Chapter 2 Practice Question Answers
1. Answer: D. When a broker-dealer acts in its broker capacity, it acts as the go-between for its customer and someone else interested in buying or selling a security. This stands in contrast to when a firm acts in its dealer capacity, which means that it buys, sells, or trades for its own account.
2. Answer: C. Qualification as an investment adviser does not by itself disqualify a firm from registering as a broker-dealer. In fact, many broker-dealer firms are also investment advisory firms. When this situation exists, dual registration is required. A broker-dealer’s agent, an issuer, and banking institutions, among other entities, are excluded from the definition of a broker-dealer.
3. Answer: A. When a firm acts as a dealer, the only two parties exchanging securities or cash are the firm and its customer. Acting as a dealer means that the firm is buying or selling for its own account, instead of acting as a go-between for its client and another investor.
4. Answer: C. If a broker-dealer does not have an office in a state and also does not have any non-institutional clients in the state, the firm is exempt from registration in that state. The five-client rule applies to investment adviser registration, as does the level of assets under management.
5. Answer: A. Broker-dealers are not necessarily required to fill out a Form ADV; instead, they must file a Form BD. Broker-dealers are subject to net capital and bonding requirements, and they must be licensed by the securities administrator in any state in which they are required to register.
6. Answer: D. Broker-dealers that work only with certain clients are exempt from registration requirements. Included on the list of those clients are other broker-dealers, pension and profit-sharing trusts, and investment companies (mutual funds). An individual with $1 million would not generally be considered an institutional investor, and thus a broker-dealer working with th