issuer must be a registered investment company.
  2. The issuer must have no operating history and be a start-up company.
  3. The issuer must have 36 months of operations and meet earnings tests. Correct answer.
  4. The issuer must be simultaneously registering the same offering with the SEC.

Explanation

Registration by notification is a simplified method available to seasoned issuers that have been in business for at least 36 months, have not defaulted on obligations, and meet specified earnings or dividend tests. Simultaneous SEC registration describes coordination, and start-ups generally use qualification.

Question 50Regulation of Securities and Issuers

An issuer files a registration statement by coordination with a state administrator on March 1. The SEC declares the federal registration effective on April 15, and all required state documents have been filed. The state registration becomes effective:

  1. April 20
  2. March 1
  3. March 31
  4. April 15 Correct answer.

Explanation

Registration by coordination becomes effective when the federal registration becomes effective, provided the state administrator has received the required documents such as the prospectus and a statement of the maximum offering price. The March 1 filing date does not control.