Submitted by: Richard Mills

Question: 1

Which of the following is not considered to be a security, as defined by the Uniform Securities?

Act (USA)?

A. a debenture

B. a certificate of deposit (CD)

C. a put option

D. an annuity contract wherein an insurance company promises to pay a fixed sum, either in a lump

amount or through periodic payments.

Answer: D

Explanation: The Uniform Securities Act excludes annuity contracts wherein an insurance company

promises either to pay a fixed sum, either in a lump amount or through periodic payments, from its

definition of a security. Debentures, CDs, and option contracts are all classified as securities unde

the USA.

Question: 2

A variable annuity is:

A. not a security and, therefore, does not have to be registered with the state.

B. not a security, but is still required to be registered with the state before it can be offered for sale.

C. a security and, therefore, has to be registered with the state before it can be offered for sale.

D. a security, but is exempt from state registration.

Answer: D

Explanation: A variable annuity is defined as a security, but is exempt from state registration in the

opinion

of the North American Securities Administrators Association (NASAA.) The Supreme Court of the U.S.

passed a ruling that deemed a variable annuity to be a security. The National Securities Market

Improvement Act of 1996 (NSMIA) established variable annuities to be federal covered securities,

however, since they are, for all intents and purposes, mutual funds. Federal covered securities are

exempt from state registration.

Question: 3

In its prospectus, the YourMoney Mutual Fund provides charts and tables of its average annual

eturn

over the past year, three years, five years, and ten years. The fund’s return has indeed been

phenomenal

over this time period, beating the S&P 500 Index by at least 15%. The prospectus states that this is

ecause the fund invests in securities that are riskier and that, therefore, an investor can expect the

fund

to continue earning a return higher than the S&P 500 Index. Is YourMoney guilty of any security

violations?

A. Question: YourMoney properly revealed to prospective investors the fact that its higher than average

eturns

are the result of its investment in riskier securities.

B. Yes. There is no way the fund could have beaten the S&P 500 Index by at least 15% over the past

ten

years. The fund is obviously misstating its returns.

C. Yes. YourMoney is guilty of fraud in claiming that “an investor can expect the fund to continue

earning

a return higher than the S&P 500 Index.” Past performance is no indication of future performance.

D. Question: Regulations require only that the mutual fund provide charts and tables of its average annual

eturns, with a statement comparing the fund performance with a relevant market index.YourMoney

has

done this and more.

Answer: C

Explanation: Yes. YourMoney is guilty of fraud in its claim that “an investor can expect the fund to

continue earning a return higher than the S&P 500 Index.” Past performance is no indication of futu

e

performance, and this statement is clearly a misstatement of a material fact. In fact, because the

securities the fund invests in are riskier than average, the fund returns can be expected to fall harde

than

the S&P 500 Index in a market downturn.

Question: 4

You are an investment adviser to Mr. Crochety, an elderly man who lives solely on his social

security

income although he managed to accumulate an investment portfolio worth about $100,000 over the

years.

Mr. Crochety recently got his hands on a business publication and read about the tax-free interest

paid by

municipal bonds. He calls you and instructs you to sell his other investments and invest all his money

in a

municipal bond portfolio, so that “the government doesn’t get any more of my hard-earned money.”

You

tell Mr. Crochety that you don’t believe this is a wise move because he’s in such a low tax bracket

that

municipal bonds are not a good investment for him, but he is insistent. Based on these facts, you

should

A. ignore Mr. Crochety’s instruction since it is not in his best interest.

B. require Mr. Crochety to sign an affidavit of liability waiver, indicating that you will not be held

esponsible for any adverse consequences of this decision.

C. have Mr. Crochety sign a statement of investment policy that indicates that this transaction is

eing executed on the client’s instructions and that you have advised the client against it.

D. call Mr. Crochety’s relatives and suggest they have him examined for mental instability.

Answer: C

Explanation: Given that you have advised Mr. Crochety that this is not a wise move and he still insists

on it,

you should protect yourself by getting it in writing. In no case, however, can you require a client to

sign an

affidavit of liability waver, nor can you refuse to follow his adamant instructions.

Question: 5

Harry Lange manages the investment portfolio for the Fidelity Magellan Mutual Fund. Mr.

Lange is a(n)

A. broker-dealer.

B. agent.

C. investment adviser.

D. investment company.

Answer: C

Explanation: If Harry Lange is managing the investment portfolio of Fidelity Magellan Mutual Fund, he

is

an investment adviser. He is making the investment decisions and receives a percentage of the assets

under management as his compensation. He is not selling the mutual fund or the fund’s investors

anything, which is the job of a broker-dealer or an agent. Fidelity Magellan is the investment

company.

Question: 6

Mr. Bigwig, CEO of HiGrowth Corporation, meets with the president of BigFee Investment

Bankers and

arranges for BigFee to underwrite an Initial Public Offering (IPO) for the firm. When the IPO comes to

market, GetErDone Broker-Dealers is part of the selling group, which handles the sale of the stock to

the

public. In this scenario, which party is the issuer?

A. HiGrowth Corporation

B. Mr. Bigwig

C. BigFee Investment Bankers

D. GetErDone Broker-Dealers

Answer: A

Explanation: HiGrowth Corporation is the issuer in this instance. Its stock will be sold, and HiGrowth

will

eceive the proceeds from the sale-less BigFee’s underwriting spread. Mr. Bigwig is merely

HiGrowth’s

epresentative in this instance.

Question: 7

Joe Treader is the owner of a small, state-registered investment advisory firm that is on the

verge of

ecoming insolvent. One of his clients who has become like a mother to him is aware of his financial

difficulties and has offered to sell off some of the assets that he manages for her and loan him the

money

to get him through this period of economic

uncertainty until he is able to get on his feet again. Can Joe take her up on her offer?

A. Yes. Based on the facts presented, it is an unsolicited offer and, as such, Joe can (and should)

accept

it.

B. Yes, but only if Joe draws up a formal loan agreement with a fair interest rate, based on the going

market rates, stated in the agreement as well as a firm date for principal repayment.

C. Question: As the client’s investment adviser, he has a fiduciary relationship with the client. Entering a

loan

agreement with this client could lead to conflicts of interest.

D. Both A and B are true.

Answer: C

Explanation: No, Joe cannot take his client’s offer of a loan because it could lead to a conflict of

interest–if

not today, perhaps in the future–and as a fiduciary Joe will be expected to put this client’s welfare

ahead

of his own. If it takes him a lot longer than expected to get on his feet again, he may be tempted to

act in

his own best interest.

Question: 8

Shady Corporation’s executives are concerned over the firm’s steadily declining stock price and

decide to

do something about it. They each decide to make significantly large purchases of their firm’s stock in

order to stabilize and hopefully even to drive up its price, reasoning that they can sell the stock fo

the

higher price down the road and profit from the transaction. You are a broker-dealer for the firm’s

executives. Are Shady’s executives planning to do anything illegal?

A. Question: It’s a win-win. They are using their own money to buy stock of their firm, and this can help

drive the

stock price up and put profits in their pockets.

B. Yes. To purchase shares of their own company is considered to be illegal insider trading.

C. Question: As long as they follow the rules and report their purchases to the SEC, it is not illegal for them

to

purchase shares of their firm’s stock.

D. Yes. Although it is not illegal for them to purchase shares of their firm’s stock, they cannot do so in

order to try to manipulate the price of the stock.

Answer: D

Explanation: Yes. Although it is not illegal for Shady’s executives to purchase shares of their firm’s

stock,

in this case they are planning to do something illegal in deciding to make significantly large purchases

of

their firm’s stock in order to manipulate the price. This is an example of price pegging.

Question: 9

Which of the following would a firm not be expected to provide to the Administrator when

egistering an

issue of securities with the state?

A. all sales and advertising materials that will be used in conjunction with the offering.

B. the agreement between the issuing firm and the underwriters

C. the agreement among the underwriters themselves

D. The firm will be expected to provide all of the above to the Administrator when registering an

issue of

securities with the state.

Answer: D

Explanation: The firm will be expected to provide all of the above-sales and advertising materials to

e

used in the offering, the agreement between the issuing firm and its underwriters, and the

agreement

among the underwriters themselves.

Question: 10

Under the 2002 Uniform Securities Act, registration by coordination allows:

A. federal covered securities to be registered simultaneously with the SEC and with the states in

which

the securities will be offered for sale.

B. securities that do not fall within the category of federal covered securities to be registered

simultaneously with the SEC and with the states in which the securities will be offered for sale.

C. both state-registered and out-of-state investment bankers to participate in the underwriting and

egistration of a new security issue.

D. issuers of federal covered securities to submit only a notice filing with the Administrator of states

in

which the securities will be offered for sale.

Answer: B

Explanation: Under the 2002 Uniform Securities Act, registration by coordination allows securities

that are

not federal covered securities to be registered simultaneously with the SEC and with the states in

which

the securities will be offered for sale. Federal covered securities are exempt from state registration

and

are required to submit only a notice filing with the Administrator of the state. This is not the same as

egistration by coordination.

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