Scrap Pad

  1. An adviser with no place of business in a state, who only provides advice to mutual funds (a type of investment company), other investment advisers, broker-dealers, banks, trust companies, insurance companies, savings and loan associations, employee benefit plans such as a 401(k), where the minimum amount of the assets is $1,000,000, is exempt from registration. An adviser with no place of business who only advises four individual clients would meet the de minimis exemption.

  2. Registration by coordination is used to coordinate state and federal registration. This method is only used by issuers that are registering securities under the Uniform Securities Act and the Securities Act of 1933 at the same time. Private placements are a type of exempt transaction, while registration by Qualification doesn't require the issue to be registered under the Securities Act of 1933. Notice filing is not a type of registration; instead, it's used to inform the state securities Administrator that federal covered securities will be sold in the Administrator's state.

  3. The state securities Administrator can impose minimum net capital requirements on broker-dealers. For investment advisers, the Administrator can impose minimum net worth requirements. Although they're similar, calculating net capital is more complex than calculating net worth. Agents and investment adviser representatives are NOT subject to minimum financial requirements. (21665)

  4. The Securities Exchange Act of 1934 established the Securities Exchange Commission (SEC), requires the registration of broker-dealers, and governs the secondary market for securities in the United States. The Investment Adviser Act requires investment advisers to register with the SEC. The Securities Act of 1933 governs the sale of new securities (e.g., IPOs), while the Uniform Securities Act is a model law that's used to create state securities legislation. (25552)

  5. An agent who holds full discretionary authority over a customer's account may buy or sell securities and withdraw money without consulting the customer. Agent's who receive compensation for using discretion would need to register as investment advisers. In this question, since the agent only works for a broker-dealer, receiving a fee for using discretion is not permitted. Borrowing client assets is never permitted. (75880)

  6. Under the Uniform Securities Act, all broker-dealers that are registered in a state are required to file financial reports, even if their home office is in another state. However, those reports cannot be different from, or more frequently filed than, those required by Section 15 of the Securities Exchange Act of 1934. Records of financial reports must be kept current and made available to the Administrator upon request. The state Administrator may cooperate with Administrators of other states, the SEC, and any national securities exchange that's registered under the Securities Exchange Act of 1934. (20407)

  7. Since the adviser has more than $110 million in assets under management and manages several registered investment companies (mutual funds), it must register with the SEC as a federal covered adviser. Federal covered advisers must complete notice filing in any state in which they have an office; therefore, the adviser in this question must notice file with the Administrator of State Z.

    (13270)

  8. Investment advisers register with either the SEC (i.e., federal covered) or the state Administrator(s). Broker-dealers must register with both the SEC and the state Administrator(s), in addition to becoming a FINRA member. (25463)

  9. Under the Uniform Securities Act (USA), registered investment advisers (RIAs) must provide a balance sheet to their clients if they hold custody, have full discretionary authority, or collect at least $500 of prepaid fees, six months or more in advance of the service. Charging an advisory fee based on a percentage of assets under management (AUM) doesn't mean that the adviser must deliver a balance sheet to its clients.

    (15188)

  10. Form ADV Part 2 is generally used to disclose an adviser's fees and services offered. Part 2B has information that's used in the brochure supplement, including information about employees of the adviser who interact with customers or have discretionary authority. Part 1 has general information about the adviser's business. Form ADV-A lists the direct owners of an investment adviser as well as the adviser’s executives. ADV-E is filed by an independent accountant after auditing an adviser that maintains custody of client assets. (25203)

  11. An investment adviser's books and records need to be maintained for at least five years. For the first two years of existence, they must be kept in an appropriate office of the investment adviser (easily accessible). Conversely, broker-dealers only need to maintain books and records for three years, with the first two years in an easily accessible location. (22069)

  12. An investment adviser's books and records need to be maintained for at least five years. For the first two years of existence, they must be kept in an appropriate office of the investment adviser (easily accessible). Conversely, broker-dealers only need to maintain books and records for three years, with the first two years in an easily accessible location. (22069)

  13. Typically, discretion may only be exercised after receiving written authorization from the client. However, a client’s oral discretion is enough to allow an investment adviser to buy or sell securities on the client’s behalf without written authorization. This oral discretion provision is only available to investment advisers and only effective for a period of 10 business days after the discretion is granted. By the end of the 10-business-day period, the adviser must obtain the client’s written authorization to continue operating in a discretionary capacity. (25192)

  14. In this question, the client received the adviser's brochure on Monday and then signed the contract on Thursday. Since the client had the brochure for more than 48 hours (i.e., two days) before signing the contract, he can be assessed a penalty for canceling the contract. If the client is given the brochure less than 48 hours before signing an advisory contract, then the client has a five-day period during which the contract can be cancelled without being assessed a penalty. (25186)

  15. A bond may be required by an Administrator to cover possible legal costs arising from violations of the Uniform Securities Act. The Administrator may accept cash or securities in lieu of a bond, but real estate and property is not acceptable. This type of bond is generally referred to as a surety bond. (21690)

  16. A person who has no place of business in a state and effects transactions only with institutional investors is not considered a broker-dealer in that state. Investment clubs do not qualify as institutional investors.

    A person who has no place of business in the state, but is licensed as a broker-dealer where the person maintains an office, may conduct securities business with existing clients who are in another state temporarily. (62021)

  17. Investment adviser representatives (IARs) cannot roll over extra continuing education credits from one year to the next. IARs must complete six credits of Regulatory and Ethics credits, and three of those six credits must specifically address ethics. For example, an IAR who completes seven hours of Regulatory and Ethics credits this year, cannot roll over the one extra credit into next year. IARs who are not dually registered as registered representatives with FINRA must also complete six credits covering Products and Practices each year.

    (13806)

  18. Investment advisers provide advice regarding securities, as a regular course of their business, and do so for compensation. Charging an annual fee for comprehensive asset management advice requires a firm to register as an investment adviser. Executing securities transactions requires a firm to register as a broker-dealer. Since neither real estate nor commodities are securities, charging for advice related to them doesn't require registration as an investment adviser. (25462)

  19. This question requires a person to carefully notice the subtle difference between the terms "net worth" and "net capital." The term "net capital" applies only to broker-dealers, not investment advisers. Investment advisers are required to maintain a minimum "net worth" and surety bonding (if they maintain custody of client assets) as prescribed by the Administrator. (22047)

  20. Investment advisers may use third-party ratings to promote their business if they also provide disclosures about the ratings. Advisers must disclose the date of the rating, identity of the rating organization, and whether compensation has been provided. In addition, third-party ratings cannot be designed to create a predetermined result. (25524)

  21. Although federal covered advisers are not required to register with the state(s), investment adviser representatives (IARs) who work for federal covered advisers (FCAs) are only required to register in any state in which they have an office. On the other hand, IARs who work for state registered IAs are required to register in any state in which they maintain an office and in any state in which they have more than five non-institutional clients.

  22. Federally Covered Advisers and Broker Dealer Difference: Federal covered investment advisers must keep books and records for a total of five years. For the first two years, the records must be kept at an office of the investment adviser. Broker-dealers keep most records for three years; however, for the first two years, the records must be kept in an easily accessible location. Both broker-dealers and investment advisers may use electronic storage for their records.

  23. If an investment adviser's ownership changes, both the SEC and its clients must be notified. An adviser is not required to receive permission from the SEC to change its ownership structure. If a majority of an adviser's ownership changes (e.g., adding three partners to a firm with four partners), clients must first provide their written permission for the firm to assign their contracts to the new business entity. Simply notifying each advisory client is not sufficient to assign a contract. (25211)

  24. An investment adviser representative is defined as any individual who makes recommendations or otherwise renders advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, solicits, offers, negotiates, or sells investment advisory services, or supervises employees who are IARs. Officers, partners, and directors are considered IARs if they're performing at least some of the duties of an IAR. An owner who doesn't participate in the operations of the business and doesn't make recommendations or solicit services is not considered an IAR under the Uniform Securities Act.

    (13271)

  25. Advisers may assess performance-based fees to qualified clients. Registered investment companies as well as Section 3(c)(1) and Section 3(c)(7) hedge funds are all considered qualified clients. Individuals with a net worth of at least $2.2 million (excluding their primary residence) or individuals with $1.1 million of assets under management (AUM) with the adviser are also considered qualified clients. Non-U.S. residents may be assessed a performance-based fee, but this is not permitted with non-qualified American residents. (25223)

  26. SEC Release 1092 states that investment adviser compensation includes "any economic benefit." Therefore, compensation can include commissions generated by the sale of non-securities products, such as insurance or real estate. As a result, Ken's commission for his involvement in the property transaction is considered investment adviser compensation within the meaning of the Investment Advisers Act. (62414)

  27. Any investment advisory contract that attempts to bind any person to transactions that are not permitted under the Act is null and void. Even if the client signs the contract, and the transactions are disclosed, the contract is void.

  28. Investment advisers that have between $100 million and $110 million in assets under management (AUM) are able to choose whether to register with the SEC or the state Administrator(s). New advisers with more than $110 million in AUM must register with the SEC; however, new advisers with less than $100 million in AUM must register with the state Administrator(s). (25212)

  29. Advisers must keep records of all advertisements that are sent to more than one person. If communication is sent to 10 or fewer people, the adviser must keep a record of the names and addresses as well.

  30. If a private fund has less than $150 million from U.S.-based investors, its investment adviser is considered an exempt reporting adviser (ERA). ERAs are not required to register with either the state or SEC, but must notice file and pay filing fees to a state Administrator. SEC Release 1092 provided clarity on the definition of an investment adviser, but did not change the registration requirements of investment advisers. (25219)

  31. Advisers that file false or misleading applications are subject to a statutory disqualification. In addition, applicants that were convicted of a felony or securities-related misdemeanor within the last 10 years are also automatically disqualified. Simply being investigated, rather than being convicted, is not a disqualification event.

  32. Individuals or businesses that only provide advice or analysis on U.S. government securities are not required to register as investment advisers with the SEC. Private fund managers are only exempt if the funds they're managing have less than $150 million in assets under management. An internet-based businesses that provides advice based on the individual needs of a client must register with the SEC. Corporations (with sports and entertainment agents as employees) that provide advisory services to athletes and entertainers are not exempt and must register as investment advisers.

  33. An adviser that solely advises venture capital funds qualifies for the federal Venture Capital Adviser Exemption and is a type of exempt reporting adviser (ERA). Pension consultants that provide advice to plans with more than $200 million in assets under management (AUM) are required to register with the SEC. In addition, an adviser that manages the assets of a registered investment company must register with the SEC regardless of the size of the fund's assets. An adviser that would be required to register in 15 or more states is a federal covered adviser (FCA) and must register with the SEC.

  34. An adviser that had previously registered with the SEC as a federal covered adviser is not required to register with the state Administrator until its assets under management (AUM) falls below $90 million. As a result, XYZ can choose to re-register with the SEC as a federal covered adviser. XYZ could also file a partial withdrawal using Form ADV-W and register as an investment adviser at the state level by filling Form ADV with the Administrator(s). It's important to note that, with $92 million in AUM, XYZ has the option of registering with either the SEC or state Administrator. (25221)

  35. In order to pay a third-party solicitor, an investment adviser must be registered. Since exempt reporting advisers (ERAs) are not registered, they're not permitted to pay solicitors. If a registered adviser uses a solicitor, material conflicts of interest must be disclosed, including payment exceeding $1,000 in any 12-month period. (25516)

  36. Investment advisers are prohibited from using hedge clauses to waive their liability for criminal or civil fraud liabilities. In addition, advisers are prohibited from using mandatory arbitration clauses. Advisory clients may sign predispute arbitration clauses, but they must do so voluntarily. Rule 204A-1 requires advisers to create a written code of ethics and prohibits advisers from using clauses which limit damages (i.e., exculpatory). (25508)

  37. If an investment adviser's ownership changes, both the SEC and its clients must be notified. An adviser is not required to receive permission from the SEC to change its ownership structure. If a majority of an adviser's ownership changes (e.g., adding three partners to a firm with four partners), clients must first provide their written permission for the firm to assign their contracts to the new business entity. Simply notifying each advisory client is not sufficient to assign a contract. (25211)

  38. If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change

  39. Investment advisers should consider all relevant information about a customer when making specific investment recommendations. Understanding a client's attitude toward investing, risk tolerance, and investment experience are all important factors to consider. However, the client's educational background and professional experience are not as important to consider when recommendations are made. (20489)

  40. When applying for registration, an agent must submit an application, the Consent to Service of Process, filing fees and, in some cases, post a bond. If the registration were for a broker-dealer or investment adviser, in addition to the aforementioned requirements, the Administrator may also require that the applicant submit a balance sheet. (89613)

  41. Sales literature is only filed with the Administrator if the securities are registered with the state. To put it another way, sales literature for exempt securities or exempt transactions doesn't need to be filed with the Administrator. Stock that trades on the OTC markets is required to be registered at the state level and any related sales literature must be filed with the Administrator. Mutual fund shares and municipal bonds are both exempt securities and transactions between institutions (e.g., issuer and underwriter) are exempt transactions. (21613)

  42. Investment advisers (IAs) are permitted to list their credentials as long as the list is not untrue or misleading. IAs are allowed to use testimonials as long as they're not misleading. In addition, advisers must make disclose if a promoter is being paid to make a testimonial. Advisers are permitted to refer to past recommendations, but they need to at least offer to provide clients with access to all of their recommendations, regardless of whether they were profitable. Advertising can include performance, but must include advisory fees. (17209)

  43. Provided proper disclosure is made, charging clients different fees is not prohibited. The fee arrangement must be disclosed to the Administrator or the SEC in Form ADV Part 2 and also specifically disclosed to clients in their advisory contracts. (67657)

  44. Under the Investment Advisers Act of 1940, investment advisers have a Duty of Care and Duty of Loyalty. The Duty of Loyalty is simple and states that an adviser must always put its clients' best interests ahead of its own. The Duty of Care requires an adviser to provide advice in the client's best interest, seek best execution when directing trades, and monitor investments over the course of an advisory relationship. (25530)

  45. According to the Uniform Securities Act, an investment adviser's minimum financial requirement is set by the state in which the adviser maintains its principal place of business. No other state may impose higher requirements than the adviser's home state. For that reason, this adviser is only required to satisfy the $70,000 requirement of its home state (State A). (67231)

  46. According to the Investment Advisers Act, an advisory contract may not be unilaterally assigned to another investment adviser without the client's consent. However, the contract is between the client and the investment advisory firm (Everyman in this case), not the individual investment adviser representative.

    If the management or control of Everyman changed hands, such as if it were bought by another firm, then Everyman would need to notify its clients and seek their consent to have their contracts reassigned. (62882)

  47. Broker-dealers that charge markups, markdowns, commissions, or sales charges for selling securities don't meet the definition of an investment adviser. However, a firm that provides asset management services for a fee based on assets under management (AUM) does meet the definition of an investment adviser. Broker-dealers that offer these services must also register as investment advisers. (25208)

  48. Investment adviser representatives (IARs) cannot roll over extra continuing education credits from one year to the next. IARs must complete six credits of Regulatory and Ethics credits, and three of those six credits must specifically address ethics. For example, an IAR who completes seven hours of Regulatory and Ethics credits this year, cannot roll over the one extra credit into next year. IARs who are not dually registered as registered representatives with FINRA must also complete six credits covering Products and Practices each year.

  49. IARs who work for state-registered IAs are required to register in any state in which the IAR has an office as well as any state in which the IAR has more than five non-institutional clients. Since the IAR works in State A, she needs to be registered there. The IAR also has more than five clients in State B (in this question, seven), so she needs to register there as well. Since the IAR only has three non-institutional clients in State C and only an institutional client in State D, the IAR is not required to be registered in States C and D. (25194)

  50. A bond may be required by an Administrator to cover possible legal costs arising from violations of the Uniform Securities Act. The Administrator may accept cash or securities in lieu of a bond, but real estate and property is not acceptable. This type of bond is generally referred to as a surety bond. (21690)

  51. A person who represents a broker-dealer in effecting securities transactions is defined as an agent, even if the transactions involve exempt securities.

  52. This question requires a person to carefully notice the subtle difference between the terms "net worth" and "net capital." The term "net capital" applies only to broker-dealers, not investment advisers. Investment advisers are required to maintain a minimum "net worth" and surety bonding (if they maintain custody of client assets) as prescribed by the Administrator. (22047)

  53. Under the Uniform Securities Act, the de minimis exemption for advisers is available if the adviser (1) has no place of business in the state and only advises institutional clients, or (2) has no place of business in the state and directs communications to no more than five non-institutional clients within 12 consecutive months.

  54. Exempt reporting advisers (ERAs) are investment advisers that are not required to register as an adviser with either the SEC or state regulators, but must still notice file with a state Administrator and pay fees. (27788)

  55. Investment advisers that maintain custody of client assets have a minimum net worth (i.e., assets - liabilities) requirement of $35,000. Investment advisers that don't maintain have custody, but have limited discretionary authority have a minimum net worth requirement of $10,000. Investment advisers that collect pre-paid fees of more than $500, six months or more in advance, must keep a positive net worth at all times. All investment advisers must file financial reports to indicate how they're meeting their net worth requirements. (21718)

  56. The Uniform Prudent Investor Act (UPIA) reflects the Modern Portfolio Theory's approach to the exercise of fiduciary investment discretion. Under this approach, the fiduciary’s performance is measured on the performance of the entire portfolio and not on any one individual investment. A fiduciary should not be concerned about an individual investment's losses as long as the investment was consistent with the overall portfolio objectives. Diversification is explicitly required as a standard for prudent investing. The UPIA doesn't prohibited any specific investment; however, speculation and outright risk taking is not permitted when it's inconsistent with the portfolio’s objectives. (20435)

  57. Investment advisers, custodians, and trustees are typically considered fiduciaries and have a higher standard of care than other professionals. Broker-dealers that execute trades for a retail customer in a margin account are not considered fiduciaries. In some limited cases (e.g., advising retirement accounts), broker-dealers are considered to be acting as fiduciaries. Notice that investment advisers are always considered to be fiduciaries. (25558)

  58. The Uniform Securities Act requires investment advisers to maintain their books and records (including complaints) for at least five years. For only the first two years, the records must be easily accessible (which generally means that they're located in the IA’s principal office). (22043)

  59. Investment advisers must notify the Administrator if they will have direct possession of client funds or securities (i.e., custody). All of an IA's regulatory filings and disclosures are made on Form ADV. Federal covered advisers will also make disclosures on Form ADV, but they file them with the SEC rather than with the state Administrator(s). (21725)

  60. Individuals or businesses that only provide advice or analysis on U.S. government securities are not required to register as investment advisers with the SEC.

  61. Private fund managers are only exempt if the funds they're managing have less than $150 million in assets under management.

  62. An internet-based businesses that provides advice based on the individual needs of a client must register with the SEC.

  63. Corporations (with sports and entertainment agents as employees) that provide advisory services to athletes and entertainers are not exempt and must register as investment advisers. (25520)

  64. Under the National Securities Markets Improvement Act (NSMIA), a state Administrator is authorized to require federal covered advisers to submit notice filings and pay fees to the state, despite the fact that they're exempt from state registration. The Administrator also has the authority to initiate criminal investigations if the adviser is defrauding investors in the state.

  65. The UPIA permits fiduciaries to delegate investment responsibilities to competent third parties (e.g., accountants and attorneys). The Uniform Securities Act (USA) and Investment Advisers Act of 1940 require investment advisers to register with the state Administrator or SEC, respectively. The UPIA asks investment advisers and other fiduciaries to make recommendations that are based on a client's entire portfolio, rather than simply analyzing on an investment-by-investment basis. (25532)

  66. Broker-dealers that receiving commissions or sales charges for buying and selling securities are excluded from the definition of an investment adviser and are not required to register. However, a broker-dealer that sells managed accounts or wrap accounts is required to register as an investment adviser because both of those accounts provide compensation to the broker-dealer which is paid specifically for the advice. (25225)

  67. Any directors, partners, or officers who are named in an investment adviser's initial registration are automatically registered as investment adviser representatives. Clerical employees don't need to be registered as investment adviser representatives. Solicitors, sales representatives, and other employees who give investment advice must register, but they're not registered automatically. (20540)

  68. Qualified clients are defined as those with at least $1.1 million under management with the adviser or have a net worth of more than $2.2 million. Qualified clients may be charged a performance-based fee by an investment adviser. (25521)

  69. Investment advisers may charge performance-based fees to qualified clients, registered investment companies, Section 3(c)(7) hedge funds, and non U.S. residents. Accredited investors may purchase private placements under Regulation D Rule 506, but are not included in the rules related to performance-based fees. (25505)

  70. Advisers must keep records of all advertisements that are sent to more than one person. If communication is sent to 10 or fewer people, the adviser must keep a record of the names and addresses as well. In this question, since the e-mail was sent to 10 or fewer people (five prospective clients), the adviser must keep a record of the addresses. (25514)

  71. Under the Investment Advisers Act of 1940, the maximum criminal penalty is a fine of $10,000 and imprisonment of five years. The maximum criminal penalty for violating the Uniform Securities Act is a fine of $5,000 and imprisonment of three years. A fine of $5 million and imprisonment of 20 years is the criminal penalty for insider trading. Three times (i.e., treble damages) any gain realized or loss avoided is the maximum civil penalty for insider trading violations. (25512)

  72. Generally, registered broker-dealers, agents, and investment advisers that have custody of client assets must post a surety bond. However, if a broker-dealer's net capital exceeds a certain amount, the surety bond may be waived by the Administrator.

  73. The Uniform Prudent Investor Act (UPIA) was created as a guide for fiduciaries in carrying out their investment responsibilities. The Uniform Securities Act was created as a template for state legislatures to use when adopting securities laws. The Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 are both federal laws which regulate securities markets and investment advisers, respectively. (25533)

  74. Under the Uniform Securities Act (USA), registered investment advisers (RIAs) must provide a balance sheet to their clients if they hold custody, have full discretionary authority, or collect at least $500 of prepaid fees, six months or more in advance of the service. Charging an advisory fee based on a percentage of assets under management (AUM) doesn't mean that the adviser must deliver a balance sheet to its clients.

  75. A state-regulated investment adviser must be registered in any state in which it has a place of business; therefore, this adviser must be registered in State A. In addition, the Uniform Securities Act requires an adviser to register in any state in which it has more than five non-institutional (retail) clients.

  76. Under the Uniform Securities Act, the Administrator may create a minimum net capital requirement for broker-dealers provided it doesn't exceed the requirement that's set by federal law. FINRA has rules about capital requirements, but doesn't set specific minimums.

  77. NASAA has established specific suitability requirements for viatical investments. Viatical investors must either be accredited investors according to Regulation D or must meet one of the following financial standards: 1) Minimum net worth of at least $150,000 (not including their primary residence) and an annual income of $100,000, or 2) minimum net worth of at least $250,000 (not including their primary residence). Keep in mind, the suitability requirements for making investments in viaticals are lower than the standards of being considered an accredited investor under Regulation D (net worth of $1 million or annual income of $200,000 in each of the last two years). For that reason, accredited investors are also considered suitable. (22015)

  78. Investment advisers may use third-party ratings to promote their business if they also provide disclosures about the ratings. Advisers must disclose the date of the rating, identity of the rating organization, and whether compensation has been provided. In addition, third-party ratings cannot be designed to create a predetermined result. (25524)

  79. If two agents want to split commissions, they must be registered in the same state andemployed by the same broker-dealer or one that’s under the same control. In this question, since the agents are not registered in the same state, they cannot split commissions. (87976)

  80. Investment advisers register with either the SEC (i.e., federal covered) or the state Administrator(s). Broker-dealers must register with both the SEC and the state Administrator(s), in addition to becoming a FINRA member. (25463)

  81. An adviser that has custody of client funds and/or securities must arrange for a certified public accountant (CPA) to audit the firm. The independent auditor will file the results because advisers are not permitted to self-audit.

  82. Although federal covered advisers (FCAs) are only required to register with the SEC, states may require them to complete the process of notice filing. There are two situations in which an adviser is required to perform notice filing in a state: (1) when a federal covered adviser has a place of business in the state, and (2) when an adviser has no place of business in the state, but has more than five (i.e., six or more) non-institutional clients who reside in the state. (25202)

  83. An individual employed by a broker-dealer who gives information relating to prices and sales of securities, but who does not receive transaction-related compensation, does not need to be licensed as an agent. (75467)

  84. Under the Uniform Securities Act, investment advisers are generally prohibited from charging their clients a performance-based fee. An exception is made for "qualified clients." A qualified client is a company or natural person with at least $1.1 million under management with the adviser OR with a net worth (excluding any primary residence) of more than $2.2 million. Since the question makes no reference to the client's financial status, changing a fee based on appreciation or capital gains is prohibited.

  85. If an agent's registration has been revoked, the broker-dealer's registration will not be impacted immediately. However, if it's discovered that the broker-dealer failed to properly supervise the agent, it could lead to administrative or criminal penalties against the firm. (21846)

  86. The Administrator cannot impose prison sentences, levy fines, or issue injunctions. These actions must be brought about by a criminal court. If the Administrator discovers or suspects a violation of the Uniform Securities Act has occurred or is about to occur, it can issue a cease-and-desist order. Thereafter, the Administrator may refer the case to a prosecutor who could refer the matter to the district attorney or the attorney general’s office for prosecution. (22158)

  87. Commingling is the illegal practice of intermixing securities belonging to customers with those belonging to the broker-dealer. Client securities that are retained by the broker-dealer must be segregated (separated) from the securities that are owned by the broker-dealer. However, client securities can be commingled with securities owned by other clients. Broker-dealers are not required to segregate customer cash from the broker-dealer's cash positions.

  88. Only an advertisement that originates in and is seen (or heard) by the residents of the state is considered an offer in the state. Newspaper, magazine, radio, and television ads are only considered to be offers to residents of the state in which they originate (are published), not other states. If more than 2/3rds of the circulation of a newspaper or magazine is outside of the publishing state, then no offer is considered to be made in the state. (20456)

  89. The maximum criminal penalty for a violation of the Uniform Securities Act is a $5,000 fine and/or three years imprisonment. However, if the defendant can prove that she had no knowledge of the rule violation, no prison sentence can be imposed. (20471)

  90. If registration is denied, suspended, or revoked by the Administrator, the registrant must be notified in writing, provided written findings of fact, and given an opportunity for a hearing. If requested, a hearing must be held within 15 days. (25490)

  91. The Administrator can deny, suspend, or revoke a registration statement for a misstatement or omission of fact on it. If an applicant did not disclose a felony or sales practice violation, the Administrator can initiate disciplinary proceedings. In addition, the Administrator has jurisdiction for 12 months after an application is withdrawn. However, an Administrator cannot deny or suspend a registration for a fact that the Administrator knew at the time registration was granted, unless proceedings started within 30 days of the registration being granted. (21840)

  92. This question contains an example of providing a quote that is not based on the contemporaneous market price. Even with proper disclosure, this is considered an unethical business practice. A market maker is prohibited from adding a large markup to a stock price in order to ensure a profit. The contemporaneous market price is the current price at which a firm is willing to effect a trade. (67532)

  93. An offer (letter) of rescission must be made prior to any lawsuit being filed and must be accompanied by an offer to buy back the security at the original purchase price. The customer must also be paid interest on the original investment, minus income received from the security. However, the customer is not required to sign any waiver of non-compliance. (20461)

  94. If an offer is made by means of a radio or television program, the only possible state in which the offer is considered to have been made is the state from which the microphone or camera is located.

  95. A gift of assessable stock involves both an offer and a sale, and is subject to the USA’s requirement to disclose all material facts. Assessable stock is a class of stock in which the issuing company is allowed to demand additional funds from existing stockholders. The USA specifically excludes both gifts of non-assessable stock and stock dividends because no money or anything of value has been exchanged for the securities. Pledges of securities are not sales because pledging securities as collateral is not a transfer of ownership at the time of the pledge. (25486)

  96. The Uniform Securities Act states that it's unlawful for a person to omit any material fact which is necessary to make an informed investment decision. The individual doesn't need to be aware that her statements are fraudulent; in addition, omissions of facts could be fraudulent regardless of whether they relate to valuing investments. (22144)

  97. An appeal of Administrative action must be filed with a state court within 60 days. (25495)

  98. There are no limitations on the Administrator's authority to examine the records of a broker-dealer. The ability to inspect records both in and out-of-state is referred to as the Administrator's "inspectorial powers." (22159)

  99. When acting as an underwriter, a broker-dealer must make a bona fide effort to sell new issues (e.g., an IPO). A broker-dealer that fails to sell newly issued securities when presented with a legitimate customer order is guilty of withholding the securities.

  100. When acting as an underwriter, a broker-dealer must make a bona fide effort to sell new issues (e.g., an IPO). A broker-dealer that fails to sell newly issued securities when presented with a legitimate customer order is guilty of withholding the securities.

  101. The joint tenants in common designation provides multiple owners with an undivided interest in the assets in an account and doesn't require the owners to be married. The undivided interest means that any owner is permitted to use or benefit from the property, even if their ownership interest is unequal. One owner of a tenants in common arrangement is permitted to sell jointly owned assets without permission from the other owner(s). Unlike other forms of joint ownership, interest in property in a tenancy in common designation passes to the deceased's estate after the person dies. The other owners of the property will not automatically receive ownership after one owner dies. (25256)

  102. Although Form CRS had already been delivered already to the customer, the opening of a new account (the retirement account) triggers the requirement to send an updated Form CRS to the customer. (25229)

  103. Non-financial considerations include age, time horizon, risk tolerance, and an investor's social values. On the other hand, financial considerations include the client's financial status, objectives, need for liquidity, and need for tax relief. (20773)

  104. If securities are received as a gift, any tax implication is delayed until the securities are subsequently sold. To determine capital gains, the recipient's cost basis will either be the donor's original cost or the fair market value (FMV) at the time of the gift (i.e., dual basis). At the time of the gift, if the securities have appreciated (i.e., FMV > donor's cost), the recipient will always use the donor's original cost as her basis. This is the way that most gifts will work. However, in this question, the securities have fallen in value at the time of the gift (i.e., $16 FMV < $20 donor's cost). As a result, the cost basis is dependent on the sales price. If the sales price was above the donor's cost (i.e., $23 sales price > $20 donor's cost), then the donor's cost will be used as the cost basis. In addition, the donor's holding period will be used to determine whether there's a long or short-term holding period. If the sales price was less than the FMV (e.g., $5 sales price < $16 FMV), then the FMV will be used as the cost basis. In addition, the holding period begins one day after the gift is made.

  105. If a customer's adjusted gross income (AGI) being reported to the IRS exceeds a certain limit, an Income Related Monthly Adjustment Amount (IRMAA) will be added to the standard Medicare premium. In other words, Medicare premiums will be more expensive for individuals with higher incomes. (25249)

  106. A durable power of attorney provides a person (usually a relative) with the power to manage another's persons account and/or financial affairs even if the person becomes incapacitated. With this authority (which must be in written form), another person may make financial decisions on behalf of the grantor (i.e., he has discretion). A standard power of attorney is terminated if the grantor becomes incapacitated. (25251)

  107. If an individual dies without a will and the assets of estate exceed the estate's liabilities, the estate is considered "intestate." A probate court will appoint a person to act as the administrator of the estate and distribute the estate's assets to the beneficiaries. A power of attorney is void upon the death of the client. (25264)

  108. As opposed to an irrevocable trust, a revocable trust provides the grantor with the ability to alter or cancel (terminate) the trust and reclaim the assets. Income earned during the life of the trust is distributed to the grantor and taxable at the grantor’s tax rate. Similar to irrevocable trusts, the assets placed in a revocable trust avoid probate, but will be included in the value of the deceased’s estate. (25266)

  109. Employees of self-employed persons with a Keogh plan must be covered by the plan if they have worked for the employer for one year and are at least 21. (62497)

  110. Fiduciaries are not allowed to put their best interests ahead of their clients'. ERISA generally prohibits fiduciaries from engaging in transactions with the portfolios for which they act as administrators. It's a serious violation of a fiduciary's responsibilities to buy and sell investments directly with the pension fund's portfolio, especially at prices that are below current market prices.

  111. An individual may start taking Social Security benefits once she reaches age 62. However, if she waits, she will receive larger payments. Once an individual begins taking benefits, she locks in the base amount that she will receive. The age at which a person begins taking benefits doesn't prevent her from receiving cost of living adjustments. (15416)

  112. The maximum allowable contribution to a Coverdell Education Savings Account (CESA) is $2,000 per year up to the child's 18th birthday. The funds are contributed on an after-tax basis and may be used for any level of education.

  113. ESG investors are concerned with a company's environmental, social, and governance policies. The environmental component of ESG typically focuses on pollution, including carbon emissions. Corporate social policies include labor practices, diversity, equity, and inclusion (DEI), in addition to human rights concerns. Governance factors include the makeup of the board of directors and executives' compensation. (25246)

  114. Gift tax and estate tax are types of progressive taxes, which impact wealthier investors to a greater degree. Both estate and gift taxes have special exemptions for married couples. Although investment advisers are not always tax experts, they must factor potential tax liabilities into any recommendations they make to clients. (20832)

  115. The cost basis of an asset (i.e., the purchase price) is not reported on the balance sheet. Instead, the current market value of assets (e.g., Blue Book value of a car) is reported. On the balance sheet, assets (e.g., cash value of life insurance) are reduced by liabilities (e.g., outstanding mortgage balance) to determine a client’s personal net worth. (22191)

  116. With a Coverdell Education Savings Account, the custodian has greater control of the selection of investments (i.e., individual stocks, bonds, or mutual funds). There is a maximum contribution of $2,000 per year in a Coverdell. In a 529 plan, an investment is made in the state plan without the benefactor's input. Depending on the state, a 529 plan may allow a substantially larger contribution (exceeding $200,000 in some states). Both plans offer tax-free growth if the funds are used for qualified educational expenses. Funds in a Coverdell Education Savings Account (ESA) must be used within 30 days of reaching the age of 30. There is no specific age requirement for funds to be withdrawn from a 529 plan. (62766)

  117. The rules according to ERISA section 404(b) prohibits fiduciaries from maintaining the indicia or evidence, of ownership of plan assets outside the jurisdiction of U.S. courts, unless allowed by the Secretary of the Department of Labor. (62832)

  118. Funds that are contributed to a qualified retirement plan must be segregated from other corporate funds. Typically, custody of retirement funds is held by a party-in-interest (e.g., broker-dealer) that administers a qualified retirement account for an employer. (20824)

  119. If securities are received as a gift and their price has fallen at the time of the gift (i.e., donor will have a loss), then the cost basis is dependent on the sale price. If the sale price is:

    More than the donor’s cost, then the donor’s cost is the cost basis

    More than the fair market value, but less than the donor’s cost, then the sales price is the cost basis

    Less than the fair market value at the time of the gift, the fair market value at the time of the gift is the cost basis

    Since the stock was sold at $27 (i.e., more than the fair market value of $22, but less than the donor's cost), the sale price of $27 is the cost basis and there's no gain or loss.

  120. The terms settlor, grantor, and maker are synonymous. The person who supplies the assets to place in a trust may also be referred to as the donor or trustor. When taking your examination, you may see these terms used interchangeably. The term beneficiary of the trust refers to whom the trust will benefit.

  121. Under the Insider Trading and Securities Fraud Enforcement Act of 1988, both tippees and tippers can be punished for a violation. The tippee is the person who receives the tip, while the tipper is the person who gives the tip. Any executive of the issuer who doesn't either give or receive inside information will not face criminal charges. (20776)

  122. If an investment adviser enters into a principal transaction (sells securities from its own account to an advisory client), it is considered a conflict of interest since the adviser is on the other side of the transaction. This conflict must be disclosed to the client and the client must consent to the principal transaction prior to each transaction. In addition, when an adviser takes a position that is inconsistent with the recommendations that it makes to its clients, this conflict must be disclosed to its clients. (32509)

  123. Selling away is defined as an agent executing trades without the knowledge of his broker-dealer. Selling away most often occurs when an agent deals in a private placement outside his normal course of business. Participating in a private placement is acceptable provided the agent's employer is given notice. (67666)

  124. In this question, the client received the adviser's brochure on Monday and then signed the contract on Thursday. Since the client had the brochure for more than 48 hours (i.e., two days) before signing the contract, he can be assessed a penalty for canceling the contract. If the client is given the brochure less than 48 hours before signing an advisory contract, then the client has a five-day period during which the contract can be cancelled without being assessed a penalty. (25186)

  125. Advisers must record the names and addresses of the recipients of each notice, circular, advertisement, or other communication that’s sent to 10 or fewer persons. However, if a communication is sent to more than 10 persons, the adviser is not required to record the names and addresses of the recipients. Written agreements, powers of attorney, and records of personal transactions for the adviser or its IARs must be kept for five years. (25523)

  126. When a person dies with a will, she has named an executor who will act as a fiduciary for the estate. If a person dies without a will, a court will appoint an administrator to act as a fiduciary for the estate. Notice that the question mentions the term "executor," which makes fiduciary the best response. Durable powers of attorney don't remain in effect after a person dies. (15449)

  127. Hedge funds are usually illiquid, leveraged investments. The investor's money is often locked up for long periods and there is no active secondary market for hedge fund shares. Hedge funds are generally unregistered investment companies and are not necessarily suitable for all accredited investors. The regulators have stated repeatedly that meeting the financial standards for an accredited investor under Regulation D does not automatically mean that hedge funds are suitable. Hedge funds typically seek absolute positive performance. They set a definite performance goal (e.g., 8%) rather than measuring their performance against an index. (32437)

  128. Registered investment advisers (RIAs) must update their brochure at least annually by filing an updating amendment.

  129. Both federal and state-registered IAs must file the updating amendment within 90 days of the adviser's fiscal year end.

  130. Advisers can charge an hourly fee but are not obligated to assess an hourly fee.

  131. A certificate of incumbency is a court-issued document that provides the legal authority of a court-appointed guardian to act on behalf of another person. The certificate serves as evidence that the listed person is authorized to act as a fiduciary for a trust account. (25267)

  132. According to the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, a “eligible adult" is a person who's age 65 or older. (25282)

  133. Fraud involves the intentional deception of another person to that person's harm. Knowingly misleading an investor about a financial professional's education or qualifications could be considered fraudulent especially if an investor relies on the misstatements when making an investment. For example, an agent who lies about her education may convince an investor to buy stock before researching the stock for himself.(13282)

  134. The rules according to ERISA section 404(b) prohibits fiduciaries from maintaining the indicia or evidence, of ownership of plan assets outside the jurisdiction of U.S. courts, unless allowed by the Secretary of the Department of Labor. (62832)

  135. An Administrator can revoke the registration of an individual who has violated the Uniform Securities Act. However, only a state criminal court may enjoin, fine, or imprison an individual who violates the USA. (15410)

  136. If prices fluctuate over time, a person who utilizes dollar cost averaging will result in an average cost per share being less than an average price per share. (25352)

  137. FINRA rules state that a no-load fund is not allowed to have 12b-1 fees in excess of twenty-five basis points (.25%) of the annual average net asset value of the fund, or a sales charge (load). The 12b-1 test is based on average net asset value and not assets under management. (62705)

  138. Although federal covered advisers (FCAs) are only required to register with the SEC, states may require them to complete the process of notice filing. There are two situations in which an adviser is required to perform notice filing in a state: (1) when a federal covered adviser has a place of business in the state, and (2) when an adviser has no place of business in the state, but has more than five (i.e., six or more) non-institutional clients who reside in the state. (25202)

  139. Under the Investment Advisers Act of 1940, the maximum criminal penalty is a fine of $10,000 and imprisonment of five years.

  140. The maximum criminal penalty for violating the Uniform Securities Act is a fine of $5,000 and imprisonment of three years

  141. A fine of $5 million and imprisonment of 20 years is the criminal penalty for insider trading.

  142. Three times (i.e., treble damages) any gain realized or loss avoided is the maximum civil penalty for insider trading violations. (25512)

  143. When using a value investing approach, and investor's goal is to find and invest in companies that are intrinsically undervalued. Value investors tend to focus on company stocks that have low share prices, high dividends, low P/E ratios, and low price-to-book ratios. Value investors try to find stocks that are trading at prices lower than their intrinsic value (i.e., the market undervalues them). Put another way, value investors are betting against the market as a contrarian strategy. (17204)

  144. An inverted yield curve exists when short-term yields are higher than long-term yields. This often indicates that a recession is about to occur.

  145. Applicable to Broker-Dealers: An individual or firm may request a withdrawal of registration (e.g., an agent decides to retire). The withdrawal takes effect 30 days after the state Administrator receives notification, provided no revocation or suspension proceedings are in process against the person making the request. Once the registration has been withdrawn, the Administrator retains jurisdiction over the person for one year from the effective date of withdrawal. (21658)

  146. Investors who have long time horizons can tolerate less liquidity than investors who need their funds returned sooner.

  147. The bullet, laddered, and barbell strategies are ways to diversify risks in a portfolio of bonds.

    • Laddered portfolios buy bonds with a variety of different maturities.

    • The barbell strategy involves buying bonds with both short-term and long-term maturities.

    • The bullet strategy requires buying bonds with maturities on or close to the same date (e.g., a person's date of retirement). (20611)

  148. According to the Efficient Market Hypothesis, there are three forms of efficient markets – weak, semistrong, and strong. Strong-form efficiency states that no amount of information, including inside information, will consistently increase investment returns. Semistrong-form efficiency states that excess returns can be generated by accessing inside information. Weak-form efficiency states that the use of fundamental analysis can generate excess returns. (87986)

  149. When an adviser recommends that clients invest in tangible assets, such as precious metals (gold) and real estate, its general purpose is to help them hedge against inflation. (67506)

  150. An investment adviser representative is defined as any individual who makes recommendations or otherwise renders advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, solicits, offers, negotiates, or sells investment advisory services, or supervises employees who are IARs. Officers, partners, and directors are considered IARs if they're performing at least some of the duties of an IAR. An owner who doesn't participate in the operations of the business and doesn't make recommendations or solicit services is not considered an IAR under the Uniform Securities Act.

  151. In a 529 plan, assets are owned by the donor (e.g., parent or grandparent) who funded the account, not by the minor. (25253)

  152. In tactical asset allocation, an investment adviser changes a portfolio's asset mix in an attempt to time the market. This is considered an active asset allocation strategy. Buy-and-hold and systematic rebalancing are passive asset allocation strategies. (32425)

  153. There's never an exemption from registration in a state for broker-dealers even if they have no place of business in the state and limit their agents' activities to selling exempt securities in the state. Instead, it's the securities that are exempt, not the agents or the broker-dealer that sells those securities. Even if a broker-dealer has no place of business in a state, it must be registered if it has any noninstitutional clients in the state. On the other hand, an investment adviser is exempt from registration in a state if it has no place of business in the state and only deals with institutional investors in the state. Also, if an investment adviser has no place of business in a state and limits the number of non-institutional clients in the state (no more than five), it's exempt from registration in the state. Although the answer indicates that the investment advisers have no place of business in a state and a limited number of non-institutional clients in the state, it doesn't specify the number of non-institutional clients. In a situation like this, it can be assumed that the answer is referencing the "de minimis" exemption for investment advisers that have no place of business in a state as long as they have no more than five non-institutional clients who are residents of the state. (32364)

  154. NASAA has established specific suitability requirements for viatical investments. Viatical investors must either be accredited investors according to Regulation D or must meet one of the following financial standards: 1) Minimum net worth of at least $150,000 (not including their primary residence) and an annual income of $100,000, or 2) minimum net worth of at least $250,000 (not including their primary residence). Keep in mind, the suitability requirements for making investments in viaticals are lower than the standards of being considered an accredited investor under Regulation D (net worth of $1 million or annual income of $200,000 in each of the last two years). For that reason, accredited investors are also considered suitable. (22015)

  155. Under the Uniform Securities Act, any transaction involving no more than 10 persons (there is no limit on institutional accounts) is considered an exempt transaction, known as a private placement, if the following conditions are met.

    • The seller believes that all the noninstitutional buyers are purchasing for investment purposes only.

    • No commission or other remuneration is paid for soliciting non institutional buyers.

  156. Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institutional investors, is not a broker-dealer. If a firm deals with individuals, it would be considered a broker-dealer, even if it did not have an office in the state.

  157. A person representing a municipal issuer is not considered an agent and would not be subject to registration. If the securities were not exempt, the employee would be subject to registration.

  158. All registered investment advisers who have custody of client securities or funds must have an independent public accountant to conduct surprise audits of these assets at least once every calendar year. The adviser also must initiate Form ADV-E and give it to the accountant, who then submits it to the regulators with a copy of the audit report attached.

    Form ADV-W must be filed by advisers that want to withdraw their registration or register with a different regulator.

  159. According to the Uniform Securities Act, when an agent shifts from one broker-dealer to another, the agent, the former employer, and the new employer must notify the Administrator.

  160. Securities that are listed on a national exchange (e.g., Nasdaq, NYSE, or AMEX) are referred to as federal covered securities and, therefore, are not required to be registered at the state level. Additionally, if the federal covered security is listed on an exchange, the state may not require the issuer to pay a fee, submit a notice filing, or provide a consent to service of process. However, the state Administrator may investigate any broker-dealer (including the underwriter) that participates in the offering for fraud or deceit and file an enforcement action if it is warranted. (67255)

  161. Since the investment adviser's only client is an investment company (a mutual fund), it is considered a federal covered adviser. A federal covered adviser is not required to register at the state level and is not subject to state requirements (e.g., maintaining a minimum net worth requirement). Additionally, the Investment Advisers Act of 1940 (which is the appropriate regulation for federal covered advisers) does not impose minimum net worth requirements. (67269)

  162. If an investment adviser's personal investing is inconsistent with the recommendations that she makes to her clients, she is generally obligated to provide them with disclosure of this fact.

  163. An equity-indexed annuity (EIA) is a type of fixed annuity and is not a security. Since an EIA is not a security, these contracts are not required to be registered with the SEC. The owner receives a guaranteed minimum interest rate; however, there is potential upside since the rate of return is based on the performance of an index (e.g., the S&P 500 Index). If the index underperforms, the investor receives the guaranteed minimum rate, but if the index performs well, the investor receives the indexed return up to a maximum capped rate. (67253)

  164. According to NASAA's Model Rule for Recordkeeping Requirements for Investment Advisers, an adviser must maintain a record of each personal securities transaction in which the adviser, an IAR, an officer, director, partner, or employee (i.e., an access person) acquires either direct or indirect ownership. These transactions must be recorded by no later than 30 days after the end of the calendar quarter in which the transaction occurred.