20 Broker-Dealers, Agents, Securities & Issuers Practice Questions & Answers

1. 1. A firm whose only office is in State A effects securities transactions in State B exclusively with banks, insurance companies and registered investment companies located there. It has fewer than six retail customers anywhere in the country. Which statement describes its status under the Uniform Securities Act in State B?

   • A.It must register in State B, because the Act's de minimis allowance reaches no more than five non-institutional clients per twelve months.
   • B.It is exempt from registration in State B, because sophisticated institutional clients may waive the Act's registration protections.
   • C.It must register in State B, because effecting any transaction with a resident of a state makes a firm a broker-dealer in that state.
   • D.It is excluded from the broker-dealer definition there, having no place of business in State B and only institutional clients.✓ Answer

   Section 401(c)(4)(A) excludes from 'broker-dealer' a person with no place of business in the state whose in-state transactions are exclusively with issuers, other broker-dealers, or institutions such as banks, insurance companies and investment companies. The exclusion turns on place of business plus client type. There is no client-count de minimis allowance for broker-dealers; the five-client de minimis test belongs to investment advisers, which is why candidates who carry it over answer wrongly.

   Source: Uniform Securities Act (1956, as amended by NASAA) Section 401(c)(4)(A)Report a problem with this question

2. 2. A broker-dealer registered only in State A, where it keeps its sole office, has a long-standing client who lives in State A but spends each winter in State B. While she is in State B she telephones and places orders. The firm has no office in State B. What is the firm's position in State B?

   • A.It must register in State B as soon as it effects more than an isolated number of trades for a person physically located there.
   • B.It may rely on the exclusion only if the client signs a form acknowledging that each order she placed was entirely unsolicited.
   • C.It is excluded from the broker-dealer definition in State B, having no office there and dealing with an existing non-resident customer.✓ Answer
   • D.It must register in State B, because the client is treated as a State B resident for registration purposes once her stay exceeds thirty days.

   Section 401(c)(4)(B) excludes a person who has no place of business in the state, is licensed in a state where it does maintain a place of business, and offers and sells in this state only to an existing customer whose residence is not in this state. That is exactly the vacationing-client or snowbird situation. The exclusion depends on residence and prior relationship, not on trade counts, and no unsolicited-order acknowledgment is required for it.

   Source: Uniform Securities Act (1956, as amended by NASAA) Section 401(c)(4)(B)Report a problem with this question

3. 3. An industrial company issues short-term notes to fund working capital. The notes mature in 180 days, are sold in denominations of $100,000, and carry a rating in the second-highest category from a nationally recognized statistical rating organization. How does the Uniform Securities Act treat them?

   • A.They are exempt securities, because commercial paper maturing within nine months in large denominations with a high rating qualifies.✓ Answer
   • B.They are exempt securities, because a promissory note a corporation issues for working capital is outside the definition of a security.
   • C.They must be registered, because the commercial paper exemption reaches only notes maturing in ninety days or less whatever the rating.
   • D.They must be registered, because the commercial paper exemption covers only notes issued by banks, savings institutions and trust companies.

   Section 402(a)(10) exempts a note, draft, bill of exchange or banker's acceptance that matures within nine months of issuance, is issued in denominations of at least $50,000, and is rated in one of the three highest categories by a nationally recognized statistical rating organization. These notes satisfy all three tests. The exemption attaches to the security itself and is permanent, but it never relieves the issuer or seller of the Act's antifraud provisions.

   Source: Uniform Securities Act (1956, as amended by NASAA) Section 402(a)(10)Report a problem with this question

4. 4. A firm files a complete broker-dealer application with a state Administrator together with the required consent to service of process. No denial order is in effect and no proceeding is pending against it. Absent any further action by the Administrator, when does its registration become effective?

   • A.On the thirtieth day after the Administrator reviews the file and issues an order declaring the application effective.
   • B.At noon on the thirtieth day after the application is filed, unless the Administrator by rule or order specifies an earlier date.✓ Answer
   • C.At noon on the forty-fifth day after filing, the period the Act allows for examining the applicant's finances.
   • D.Immediately upon filing, since an application accompanied by a consent to service of process is self-executing.

   Section 202(a) provides that if no denial order is in effect and no proceeding is pending under Section 204, registration becomes effective at noon of the thirtieth day after the application is filed. The Administrator may specify an earlier effective date by rule or order, and may defer effectiveness to noon of the thirtieth day after any amendment is filed. No affirmative order granting the registration is needed, which is what the second choice gets wrong.

   Source: Uniform Securities Act (1956, as amended by NASAA) Section 202(a)Report a problem with this question

5. 5. A partnership registers as a broker-dealer in a state. Three of its partners regularly take customer orders and recommend securities, and the firm also employs twelve sales staff who are not partners. Which statement describes how these fifteen individuals become registered?

   • A.The firm's registration automatically registers the three partners; the twelve sales employees must each register as agents.✓ Answer
   • B.All fifteen must file separate applications, because the Act treats each individual's registration as wholly independent of the firm's.
   • C.All fifteen are automatically registered, because a broker-dealer's registration extends to everyone it employs in a sales capacity.
   • D.The three partners must each file separately, because control-person status is something firm registration cannot cover for them.

   Section 202(a) states that registration of a broker-dealer automatically constitutes registration of any agent who is a partner, officer or director, or who occupies a similar status. Employees who are not partners, officers or directors get no such benefit and must be registered as agents in their own right. Candidates most often miss this by assuming every individual files separately, which is the second choice.

   Source: Uniform Securities Act (1956, as amended by NASAA) Section 202(a)Report a problem with this question

6. 6. A firm is registered in a state both as a broker-dealer and as an investment adviser. A client pays the firm an annual fee for a written financial plan and separately pays commissions when the firm executes trades in his brokerage account. Which statement best describes the firm's obligations?

   • A.It owes fiduciary duties across both relationships, since a firm holding an adviser registration is a fiduciary in everything it does.
   • B.It owes fiduciary duties on the advisory relationship and must disclose the capacity in which it acts for each part of the business.✓ Answer
   • C.It owes no fiduciary duty on either relationship, because brokerage registration governs a firm that executes its own clients' orders.
   • D.It owes fiduciary duties only when it exercises discretion, since an adviser without trading authority merely supplies opinions.

   A dually registered firm wears two hats, and the duty follows the hat rather than the entity. Advisory activity carries the fiduciary duties that the antifraud provision of the Investment Advisers Act has been read to impose, including a duty of loyalty and full disclosure of conflicts. Because the client cannot tell from the outside which role the firm occupies at any moment, the firm must make that capacity clear, along with how it is compensated in each.

   Source: Investment Advisers Act of 1940 Section 206; NASAA Series 65 Test Specifications (effective June 12, 2023)Report a problem with this question

7. 7. An individual introduces investors to a private start-up, pre-screens them for suitability and helps negotiate terms. He is paid a percentage of every dollar the company raises. He holds no other securities role. How is he treated under state securities law?

   • A.He must be registered, because compensation tied to the amount raised is the mark of effecting transactions for the account of others.✓ Answer
   • B.He need not register, because a person who merely makes introductions never effects transactions for the account of another.
   • C.He need not register, because the issuer is excluded from the broker-dealer definition and that exclusion covers those it hires.
   • D.He must register only as an issuer's agent, since the private placement exemption relieves him of every broker-dealer obligation in the state.

   Transaction-based compensation is the decisive factor in both SEC and NASAA analysis of finders. A person paid in proportion to the money raised, who also solicits, pre-qualifies investors and negotiates, is engaged in the core activity of effecting transactions in securities and must register as a broker-dealer or as an agent. The issuer exclusion in Section 401(c)(2) protects the issuer itself, not the people it pays to sell, and an exempt transaction does not exempt the person.

   Source: Uniform Securities Act (1956, as amended by NASAA) Sections 401(b) and 401(c)(2); NASAA Series 65 Test Specifications (effective June 12, 2023)Report a problem with this question

8. 8. A corporation is retained by an issuer to solicit retail investors in a state to buy the issuer's stock, and it uses its own employees to make the calls. Which statement correctly characterizes the corporation itself under the Uniform Securities Act?

   • A.The corporation cannot be an agent, since only a natural person qualifies; it must instead be analyzed as a broker-dealer.✓ Answer
   • B.The corporation is neither, because a company selling on an issuer's behalf takes the issuer's own exclusion from both terms.
   • C.The corporation is an agent of the issuer, because the Act's definition of person covers corporations as well as individuals.
   • D.The corporation is an agent only if its own employees are registered, since agent status flows up from the people who sell.

   Section 401(b) defines an agent as an individual, meaning a natural person, other than a broker-dealer, who represents a broker-dealer or issuer in effecting securities transactions. An entity can never be an agent. Because it is engaged in the business of effecting transactions for the account of others, the corporation is analyzed under the broker-dealer definition in Section 401(c), and the issuer exclusion there protects the issuer, not a firm it retains.

   Source: Uniform Securities Act (1956, as amended by NASAA) Sections 401(b) and 401(c)Report a problem with this question

9. 9. Four individuals each sell securities on an issuer's behalf in a state, and each is paid a commission. One sells U.S. Treasury obligations, one sells the bonds of a city, one sells common stock of the insurance company that employs him, and one sells qualifying short-term commercial paper. Which of them must register as an agent?

   • A.None of them, because an individual who represents an issuer rather than a broker-dealer is never an agent under the Act.
   • B.All four, because the issuer-agent exclusion is withdrawn whenever the individual is paid a commission for soliciting the sales.
   • C.Only the one selling commercial paper, because the exclusion is confined to government and bank obligations of any maturity.
   • D.Only the one selling insurance company stock, since that exemption falls outside the clauses the issuer-agent exclusion lists.✓ Answer

   The issuer-agent exclusion in Section 401(b)(1)(A) reaches only transactions in securities exempted by clauses (1), (2), (3), (10) and (11) of Section 402(a): government and municipal issues, Canadian and recognized foreign government issues, bank and trust company securities, qualifying commercial paper, and employee benefit plan investment contracts. Insurance company securities are exempt under clause (5), which is not on that list, so the individual selling them is an agent and must register.

   Source: Uniform Securities Act (1956, as amended by NASAA) Section 401(b)(1)(A)Report a problem with this question

10. 10. An officer of a manufacturing corporation offers newly issued shares of that corporation to its current employees, partners and directors. She draws her regular salary and receives no commission or other remuneration for soliciting anyone in the state. Must she register as an agent?

    • A.Yes, because the exclusion further requires that the shares themselves also be an exempt security under the Act.
    • B.No, because an officer of an issuer can never be an agent, the Act treating officers as part of the issuer.
    • C.No, because representing an issuer in sales to its existing employees without selling compensation is outside the definition.✓ Answer
    • D.Yes, because registration turns on effecting sales of securities and compensation is irrelevant to that analysis.

    Section 401(b)(1)(D) excludes an individual who represents an issuer in effecting transactions with existing employees, partners or directors of that issuer, provided no commission or other remuneration is paid directly or indirectly for soliciting any person in the state. Her salary is not selling compensation. The last sentence of Section 401(b) also makes clear that an officer is an agent only if she otherwise comes within the definition, so title alone settles nothing.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 401(b)(1)(D)Report a problem with this question

11. 11. An agent registered in a state resigns from her broker-dealer on a Friday and begins work at a different registered broker-dealer the following Monday. Neither firm has made any filing yet. What is her registration status on Monday morning?

    • A.Her registration continues for thirty days after she leaves, a grace period the Act provides for agents changing employers.
    • B.Her registration lapses permanently on resignation, so she must requalify by examination before she can be registered again.
    • C.Her registration is not effective while she is unassociated, and both she and each firm must promptly notify the Administrator.✓ Answer
    • D.Her registration carries over to the new firm automatically, since it was granted to her personally and runs through December 31.

    Section 201(b) makes an agent's registration ineffective during any period when she is not associated with a particular registered broker-dealer or a particular issuer, and requires that both the agent and the firm promptly notify the Administrator when the connection begins or ends. The registration therefore does not travel with the person and there is no statutory grace period, but it also does not disappear so completely that she must retake an examination.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 201(b)Report a problem with this question

12. 12. A registered agent sitting in State A telephones a prospect at her home in State B and recommends a stock. The prospect accepts while traveling in State C and communicates her acceptance from there. Which statement describes the reach of the several state Administrators?

    • A.Only State A has jurisdiction, because the Act assigns an offer to the state in which the offeror sat when the offer was made.
    • B.Only State A, State B and State C have jurisdiction: the offer originated in A, was received in B, accepted in C.✓ Answer
    • C.Only State B has jurisdiction, because the Act looks exclusively to the state where the purchaser maintains her permanent residence.
    • D.Only State C has jurisdiction, because a securities transaction is located where the contract is formed by the buyer's acceptance.

    Under Section 414(c) an offer is made in a state, whether or not either party is present there, when it originates from that state or is directed by the offeror to that state and received at the place directed. Section 414(d) locates acceptance where it is communicated to the offeror. One telephone call can therefore expose the seller to three Administrators at once, which is why jurisdiction is analyzed by the path of the communication rather than by anyone's residence.

    Source: Uniform Securities Act (1956, as amended by NASAA) Sections 414(c) and 414(d)Report a problem with this question

13. 13. A securities offering is advertised in a magazine published in State A and distributed nationally. More than two-thirds of that magazine's circulation over the past twelve months has been outside State A. A resident of State A reads the advertisement. Is an offer made in State A?

    • A.No, because an advertisement is never an offer, the Act reaching only communications addressed to a named person.
    • B.Yes, because the exception shelters only publishers located outside the state, and this magazine is published inside it.
    • C.No, because the Act excepts a bona fide paid general-circulation publication whose circulation is mostly outside the state.✓ Answer
    • D.Yes, because an advertisement published within a state is an offer to every reader there, whatever the circulation pattern is.

    Section 414(e) provides that an offer is not made in a state when it appears in a bona fide newspaper or other publication of general, regular and paid circulation that is not published in the state, or that is published in the state but has had more than two-thirds of its circulation outside the state during the past twelve months. The same subsection excepts a radio or television program originating outside the state, so the exception is about circulation, not about where the publisher sits.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 414(e)Report a problem with this question

14. 14. An insurance company authorized to do business in a state offers two products: a contract promising a fixed monthly payment for life, and a contract whose payments rise and fall with the results of a separate account invested in equities. How does the Uniform Securities Act treat them?

    • A.The fixed contract is not a security, while the variable contract is and falls outside the insurance company exemption.✓ Answer
    • B.The variable contract is not a security, because the state insurance regulator rather than the Administrator supervises it.
    • C.Both are securities, because any contract an insurance company issues for investment purposes meets the definition.
    • D.Neither is a security, because the Act excludes every contract issued by an authorized insurance company from the term.

    The last sentence of Section 401(m) removes from 'security' any insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum, so the fixed contract is outside the Act entirely. The variable contract is a security, and the bracketed proviso in Section 402(a)(5) expressly withholds the insurance company exemption from a contract whose payments depend on the investment results of a segregated account.

    Source: Uniform Securities Act (1956, as amended by NASAA) Sections 401(m) and 402(a)(5)Report a problem with this question

15. 15. A company sells units in a citrus grove. Each buyer takes recorded title to a small plot but simultaneously signs a service agreement under which the company cultivates, harvests and markets the fruit and remits a share of the pooled proceeds. Buyers perform no work. Is what is sold a security?

    • A.No, because the buyers keep the right to cancel the service agreement, which leaves managerial control in their own hands.
    • B.No, because each buyer receives recorded title to real property, and a direct interest in land is outside the definition.
    • C.Yes, but only because the units are sold to many buyers at once, a public distribution being what makes an instrument a security.
    • D.Yes, it is an investment contract: money is invested in a common enterprise with profits expected from another's efforts.✓ Answer

    'Security' in Section 401(m) includes an investment contract, and the Howey test asks whether there is an investment of money in a common enterprise with an expectation of profits derived primarily from the efforts of others. The land title is incidental; what the buyers actually purchase is the company's management of the grove and a share of pooled returns. The number of buyers is not part of the test, and packaging an interest as real estate does not defeat it.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 401(m); SEC v. W.J. Howey Co., 328 U.S. 293 (1946)Report a problem with this question

16. 16. A promoter distributes shares of his company's assessable stock to a list of prospects, charges them nothing, and calls the distribution a gift. He makes no other transfer to them. How is this treated under the Uniform Securities Act?

    • A.It is neither an offer nor a sale, since nothing of value passed from the recipients back to the promoter.
    • B.It is an offer but not a sale, since no contract of disposition was ever formed with the recipients.
    • C.It is a sale but not an offer, since offer reaches only attempts to dispose of a security for value.
    • D.It is an offer and a sale, because the Act deems a purported gift of assessable stock to involve both of those acts.✓ Answer

    Section 401(k)(4) states that a purported gift of assessable stock is considered to involve an offer and a sale. Assessable stock can generate future calls for payment from the holder, so the recipient takes on an obligation and the transaction is not gratuitous in substance. A gift of non-assessable stock is the classic contrasting case and is not a sale, which is why the assessable and non-assessable pairing appears so often as a distractor set.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 401(k)(4)Report a problem with this question

17. 17. An issuer is conducting a nationwide public offering and has filed a registration statement with the SEC. It wants its state registration to become effective at the same moment the federal registration statement does. Which set of conditions must it satisfy?

    • A.The issuer has operated at least thirty-six months, has 500 holders of record, and meets the Act's stated net worth tests.
    • B.The Administrator has entered an order declaring the registration effective after examining the promoters' compensation terms.
    • C.The state filing has been on file at least thirty days, the Administrator has reviewed the merits, and a bond has been posted.
    • D.The state filing has been on file at least ten days, price terms two full business days, and no stop order or proceeding is pending.✓ Answer

    Registration by coordination under Section 303 is the method for a security with a concurrent Securities Act of 1933 registration statement, and Section 303(c) makes the state registration automatically effective at the moment the federal statement becomes effective if three conditions hold: no stop order is in effect and no Section 306 proceeding is pending, the state registration statement has been on file at least ten days, and a statement of maximum and minimum proposed offering prices and maximum underwriting discounts and commissions has been on file two full business days.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 303(c)Report a problem with this question

18. 18. A start-up will sell its shares only to residents of the single state where it operates, and it will file nothing with the SEC. It has no operating history and no publicly held class of equity. Which state registration method is available, and when does it take effect?

    • A.No registration is needed, since an offering confined to one state's residents is a federal covered security.
    • B.Registration by qualification, which becomes effective when the Administrator so orders after reviewing the disclosure filed.✓ Answer
    • C.Registration by coordination, effective automatically on the tenth day after the state filing is placed on file.
    • D.Registration by filing, effective automatically because no federal registration statement competes with it here.

    Section 304(a) says any security may be registered by qualification, and it is the only method open to a purely intrastate offering with no federal registration statement. It demands the fullest disclosure, including issuer and subsidiary information, capitalization, use of proceeds, promoter and officer compensation, a recent balance sheet and three years of profit and loss statements. Section 304(c) provides that the registration becomes effective when the Administrator so orders, rather than automatically.

    Source: Uniform Securities Act (1956, as amended by NASAA) Sections 304(a) and 304(c)Report a problem with this question

19. 19. An issuer raises capital in a state through an offering conducted under Rule 506 of Regulation D and sells to several investors located there. What may that state's Administrator require of the issuer, and what authority does the state retain?

    • A.Nothing at all, since federal covered status removes the offering from every provision of the state securities act.
    • B.Registration by qualification within fifteen days of the first sale, because private offerings are not covered securities.
    • C.A Form D notice and a consent to service of process within fifteen days of the first sale, plus fees; antifraud authority stays intact.✓ Answer
    • D.A full merit review of the offering's fairness before any sale, since Regulation D does not preempt substantive state review.

    A security sold under Rule 506 is a federal covered security under Section 18(b)(4)(D) of the Securities Act of 1933, so the state cannot require registration or conduct merit review. Section 307(b) preserves the Administrator's power to require a notice on SEC Form D and a consent to service of process no later than fifteen days after the first sale in the state, together with a fee. Preemption of registration is never preemption of antifraud enforcement.

    Source: Uniform Securities Act (1956, as amended by NASAA) Section 307(b); Securities Act of 1933 Section 18(b)(4)(D)Report a problem with this question

20. 20. Over an eight-month period an issuer's principal directs offers of unregistered stock to fourteen individuals in a state, none of them institutions. Six of them buy, each stating in writing that the purchase is for investment, and no one is paid to solicit. The Administrator challenges the sales. What is the outcome?

    • A.The exemption holds, because the investment letters and the absence of selling compensation satisfy its conditions.
    • B.The exemption fails, since it is measured by offerees rather than purchasers, and the principal must prove that it applies.✓ Answer
    • C.The exemption fails, but the Administrator must prove its unavailability before any violation can be found.
    • D.The exemption holds, since only six persons actually purchased and the limit counts purchases in twelve months.

    Section 402(b)(9) exempts a transaction pursuant to an offer directed by the offeror to not more than ten persons, other than the institutional buyers listed in paragraph (8), in the state during any twelve consecutive months. Fourteen non-institutional offerees within eight months exceeds the limit even though only six bought, because the count is of offerees. Section 402(d) then places the burden of proving an exemption on the person claiming it, so an exemption is claimed rather than granted.

    Source: Uniform Securities Act (1956, as amended by NASAA) Sections 402(b)(9) and 402(d)Report a problem with this question

Practice questions written from the NASAA Series 65 Test Specifications and the Uniform Securities Act. Not affiliated with or endorsed by NASAA, FINRA or Prometric. Dollar thresholds, fee figures and contribution limits change; where one matters the question supplies it. Confirm current requirements with NASAA before testing. NASAA exam content outline →