Question 1

Which of the following statements regarding the registration of broker-dealers and investment advisers is true?

Accepted Answer

The true statement is C: Investment advisers are required either to be registered with a state or with the SEC, but broker-dealers must be registered with both the SEC and the state. Investment advisers who are federal covered do not need to be registered with the state as well, but they do have to execute a notice filing with the Administrator of any state in which they have an office.

Question 2

Under the Uniform Securities Act (USA), which of the following statements would be disallowed?

Accepted Answer

A sales representative (aka an agent) of a broker-dealer may not make any guarantees. Only three entities are allowed to make guarantees under the Act: Parent companies, which may guarantee the securities of one of its subsidiaries, the U.S. government, and insurance companies.

Question 3

Which of the following would meet the requirements for an "exempt security?"

Accepted Answer

An issue of commercial paper with a $100,000 denomination and a maturity of five months with an AA rating from Standard and Poors meets the requirements for an "exempt security." A short-term security, with no more than 270 days to maturity, that has a denomination of at least $50,000, and has a rating of AAA, AA, or A from a recognized rating agency is exempt from registration with the state Administrator.

Question 4

Which of the following describes an investment adviser that is not required to register with the state Administrator?

Accepted Answer

Buckeye Investment Advisers is not required to register with the state Administrator since it has no offices in the state and provides portfolio management services to an institutional investor within the state. Both MoeMoney and Financial Freedom must register since they advise more than 5 individual clients. It doesn't matter in that case whether they have offices within the state or not. CanDo is registered only as a broker-dealer, but it has begun offering investment advice for a fee, so it must also register with the state as an investment adviser.

Question 5

The state official who has regulatory authority over the securities industry within the state is known as the

Accepted Answer

The state official who has regulatory authority over the securities industry within the state is the administrator.

Question 6

Which of the following actions is the Administrator of a state empowered to take?

Accepted Answer

The Administrator of a state can gather evidence, but it cannot impose any civil penalties, including the requirement of restitution to victims. These actions can only be performed by a court of law.

Question 7

Which of the following orders can an Administrator issue without providing prior notice?

Accepted Answer

The Administrator can issue an order to cease and desist without providing the party concerned with prior notice. In the cases involving the denial, suspension, or revocation of a license, the Administrator will provide prior notice, along with the opportunity for a hearing, and a written statement of the facts and the legal consequences involved.

Question 8

It has come to the attention of the Administrator of the state that Samuel Shyster provided false information on his application to become a registered investment adviser with the state. Prior to revoking Samuel's license, the Administrator will provide Samuel with which of the following?
I. prior notice
II. an opportunity to fill out a new registration statement
III. an opportunity for a hearing
IV. a written statement regarding the facts and the legal consequences

Accepted Answer

Prior to revoking Samuel's license, the Administrator will provide Samuel with prior notice (I), an opportunity for a hearing (III), and a written statement regarding the facts and the legal consequences (IV).

Question 9

Sam Shyster had his day in court-and lost. His license to do business as an investment adviser in the state has been revoked. What legitimate options does Sam have available to him now?

Accepted Answer

Sam has the legitimate option of filing an appeal of the decision in a court of law within 60 days. He will not be able to register as an investment adviser with the SEC or with another state. His application will be denied when it is discovered that Sam has had his license revoked by one state.

Question 10

Which of the following constitutes a non-punitive order?

Accepted Answer

Registration cancellation is a non-punitive order. The Administrator issues a cancellation order if a registered person dies, becomes mentally incompetent, is no longer in business, or is unable to be located.

Question 11

Broker-dealer Nebulous opted to withdraw its registration with the state. Six months later, the Administrator finds that Nebulous had been engaged in fraudulent securities transactions. Which of the following statements is true?

Accepted Answer

Even though Nebulous withdrew its registration from the state, the Administrator has up to a year to take disciplinary action against the broker-dealer if he discovers that Nebulous has been engaged in fraudulent securities transactions after the fact. The Administrator can retroactively begin a revocation or suspension proceeding. Criminal courts can initiate proceedings anytime within five years of the alleged misdeeds.

Question 12

Broker-Dealer Wheeler has no offices in the state. Wheeler does, however, sell corporate bonds from his portfolio to banks and insurance companies located in the state that
Purchase the bonds for their investment portfolios. He executes about twelve of these transactions a year. Wheeler profits from the price appreciation of the bonds during the time he held them, but receives no other form of compensation. Based on these facts,

Accepted Answer

Since Wheeler has no offices in the state and is selling bonds from his portfolio to institutional investors, Wheeler need not register in the state, and the securities are exempt from registration. Broker-dealers with no physical location in a state that are doing business with other broker-dealers or with institutional investors such as banks and insurance companies that do have offices in that state are exempted from registering in the state. Securities sales to institutional investors are exempt transactions, and securities sold in exempt transactions are themselves exempt from state registration requirements.

Question 13

Jack Bean is employed by Giant Investment Advisers, LLC. His job duties include advising clients on the asset allocations of their portfolios. Jack Bean is

Accepted Answer

As an employee of Giant Investment Advisers who provides investment advice to clients, Jack Bean is an investment adviser representative. Giant is the investment adviser. Agents are employed by broker-dealers.

Question 14

Muffet is employed by Spyder Broker-Dealers. Her job duties include providing price quotes and executing purchases and sales for the firm's clients. She is paid a salary plus commission. Ms. Muffet is

Accepted Answer

As an employee of Spyder Broker-Dealers who executes trades for clients, Ms. Muffet is an agent who works for the broker-dealer Spyder. She does not provide investment advice for a fee, so she is neither an investment adviser nor an investment adviser representative.

Question 15

What criminal penalties are specified for "willful violations" of the Uniform Securities Act?

Accepted Answer

The criminal penalties specified by the Uniform Securities Act for "willful violations" of the act are up to 3 years in prison or a $5,000 fine, or both, for each violation.

Question 16

George Geek is a computer programmer who tired of working for others and started his own company. He convinced forty investors that he could design software that would rival Microsoft, and sold them each a 10% partnership interest in his firm for $25,000. He designed and printed up the partnership certificates himself. George told the investors that he had a product that was on the verge of being marketable and that when it did-within the next two months-revenues would pour into the company, and he would begin paying dividends. He told them they could expect a 20% return on their money this year, with even higher returns in the years to come. As it turned out, George wasn't quite the programmer he thought he was, and he wasn't able to get all the bugs out of the program to make it marketable within the promised two months. Within a year, George had tired of the project and was too busy picking up chicks in his new Corvette when he wasn't on the island of St. Bart overseeing the construction of his new beach mansion-and picking up chicks. His activities, of course, were financed by the extremely generous "salary" he paid himself from the investors' monies. Under the Uniform Securities Act, do the investors have any civil claims against George?

Accepted Answer

Yes. The investors have a civil claim against George under the Uniform Securities Act and can sue for the return of their original investment, plus interest, reasonable attorneys' fees, and court costs. There is no provision for pain and suffering. Partnership interests fall under the definition of securities, so the Uniform Securities Act does apply, and George sold the interests illegally. As securities, they were required to be registered with the state before they could be sold.

Question 17

Naiveté gave Mr. Smooth, owner of Smooth Construction, $40,000 in return for a promissory note that promised to pay interest at the rate of 8% a quarter, with a repayment of principal at the end of two years. The money would be used by Mr. Smooth to rehab a few beach condo units that had been severely hurricane-damaged and that Mr. Smooth had been able to purchase for "pennies on the dollar," or so he said. The first units would be completed within a month, and the rents would be used to make the interest payments. The investment was almost as risk-free as U.S. government bonds, Mr. Smooth claimed. By the end of the second year, Ms. Naiveté had received a lot of fast talk and only one of the promised interest payments. Have there been any violation of securities laws in this instance?

Accepted Answer

Yes, there have been violations of securities laws in this instance; the promissory note required registration, and Ms. Naiveté has been defrauded. Promissory notes are considered to be securities as defined by the Uniform Securities Act and, as such, must be registered with the state before they can be offered for sale. Furthermore, a promissory note is a promise to repay, and Mr. Smooth has defaulted on this promise after telling Ms. Naiveté that the investment was close to being risk-free. In essence, he took Ms. Naiveté's money under false pretenses when he sold her the note, and that is the definition of fraud.

Question 18

You have recently discovered that a security you purchased has not been registered with the state, nor is it exempt from registration. You can file a civil claim against the seller as long as you do so within

Accepted Answer

If you discover that a security you purchased has not been registered with the state and was sold unlawfully, you can file a civil claim against the seller as long as you do so within two years from discovery or three years from the event, whichever comes first, under the guidelines of the Uniform Securities Act. Therefore, if you know about an unlawful sale for more than two years or if the sale took place more than three years ago, you cannot sue. The statute of limitations has expired.

Question 19

Iggy recently started his own company. He soon discovered it required more cash to keep it going than he had anticipated. He ran an ad in the local paper for investors and got a response. He found a template for a promissory note on the internet, filled in the requisite information specific to the agreement he and the investor had worked out, and printed it out. On it, he promised to make monthly interest payments of 2% on the loan and to repay the principal amount at the end of 18 months. A few months after the arrangement, Iggy read an article in a small business publication that indicated that promissory notes had to be registered with the state unless they were sold in an exempt transaction, such as one enacted with a financial institution, prior to being offered for sale. The article indicated that a seller who had sold an unregistered note in error could remedy the situation by sending the buyer a formal offer to buy the security back, with interest. Iggy turned to the computer once again, found a form that could be used for a formal offer of rescission, filled it out, and sent it to the investor. Having done this,

Accepted Answer

Since Iggy realized the promissory note he had sold to the investor required state registration and sent a formal offer of rescission to the investor, he cannot be sued for civil damages if the investor has not responded to the offer within 30 days. The investor has 30 days to accept or reject the offer. If he either rejects it or fails to accept it by not responding to the offer at all, the investor has lost the right to sue for damages.

Question 20

An investment adviser suggests that his client, Arnold, a 74-year old gentleman, should consider a reallocation of the assets in his portfolio. The adviser tells Arnold that he has far too much invested in bonds, which don't earn as much as stocks. He advises Arnold to take 80% of the money he has in bonds and invest it in an aggressive growth mutual fund that has provided an average annual return of 40% over the past three years. Arnold is impressed and follows this advice. Shortly thereafter, there is a steep drop in the market in general, and the net asset value of the aggressive growth mutual fund falls 85%. Does Arnold have any remedies available to him?

Accepted Answer

If Arnold loses his money because he took the advice of his investment adviser and reallocated a large percentage of his money from bonds to an aggressive growth mutual fund, he can sue the investment adviser in civil court for the amount of his losses, plus interest, court costs, and attorneys' fees. The courts do not award damages for "pain and suffering" in these cases. The investment adviser failed in his fiduciary responsibility to Arnold in recommending that a 74-year old man reallocate a large percentage of his money from the relative safety of bonds to the much riskier investment of an aggressive growth mutual fund.

Quiz 4: Uniform Securities Act USA and State Registration Requirements