Question 1

Mr. Teche is an agent with broker-dealer CanDo, and his only compensation is the commissions he
earns on trades he executes. He has applied for and been granted an adjunct teaching position with a
local university that will allow him to earn money while he is establishing himself.
Which of the following statements are true?

Accepted Answer

D

Explanation: Both statements A and B are true. As an agent for broker-dealer CanDo, Mr. Teche is required to inform CanDo in writing before accepting any outside position that will provide him with additional compensation, and CanDo has the right to deny Mr. Teche the permission to accept this position.

Question 2

Once a person has filed an application with the Administrator, and in doing so has truthfully disclosed
every material fact, how long does the Administrator have after the effective date of the registration
to commence a proceeding to deny, suspend, or revoke that person’s license based on those facts?

Accepted Answer

C

Explanation: If a person has appropriately and truthfully disclosed every material fact on its application for registration, the Administrator has 90 days after the registration becomes effective to commence a proceeding to deny, suspend, or revoke the license. If the Administrator has known about the fact for longer than this, he may not begin a proceeding against that person according to the Uniform Securities Act.

Question 3

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

C

Explanation: 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 4

BondsRUs is a broker-dealer that (unsurprisingly) specializes in bonds. The firm has found that it is
able to sell Treasury bonds that it buys for $90 per $100 of par value for $99 per $100 of par value to
some of its more naïve clients, who never pay attention to the confirmation statements BondsRUs
sends them. BondsRUs is guilty of

Accepted Answer

B

Explanation: BondsRUs is guilty of overcharging its clients by unreasonable markups. A $9 dealer’s spread on a risk-free investment such as a Treasury bond is unwarranted, and this practice is prohibited. Based on the information provided, BondsRUs is not guilty of fraud since it appears that the firm is revealing the markup in its confirmation statements. The clients just aren’t paying attention.

Question 5

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

Accepted Answer

D

Explanation: 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 6

Which of the following practices would be prohibited in connection with the sale of investment
company shares?
I . selling a client shares of a load stock fund when a no load stock fund with the same investment
objective exists
II . selling the client shares of five S&P 500 Index mutual funds, offered by different fund families
III . encouraging a client to swap his money between two funds in the same family without informing
him that this creates a taxable event

Accepted Answer

D

Explanation: The scenarios described in Selections II and III only would be prohibited. Five S&P 500 Index mutual funds, even if offered by different fund families, all have the same investment objective-duplicating the returns earned on the S&P 500 Index, and they will be invested in very similar stocks. Therefore, the client is getting little or no more diversification of risk by investing in five funds over investing in just one. The agent is just getting richer from more commissions. Encouraging a client to swap his money between two funds in the same family without informing the client that this creates a taxable event is not providing the client with “full and fair disclosure.” It may well be in the client’s best interest to make the switch, but he needs to be made aware of the tax consequences. It is not necessarily prohibited to sell a client shares of a load stock fund when a no load stock fund with the same investment objective exists as long as the agent believes that the load stock fund is a better investment for his client.

Question 7

If a person has had its license revoked by the Administrator of the state and has appealed the decision to a court of law, that person

Accepted Answer

D

Explanation: If a person has had its license revoked by the Administrator of the state and has appealed the decision to a court of law, that person must notify the Administrator of the state that it has appealed the decision, but that person is considered to have a revoked license until the courts rule otherwise and may not continue “business as usual.”

Question 8

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

A

Explanation: 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 9

MoeMoney Investment Advisers, LLC is registered in the state of Texas, and its three offices are all
located in the greater Dallas-Fort Worth are
a. Five of its clients-all individuals-have relocated to Colorado and all have indicated a desire to retain
the services of MoeMoney. In order for this to be possible,

Accepted Answer

D

Explanation: In order for MoeMoney to continue servicing its five individual clients who have relocated to Colorado, neither MoeMoney nor its clients need to do anything. The National Securities Markets Improvement Act of 1996 (NSMIA) established a “deminimis” exemption for investment advisers if they have no office in a state and do business with “no more than five non-institutional clients” during a one-year time frame.

Question 10

Registered agent Ina Scent has had her license suspended by the state Administrator prior to an
administrative hearing on the order.
Which of the following statements is true regarding Ina’s situation?

Accepted Answer

C

Explanation: When Ina receives notice of her license suspension, she can make a written request that a hearing on the issue be scheduled within fifteen business days of her request. She cannot continue working with clients unless the Administrator vacates the order until final determination because her license is still suspended pending final determination. If, after the hearing, the order still stands, Ina can file an appeal of the suspension with a court of law if she does so within 60 days.

Question 11

Which of the following is an example of commingling?

Accepted Answer

A

Explanation: When Sly has his client pay for a stock purchase by making the check out to Sly himself, he has engaged in the prohibited practice of commingling. Ms. Fox is also engaged in a prohibited practice, but she is engaged in making unauthorized transactions. Mr. Hawk is doing nothing wrong. It is typical for clients to leave securities on deposit with their broker-dealers in what is called “street name.” This makes it easier for the client to sell the securities later on since he physically will not have to deliver the securities to the broker, for one thing.

Question 12

Don is a state-registered agent with GetErDone Broker-Dealers. He has three other friends who are
licensed agents-Huey, Dewey, and Louie. Huey is also an agent with GetErDone Broker-Dealers.
Dewey is an agent with a different firm in the same city, CanDo Broker-Dealers. Louie works for a
Broker-Dealer with an office just across the state line.
Don can enter a commission-splitting agreement with

Accepted Answer

A

Explanation: Don can enter a commission-splitting agreement with Huey only since he is the only one who is also working for GetErDone Broker-Dealers. It is considered unethical to split “commissions, profits or other compensation. . .with any person not also registered as an agent for the same broker-dealer,” under NASAA Model Rules.

Question 13

While on vacation in Colorado, Mr. Moneybags became interested in the stock of a company called
SafeAway, which designs and installs customized high-tech security systems in the multimillion dollar
mansions located in Colorado’s pricier ski resort areas, such as Vail and Aspen. Upon returning to his
home in Boston, he calls his broker-dealer with an order to purchase 10,000 shares of the stock,
which he learned trades in the over-the-counter market. Fast Eddie, a registered agent with his
broker-dealer, discovers that SafeAway’s stock is registered only in the states of Colorado and
Wyoming. Neither Fast Eddie nor his broker-dealer are registered to do business in either of those
states. Under these circumstances,

Accepted Answer

D

Explanation: Under the circumstances described, Fast Eddie can execute the trade for Mr. Moneybags even though SafeAway stock is registered for sale only in the states of Colorado and Wyoming since neither Fast Eddie nor the broker-dealer solicited the transaction, making this an exempt transaction. However, the Massachusetts Administrator may demand that Fast Eddie and his broker-dealer provide proof that the trade was indeed unsolicited.

Question 14

Which of the following would not appear on a trade confirmation?

Accepted Answer

D

Explanation: All of the items listed appear on a trade confirmation-the client’s account number, the commission, and the settlement date-as well as a lot of additional information.

Question 15

An investment adviser representative with Capital Investment Advisors, Inc. advised his client to
invest $5,000 in bonds of a firm that the adviser claimed was an investment “almost as risk-free as
investing in U.S. government bonds; maybe even more so, given the magnitude of the government
deficit these days.” The client paid a total of $200 for this advice. The bonds paid interest at the rate
of 6%, with semiannual payments, and the client received $300 in interest payments before the firm
went belly-up at the end of a year, and its bonds were deemed worthless. The client has filed suit,
and its attorneys’ fees and court costs are expected to be $1,000. When the investment is a bond, the
state has recently been assessing an interest rate equal to the interest rate paid by the security as an
equitable interest payment guideline in civil penalties.
The maximum the client can expect in civil penalties is

Accepted Answer

B

Explanation: The maximum amount the client can expect in civil penalties in this case is $6,200. In civil court, the client is awarded the cost of the investment plus any attorneys’ fees and court costs, plus any interest that the state deems appropriate, less any income earned on the investment. In this instance, the only income is the interest that the client earned, which is identical to the interest that the Administrator mandates the investment adviser pay, so that is a wash. The investment advisory fee is included as part of the investor’s cost, so the client can sue for the recovery of his original investment of $5,000 plus the $200 he paid for the investment advice plus the court costs and attorneys’ fees of $1,000, or $6,200 total.

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