Business Practices Quiz #1 Missed Questions
If an agent opens a joint account with a customer, the agent is permitted to: A. place a trade in the account without having a written power of attorney from the customer B. withdraw funds from the account in the form of a check made payable to the agent's name C. share in investment gains in the account but not in investment losses D. effect transactions in the account only at the direction of the customer
A An agent can open a joint account with a customer, as long as sharing is proportional to capital contributed and sharing occurs in both gain and loss. In addition, the employing firm must approve of the arrangement. Regarding the operation of any joint account, any single owner can enter a trade (this would be either the customer or agent, in this case). There is no requirement for joint agreement to accept a trade. Any single owner of a joint account can demand that a check be drawn, but checks must be drawn to full account name
An Investment Adviser Representative (IAR) is permitted to borrow money from: A. a close relative B. a customer, as long as the loan is disclosed to the investment adviser C. a customer that is defined as an accredited investor D. no one
A IARs cannot borrow money personally from customers - no ifs, ands or buts. However, there is nothing stopping an IAR from borrowing money from a relative that is not a customer (e.g., the IAR gets a loan from his or her parents). Also note that the FINRA (Federal) rule for broker-dealer agents is a bit different here than the NASAA rule for IARs. An agent (registered representative) cannot borrow from a customer unless the customer is an immediate family member.
An investment adviser representative recommends the purchase of DEFF stock to her client. DEFF is currently trading at $50 per share. The client is not terribly eager to make the investment, so the IAR tells the client that over the next 12 months, the adviser will repurchase the stock from the client at no less than $45 per share. This action is: A. a prohibited performance guarantee B. not a prohibited performance guarantee since the buyback price represents a loss to the client C. a repurchase agreement, as defined under State law, since the buyback price is established D. a round trip stock transaction
A The prohibition on guaranteeing a client against loss (a performance guarantee) applies not only to a promised buy back at the same price as the original purchase price, but to a promised buy back at ANY price.
Which order is NOT required to be retained as a record by a broker-dealer? A. Subscription order pursuant to a rights offering B. Market-not held order C. Unexecuted order that is subsequently canceled D. Market order that is immediately filled
A A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these.
An agent of a broker-dealer wants to become a part-time SCUBA instructor. Which statement is TRUE? A. The agent must notify the broker-dealer in writing B. The agent is permitted to do so as long as he does not offer securities to students in his SCUBA classes C. The agent is permitted to do so as long as he earns less as a SCUBA instructor than he does as an agent D. The agent is prohibited from engaging in any other business
A An agent of a broker-dealer or investment adviser must notify his employer in writing if he or she wishes to take outside work and must follow any instructions of the employer (for example, if the employer says no, then the agent can't take the outside work).
Which of the following are prohibited under the Uniform Securities Act? I Effecting a public offering of unregistered non-exempt securities II Failing to tell a customer all facts about a securities transaction III Failing to tell a customer that a transaction will incur larger than normal expenses IV Maintaining a discretionary account for a customer A. I and III only B. II and IV only C. I, III, and IV D. I, II, III, IV
A It is prohibited to effect a public offering of unregistered non-exempt securities in a State; these securities must be registered. (Please note that if the securities were exempt, this would be permitted). It is a prohibited practice to fail to tell a customer that a transaction will incur larger than normal expenses. Failing to tell a customer all facts about a securities transaction is not a violation; failing to disclose all material facts about a securities transaction is a violation. Finally, it is permitted to maintain a discretionary account for a customer; however, the customer must sign and return a discretionary power of attorney before discretion can be exercised.
A customer signature is needed to open a: A. cash account B. margin account C. both of the above D. neither of the above
B There is no customer signature required on a new account form - this allows cash accounts to be opened over the phone, if a firm so desires. However, a customer signature is required on the hypothecation agreement needed to open a margin account - this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer.
When offering a new issue to an elderly customer, the agent prepares a large-type summary to make it easier for the customer to understand the details of the offering. Which statement is TRUE? A. This action is appropriate because it is in the best interests of the customer B. This action is a violation of the Uniform Securities Act C. This action is only permitted if the changes to the prospectus are approved by the SEC D. This action is only permitted if the prospectus is filed with the Administrator
B A prospectus cannot be altered, highlighted, or summarized. It is a legally prepared document that cannot be changed before it is delivered to the purchaser of a new issue security.
A customer asks an agent for the current market value of his stock portfolio. The stock market has been dropping sharply today, and the agent gives the customer the most recent valuation that he has, which is based on yesterday's closing prices. Which statement is TRUE? A. The agent's action is permitted since he gave the customer the most recent information that he had B. The agent's action is fraudulent because he misrepresented the status of the account to the customer and gave inaccurate market quotations C. The agent's action is permitted since price quotes are only estimates D. The agent's action is fraudulent because he withheld material inside information from the customer
B Giving inaccurate market quotes is a prohibited practice under the Act. In this case, the agent misrepresented the status of the account to the customer by giving yesterday's closing quotes. If the agent did not have immediate access to today's prices, then he should have told the customer that he would get today's quotes and call him back as soon as possible.
Which of the following orders would be performed in a discretionary account? A. A customer places an order to sell 100 shares of KO at the market B. A customer places an order to buy as much of GE at $40 as possible during this trading day C. A customer places an order to buy 100 shares of IBM at $125 D. A customer places an order to sell 100 shares of GE when it gets to a certain level or lower
B If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." If the agent chooses any more than price or time - that is, the size of the trade or the security to be traded - a power of attorney is required.
Michael Michaelson has an MBA in finance and has taught classes at a local college for the past 15 years. He has decided to use his knowledge and acumen in the private sector and registers in the State as an investment adviser. His business will be creating financial plans and implementing them for clients. Michael requests a waiver from the State Administrator from having to pass the Series 65/66 exam based on his educational and teaching background and receives it. He registers as an IA in the State. He wishes to publish an advertisement for his new business. Michael can state which of the following in the advertisement? A. "Because of my extensive finance background, I have been approved by the State to sell financial plans without having to take the examination required of other advisers" B. "My fee schedule, which is non-negotiable, is comparable to that charged by other advisers that do not have my extensive finance background" C. "As a registered investment adviser in the State, I have been certified to create financial plans" D. "I have 15 years of experience as an investment adviser in the State"
B In Choice A, Mike cannot say that he was "approved" by the Administrator, nor can he say he was "certified" (Choice C) by the Administrator. Choice B is a reasonable and true statement. Choice D is misleading because Mike has 15 years' experience as a teacher of finance; not as an investment adviser.
Which of the following is prohibited in a margin account? A. Buying stocks without making full payment B. Selling short securities that cannot be borrowed by settlement C. Buying and selling the same security on the same day D. Depositing fully paid securities as collateral to buy other marginable securities
B In a margin account, one does not pay in full; rather a percentage of the purchase price is deposited (the margin requirement); with the balance of the purchase amount lent to the customer by the broker-dealer.
An investment adviser would be permitted to charge a 2% fee to clients based on all of the following EXCEPT: A. average assets under management over the calendar year B. increase in assets under management over the calendar year C. highest value of assets over the calendar year D. assets under management at the end of the year
B Investment advisers cannot be compensated based on gain or loss in an account under Uniform State Law. Compensation based on an increase in assets under management would be considered to be based on "gain" and would be prohibited. Taking a percentage of assets under management is the norm for investment advisers. It makes no difference if the basis for the calculation is average net assets over the year; end-of-year net assets; or highest value of net assets over the year.
Prior to effecting a transaction for a customer, an agent is obligated to disclose: A. the amount of commission to be charged B. if the commission to be charged will be higher than normal C. the bid-ask spread on that security D. the last reported trade in that security
B There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade.
Obtaining the 4 critical pieces of information from a customer at account opening is part of the company's policies and procedures covering: A. Privacy of Customer Information B. Anti-Money Laundering C. Cybersecurity D. Business Continuity
B When a customer account is opened, the customer must provide identifying information that must be verified promptly after account opening. The 4 critical pieces of information that must be verified are: Name, Street Address, Date of Birth and Social Security number. This is part of the "Know Your Customer" requirement. This is done to stop "bad actors" such as terrorists from opening accounts from which they can wire money to co-conspirators either within or outside the United States.
Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II The exchange where the transaction was effected III The customer name and account number IV The price of execution A. I and II B. III and IV C. II, III, IV D. I, II, III, IV
B Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.
An Investment Adviser MUST inform a client about: I Change of address II Change of phone number III Addition of client accounts from another advisory firm that was "bought out" IV Change in a majority of the partners of the advisory firm A. I and III B. II and IV C. I, II, IV D. I, II, III, IV
C
A customer telephones a broker-dealer to complain that an agent forged her signature on a document. Which statement is TRUE? A. This is defined as a complaint that the broker-dealer must document and attempt to resolve B. This is only defined as a complaint that the broker-dealer must document and resolve if it is put in writing and filed with the State Administrator C. This is only defined as a complaint that the broker-dealer must document and resolve if it is put in writing and filed with the broker-dealer D. This is only defined as a complaint that the broker-dealer must document and resolve if it is sent to the broker-dealer by certified mail, return receipt requested
C A complaint that must be recorded and resolved is defined as one received by the broker-dealer in writing (e-mail counts here as well), A verbal complaint does not count
An investment adviser that claims that it is a "fee only" adviser could be compensated based on: I a percentage of assets under management II a flat annual or hourly fee for all work performed for wealthy investors III 12b-1 fees paid by mutual funds IV a performance based fee for wealthy investors A. I, II, III B. III and IV C. I, II, IV D. I, II, III, IV
C Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,100,000 as permitted under the Investment Advisers Act of 1940).
An investment adviser has 3 managing partners and 3 investment adviser representatives. All of the partners have completed the Certified Financial Planner (CFP) program and received the designation. The 3 IARs have been enrolled in a CFP preparation course and are scheduled to take the next CFP exam. The IA publishes an advertisement that states: "All of our partners are Certified Financial Planners." This advertisement is: A. fraudulent and misleading B. unethical because an advertisement cannot include the qualifications of the firm's principals C. permitted since it is true D. permitted only after the IARs pass their CFP exams
C Since the 3 partners of the firm all have their CFPs, this is a true statement and is not misleading.
A broker-dealer has a marketing agreement with a local bank and has located offices in each of the bank's branches. If a bank customer makes an inquiry about mutual funds offered by the broker-dealer in the branch, all of the following are true EXCEPT: A. oral disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal B. written disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal C. the customer's signature must be obtained on a document acknowledging receipt of the appropriate risk disclosures D. reasonable efforts must be made to obtain the customer's signature on a document acknowledging receipt of the appropriate risk disclosures
C When a broker-dealer has a branch location in a bank office, any customers who wish to effect securities transactions must be told orally and in writing that securities products are not FDIC insured; are not deposits; and are subject to risk of loss of principal. In addition, at the time that an account is opened for a customer in such a location, NASAA requires that the member make reasonable efforts to get the customer's written acknowledgment of receipt of these disclosures.
An agent of a broker-dealer publishes a web page that offers a free suitability determination to each customer that fills out a form electronically. Furthermore, if the customer agrees to open an account, the site states that: "The first month of trading will be free." Which statement is TRUE regarding this communication? A. This communication is permitted without restriction B. This communication is prohibited in each State C. This communication is permitted only if the broker-dealer and the agent are registered in each State where a customer completes the Web form D. This communication is permitted only if the broker-dealer and the agent are Federally registered
C Because this is not a "general" Internet Communication and the communication is being followed-up with specific client interaction, this is considered to be an offer of brokerage services in each State where a customer completes and submits the electronic suitability form. As such, the maker of the offer (the broker-dealer) and its agents must be registered in each State where this occurs. The fact that the first month of trading is free has no bearing. The broker-dealer will charge for its trades thereafter.
A Chinese Wall must be maintained by a broker-dealer between investment banking and which of the following departments? I Research II Trading III Retail Sales IV Mergers and Acquisitions A. I and II B. III and IV C. I, II, III D. I, II, III, IV
C Chinese Walls to stop information flow must be maintained between: Investment Banking and Trading; Investment Banking and Research; and Investment Banking and Sales (Retail and Institutional). Evens the investment playing field
Which of the following are "critical" pieces of information that MUST be collected from a customer to open a new account? I Name II Date of Birth III Telephone Number IV Social Security Number A. I and II B. III and IV C. I, II, IV D. I, II, III, IV
C There are 4 critical pieces of information that must be collected to open a new account: Customer Name Address Date of Birth Social Security Number
If a customer of a broker-dealer fails to pay for a securities purchase by the 4th business day from trade date, the customer's account must be: I restricted II frozen III for 30 days IV for 90 days A. I and III B. I and IV C. II and III D. II and IV
D
Under the NASAA Statement of Policy on unethical practices, investment advisers must do all the following EXCEPT: A. determine the suitability of recommendations to all customers B. act in a fiduciary capacity for all customers C. disclose conflicts of interest to all customers D. send quarterly account statements to all customers
D Quarterly account statements must be sent by investment advisers that take custody of client funds or securities; there is no such requirement for advisers that do not take custody. Investment advisers must make suitable recommendations to all customers; must disclose conflicts of interest to customers; and must act in a fiduciary capacity for all customers.
Which customer could be charged an advisory fee based on account performance? A. A customer that deposits $250,000 to be invested by the adviser B. A customer with a $2,500,000 net worth C. A customer that deposits $500,000 with the adviser D. Any of the above
D Because the Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,100,000), NASAA cannot prohibit the charging of a performance fee for this customer who has a net worth of $2,500,000. (Remember that Federal law supersedes State law; in the absence of a Federal law, then only that State law applies.) An annual account fee, or an hourly fee arrangement, would always be acceptable.
A customer buys shares of a stock that had its initial public offering 5 years ago. Which statement is TRUE regarding prospectus delivery? A. The prospectus must be delivered to the customer within 24 hours of confirmation B. The prospectus must be delivered to the customer within 3 business days of the transaction C. The prospectus must be delivered to the customer no later than settlement of the transaction D. A prospectus is not required because the initial public offering happened 5 years ago
D Prospectus delivery is only required for new issues being sold in the primary market. Once a company is trading in the secondary market, it is reporting its results to the SEC and this information is publicly available. Thus, an investment decision can be made from this information and there is no longer a prospectus delivery requirement.
True or False: An agent (registered representative) can borrow from a customer and from immediate family members.
False
