Series 99 Operations Professional Exam

Correct: Under MSRB Rule G-44, municipal advisors are required to establish, implement, and maintain a system to supervise their municipal advisory activities. When a recordkeeping failure is identified under MSRB Rule G-8 or SEC Rule 17a-4, the firm’s primary responsibility is to identify the root cause of the failure within its supervisory framework and implement corrective actions to prevent future non-compliance. This ensures the firm meets its fiduciary duty and regulatory obligations. Incorrect: Obtaining copies from the client does not address the underlying failure of the firm’s own required recordkeeping systems and does not satisfy the requirement for the firm to maintain its own original records. Amending Form MA is required for changes in the firm’s registration information or legal status, not for reporting internal compliance lapses. The MSRB does not typically grant waivers for recordkeeping failures, and the firm must instead focus on remediation and supervisory improvements. Takeaway: When regulatory failures are identified, firms must conduct a root cause analysis and update their written supervisory procedures to ensure ongoing compliance with MSRB and SEC rules.

Correct: Under SEC Rule 15B, the definition of a municipal advisor includes any person who provides advice to or on behalf of a municipal entity with respect to municipal financial products. Municipal financial products specifically include the investment of bond proceeds. While broker-dealers have a limited exclusion when acting as underwriters on a specific issuance, providing advice on the investment of proceeds is a distinct municipal advisory activity that requires registration and subjects the firm to a fiduciary duty under MSRB Rule G-42. Incorrect: Providing a written disclaimer or disclosure does not exempt a firm from registration if its substantive activities meet the statutory definition of municipal advisory work. The definition of municipal advisory activities is not limited to the issuance of securities; it explicitly encompasses advice regarding the investment of bond proceeds. Furthermore, the underwriter exclusion is narrow and only applies to advice provided by an underwriter for a particular issuance of municipal securities for which they have been engaged; it does not cover general investment advice regarding the proceeds of past issuances. Takeaway: Providing advice to a municipal entity regarding the investment of bond proceeds, such as GICs, requires registration as a municipal advisor and carries a federal fiduciary duty.

Correct: MSRB Rule A-12 requires municipal advisors to register with the MSRB and keep their registration information current. Specifically, any change to the information required by Form A-12 must be updated within 30 days of the change. Failure to maintain accurate registration or pay the required annual fees (such as the $1,000 annual professional fee and the technology fee) constitutes a violation of MSRB rules and can lead to disciplinary action or the loss of the firm’s ability to conduct municipal advisory business. Incorrect: The option regarding disclosure of conflicts of interest relates to the fiduciary duty requirements under Rule G-42, not the administrative registration requirements of Rule A-12. The option regarding recordkeeping refers to Rule G-8 and G-9, which govern the maintenance of books and records rather than the registration process. The option regarding professional qualifications refers to Rule G-3, which establishes the testing and qualification standards for individuals, whereas Rule A-12 focuses on the firm’s registration and information maintenance with the MSRB. Takeaway: Municipal advisors must update their MSRB Form A-12 within 30 days of any material change to ensure continuous regulatory compliance and avoid administrative penalties.

Correct: Under MSRB Rule G-42, municipal advisors owe a fiduciary duty to their municipal entity clients, which includes a duty of care and a duty of loyalty. When advising on bond valuation and pricing, the advisor must exercise professional judgment and perform independent due diligence to ensure the terms are favorable to the client. This involves analyzing current market yields, credit spreads, and the specific features of the bonds to provide an unbiased recommendation that aligns with the issuer’s long-term financial objectives. Incorrect: Relying solely on the underwriter’s pricing scale is incorrect because the advisor has an independent fiduciary obligation to the issuer that is distinct from the underwriter’s role. Focusing only on the lowest interest rate is a narrow approach that may ignore the long-term costs of restrictive covenants or the loss of future refinancing flexibility. There is no MSRB-mandated ‘standardized valuation formula’ for pricing; instead, advisors must use their professional expertise to evaluate various market inputs and qualitative factors. Takeaway: A municipal advisor’s valuation advice must be independent, evidence-based, and prioritized around the issuer’s best interests as part of their fiduciary obligation.

Correct: According to MSRB Rule G-9 (Preservation of Records), municipal advisors are required to preserve records of all written communications received and sent relating to municipal advisory activities for a period of at least five years. Additionally, the rule specifies that these records must be kept in an easily accessible place for the first two years of the retention period. Incorrect: The three-year period is a common retention timeframe for certain broker-dealer records under SEC Rule 17a-4, but it does not meet the five-year minimum required by the MSRB for municipal advisor communications. The six-year retention period applies to specific records such as blotters and ledgers under Rule G-9, but not to general written communications. Permanent retention is reserved for organizational documents like articles of incorporation or partnership agreements, rather than routine business correspondence. Takeaway: Municipal advisors must maintain written communications related to their advisory activities for at least five years, with the first two years requiring easy accessibility.

Correct: Under FINRA Rule 11870, a carrying member must either validate or protest a transfer instruction within a specific timeframe. When a conflict arises between the duty to transfer assets and regulatory obligations such as the Customer Identification Program (CIP) or legal claims, the firm must evaluate whether the restriction constitutes a valid reason to protest the transfer. Coordinating with the compliance department is essential to ensure that the firm does not violate Anti-Money Laundering (AML) requirements or Know Your Customer (KYC) standards while navigating the procedural requirements of the Automated Customer Account Transfer Service (ACATS). Incorrect: Moving disputed assets to an error account is an inappropriate use of internal accounting for a customer transfer and does not resolve the underlying legal claim. Issuing a blanket protest for ‘Account in House’ is often a misuse of the ACATS protest codes if the account is valid but restricted, and requiring notarized letters for all transfers may be an unnecessary hurdle that violates the spirit of efficient asset portability. Lifting a regulatory restriction without resolving the CIP deficiency would constitute a direct violation of the firm’s compliance program and federal regulations regarding identity verification. Takeaway: Operations professionals must ensure that ACATS transfers are handled in strict accordance with FINRA Rule 11870 while maintaining the integrity of CIP and KYC regulatory requirements.

Correct: MSRB Rule G-8(a)(xii) specifically requires every broker, dealer, and municipal securities dealer to maintain a record of all written complaints of customers and municipal entities. This record must include a statement of what action, if any, has been taken by the firm in response to the complaint. This ensures that regulators can track how firms resolve grievances and identify potential patterns of misconduct or systemic compliance failures. Incorrect: The requirement to maintain records of complaints is not limited to those resulting in legal action; all written complaints must be recorded regardless of the outcome. Simply filing complaints within general correspondence is insufficient because Rule G-8 requires a specific, identifiable record of complaints and the firm’s subsequent actions. Furthermore, Rule G-8 focuses on written complaints rather than verbal ones, and the retention period for such records under Rule G-9 is six years, making a three-year timeframe incorrect. Takeaway: MSRB Rule G-8 requires firms to maintain a dedicated record of all written complaints from municipal entities, including documentation of the firm’s response or action taken.

Correct: Under Internal Revenue Service (IRS) regulations, issuers of tax-exempt bonds are generally required to calculate and pay arbitrage rebates to the federal government every five years. A municipal advisor, as part of its fiduciary duty and compliance monitoring, must ensure the issuer tracks investment yields relative to the bond yield and monitors spending benchmarks that might exempt them from rebate requirements. Establishing a systematic monitoring process ensures the issuer avoids penalties and maintains the tax-exempt status of the bonds. Incorrect: Liquidating investments into SLGS securities can help manage future yield, but it cannot retroactively eliminate a rebate liability already incurred. Arbitrage rebate payments are required at least every five years, not just at final maturity. While an auditor may review financial statements, the municipal advisor has a specific fiduciary obligation to provide competent advice and maintain records related to the municipal advisory activity, and MSRB Rule G-37 pertains to political contributions, not the delegation of arbitrage monitoring. Takeaway: Municipal advisors must proactively monitor investment yields and expenditure milestones to ensure issuers comply with the five-year arbitrage rebate payment cycle required by federal tax law.

Correct: The arbitrage yield limit is the maximum interest rate that can be earned on the investment of tax-exempt bond proceeds. Under federal tax law, this yield is calculated based on the ‘issue price’ of the bonds. When bonds are sold at a premium, the yield to the investor is lower than the coupon rate. Because the arbitrage yield limit is derived from the bond’s own yield, a higher issue price (due to premiums) results in a lower arbitrage yield limit for the issuer. Incorrect: The arbitrage yield limit is not fixed at the coupon rate because the coupon does not reflect the actual cost of capital when bonds are sold at premiums or discounts. While the average life is important for debt service scheduling and sinking fund requirements, it is not the metric used to define the arbitrage yield limit. There is no regulatory provision that allows premiums to be excluded from yield calculations based on the length of a construction period; all proceeds must be accounted for in the yield restriction compliance framework. Takeaway: The arbitrage yield limit is determined by the actual yield of the bonds, which is calculated using the issue price (including premiums and discounts) rather than the face value or coupon rate.

Correct: MSRB Rule G-42 establishes a fiduciary duty for municipal advisors, which includes a duty of care. This duty requires advisors to exercise due diligence and perform a reasonable inquiry into the facts that form the basis for their advice. Relying blindly on client-provided data without performing basic due diligence or cross-referencing available audited financials fails to meet the standard of care required of a fiduciary. Incorrect: Relying solely on official representations without inquiry is insufficient under the duty of care, even if fraud is not explicitly suspected. While an advisor may use third parties, they cannot outsource their primary regulatory duty to understand and validate the data they use for their own recommendations. Limiting the scope of an engagement via disclosure does not permit an advisor to ignore material financial discrepancies that are central to the advice being rendered, as the fiduciary duty cannot be waived in a way that permits negligence. Takeaway: Under MSRB Rule G-42, a municipal advisor must perform a reasonable inquiry into the accuracy of financial information provided by a client to fulfill their fiduciary duty of care.

Correct: Under MSRB Rule G-42, municipal advisors owe a fiduciary duty to their municipal entity clients, which includes a duty of care. This duty requires advisors to provide informed advice and disclose all material facts and risks associated with the municipal advisory activity. Since the reduction of federal subsidies due to sequestration is a known material risk for Direct Pay Build America Bonds (BABs), the advisor’s failure to inform the client about these impacts constitutes a breach of their professional and fiduciary obligations. Incorrect: MSRB Rule G-37 pertains to political contributions and ‘pay-to-play’ restrictions, which are not relevant to the failure to disclose subsidy risks. Build America Bonds, while taxable, are municipal securities and remain exempt from the registration requirements of the Securities Act of 1933. While suitability is a factor, municipal advisors are held to the higher fiduciary standard when serving municipal entities, meaning they must act in the client’s best interest and provide full disclosure of risks, rather than just ensuring the product is suitable. Takeaway: Municipal advisors must fulfill their fiduciary duty of care by proactively disclosing material risks, such as the impact of federal sequestration on BABs subsidies, to their municipal entity clients.

Correct: Rule D-13 defines municipal advisory activities by reference to the Exchange Act, which focuses on the provision of advice. Under regulatory guidance, the ‘advice’ threshold is met when a communication is tailored to the specific needs, objectives, or circumstances of a municipal entity or obligated person. Providing specific recommendations on the timing, structure, or terms of a municipal securities issuance constitutes municipal advisory activity, regardless of the existence of a formal contract. Incorrect: The absence of a formal engagement letter or written agreement does not prevent an activity from being classified as municipal advisory activity if the nature of the work meets the regulatory definition of advice. Compensation is not the primary determinant for the definition of municipal advisory activities; the focus is on the nature of the service provided to the municipal entity. While presenting general financing structures is often considered ‘general information,’ providing tailored analysis that suggests a specific course of action moves the activity into the realm of regulated advice. Takeaway: Under Rule D-13, the determination of municipal advisory activity depends on whether the communication constitutes tailored advice rather than the existence of a formal contract or the receipt of compensation.

Correct: Under SEC Rule 15B and MSRB Rule D-13, the exclusion for registered investment advisers is narrow. It only applies to the provision of investment advice that would subject the person to the Investment Advisers Act of 1940. When a firm provides advice on the structure, timing, or terms of a municipal security issuance (such as call provisions or maturity schedules), it is engaging in municipal advisory activities that require registration, as these activities are distinct from providing investment advice on the proceeds of such an issuance. Incorrect: The investment adviser exclusion does not provide a blanket exemption for all interactions; it is limited strictly to investment advice and does not cover advice on the issuance of securities. Registration requirements are based on the nature of the activity performed, not on a de minimis compensation threshold or the sophistication level of the municipal entity receiving the advice. Takeaway: A firm must register as a municipal advisor if it provides advice on the structure or terms of a municipal issuance, even if it holds other professional registrations like that of an investment adviser or broker-dealer.

Correct: Under SEC Rule 17a-4 and the Customer Identification Program (CIP) requirements of the USA PATRIOT Act, firms must maintain records of the information used to verify a customer’s identity for at least five years after the account is closed. Additionally, if the firm utilizes electronic storage media, it must comply with the technical requirements of SEC Rule 17a-4(f), which mandates that records be preserved in a non-rewriteable, non-erasable format (WORM – Write Once Read Many) to ensure the integrity and immutability of the data throughout the required retention period. Incorrect: The approach suggesting a three-year retention period from the date of creation is incorrect because CIP records have a specific five-year post-closure requirement that exceeds the general three-year rule for many other broker-dealer records. The approach suggesting a six-year retention from the date of the initial transaction is flawed because the regulatory clock for account-level records often begins at the time of account closure or when information is updated, not just the initial transaction. The approach requiring physical copies to be kept for ten years is incorrect because SEC Rule 17a-4 explicitly permits electronic storage provided specific integrity standards are met, and the ten-year timeframe does not align with standard FINRA or SEC retention schedules for onboarding documents. Takeaway: Customer identification records must be retained for five years after the account is closed and, if stored electronically, must be kept in a non-rewriteable, non-erasable format.

Correct: Under MSRB Rule G-42, a municipal advisor owes a fiduciary duty to its municipal entity client, which includes a duty of care and a duty of loyalty. The duty of care requires the advisor to exercise due sincerity and perform a reasonable investigation into the facts relevant to a client’s financial situation. When concerns about debt and liabilities arise, the advisor must independently evaluate the risks and provide professional advice to ensure the client is making informed decisions and meeting its disclosure obligations. Incorrect: Deferring entirely to other professionals without independent review fails the advisor’s duty of care to provide informed advice. Limiting disclosure only upon underwriter request ignores the advisor’s primary responsibility to the issuer’s long-term interests and regulatory compliance. Suggesting a change in bond type solely to obscure liabilities is a violation of the duty of loyalty and could be considered a deceptive practice under the Dodd-Frank anti-fraud provisions. Takeaway: A municipal advisor’s fiduciary duty requires proactive investigation and professional analysis of all material debt and liabilities to protect the issuer’s interests and ensure regulatory compliance.

Correct: Under MSRB rules, specifically those governing the conduct of solicitor municipal advisors, a solicitor is required to provide a written disclosure to the municipal entity being solicited. This disclosure must be provided at or before the time of the solicitation and must include the nature of the relationship between the solicitor and the municipal advisor, the compensation arrangement, and any material conflicts of interest. This ensures the municipal entity is aware of the financial incentives behind the recommendation or introduction. Incorrect: Option b is incorrect because success-based fees are generally permitted for solicitors provided they are properly disclosed, and they are not inherently violations of the gifts and gratuities rule (Rule G-20). Option c is incorrect because while a solicitor must be registered as a municipal advisor, there is no requirement for dual registration as a broker-dealer for these activities. Option d is incorrect because the status of a ‘sophisticated municipal market participant’ (SMMP) does not exempt a solicitor from the fundamental requirement to disclose compensation and conflicts of interest during a solicitation. Takeaway: Solicitor municipal advisors must provide written disclosures regarding compensation and conflicts of interest to municipal entities at or before the time of solicitation to ensure transparency.

Correct: Under MSRB Rule G-42 and the fiduciary duty established by the Dodd-Frank Act, a municipal advisor owes a duty of care to its client. This duty requires the advisor to exercise due diligence and perform a reasonable inquiry into the facts that form the basis for any advice or disclosure document. If a discrepancy is identified, the advisor cannot simply ignore it; they must investigate and ensure that the information presented to investors is not misleading and is based on reasonable assumptions. Incorrect: Relying solely on client representations without inquiry fails the duty of care, as advisors must have a reasonable basis for their advice. Delegating the verification to the underwriter’s counsel is inappropriate because the advisor’s fiduciary duty is specifically to the municipal entity, whereas the underwriter has a different set of obligations to investors. Using a general disclaimer does not absolve the advisor of their regulatory obligation to conduct a reasonable inquiry into the accuracy of the information they help prepare. Takeaway: The fiduciary duty of care requires municipal advisors to actively verify material facts and reconcile inconsistencies during the disclosure preparation process rather than passively accepting client-provided data at face value.

Correct: Under MSRB Rule G-42, a municipal advisor owes a fiduciary duty to their municipal entity clients, which includes a duty of care and a duty of loyalty. This requires the advisor to provide a fair and balanced representation of the risks, benefits, and costs of a transaction. In the context of new issue structuring with call options, the advisor must evaluate how different interest rate environments affect the value of the option and the resulting cash flows to ensure the client can make an informed decision about the trade-off between the call premium and future flexibility. Incorrect: Recommending the lowest current yield (option b) focuses only on short-term costs and may ignore the long-term strategic benefits of a call option, failing the duty of care. Delegating the valuation to an underwriter (option c) is inappropriate because the advisor has an independent obligation to provide advice that is in the best interest of the client, whereas an underwriter’s interests may differ. Recommending a call option as a standard practice (option d) without a specific cost-benefit analysis for the current issuance fails to provide the tailored, professional judgment required by the fiduciary standard. Takeaway: Municipal advisors must provide independent, scenario-based analysis of call features and cash flows to fulfill their fiduciary duty of care to municipal issuers.

Correct: Under MSRB Rule G-42, the duty of care requires a municipal advisor to exercise due sincerity and perform a reasonable inquiry into the facts that are relevant to a municipal entity’s determination of whether to proceed with a course of action. This includes a duty to have a reasonable basis for any advice provided and to ensure that recommendations are suitable based on the client’s financial situation and objectives. Blindly relying on a third-party model without understanding or validating its assumptions fails to meet the standard of reasonable diligence required of a fiduciary. Incorrect: Relying on a vendor’s output simply because they are a registered entity is insufficient, as the advisor’s fiduciary duty is non-delegable. Disclosure of third-party reliance does not satisfy the duty of care or the requirement to have a reasonable basis for a recommendation. Obtaining a certification from a vendor does not relieve the municipal advisor of their independent obligation to conduct due diligence and ensure the suitability of the advice provided to the municipal entity. Takeaway: The duty of care under MSRB Rule G-42 mandates that municipal advisors perform independent reasonable inquiry and have a factual basis for all recommendations provided to clients.

Correct: In a defined benefit plan, the employer bears the investment risk, meaning they must make up any shortfalls if the plan’s assets do not perform as expected to meet the promised benefits. Furthermore, because these plans promise a specific monthly benefit at retirement, ERISA requires annual actuarial valuations to determine the required employer contribution to keep the plan sufficiently funded. Incorrect: Qualified plans, including defined benefit plans, must meet strict non-discrimination and coverage tests and cannot favor highly compensated employees. Unlike defined contribution plans (like 401ks), the employer, not the participant, is responsible for investment decisions and bears the fiduciary risk. Defined benefit plans have rigid funding requirements; failing to meet minimum funding standards can result in significant excise taxes and penalties, unlike discretionary profit-sharing plans. Takeaway: Defined benefit plans shift investment risk to the employer and require rigorous actuarial oversight to guarantee specific future payouts to participants.

Correct: Under the Investment Advisers Act of 1940 and related SEC rules, a venture capital fund is defined as a private fund that represents itself as being a venture capital fund, does not provide redemption rights to its investors except in extraordinary circumstances, and limits its leverage and non-qualifying investments. Allowing regular or discretionary redemptions would typically disqualify the fund from this specific exemption. Incorrect: Maintaining a high percentage of exchange-traded securities would likely violate the requirement that at least 80% of the fund’s assets be qualifying investments (typically private company equity). Registering as a diversified management company is a requirement for mutual funds, not exempt venture capital funds. Providing quarterly liquidity windows is a characteristic of open-end funds or certain hedge funds and would explicitly disqualify a fund from being classified as a venture capital fund. Takeaway: To maintain venture capital fund status and its associated registration exemptions, a fund must not offer its investors the right to redeem their interests under normal operating conditions.

Correct: ADRs are issued by U.S. depositary banks and represent ownership in a foreign corporation. While they provide the convenience of receiving dividends in U.S. dollars and trading on domestic exchanges, the voting rights are often held by the depositary bank, and the ADR holder may not be able to participate in shareholder votes as easily as a direct owner of the foreign common stock. Incorrect: Currency risk is not eliminated by ADRs; the value of the ADR will fluctuate based on the exchange rate between the U.S. dollar and the foreign currency of the underlying stock. ADRs are issued by domestic (U.S.) banks, not the foreign corporation itself, and they are generally subject to SEC registration. Preemptive rights are rarely passed through to ADR holders due to the administrative complexity of offering those rights across international borders. Takeaway: While ADRs simplify the process of investing in foreign companies by trading in U.S. dollars, they still carry currency risk and may offer limited shareholder rights compared to direct equity ownership.

Correct: Investment-grade bonds are those rated in the top four categories by the major rating agencies. For Moody’s, the lowest investment-grade rating is Baa3; for Standard & Poor’s, it is BBB-. Ratings of Ba1 (Moody’s) and BB+ (S&P) are the highest tier of non-investment grade, also known as speculative or high-yield bonds. Marketing them as investment grade is a misrepresentation of risk. Incorrect: The B prefix does not signify investment grade; ratings like Ba or BB are speculative, while single B or lower are even higher risk. There is no regulatory crossover designation that permits speculative bonds to be marketed as investment grade based on their position within the speculative tier. A credit watch is a notification of a potential future rating change and does not determine the current classification of a bond as investment or speculative grade. Takeaway: To be considered investment grade, a bond must be rated in the top four categories, specifically Baa3 or higher by Moody’s and BBB- or higher by S&P.

Correct: Under the Uniform Securities Act, the definition of a security specifically includes any ‘fractional undivided interest in oil, gas, or other mineral rights.’ Furthermore, an issuer is defined as any person who issues or proposes to issue any security. In the context of oil and gas rights, the person who creates these fractional interests for the purpose of sale or distribution is generally considered the issuer. Incorrect: While physical commodities themselves are not securities, a fractional interest in the rights to those commodities (like oil and gas) is explicitly defined as a security. The method of distribution, such as a performance bonus or gift, does not change the legal definition of the instrument itself. Finally, the source of the return (production volume) does not disqualify an instrument from being a security if it meets the criteria of an investment contract or is specifically named in the Act. Takeaway: Fractional undivided interests in oil, gas, or mineral rights are explicitly defined as securities under the Uniform Securities Act regardless of how they are distributed.

Correct: Commercial paper is a money market instrument consisting of short-term, unsecured promissory notes issued by corporations to finance immediate needs such as accounts receivable or inventory. It is typically issued at a discount and, to remain exempt from SEC registration under the Securities Act of 1933, must have a maturity of no more than 270 days. Incorrect: Treasury bills are incorrect because they are issued by the U.S. government, not corporations. Negotiable certificates of deposit are incorrect because they represent time deposits at a bank rather than unsecured corporate debt. Banker’s acceptances are incorrect because they are specifically used to facilitate international trade and are guaranteed by a bank, which does not match the description of unsecured corporate promissory notes. Takeaway: Commercial paper is defined as short-term, unsecured corporate debt with a maximum maturity of 270 days, typically issued at a discount.

Correct: Under the Uniform Securities Act, commercial paper is considered an exempt security if it meets three primary criteria: it must have a maturity of 270 days or less, it must be issued in minimum denominations of $50,000, and the proceeds must be used for current transactions, such as financing inventory or meeting short-term payroll needs. These requirements ensure the instrument functions as a high-quality money market tool rather than a long-term investment vehicle. Incorrect: The requirement for collateralization is incorrect because commercial paper is by definition an unsecured promissory note. A maturity of 365 days is incorrect because the legal limit for the exemption is 270 days (nine months). Using proceeds for capital improvements or long-term debt retirement disqualifies the instrument from the ‘current transactions’ requirement necessary for the exemption. Finally, exempt commercial paper does not require registration with the state Administrator, as the exemption removes that specific filing burden. Takeaway: To qualify as an exempt security under the Uniform Securities Act, commercial paper must be short-term (270 days or less), issued in large denominations ($50,000+), and used for current business operations.

Correct: Under the Uniform Securities Act, the definition of a broker-dealer excludes entities that have no place of business in a state and whose only clients in that state are institutional investors (such as pension funds and credit unions) or existing customers who are not residents of the state but are temporarily located there (often referred to as the ‘snowbird’ exemption). Since the firm has no office in State Y and only deals with institutional clients and temporary residents, it does not meet the definition of a broker-dealer in State Y. Incorrect: The claim that the firm is a broker-dealer regardless of residency is incorrect because the Uniform Securities Act specifically provides an exclusion for transactions with existing clients who are temporarily in another state. The suggestion of a de minimis exemption (the five-client rule) is a common misconception; this rule applies to Investment Advisers, not Broker-Dealers. There is no provision for a ‘reciprocal registration waiver’ based solely on being registered in a home state if the firm’s activities otherwise require registration. Takeaway: A firm is not a broker-dealer in a state if it has no physical office there and its only clients are institutional investors or existing customers who are temporary visitors.

Correct: Cumulative preferred stock is a specific type of equity security that protects investors by requiring that any dividends not paid in previous periods (known as dividends in arrears) must be paid in full before the company is permitted to distribute any dividends to common stockholders. This catch-up mechanism is the primary distinction between cumulative and non-cumulative preferred issues. Incorrect: The participating feature allows preferred shareholders to receive additional dividends if the company’s profits exceed a specified threshold, but it does not address dividends in arrears. Preemptive rights are a characteristic of common stock that allows existing shareholders to maintain their proportionate ownership when new shares are issued. The conversion privilege allows preferred shareholders to exchange their shares for common stock at a predetermined ratio, which is a feature related to capital appreciation rather than dividend priority. Takeaway: Cumulative preferred stock ensures that all dividends in arrears are settled before common shareholders receive any distributions.