Chapter 2 Practice Question Answers

1. 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 and buys, sells, or trades for its own account.
2. 2. Answer: C. Being an investment adviser by itself does not disqualify someone from also being a broker-dealer. In fact, many broker-dealers also act as investment advisers. When this is the case, dual registration is required. A broker-dealer’s agent, an issuer, and banking institutions, among other exceptions, are excluded from the definition of a broker-dealer.
3. 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 their client and another investor.
4. 4. Answer: C. Broker-dealers with zero clients (not counting exempt clients like other broker-dealers, investment companies, etc.) are not required to register if the broker-dealer does not have an office in that state. The five-client rule applies to investment adviser registration, as does the level of assets under management.
5. 5. Answer: A. Broker-dealers are not necessarily required to fill out a Form ADV, only a Form BD. Broker-dealers are subject to net capital and bonding requirements, as well as their state security administrator’s licensure requirements.
6. 6. Answer: D. Broker-dealers that work only with certain clients are exempt from registration requirements. Among the list of clients which do not require registration 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.
7. 7. Answer: D. The net capital requirements set by the state may not