Practice Quiz

FINRA Series 63 (NASAA)

Category - Series 63

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Needy Investment Advisers, LLC needs a loan. One of its wealthier clients has offered to lend the firm the money at the prime rate of interest. A promissory note is drawn up stipulating the terms of the loan. Based on these facts,
  1. Needy will be in violation of securities laws unless a waiver of compliance form is signed by the client and submitted to the administrator.
  2. Needy is in violation of securities laws by acting as an issuer of securities.
  3. Needy is in violation of securities laws only if the face value of the note is for $50,000 or more.
  4. Needy is not in danger of violating any securities laws since the loan was unsolicited and has been properly executed via a promissory note.
Explanation
Answer: B - In accepting a loan from a wealthy client, Needy is in violation of securities laws by acting as an issuer of securities. Under NASAA Model Rules, investment advisers may not borrow money from clients unless the client is in the business of lending money, as would be the case if the client were a financial institution. It doesn’t matter if the client is in agreement with the loan; waiver of compliance agreements are prohibited by both the NASAA Model Rules and the Investment Advisers Act of 1940. Nor does it matter that the loan was unsolicited and formalized with a promissory note.
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