Review Topics
Practice Exams
I know there might be distractions in the testing facility (hellooooo bison cows), but try to keep your eyes on the prize.


Acting Against Recommendations

Let's say you head to the emergency room with stomach pains. The doc in charge says, "Yep, you've got appendicitis. But I'm brutally tired, so...I recommend you go home." Odds are, if the doc himself had appendicitis, he'd get someone to take that puppy out, stat.

Acting Against Recommendations is kind like that—just in the financial world. If your broker tells you to do something he wouldn't recommend for his own investments, he has a duty to tell you that he wouldn't do that same thing in his own case.

Why would anyone act against recommendations? Well, in the case of the doc, maybe he is so tired that he's a dangerous menace in the O.R. In the case of the broker, maybe there's something about your specific situation that makes acting against recommendation the way to go. As long as they tell you, it's totally legit.

Acting As A Principal

Acting as a Principal doesn't mean you get to suspend a bunch of snotty ten-year-olds for smoking behind the gym.

If a broker or a firm is acting as a principal, it acts as either the buyer or the seller for its own account, or as the main party when buying or selling.

Administrative Order

The administrator is the person in each state who's in charge of making sure that securities laws are followed and investors are protected. If an administrator thinks something shady is going on, he can issue an order to deny, suspend, or revoke the sketchy financial individual's license so that investors are protected.

When the administrator pulls rank like that, it's called an administrative order.


Each state has a Big Cheese of securities regulation called the administrator. The administrator oversees administration (hence, "the administrator") of the provisions of the Uniform Securities Act for securities regulation in their state. Basically, they make sure that the securities rules are being followed and that investors in their state aren't being fleeced by shady financial guys.


The glossy pictures you see in magazines and the pop-ups on your phone that promise you’ll be happy, rich, and/or beautiful forever if you just buy this one brand of gum/cola/whatever.

Businesses use advertisements to try to get you to buy stuff. Ads show up on TV, the Internet, and in newspapers. The advertiser only has limited control over who sees the ad, though. It could be you, your grumpy Uncle Dean, or your little sister (who’s too young to care, anyway).   

Advertising Prospectus

Have you seen those ads for whatever where lots of people are partying to great music and having the time of their lives?

An advertising prospectus is the opposite of that.

It’s an advertisement for a mutual fund, and it usually involves information about how the fund has done in the past and what features it has. It’s probably very exciting to financial types (and probably only for those types—the rest of us will stick with Super Bowl ads, thankyouverymuch).

Agency Cross Transaction

When a broker acts as a broker for both you and the other party during a transaction.

Thanks to the Investment Advisers Act of 1940, investment advisers who need to get permission from their clients before trying this system out.


The thing you write for History class to explain why France doesn't have kings anymore.

In the financial world, though, assignment can mean a notice stating that an option has been exercised. It can also mean the transfer of rights or property.

No kings involved. 


If you’re going to be handing over your cash to someone for investment help or financial help of any kind, you want to make sure they’ve gone past 6th grade math and actually know enough to help you get your finances sorted.

One problem: there's a ton of business schools, economics programs, and job titles out there for money guys. How are you supposed to sort through that? The idea is that certification is supposed to show you who can be trusted and who’s shadier than a bookie in an ill-lit alley. But, uh, some shady types might come up with bogus certifications and titles to fool you. That’s why NASAA (North American Securities Administrators Association, no spaceships) has created a bunch of rules that decide who gets to claim which certifications. They can even help you sort out what certifications mean what. 

Certified Or Approved

Let’s say you head over to the office of a registered investment broker or representative and you see that a national or state regulator is endorsing them. Good news, right? Nope. Regulators are not allowed to offer approval or certification for any investment pros in their state. It’s like the separation of church and state: regulators are there to enforce financial rules and investment pros are there to make you money. So if someone’s claiming this type of endorsement or certification from regulators, they’ve got some 'splainin' to do. 

Compensation - Advisory Fee Limits

There are loads of fees you pay when you buy mutual funds or securities. Advisory fees are the ones you pay to a financial adviser or fund manager to make recommendations or to make changes to a fund.

These fees tend to be a hot-button issue with money types. One the one hand, limiting advisory fees and requiring advisers to disclose extra or hidden fees can help by letting you see what you're paying and allowing you to save money on fees. But some experts claim that limiting too many fees doesn't reward good advisers and fund managers who could help you earn more. 

Conflict Of Interest

A conflict of interest is a tricky ethical situation in which an individual, employee, or a corporate entity has a vested interest in something that makes their vote or input unreliable.


Cosmetics tycoon and board member Mabel Doughy votes in favor of granting a multi-year contract to Sticky Lipsticks, a major lipstick manufacturing company. The problem? Her son, Hughie Doughy, is CEO of Sticky Lipsticks. Her vote lets Sticky Lipsticks gain an advantage because Mabel is a board member. Not fair, which is why Mabel needs to disclose her association with Hughie and abstain from voting on this issue.

Consent To Service Of Process

Consent to Service of Process sounds very dull and wordy... and it is.

If you register as a public company in any given state, the consent to service of process is a form that you (and all parties related to your business) must sign. The form lets the state securities administrator be served legal papers on your behalf. Handy if there's some lawsuit, but otherwise it's just more paperwork to sign.

Contempt Of Court

Yeah, we all know what this one means.

Being held in contempt of court means you've been stupid enough to violate a court order, court injunction, or a subpoena. When a court tells you that you need to do something... you need to do it. Or hire a really good lawyer who can find lots of reasons why you're the exception to the rule.

Contractual Clarity

Thanks to the Uniform Securities Act, investment advisory firms need to reveal a bunch of stuff to their clients (like you) so they can't just make a bunch of promises or make up some numbers to get your cash.

Fancy that.

The law requires that all contracts between a client and a firm have a bunch of of important information—like the fees to be charged and the method for calculating those fees, services provided, and whether the account is discretionary, among a boatload of other things.


A custodian is the bank, trust company, or other business entity holding the cash or securities for both investment and insurance companies and their accounts.


When you have custody, you have the actual physical assets, whether they are in the form of cash or securities.

If a client has given their investment adviser full discretion to withdraw customer cash and securities, the investment adviser is considered to have custody.


Not that kind of dealer.

Dealers can be broker-dealers or self-dealers. They handle securities business for their own accounts and operate as a principal for customer transactions.

Effective Date

The effective date is the date when a security can be sold to the public (because its registration has become effective).

Usually it happens about 20 days after the security registration has been filed with the SEC.

Exempt Security

A security that does not have to meet the registration requirements of The Securities Act of 1933.

Usually, exempt securities are backed by or insured by a government or government institution, banks or depository institutions, insurance companies authorized to do business in the state, railroads and public utilities securities, options or warrants, employee benefit plans, equipment trust certificates, and nonprofits.

The idea, generally, is that these securities are less of a risk for investors so the SEC doesn't have to get involved. 

Exempt Transaction

An exempt transaction is one that doesn't have to meet the registration requirements of the Uniformed Securities Act or the SEC. The idea here is that every transaction creates a lot of paperwork and there are some cases where all that hassle is not needed. As long as you're trading small amounts of stocks or investments and your transaction is considered exempt, there's less paperwork.

That's worth celebrating.


Unsolicited transactions, fiduciary transactions, transactions with financial institutions, private placements, and isolated non-issuer transactions.

So if Uncle Ned passes on and leaves you a bunch of stock in his will and those stocks are sold to create moolah for you, it's is usually an exempt transaction (a fiduciary transaction, FYI). Or let's say you have a fancy job with stock options and you decide to sell back some of your company stock. As long as you are not an executive, it's probably an exempt transaction. 

Fidelity Bond

A fidelity bond is not a type of investment bond. Instead, it's a type of business insurance (and it would've been a lot simpler to remember if people called it "fidelity insurance"—just saying). Brokerages and insurance companies carry this type of insurance, which protects them in case one of their employees does something shady. If a broker engages in fraud, for example, or steals a bunch of client money, this type of insurance will protect the brokerage.  


Fraud is considered a serious crime, and carries serious penalties, we might add, for anyone caught practicing it, including not just investment professionals but individual investors, too. Fraud is defined as any attempt to gain an unfair advantage over another party through the use of misrepresentation, concealment, or outright deception.

Fulcrum Fee

This is another way of keeping things in balance between an investor and an adviser. A fulcrum fee reduces an adviser's compensation for underperformance by as much as it would raise it for overperformance. Now you won't have to pay Joe the Broker 20% of your account value when it's actually gone down in value.

Government Security

A government security is any security that is issued by the U.S. Treasury and backed up and guaranteed by the U.S. government.


The word 'guarantee' by itself doesn't sound so bad, but when misused within the context of investment performance or returns, it is considered fraudulent. Think of Joe Blow the Broker guaranteeing his client will see 100% returns on his investment. Can anyone really guarantee an investment is going to return 100%?

Guaranteed Security

A promise from a third party to pay interest, principal or dividends either for its own issue or on behalf of a subsidiary. The only parties that may make a guarantee include parent companies for a subsidiary, the government, or an insurance company.

Hiding Written Complaints

Remember when you were a kid and your teacher sent home a note to your parents? You knew you were in big-time trouble, so... why not just hide the note? What your parents don't see can't hurt you, right?

Hiding written complaints is kind of like that.

If an investment rep receives a written complaint from a client, they are obligated to pass it along to their employer, who has to add it to the rep's U-4 (that's a form that the rep has to use when registering with the state). Hiding written complaints is illegal and can get the rep in deep you know what.


Insiders are the people who are in the know when it comes to a company and its secrets. Insiders in a company include its officers and directors, large stockholders of the company, and anyone else who would be in possession of important information that the average person doesn't have. Insiders also include immediate family members of all the above.

The important thing about insiders is that they have access to insider information, and if you somehow overhear or learn of this information, you have to be really careful not to use it in trading or you could end up in a legal mess—or in jail.

Insiders themselves have to obey a bunch of rules to make sure they don't use the knowledge they have to gain a trading advantage. 

Institutional Account

An account that's opened by or for an institution (like an insurance company or brokerage) for the benefit of banks, mutual funds, or others. These accounts usually have lower costs and commissions and let money flow between institutions more easily. There's lots of cash involved, but there's actually no minimum to open one.

Institutional Investor

An institutional investor is either someone who trades for themselves or others in insane amounts.

These folks get VIP perks from brokerages and can usually take care of exempt transactions with less hoopla. They pretty much prove that size does matter.

On the other hand, institutional investors get less protection legally from the U.S. government compared to individual investors like, uh, you. The idea is that they need less protection.

Interstate Offering

When companies issue an offering of stocks or securities, they can sell shares in their state or in more than one state. If they choose door #2, it's an interstate offering and it will mean more paperwork. The company will need to register with every state and with the SEC.

Investment Adviser

An investment adviser is any person who takes your  money to give you investment advice or who handles securities analysis. Anyone who promises or advertises themselves as offering investment advice for money is also an investment adviser... even if they're terrible at it.

Investment Adviser Representative

An investment adviser representative is someone who works for or is linked to an investment advisor. The fine folks who brought you the Uniform Securities Act also have this technical explanation of what an investment adviser representative does:
  • Makes any recommendations or otherwise gives investment advice regarding securities
  • Manages accounts or portfolios of clients
  • Determines which recommendation or advice regarding securities should be given
  • Provides investment advice or holds herself or himself out as providing investment advice
  • Receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice
  • Supervises employees who perform any of the foregoing

Investment Advisers Act Of 1940

The federal law that decides what investment advisers can and can't do (spoiler alert: they can't legally take your money and spend it all on their car collection). The Securities and Exchange Commission (SEC) enforces this law and resolves any issues about what it actually means.

Investment Company

An investment company is a trust or corporation that takes money from a bunch of investors and, uh, invests it, managing the pooled money to make as much as possible.

If you have lots of money but don't want to spend a lot of time managing your investments, you might take your oodles of cash to an investment company. In most cases, these companies have to be registered with the SEC.

Investment Contract

The Uniform Securities Act and the Federal Securities Act of 1933 decided that the word "security" wasn't enough, so they created this word, which means the same thing. 

Matched Purchases

A scam that can get you in a lot of hot water—if you're caught.

This scheme requires at least two people: one of you sells a stock or security at an agreed-upon price, and the other buys at an agreed-upon price. Then you switch, so that the stock exchanges hands between you—again and again. Lots of trading happens but no one loses money.

The goal is to make other investors (those suckers) think that there's lots of interest in a stock, which will hopefully cause people to buy. That in turn drives the price up, and in the end, you and your co-schemer have stock that's worth more. You can then sell the stock for real to someone else at the inflated price and keep the profit.

You can also go to jail, so choose wisely.

Material Fact

A material fact is knowledge that, if everyone knew about it, would affect the prospects of a corporation.


The fact that the person leading Corporation Z is a human-eating alien who knows the cure to six different diseases and is now heading a big pharma corporation? That's a material fact. 


Misappropriation can have multiple meanings, but in finance, it usually means that client funds are used in an unauthorized or inappropriate way.


If you give your money to a brokerage firm and a broker at the firm uses the cash to buy a condo for his girlfriend, that is misappropriation. According to FINRA Rule 3070, if the brokerage gets wind of the problem, they must report the issue and take action. 


Think of it as catfishing in the finance world. Misrepresentation happens when a broker, investment firm, or agent doesn't give you the facts or misleads you about the status of your account. When you don't have good information, it can affect the investment decisions you make, which is why the finance industry takes a dim view of misrepresentation. 


If someone tells you "your investment account is doing fine; don't worry" when it's dropped by 90% in value over the past few months, that's misrepresentation. 

Municipal Security

Another word for municipal bonds.

Municipal securities are issued by local or state governments to raise money for roads, bridges, new buildings, and all that jazz. The interest is usually exempt from federal taxes, which is why some investors love 'em. Historically, they were seen as pretty secure, but that was before the 2000s, when some U.S. cities declared bankruptcy (we still love you, Detroit). 

Net Capital

When you invest your money with an investment advisory or broker-dealer, you want to make sure they have enough cash on hand to protect you. If they can't scrape together enough money for pizza Fridays, that's not good news for you.

The net capital refers to the minimum amount of cash and financial health a firm or broker-dealer need to have to protect you and other investors. 


A non-issuer is any person, company, or organization that doesn't issue securities or have plans to issue securities.

The term most often comes up when talking about non-issuer transactions, which happen when the issuer doesn't directly benefit from a sale.

These transactions don't have to meet all kinds of registration rules.


Mary sells 100 shares of Google stock to her sister. This is a non-issuer transaction and Mary is a non-issuer (so is her sister, we assume). 

Non-Issuer Distribution

A security offering where the issuer of the security is not the person who benefits from the offering.

Non-Punitive Orders

Some orders issued by state administrators are punitive; e.g. if a broker steals money from clients, you can be sure that the state administrator will want to bring the pain. But other orders aren't related to crimes or punishment (or Crime and Punishment); those ones are non-punitive.


An agent decides to withdraw their license or cancel it. (She's decided to open a cat B&B instead of being in the rough-and-tumble world of finance.) The state administrator issues an order that cancels or withdraws the license. It's non-punitive because the agent hasn't committed a crime.

At least not a financial one.

Outside Business Activities

If an investment firm has registered employees who are moonlighting and earning money outside of the firm, the employees have to report on these activities. According to NASD (FINRA) Rule 3030, the firm has to okay and monitor this extra-curricular work (known as outside business activities). 


Mary Ellen is a registered employee at an investment firm. The pay is good, but she feels her soul bleeding out of her ears whenever she looks at a spreadsheet; so she launches her own knitting business.

She has to tell her firm about the business, and the firm has to green light the earnings and make sure the knitting doesn't interfere with what Mary Ellen does at the firm.

Translation: Big Brother is watching.


Seems obvious, but within the investment industry the term "person" has a specific meaning. A "person" is any natural person past the legal age of majority or any entity (like a corporation) that can enter into a legally binding contract.

Private Investment Company

A private investment company is a hedge fund or investment company that's in business to make money for its investors.

This type of company usually sells securities. While investment companies that cater to the public have to be registered and have to follow some rules, private investment companies sell only to qualified buyers and so don't have to go through all that. 

Private Placement

Also known as a Reg D offering, a private placement is an offering for unregistered securities which is made to accredited investors (not the general public) and no more than 35 non-accredited investors during any 12-month period.

Punitive Orders

If an investment pro violates SEC rules or does something illegal, the state administrator can issue a punitive order, which is a type of punishment. This type of order can deny a license to work in the state, can be a suspension of a license, or can involve some sort of torturous dunk tank.

Qualified Purchaser

Basically, a qualified purchaser is just a super rich person.

No, seriously... they're super rich.

We're talking a sophisticated investor (not a bumbling retail investor) who has at least $5 million in investments, or a family-owned business or trust with at least $5 million in investments, or a corporation that invests for others with at least $25 million.

Since they have so much cash, these folks don't have to meet as many rules because the government thinks they need less protecting (i.e., they know what they're doing).

Refusing To Follow Instructions From A Customer

A broker gets instructions from you to buy or sell a security; the instructions are clear and the broker can in fact buy or sell...but they don't.

They have failed to follow your instructions, and they can get into some major trouble if you report them.

Sound crappy? Well, get used to it. It's one of the most common claims against fund managers, brokers, and professionals. 

Registration By Coordination

When your company issues securities, you have to register with the feds and the state—it's tedious and a lot of paperwork.

Registration by coordination lets you register for both at the same time. Consider it a two-for-one special. 

Registration By Filing/Notification

If you've issued securities in the state before, you can use this method to register securities.

You may still have to register with the feds, though.

Registration By Qualification

If you issue securities but haven't sold 'em in a particular state before, you need to resister to sell securities in that state. You do it by qualification, which means submitting lots of information to the administration.

Next time, it'll be a little less painful.


Rescission just means that you sell someone something and then buy it back from them.

Uh, why would you do that?

Because you have to.

Maybe because when making the sale in the first place, you violated some securities rules, and the law tells you that you have to buy back the securities—plus interest and minus any income the security paid to the buyer. Of course, since the securities are most likely bogus, it's fairly certain that you didn't pay the buyer anything anyway.

Sales Literature

If you work with an investment firm, they probably send you a lot of information on glossy paper.

If what they're sending is to drum up business and is sent out to 25 people or more, it's considered sales literature. The investment firm has to follow certain rules about this stuff (like, you know, not lying outright). Sales literature can include form letters, reports, brochures, blood contracts...

If you have insomnia, try curling up with this stuff in bed.


When an investment firm or fiduciary acts in their own best interests to the detriment of clients. Examples? Knowingly making bad investments or giving bad advice.

Get ready for the lawsuits.

Self-Regulatory Organization (SRO)

These are self-policing organizations that regulate their own members. Examples? FINRA, the National Association of Securities Dealers in the United States, NYSE, and AMEX. 

Selling Away

Selling away means your broker-dealer suggests stocks and securities not held or sold by their firm.

Usually, securities regulators from upon it since it generally means the broker-dealer is taking business away from the firm.

Sharing In Profits/Losses Of Clients

An agent can only share in a client's account profits or losses if the agent has been allowed to do so by a principal or if the agent contributed to the account, in which case, the agent can only take part in the profits and losses to the extent that they took part in the account.

These limits and rules ensure that the agent can't help themselves to an account's profits whenever they want.

Soliciting Orders For Unregistered, Non-Exempt Securities

Sales reps can accept unsolicited orders for non-exempt and registered securities, but they can also solicit orders for non-exempt, registered securities and for exempt, unregistered securities.

They cannot solicit orders for non-exempt, unregistered securities.

(Say that three times fast.)

Surety Bond

Remember when you were a kid at summer camp and had to pony up a buck to prove your heavy roller status at Friday night's poker game?

Surety bonds are kind of like that.

We repeat: kind of.

A surety bond is an agreement between three parties. One party guarantees that second party will fulfill a promise to the third party.

For example, one signer might guarantee that a small business will honor a government contract. If the small business doesn't meet the contract, the person who signed on may have to pay up.

Trade Confirmation

A trade is executed for you by your investment firm or broker. When that happens, you get a trade confirmation (on dead trees or electronically) outlining the details.

A trade confirmation can also be the comparison of the two counterparts to be sure they match before the trade is settled. If there's a typo or something seems off, more info is requested.


Here you go.

Turnover Rate

Sometimes securities regulators talk about the turnover rate when describing how often trades are happening in an account.

There's a possible problem if the turnover rate for an account is very high or at least higher than the actual average daily value of the account.


If Billy Bob's account has an average balance of $10,000 but has total combined trades of $70,000 for the year, then his account is trading at a high turnover rate. It's a problem for a few reasons. Billy Bob might be the victim of churning, where the broker or manager just trades with no rhyme or reason to earn more commissions (each time a trade is made, an commission is earned). Also, each time a sale is made, BB may have to pay taxes on the gains. Her might be paying extra taxes with a high turnover—and all those transactions might not even be doing his account any good. 

Unauthorized Transactions

Sounds exactly like what it is: a transaction that isn't authorized.

An unauthorized transaction happens when your broker makes a trade in your account without you giving the thumbs up. Really nasty brokers can even set up fake mailing addresses so that you never get the letters about the trades, so you don't know about the extra activity on your account.

Needless to say, it's illegal. Like... very illegal.

Unsolicited Order

An order that you request but that wasn't recommended by the firm or your broker. That means you came up with the idea on your own—like a boss (or an idiot, depending on how it turns out).

All unsolicited orders are exempt transactions, regardless of the security involved.


You've inherited 10 grand from Crazy Uncle Larry. It's been sitting in your brokerage account for 3 months. You're in bed watching Cramer screaming about something or other on CNBC and decide you like the cut of his scream. You want to buy shares in Booyah.com. So, out of the blue, you call your broker and just place the order. It was "unsolicited." Had it been "solicited," the broker would have called you and whispered in serious tones, the word, "...plastics."

Unsuitable Recommendations

The law is pretty clear on this: If you're a broker or adviser, you have do what's best for your client...not what's best for you, your commission structure, or the Hawaii trip you win at the end of the year for whoever shafted the dumbest client.

You work for the client, not against them. Even if the client has halitosis and is a close talker, you don't give them lousy recommendations. And if you do, the law will come down on you hard. 


An unscrupulous investment adviser recommends 90 year-old Grandma Madge sink her life savings into a 30-year long bond. Unsuitable? You bet. Like is she really gonna live 90 more years? Would you put her into venture capital? Uh... no.

A fund typically lasts a decade, so that won't work either. Equities? Eh. Maybe very small, if it pays a fat dividend. So what is suitable for a 90-year-old grandma? Well, cash looks pretty good.

You don't get big commissions selling people cash, but it's the suitable thing to do. Short term paper, low yields, low risk. 


In legal speak, a waiver is an exemption. If a fee is waived, that means you don't have to pay it.


  • "If I buy this house as-is, I waive my right to rescind my purchase if I find ghosts in it."
  • "If I hire you as my fund manager, I waive my right to sue you based on bad performance."

*Securities is a registered trademark of the College Board, which was not involved in the production of, and does not endorse this product.