Broker-Dealer and Investment Adviser Regulations

Questions and Answers

What is the procedure called when issuers of mutual fund shares file a copy of the registration statement with the state?

Notice filing

__________ of prior corporate earnings is not a sufficient reason for the state administrator to issue a stop order denying or suspending a registration statement.

Lack

When must broker-dealers disclose their compensation when selling non-NASDAQ OTC stocks?

Both at the time of the sale and again on the confirmation

Under the USA, who would not have to register as an investment advisor?

Investment advisor representative Signup and view all the answers

Which federal covered securities may require notice filings by the state administrator?

Investment company securities Signup and view all the answers

If you are registered as an agent in state A and your client moves to state B but maintains a vacation home in state A, what are you guilty of if you continue to make trades for this client using their vacation home address?

Using fictitious information to execute a trade Signup and view all the answers

What is co-mingling?

Mixing customer securities with those owned by the firm in its proprietary accounts Signup and view all the answers

Unsolicited, issuer transactions are exempt under the USA.

False Signup and view all the answers

When selling investment company shares, broker-dealers and agents must not imply that shares sold without a commission are no-load or have no sales charge if there is any of the following associated with the purchase:

Commissions or other offering expenses in the case of closed-end funds Signup and view all the answers

If an agent offers securities in a private placement to 11 persons within a 12 month period, all offers are in violation of the private placement exemption.

True Signup and view all the answers

Under the Uniform Securities Act, who must promptly notify the Administrator if an investment adviser representative is terminated?

The IA firm if it is state registered; the IAR if it is federally covered. Signup and view all the answers

Securities issued by a Canadian corporation whose stock trades on the Canadian Stock Exchange are exempt from registration under the USA.

False Signup and view all the answers

Can a broker-dealer solicit an existing customer who is vacationing in another state?

Yes, the broker-dealer may solicit the customer without registering in that state. Signup and view all the answers

Which of the following are defined as either a 'sale' or an 'offer to sell' common stock?

Any offer to sell the common stock for value Signup and view all the answers

An applicant's registration can be denied by the Administrator if convicted within the past __________ of any misdemeanor involving a security.

10 years Signup and view all the answers

It is prohibited for an investment adviser to be compensated only on the basis of __________ achieved.

capital gains Signup and view all the answers

What type of securities are sold through a private placement?

Unregistered securities Signup and view all the answers

The Administrator is NOT empowered to:

Issue injunctions Signup and view all the answers

Under the Uniform Securities Act, the term 'sale' or 'sell' includes which of the following?

A disposition of a security for consideration Signup and view all the answers

Which actions could constitute fraud?

A deceptive statement made in the sale of a government bond Signup and view all the answers

What type of transaction is an unsolicited customer order in the secondary market?

Exempt transaction Signup and view all the answers

Which type of securities is not exempt under the Uniform Securities Act?

Limited partnership interests Signup and view all the answers

What does registration of a security under the Securities Act of 1933 mean?

State registration by notice filing or coordination may be available. Signup and view all the answers

Agents may never __________.

Lend or borrow money or securities from a customer Signup and view all the answers

What must the Administrator provide in disciplinary proceedings?

Opportunity for a hearing Signup and view all the answers

What must an attorney do if advertising advisory services?

Register as an investment adviser Signup and view all the answers

A broker-dealer firm may do business in this state without registering if it deals exclusively with:

Trust companies Signup and view all the answers

The record keeping requirements set by the state administrator may not exceed those required under the federal Securities Exchange Act of __________.

1934 Signup and view all the answers

What must broker-dealers disclose to register in a state?

Orders issued by other states Signup and view all the answers

What information must be included in an application for registration?

The qualifications and business history of the applicant Signup and view all the answers

Who may the Administrator impose net capital requirements upon?

Investment advisers Signup and view all the answers

What must a Canadian broker-dealer do to effect transactions in this state?

Register in this state Signup and view all the answers

What happens if an agent tells clients he has inside information but doesn't use it to execute trades?

He is in violation of the Uniform Securities Act Signup and view all the answers

Under the Uniform Securities Act, the registration of a security that was registered by notice filing will be effective for __________.

one year from its effective date Signup and view all the answers

Under the __________, stocks and bonds issued by insurance companies are considered to be exempt securities.

Uniform Securities Act Signup and view all the answers

SEC Regulation __________ is a federal exemption.

A Signup and view all the answers

Securities issued in connection with employee benefit plans are considered to be exempt __________ under the USA.

securities Signup and view all the answers

When can the state administrator use an agent's lack of experience as the only grounds for the denial of registration?

Only when it is in the public interest Signup and view all the answers

Under the Uniform Securities Act, broker-dealers are excluded from the definition of an investment advisor only if the advisory services are __________ to their brokerage business.

incidental Signup and view all the answers

What must restricted stock do before it can be resold?

It must be registered or sold under another exemption. Signup and view all the answers

Who must notify the Administrator when an investment advisor representative terminates employment?

Either the investment advisory firm or the investment advisor representative Signup and view all the answers

Under the Uniform Securities Act, __________ companies are not specifically excluded from the definition of an investment advisor.

insurance Signup and view all the answers

The state administrator may not use lack of experience as grounds for agent termination if:

The agent is under the supervision and training of a broker-dealer Signup and view all the answers

__________ are a type of casualty insurance often required by government as a condition to licensing.

Surety bonds Signup and view all the answers

What can the state administrator do if an agent refuses to comply with a subpoena?

Petition the court to require that the agent produce the requested records Signup and view all the answers

Advance written __________ is required for both the amount and the type of stock to be purchased.

discretionary authority Signup and view all the answers

Under the Uniform Securities Act (USA), issuers of exempt securities must give potential investors all __________ information.

material Signup and view all the answers

The state administrator may require a surety bond for all of the following EXCEPT:

Issuers Signup and view all the answers

Under the Uniform Securities Act, the Administrator may require issuers of mutual fund shares to file what?

A copy of the registration statement filed with the SEC Signup and view all the answers

Study Notes

Broker-Dealer Regulations

Broker-dealers can solicit existing customers on vacation in another state without registering in that state as long as no new customers are involved.
The definition of a "sale" includes any offer to sell securities for value and any solicitation to buy. Gifts of non-assessable common stock are not considered sales.
An applicant's registration may be denied if convicted of a securities-related misdemeanor or any felony within the past 10 years.

Investment Advisers

Investment advisers cannot be compensated solely based on capital gains; they can charge a percentage of assets under management.
An investment adviser must register if advertising advisory services, even if those services are incidental to legal duties.
Agents may not lend or borrow money or securities from customers, irrespective of authorization.

Securities Definitions and Exemptions

Securities sold through a private placement are unregistered and defined as an exempt transaction under state law.
Under the Uniform Securities Act, brokerage firms must disclose orders from other states when applying for registration, including any past administrative orders against them.
Limited partnership interests are not exempt under the Uniform Securities Act, while government bonds and securities from registered exchanges are exempt.

Registration and Reporting

Registration statements are valid for one year from their effective date regardless of filing method.
Restricted stock, which is not registered or sold under an exemption, cannot be resold.
Broker-dealers must notify the Administrator when an investment adviser representative terminates employment.

Administrator Powers

The Administrator can issue subpoenas and conduct investigations but cannot issue injunctions; these are court matters.
Disciplinary proceedings require prior notice, a hearing opportunity, and written findings from the Administrator.
The Administrator may impose net capital requirements on broker-dealers and investment advisers but cannot deny registration solely based on lack of experience.

Investment Firms and Surety Bonds

Surety bonds may be required for investment adviser firms with discretionary authority over customer accounts.
Compliance with a subpoena is mandatory for agents; non-compliance may lead the Administrator to petition the court.
The Administrator may require notice filings from investment companies, even though these securities are federally covered.

Anti-Fraud Provisions

Intentional omission of material information constitutes fraud, even for exempt securities like government bonds.
The agent’s mere claim of having inside information constitutes a violation if misleading statements are made.
Disclosure of all material information is necessary when dealing with exempt securities as they are still subject to anti-fraud laws.

General Guidelines

An attorney advertising advisory services must register as an investment adviser unless services are incidental.
Non-NASDAQ OTC stocks must have disclosed compensation at sale and confirmed in documentation.
Both agents and broker-dealers may need to post surety bonds, but issuers do not have such requirements.

Miscellaneous

Lack of prior corporate earnings is not enough to deny a registration statement.
The definition of an investment adviser excludes integrated broker-dealers if the advice is incidental to regular brokerage services.### Regulatory Compliance
Payment of fees, filing of SEC documents, and consent to service of process are essential steps in regulatory compliance.

Agent Registration

An agent registered only in state A is guilty of using fictitious information if they continue trading for a client who moved to state B while using a vacation home address in state A.

Co-mingling

Co-mingling refers to mixing customer securities with those owned by the firm.
NASAA requires broker-dealers to segregate customers' free securities from the firm's proprietary accounts. Free securities are those not pledged as collateral.

Unsolicited Issuer Transactions

Unsolicited, non-issuer transactions are classified as non-exempt under the USA.
Non-issuer transactions occur in the secondary market, while issuer transactions occur in the primary market.

Investment Company Shares

Broker-dealers cannot claim shares sold without a commission are "no-load" if there are associated costs like front-end loads, contingent-deferred sales loads, or excessive 12b-1 fees.

Private Placement Exemption

Offering securities in a private placement to more than 10 persons within 12 months violates the private placement exemption rule.
This exemption allows small companies to raise capital without costly state registration, provided they follow specific rules.

Termination Notification

For a terminated investment adviser representative, state-registered firms must notify the Administrator promptly.
In federally covered firms, the investment adviser representative is responsible for notifying the state.

Foreign Securities

Securities issued by Canadian corporations trading on the Canadian Stock Exchange are considered non-exempt under the USA.
Exemption applies to recognized foreign governments but not foreign corporations.

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Description

This quiz covers key regulations affecting broker-dealers and investment advisers, including customer solicitation rules, registration requirements, and definitions of securities. Test your knowledge on the legal standards that govern the securities industry and ensure compliance in various scenarios.