Series 63 Practice Exam

1. The difference between the bid price and the ask price of a security is commonly referred to as the:

• A. Coupon
• B. Spread
• C. Par value
• D. Dividend

2. A firm that stands ready to buy and sell a particular security for its own account, quoting both a bid and an ask price, is acting in which capacity?

• A. As an agent (broker) executing on behalf of a customer
• B. As a market maker (dealer) trading for its own account
• C. As a transfer agent
• D. As a custodian

3. A broker-dealer is registered in State A, where it maintains its only office. It has one existing customer who moves to State B, and the firm continues to service that account without soliciting anyone else in State B. Must the firm register in State B?

• A. No, a broker-dealer with no place of business in the state dealing only with existing customers is generally excluded
• B. Yes, any transaction with a resident triggers registration
• C. Yes, unless the customer signs a waiver of state protection
• D. No, because broker-dealers are federal covered and never register with states

4. When must an applicant for registration as a broker-dealer or agent file a consent to service of process?

• A. Annually with each renewal
• B. With the initial application, and it remains in effect permanently
• C. Only if the applicant has no office in the state
• D. Only when the Administrator opens an investigation

5. Registrations of broker-dealers, agents and investment advisers under the Uniform Securities Act generally expire on what date unless renewed?

• A. June 30 of each year
• B. The anniversary of the original effective date
• C. December 31 of each year
• D. They do not expire once granted

6. The Administrator may require a registered broker-dealer to post a surety bond. In lieu of the bond, what may the Administrator accept?

• A. A deposit of cash or securities in the required amount
• B. A personal guarantee from the firm's principal
• C. An indemnification agreement from the clearing firm
• D. Nothing; a surety bond is the only permitted form

7. May an Administrator deny a broker-dealer's registration solely because the applicant lacks experience?

• A. No; lack of experience alone is not a sufficient basis, though it may be considered alongside other factors
• B. No; the Administrator may never consider experience at all
• C. Yes; experience is an absolute statutory prerequisite
• D. Yes, but only for applicants under the age of 25

8. A broker-dealer maintains custody of customer funds and securities. Which additional requirement is the Administrator most likely to impose?

• A. Minimum net capital and a surety bond, together with segregation and recordkeeping requirements
• B. A prohibition on charging any commission
• C. Mandatory registration of every customer with the Administrator
• D. A requirement that all customers be accredited investors

9. During the year, Redwood Securities relocates its headquarters, adds a new controlling owner, and hires a new chief compliance officer. Which describes the firm's obligation regarding Form BD?

• A. Report the changes at the next annual renewal, since Form BD is only reviewed once a year
• B. File an amendment to Form BD promptly after each change that makes the form inaccurate, because the firm has a continuing duty to keep it current
• C. File a new initial Form BD and restart the registration process
• D. Notify only FINRA, since state Administrators receive no Form BD updates

10. A bank's trust department buys and sells securities for its trust accounts. An issuer sells its own shares directly to investors in a registered offering. Which of these must register as a broker-dealer under the Uniform Securities Act?

• A. Both the bank and the issuer
• B. The issuer only
• C. The bank only
• D. Neither, because banks and issuers are both excluded from the definition of broker-dealer

11. Summit Securities is registered in State A only. A State A customer spends the winter in State B, and while there calls Summit's office in State A to place trades. Summit has no office in State B and does no other State B business. Is Summit required to register in State B?

• A. Yes, because it effected a transaction while the customer was physically in State B
• B. No, because a broker-dealer with no place of business in the state that deals with an existing customer temporarily present in the state is excluded from the definition
• C. No, because a broker-dealer only ever needs to register in its home state
• D. Yes, unless the customer signs a waiver of State B's registration requirement

12. Cascade Securities receives written complaints and notices of a routine on-site examination from the State Administrator. The compliance officer asks what authority the Administrator has under USA §204 over a registered broker-dealer. Which statement is most accurate?

• A. The Administrator may revoke registration solely because it believes the firm is not profitable enough to serve investors
• B. The Administrator has no authority over a firm that is also registered with the SEC and is a FINRA member
• C. The Administrator may deny, suspend, or revoke a broker-dealer's registration if it finds the action is in the public interest and a statutory ground exists, such as a willful violation of the Act or a false material statement in the application
• D. The Administrator may revoke registration for any reason without a hearing

13. Tidewater Capital LLC has no office in State B and has never solicited a State B resident. It executes securities transactions only with other broker-dealers and with banks and insurance companies acting for their own accounts, all located in State B. Under the Uniform Securities Act, what is Tidewater's registration position in State B?

• A. It must register as a broker-dealer because it is effecting transactions with persons located in State B
• B. It is excluded from the definition of broker-dealer in State B because its only State B clients are institutions and it has no place of business there
• C. It must register unless it files a notice filing and consent to service of process with the Administrator
• D. It is excluded only if each institution signs a written waiver of State B registration

14. Meridian Brokerage is completing its Form BD in connection with a state broker-dealer application. Which of the following best describes the role of Form BD in the state registration process under the Uniform Securities Act?

• A. Form BD is a federal-only document and states must require their own separate application form
• B. Form BD replaces the consent to service of process required by the Administrator
• C. Form BD is filed only by firms that are not SEC-registered
• D. Form BD is the uniform application used for both SEC registration and state broker-dealer registration, and a state may not require information beyond what the form permits

15. After Form BD is filed and registration granted, Northbrook Securities discovers that a disclosure answer in the filing was inaccurate when made. Under USA §201's filing requirements, what is the firm's obligation?

• A. It must promptly file a correcting amendment, because the information in the application must be kept current and accurate for as long as the registration is in effect
• B. It may correct the answer at the next annual renewal
• C. No action is required because the registration has already become effective
• D. It must withdraw the registration and reapply with corrected information

16. State D's Administrator wants to impose a net capital requirement on broker-dealers registered in the state that is higher than the federal net capital requirement applicable to SEC-registered broker-dealers. Under USA §202 and the federal preemption framework, may the Administrator do so?

• A. Yes, because the Administrator may set any financial requirement he considers necessary for investor protection
• B. No, because a state may not impose capital, custody, margin, financial responsibility, recordkeeping or bonding requirements on a registered broker-dealer that exceed the federal requirements
• C. Yes, but only if the firm has a place of business in State D
• D. No, because only FINRA may establish net capital requirements for any broker-dealer

17. Lakefront Securities has been registered in State E for two years. It intends to continue operating in State E next year. Which statement best describes the life of its registration under the Uniform Securities Act?

• A. The registration is permanent once effective and lapses only if the Administrator revokes it
• B. The registration expires at the end of the statutory registration year and must be renewed by filing and paying the Administrator's fee before expiration
• C. The registration renews automatically as long as the firm remains a FINRA member
• D. The registration must be re-earned by having each agent retake the qualification examination

18. Granite Ridge Securities wants to stop doing business in State F and files an application to withdraw its broker-dealer registration. While the withdrawal is pending, the Administrator opens an investigation into sales practices that occurred before the filing. Under USA §204, what is the effect of the withdrawal application?

• A. The withdrawal takes effect immediately on filing and ends the Administrator's jurisdiction over the firm
• B. Withdrawal becomes effective after the statutory waiting period, but the Administrator retains jurisdiction to institute a revocation or suspension proceeding for a period after withdrawal takes effect
• C. The Administrator must grant the withdrawal and may pursue the firm only in civil court
• D. Withdrawal is denied automatically whenever any investigation is open

19. Silverpine Securities designates a supervisor for its retail branch. The supervisor is an experienced producing representative who reports to the branch manager she is assigned to supervise, and she is compensated in part on that branch's production. Under FINRA Rule 3110, what is the principal problem with this arrangement?

• A. Producing representatives may never hold any supervisory title
• B. A supervisor should not report to or be compensated by the person or activity she supervises, because that undermines the independence the supervisory system requires
• C. Branch supervisors must be registered as investment adviser representatives
• D. The arrangement is acceptable because Rule 3110 addresses only written procedures, not reporting lines

20. An agent of Cobalt Securities sends a prospective client an email from a personal account describing a private placement, using a message thread the firm does not archive. The firm's manual prohibits personal-account business email. Under FINRA Rule 3110, what is the firm's supervisory responsibility regarding this correspondence?

• A. None, because the message was sent from a personal account outside the firm's systems
• B. The firm must have procedures for the review of incoming and outgoing correspondence relating to its investment banking or securities business, and a written prohibition alone does not satisfy that duty if the firm does not act to enforce it
• C. The firm satisfies the rule by requiring the agent to sign an annual attestation that she used only firm systems
• D. Review is required only for correspondence sent to more than a threshold number of retail investors

21. Harbor Point Securities, a broker-dealer registered in State G, wants to add a new agent who will solicit retail customers in State G. The firm argues that because it is already registered in the state, the agent may begin soliciting immediately and the firm will report the hire on its next amendment. Under the Uniform Securities Act, which statement is correct?

• A. The agent may not transact business in State G until the agent is separately registered or exempt, and the agent's registration is effective only while employed by a registered broker-dealer
• B. Agent registration is required only if the agent will receive transaction-based compensation from State G residents
• C. The agent may solicit immediately so long as the firm amends its Form BD before the end of its fiscal year
• D. The firm's registration automatically covers all of its agents, so no separate agent registration is required in State G

22. An SEC-registered broker-dealer with an office in State H tells its compliance officer that because it is registered under the Securities Exchange Act of 1934, State H's Administrator has no authority over the firm's registration or conduct. Which statement best describes the relationship between federal and state broker-dealer regulation?

• A. A federally registered broker-dealer with a place of business in the state must still register with the state, and the Administrator retains antifraud and examination authority over it
• B. Federal registration preempts all state broker-dealer registration and antifraud authority over the firm
• C. The Administrator may enforce the antifraud provisions but may never require the firm to register in the state
• D. State authority applies only if the firm has no federal registration at all

23. Which of the following characteristics is generally associated with preferred stock as compared to common stock?

• A. A higher priority claim on dividends and assets than common stock
• B. Greater voting control over corporate decisions than common stock
• C. An unlimited right to share in the firm's growth beyond a stated amount
• D. A guaranteed return of principal superior to that of bondholders

24. In the event that a corporation is liquidated, which class of claimants generally has the LOWEST priority to the firm's remaining assets?

• A. Preferred stockholders
• B. General (unsecured) creditors
• C. Common stockholders
• D. Secured creditors

25. Which statement BEST describes the economic function of a securities market?

• A. It guarantees that all investors earn a profit on their holdings
• B. It facilitates the flow of capital from savers to entities that need financing
• C. It eliminates all investment risk for participants
• D. It sets fixed prices for all securities that cannot change

26. An investor purchases a bond issued by a corporation. Which of the following BEST describes the investor's relationship to the corporation?

• A. The investor is a part-owner of the corporation
• B. The investor is a creditor who has lent money to the corporation
• C. The investor is a director of the corporation
• D. The investor is an employee of the corporation

27. The market in which a company sells newly issued securities directly to investors to raise capital for the first time is best described as which of the following?

• A. The fourth market
• B. The primary market
• C. The third market
• D. The secondary market

28. An investor buys shares of a publicly traded company from another investor on a stock exchange. In which market did this transaction take place?

• A. The primary market, because the shares were issued by the company
• B. The secondary market, because the trade was between investors
• C. The primary market, because it occurred on an exchange
• D. A private placement market

29. Which of the following BEST distinguishes an equity security from a debt security?

• A. Equity must be repaid at maturity, while debt need not be
• B. Equity is always guaranteed a fixed return, while debt is not
• C. Equity represents an ownership interest, while debt represents a creditor relationship
• D. Debt confers voting rights, while equity does not

30. Which of the following is NOT a security under the Uniform Securities Act?

• A. A fixed annuity contract
• B. A variable annuity contract
• C. A certificate of interest in an oil and gas program
• D. A limited partnership interest

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

• A. A general obligation bond issued by a US municipality
• B. Common stock of a start-up sold to state residents
• C. A limited partnership interest in a local real estate venture
• D. Shares of a privately held manufacturing corporation

32. A customer telephones her agent and, entirely on her own initiative, asks him to buy a security the firm does not follow and has never recommended. Which concept applies?

• A. An unsolicited transaction, which is an exempt transaction
• B. An exempt security, because the customer initiated the order
• C. A private placement exemption
• D. No exemption applies to any retail order

33. What is the practical significance of the difference between an exempt security and an exempt transaction?

• A. An exempt security is exempt whenever it is sold, while an exempt transaction depends on the circumstances of a particular sale
• B. An exempt security is exempt from antifraud provisions, while an exempt transaction is not
• C. There is no practical difference; the terms are interchangeable
• D. An exempt transaction permanently exempts the security in that state

34. Under the Uniform Securities Act, which method of securities registration is available to an issuer whose offering is also registered with the SEC and which becomes effective simultaneously with federal effectiveness?

• A. Notice filing only
• B. Registration by coordination
• C. Registration by consent
• D. Registration by qualification

35. A federal covered security is offered in a state. What may the state Administrator generally require?

• A. A notice filing, consent to service of process and payment of a fee
• B. Full registration by qualification including merit review
• C. Nothing at all, and no fee may be charged
• D. Approval of the offering's price and terms

36. Under the Uniform Securities Act, when is a sale considered to have taken place for purposes of the Act's jurisdiction?

• A. Only when the customer's payment clears
• B. Only when the security is delivered to the buyer
• C. Only when the transaction is reported to the Administrator
• D. When an offer to sell or to buy is made in, or is directed to and received in, the state

37. Under the Uniform Securities Act, which of the following is included in the definition of an offer to sell?

• A. A gift of assessable stock
• B. A bona fide pledge of securities as loan collateral
• C. A stock dividend where nothing of value is given by the holder
• D. A bona fide gift of non-assessable stock

38. To which securities do the Uniform Securities Act's antifraud provisions apply?

• A. Only federal covered securities
• B. All securities, including exempt securities and those sold in exempt transactions
• C. Only non-exempt securities sold to retail customers
• D. Only securities registered by qualification

39. Which of the following would most likely qualify as an exempt transaction under the Uniform Securities Act?

• A. A sale of securities to a registered investment company
• B. A general solicitation of a new equity issue to retail residents
• C. An agent recommending a growth stock to a retired customer
• D. A public advertising campaign for a start-up's shares

40. A state Administrator and the SEC both have authority over a fraudulent offer made in the state involving a federal covered security. What is the general position?

• A. State antifraud authority survives federal preemption of registration, so both may act
• B. Only the SEC may act, because federal covered securities are wholly preempted
• C. Only the state may act, because the offer occurred in the state
• D. Neither may act until the offering is complete

41. An issuer sells its securities to ten non-institutional purchasers in a state during a twelve-month period, with no general advertising and no commissions paid to anyone other than a registered agent. Which exemption is most likely in play?

• A. The isolated non-issuer transaction exemption
• B. The unsolicited brokerage transaction exemption
• C. The fiduciary transaction exemption
• D. The private placement exemption for a limited number of non-institutional offerees

42. Who bears the burden of proving that an exemption from registration is available under the Uniform Securities Act?

• A. The purchaser of the security
• B. The Administrator, who must disprove it
• C. The clearing firm that settled the trade
• D. The person claiming the exemption

43. Under the Uniform Securities Act, a person who represents a broker-dealer in effecting securities transactions is defined as which of the following?

• A. An agent
• B. An investment adviser representative
• C. An issuer
• D. A federal covered adviser

44. An individual sells securities exclusively on behalf of an issuer in transactions that are themselves exempt, and receives no commission. Under the Uniform Securities Act, is that individual an agent required to register?

• A. Yes; anyone selling any security must register as an agent
• B. Yes, unless the issuer is a federal covered issuer
• C. No; representing an issuer in exempt transactions without compensation generally falls within an exclusion
• D. No, because issuers are never subject to state law

45. An agent's registration is effective. The agent leaves one broker-dealer to join another. What happens to the registration?

• A. It remains with the former employer until the next renewal date
• B. It is not automatically transferred; the agent, the former employer and the new employer must each notify the Administrator promptly
• C. It terminates permanently and the agent must requalify by examination
• D. It transfers automatically upon the new firm's hiring decision

46. An agent is convicted of a felony unrelated to securities eight years before applying for registration. What is the general effect?

• A. It is generally outside the ten-year lookback used for statutory disqualification purposes, though the Administrator may still consider fitness
• B. It requires the applicant to post a surety bond of 1 million dollars
• C. It has no relevance whatsoever to any registration decision
• D. It results in automatic permanent denial regardless of timing

47. An agent is compensated with a percentage of the commissions generated in the accounts he services. Does this compensation structure by itself violate the Uniform Securities Act?

• A. No; transaction-based compensation is permitted, though it heightens the need for suitability discipline
• B. Yes; agents may only be paid a flat salary
• C. Yes; commissions may only be paid to the broker-dealer, never shared with agents
• D. No; and suitability obligations do not apply where compensation is commission based

48. An agent registered in State A accepts an offer from a new broker-dealer and will now sell securities in State A for that new firm. Under the Uniform Securities Act, what happens to the agent's registration when the agent moves from the old firm to the new firm?

• A. The registration travels with the agent automatically, because it belongs to the individual rather than the firm
• B. The registration is not transferable; it terminates as to the former broker-dealer and a new application must be filed for the new firm, with both the agent and each firm notifying the Administrator
• C. The agent may continue selling under the old registration for the remainder of the calendar year and register with the new firm at the next annual renewal
• D. Only the new broker-dealer must notify the Administrator; the agent has no separate obligation because the firm files on the agent's behalf

49. A broker-dealer files an application to register an individual as an agent. Before the application becomes effective, the individual begins calling prospects in the state and taking indications of interest in a new offering, though no tickets are written until the registration is granted. How should this activity be characterized under the Uniform Securities Act?

• A. Permissible, because no transaction was actually executed until the registration became effective
• B. Permissible, because a pending application gives the individual conditional authority to solicit in the state
• C. A violation, because soliciting offers to buy is itself agent activity requiring effective registration
• D. A violation only if the individual was compensated for the calls; uncompensated solicitation is outside the definition of agent

50. While completing Form U4, an applicant discloses a disciplinary matter in one item but omits a related regulatory action in another, and the firm submits the form. Two months after the registration becomes effective, the omission comes to light. Which statement best describes the consequences under state law?

• A. The firm alone is accountable, since the firm transmits the form and is responsible for its accuracy
• B. Nothing can be done once registration is effective; the Administrator's only remedy is to deny the next renewal
• C. Because the matter appeared elsewhere on the form, the omission is cured as a matter of law and no amendment is required
• D. The filing must be amended, and the Administrator may institute proceedings to suspend or revoke the registration because the application contained a materially incomplete statement

51. A broker-dealer closes a private placement and wants to pay a finder's fee to a former agent who introduced the investors. The former agent's registration lapsed before the introductions were made and was never reinstated. Applying FINRA Rule 2040, what is the firm's position?

• A. The payment is permitted because the recipient was previously registered with the firm
• B. The payment is permitted if it is characterized as a consulting fee rather than transaction-based compensation
• C. The firm may not pay transaction-based compensation to a person who was unregistered when the activity requiring registration occurred
• D. The payment is permitted if the firm reports it to the state Administrator within the period the Administrator prescribes

52. A regulatory framework in which a self-regulatory organization oversees its member firms while itself being subject to government oversight is an example of what regulatory structure?

• A. Direct government-only regulation
• B. Self-regulation operating under government oversight
• C. Fully unregulated market activity
• D. Regulation exclusively by individual firms with no external body

53. Under the Uniform Securities Act, any condition or agreement by which a customer purports to waive compliance with the Act is treated how?

• A. It is enforceable if approved by the Administrator
• B. It is void
• C. It is enforceable if signed and notarized
• D. It is enforceable if the customer is accredited

54. Under the Uniform Securities Act, a purchaser who buys a security sold in violation of the Act may generally recover which of the following?

• A. Only the difference between the purchase price and current market value
• B. Nothing, because the Act provides only administrative remedies
• C. Triple the purchase price as punitive damages
• D. The purchase price plus interest and reasonable attorney fees, less any income received on the security

55. A seller who has violated the Uniform Securities Act offers the buyer a written rescission offer. If the buyer does not accept within the period stated in the offer, what is the general consequence?

• A. The buyer loses the right to bring a civil action based on that violation
• B. The offer automatically renews every 30 days
• C. The Administrator must approve the rescission before it is effective
• D. The buyer retains all rights indefinitely regardless of the offer

56. Under the Uniform Securities Act, what is the general limitation period for bringing a civil action for a securities violation?

• A. Five years after the sale, with no discovery rule
• B. One year after the sale in all circumstances
• C. Ten years after discovery of the violation
• D. Two years after discovery of the violation or three years after the sale, whichever occurs first

57. What are the maximum criminal penalties for a willful violation of the Uniform Securities Act as generally tested?

• A. A fine of up to 5,000 dollars, imprisonment of up to three years, or both
• B. A fine of up to 10,000 dollars and imprisonment of up to five years
• C. A fine of up to 1,000 dollars and no imprisonment
• D. Imprisonment of up to ten years with no fine

58. The Administrator wishes to stop an ongoing violation immediately without first holding a hearing. What tool is available?

• A. A cease and desist order, subject to the person's right to request a hearing afterward
• B. A criminal conviction entered by the Administrator
• C. An order permanently barring the person with no right of appeal
• D. Nothing; a hearing must always precede any order

59. Which of the following is within the Administrator's authority under the Uniform Securities Act?

• A. Waiving the Act's antifraud provisions for institutional clients
• B. Imposing a prison sentence directly after an administrative hearing
• C. Conducting investigations inside or outside the state and issuing subpoenas for witnesses and records
• D. Approving the investment merits of a registered offering

60. On what basis may an Administrator deny, suspend or revoke a registration under the Uniform Securities Act?

• A. Solely because a competitor has filed a complaint
• B. Only after a criminal conviction has been entered
• C. Where the action is in the public interest and a specified statutory ground exists
• D. Solely because the Administrator disagrees with the firm's business model

61. The Administrator issues a stop order suspending the effectiveness of a registration statement. What must accompany or follow that action?

• A. Prompt notice to the interested parties and an opportunity for a hearing
• B. A criminal referral to the state attorney general in every case
• C. Automatic revocation of all agents' registrations at the firm
• D. A permanent bar on the issuer from ever registering again

62. A customer buys a security in a cash account intending to sell it before payment is due, with no ability or intention to pay for it. What is this called?

• A. Freeriding
• B. Arbitrage
• C. Hypothecation
• D. Rehypothecation

63. An agent effects transactions in a customer's account that are excessive in size and frequency in light of the customer's resources and objectives, generating substantial commissions. What is this practice called?

• A. Front running
• B. Freeriding
• C. Churning
• D. Matched orders

64. Two agents arrange simultaneous buy and sell orders in a thinly traded security to create the appearance of active trading without any change in beneficial ownership. What is this?

• A. A prohibited market manipulation through matched orders or wash trading
• B. A permissible liquidity-providing arrangement if disclosed to the issuer
• C. An exempt transaction because both sides are broker-dealers
• D. A legitimate cross trade requiring only customer consent

65. An agent tells a customer that if the recommended stock declines, the agent will personally make up any loss. Is this permissible?

• A. No, guaranteeing a customer against loss is a prohibited practice
• B. Yes, if the agent has the financial capacity and puts it in writing
• C. Yes, if the broker-dealer approves the arrangement in advance
• D. Yes, provided the customer is an accredited investor

66. An agent of a broker-dealer wants to exercise discretion over a customer's account. When must written authorization be obtained?

• A. Before the first discretionary transaction is effected
• B. Within 10 business days of the first discretionary transaction
• C. Within 30 calendar days of opening the account
• D. Only if the account exceeds a specified size

67. A customer instructs an agent to buy 500 shares of a named stock today, leaving only the specific time and price of execution to the agent's judgment. Is this discretion requiring written authorization?

• A. No; time and price alone are not discretion when the security, quantity and side are specified
• B. Yes; any latitude given to the agent constitutes discretion
• C. Yes, unless the order is executed within one hour
• D. No, because discretion never applies to purchases

68. An agent participates in a securities transaction outside the scope of his employment without notifying his broker-dealer. What is this violation commonly called?

• A. Freeriding
• B. Commingling
• C. Selling away
• D. Backing away

69. An agent deposits a customer's check into the agent's personal bank account, intending to forward the funds to the firm the following week. What violation has occurred?

• A. Commingling of customer funds with the agent's own funds
• B. Churning of the customer's account
• C. A permissible accommodation if the funds are forwarded intact
• D. Front running of a customer order

70. An agent learns that his firm is about to publish a research report recommending a stock and buys the stock for his own account before publication. What is this?

• A. Front running, a prohibited practice
• B. A permissible personal trade if disclosed after the fact
• C. An exempt transaction because it is unsolicited
• D. Permissible because research reports are public documents

71. An agent recommends an aggressive growth stock to a retired customer whose stated objective is capital preservation and whose income is fixed. What is the primary violation?

• A. Making an unsuitable recommendation given the customer's objectives and financial situation
• B. Churning, because a single trade is excessive
• C. Commingling, because the funds are the customer's
• D. No violation, because the customer may reject the recommendation

72. An agent shares directly in the profits and losses of a customer's account. Under the model rules, what is generally required?

• A. Written authorization from the customer and the firm, with sharing proportionate to the agent's financial contribution
• B. Sharing is permitted only in losses, never in profits
• C. Only the customer's oral consent
• D. Nothing, provided the customer benefits overall

73. An agent effects a transaction in a customer's account without the customer's prior authorization and without written discretionary authority. What is this?

• A. An unauthorized transaction, a prohibited practice
• B. A permissible accommodation if the trade is profitable
• C. Time and price discretion
• D. An exempt transaction under the Act

74. An agent is asked by a customer to hold the customer's mail for an extended period while the customer travels. What is the general rule?

• A. Mail may never be held for any customer under any circumstance
• B. Mail may be held indefinitely on oral instruction
• C. Mail may be redirected to the agent's home address
• D. Mail may be held only on written instruction and generally for a limited period, subject to firm procedures

75. An agent borrows money from a customer who is not a lending institution and not a family member. Under the model rules, is this permitted?

• A. Always permitted between consenting adults
• B. Permitted only if the customer's account is discretionary
• C. Always permitted if the loan is documented and bears market interest
• D. Generally prohibited unless the firm's written procedures permit it and specified conditions are met

76. An agent omits telling a customer that the recommended bond issuer has missed its two most recent interest payments. Under the Act's antifraud provision, is an omission actionable?

• A. Yes, but only if the customer suffers an actual loss
• B. No, provided the information appears somewhere in the prospectus
• C. No; only affirmative false statements are actionable
• D. Yes; omitting a material fact necessary to make statements not misleading is prohibited

77. A broker-dealer wishes to act as principal in a trade with an advisory client and disclose that capacity. Which is the more demanding standard the agent should understand?

• A. Advisory principal trades generally require disclosure and client consent for each transaction
• B. Advisory principal trades require nothing beyond a confirmation
• C. Principal trades are prohibited in all circumstances
• D. Only the broker-dealer's capacity on a brokerage trade requires consent

78. A customer's account statement shows a security the customer says he never authorized. The agent asks the customer to sign a blank order ticket to paper the file. What violations are involved?

• A. Unauthorized trading plus falsification of firm books and records
• B. Only a bookkeeping irregularity with no securities law consequence
• C. No violation if the customer ultimately signs
• D. Only a suitability violation

79. An agent at a broker-dealer has discretion over a retail client's account and generates commissions by buying and selling the same closed-end fund positions every few weeks, even though the client's stated objective is long-term growth and the trading produces no discernible benefit. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices, this conduct is best characterized as:

• A. Market manipulation, because repeated buying and selling affects the fund's price
• B. Permissible, because the client granted discretionary authority in writing
• C. Front-running, because the agent traded ahead of the client's stated objective
• D. Churning — excessive trading in light of the customer's resources, objectives and the character of the account

80. An institutional trader at a broker-dealer enters a large volume of buy orders for a thinly traded stock at prices just below the inside market, with the intention of cancelling them before execution once the visible buying interest pushes the displayed price up, at which point the trader sells the firm's inventory. This pattern is best described as:

• A. Spoofing/layering — entering orders without intent to execute in order to create a false appearance of market interest
• B. Legitimate market making, because posting and cancelling quotes is inherent to providing liquidity
• C. Unauthorized trading, because the orders were entered without customer approval
• D. A soft-dollar arrangement, because the order flow generates a benefit to the firm

81. A broker-dealer directs a portion of its client commission business to an executing broker that, in return, provides the firm with equity research reports and analytical software used in making investment decisions. The firm relies on the safe harbor of Section 28(e) of the Securities Exchange Act. Which additional item, if obtained the same way, would fall OUTSIDE the safe harbor?

• A. Payment of the firm's office rent and the salary of its receptionist
• B. Research reports analyzing the creditworthiness of corporate bond issuers
• C. Seminars and conferences whose content concerns portfolio strategy
• D. Software that analyzes securities portfolios and produces trade recommendations

82. A registered representative recommends that a retail customer roll a workplace retirement plan into an IRA holding a proprietary product that pays the representative a higher commission than the alternatives considered. Under SEC Regulation Best Interest, the representative's obligation with respect to that conflict is to:

• A. Identify and at a minimum disclose the conflict, and eliminate conflicts arising from sales contests for specific securities within a limited period
• B. Avoid the recommendation entirely, because Reg BI prohibits recommending any product that pays differential compensation
• C. Obtain the customer's written consent to the commission before the transaction settles
• D. Do nothing further, because commission disclosure on the trade confirmation satisfies Reg BI

83. An agent sells a customer shares of an open-end investment company and, in the same conversation, tells the customer that because the fund is registered with the SEC, the principal is protected against loss. The fund's prospectus says nothing of the kind. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of investment company shares, the agent has engaged in:

• A. Misrepresentation — stating or implying that registration equates to approval or safety of the investment
• B. Selling away, because the statement was made outside the prospectus
• C. Nothing actionable, provided the customer received the prospectus before settlement
• D. A breakpoint violation, because the agent failed to describe sales charge reductions

84. A broker-dealer's trading desk learns that a large institutional customer has just submitted a block order to buy a mid-cap stock. Before working the customer's order, a desk trader buys the same stock for the firm's proprietary account, expecting the block to move the price. The most accurate characterization is:

• A. Front-running — trading for the firm's own benefit ahead of a known customer order expected to move the market
• B. Insider trading, because the trader used material nonpublic information about an issuer
• C. Acceptable, because the customer's order was ultimately executed at the price the customer specified
• D. Churning, because the firm's account traded the same security as the customer

85. An agent believes a long-standing customer, an 82-year-old widow, is being pressured by a new acquaintance to wire most of her account to an offshore entity. Under the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, the agent's firm may:

• A. Take no action, because acting on a suspicion would breach the customer's confidentiality
• B. Liquidate the account and hold the proceeds in the firm's name until the matter is resolved
• C. Refuse the request permanently unless a court appoints a guardian for the customer
• D. Delay the disbursement and notify the state securities administrator and adult protective services, within the period and conditions the administrator prescribes

86. A trustee investing under a state's version of the Uniform Prudent Investor Act holds a single volatile technology stock that has performed exceptionally well in isolation. A beneficiary objects that the holding is speculative. Under the Act, the prudence of that holding is evaluated:

• A. In the context of the entire portfolio and as part of an overall investment strategy having risk and return objectives suited to the trust
• B. By reference to the security's own risk characteristics, since speculative securities are per se imprudent for trusts
• C. Solely by hindsight, based on whether the investment produced a gain over the accounting period
• D. By whether the security appears on a list of investments approved by the state securities administrator

87. A customer tells his agent by phone, "Sell 500 shares of my utility stock sometime today if you think it's the right moment." The agent has no written discretionary authority on file. The agent waits until mid-afternoon and sells. Which statement best describes the agent's position?

• A. The order is acceptable, because the customer specified the security, the size and the action, leaving only time and price to the agent's judgment
• B. The agent engaged in unauthorized trading, because any exercise of judgment requires written discretionary authority
• C. The agent engaged in unauthorized trading, because oral instructions are never valid for a sale
• D. The order is acceptable only if the customer ratifies it in writing before settlement

88. An agent recommends a security and, when asked about risk, tells the customer the state Administrator has registered the security so it must be a sound investment. What is wrong with this statement?

• A. It is acceptable if the security is registered by qualification
• B. Nothing; registration does signify Administrator approval
• C. It understates the Administrator's role in setting the offering price
• D. It falsely implies registration is an approval or endorsement of the security's merits

89. A firm's advertisement for a security registered by qualification is prepared for distribution to state residents. What may the Administrator require?

• A. Filing of the sales literature and advertising with the Administrator
• B. Prepayment of anticipated civil penalties
• C. Approval by every purchaser before distribution
• D. Nothing; advertising is outside the Administrator's authority

90. A customer asks an agent about the tax consequences of a proposed municipal bond swap. What is the appropriate response?

• A. Explain the general features and recommend the customer consult a qualified tax professional
• B. Provide definitive tax advice, since municipal bonds are tax exempt
• C. Refuse to discuss the security at all
• D. Guarantee the tax outcome in writing

91. A broker-dealer discloses a customer's name, address, and account balance to a firm that will market its own unaffiliated insurance products to that customer, after the customer failed to return the opt-out form. Under SEC Regulation S-P, the disclosure is:

• A. permitted, because the customer received notice and a reasonable opportunity to opt out and did not exercise it
• B. prohibited, because sharing nonpublic personal information with a nonaffiliated third party always requires affirmative written consent
• C. permitted only if the customer's Social Security number is withheld from the transfer
• D. prohibited, because account balances are exempt from the opt-out framework and may never be shared

92. An investment adviser with assets under management above the federal threshold registers with the SEC rather than the state. What is such an adviser called?

• A. A federal covered adviser
• B. An exempt reporting agent
• C. A state-registered adviser
• D. An unregistered adviser

93. A person gives advice about securities as an incidental part of their profession and receives no special compensation for that advice. Which exclusion from the investment adviser definition may apply?

• A. The exclusion for lawyers, accountants, teachers and engineers whose advice is solely incidental and uncompensated separately
• B. The exclusion for anyone who advises fewer than one hundred clients
• C. The exclusion for anyone who does not maintain custody
• D. The exclusion for anyone who advises only about exempt securities

94. Summit Wealth, a state-registered investment adviser, is drafting its standard client agreement. Its compliance officer reviews the NASAA model rule on advisory contracts. Which of the following must the written contract address?

• A. The adviser's expected annual rate of return on the client's portfolio.
• B. The amount of any prepaid fee that will be refunded if the contract is terminated early, and whether the adviser is granted discretionary authority.
• C. A clause permitting the adviser to assign the contract to a successor firm without notifying the client.
• D. A waiver of the client's right to bring an action under the Uniform Securities Act.

95. Dana opens an office in State X, prints business cards describing herself as an investment adviser, and begins advertising that she will recommend securities to individuals for an annual fee. She has not yet signed a single client and does not qualify as a federal covered adviser. Under the Uniform Securities Act, which statement is correct?

• A. She need not register until she has received her first advisory fee from a client.
• B. She must be registered with the State X Administrator, or qualify for an exemption, before transacting business as an investment adviser, and holding herself out as one is transacting business.
• C. She may register as an agent of a broker-dealer in lieu of investment adviser registration.
• D. She is only required to make a notice filing with the Administrator because she has no clients.

96. Harbor Advisory has been registered with the Administrator of its home state for several years. Its assets under management have now grown past the level at which the Investment Advisers Act of 1940, through §203A, allocates the adviser to federal jurisdiction (the current figure is published by the SEC and the Administrator). What is the consequence for Harbor's state registration?

• A. Harbor keeps its state registration and adds SEC registration, so that both regulators can examine its books.
• B. Harbor registers with the SEC and becomes a federal covered adviser; the state may require a notice filing and fee but can no longer require registration.
• C. Harbor's state registration continues unchanged because the adviser's principal office remains in the state.
• D. Harbor may choose whichever regulator it prefers as long as it discloses the choice on Form ADV.

97. Cobalt Capital is a small firm whose only client is an investment company registered under the Investment Company Act of 1940. Its total assets under management are well below the published level that would otherwise require SEC registration. Where must Cobalt register as an investment adviser?

• A. With the Administrator of the state where Cobalt's principal office is located, because its assets are below the federal level.
• B. With the SEC, because an adviser to a registered investment company is a federal covered adviser regardless of assets under management.
• C. With both the SEC and every state in which the investment company's shares are sold.
• D. With neither, because advising a single institutional client is exempt from registration.

98. Pine Ridge Advisors, a state-registered investment adviser, keeps client data on a password-protected server behind a firewall and its two principals agree verbally on how to handle a data breach. During a routine examination, the Administrator's staff ask for the firm's information security program. Under the NASAA model rule on information security, what deficiency is the examiner most likely to cite?

• A. The firm has no written, maintained and enforced policies and procedures covering physical security and cybersecurity, and no evidence of periodic review.
• B. None; the firm has adequate technical controls and a shared understanding of breach handling.
• C. The firm must retain an outside cybersecurity vendor; internal controls are never sufficient.
• D. The firm should have registered its server location with the Administrator as a branch office.

99. An applicant files for registration as an investment adviser in State Y. She holds a graduate degree in finance and has passed the required examinations, but she has never worked in the securities industry. The Administrator proposes to deny the application solely because of her lack of experience. Under the Uniform Securities Act, may the Administrator do this?

• A. Yes, but only after a hearing at which the applicant may present character witnesses.
• B. No; an Administrator may deny an application only for a criminal conviction or a prior revocation.
• C. Yes; the Administrator has unlimited discretion to deny any initial application.
• D. No; lack of experience alone is not a ground for denial when the applicant is qualified by training or knowledge, though the Administrator may condition the registration.

100. Ridgeline Advisory, a state-registered adviser, has written authorization from each client to instruct the qualified custodian to deduct Ridgeline's quarterly advisory fee directly from the client's account. Ridgeline holds no client cash or securities itself. Under the NASAA model custody rule, which statement is correct?

• A. Ridgeline does not have custody as long as the fee is deducted no more than once per quarter.
• B. Ridgeline has custody and must undergo the same surprise examination as an adviser that physically holds client securities, with no alternative available.
• C. Ridgeline does not have custody because the assets stay at an independent qualified custodian.
• D. Ridgeline has custody, but if it meets the direct-fee-deduction conditions, such as sending an itemized invoice to the custodian and to the client each time a fee is deducted and disclosing custody on its registration filing, it is relieved of the surprise examination requirement.