Ch 4 The NASAA Stmts of policy & model rules
The last time an agent met with one of his clients they discussed the possibility of investing in ABC common stock based on the growth potential of ABC. Today the agent is informed that ABC has been awarded a large contract for future work. This news will cause the growth of ABC to move up quickly. The agent is unable to reach the client but is sure that the client would like to own ABC now. Which of the following actions would be appropriate by the agent? (A)Continue to try to contact the client and not enter an order to buy ABC until he has reached the client. (B)Enter an order to buy a moderate amount of ABC now and hold it in the firm's account until the client can be reached. (C)Enter an order to buy a large block of ABC and then later allocate shares to all of the agent's clients. (D)Buy the stock in the agent's own account and later transfer the stock to the client.
[A]Continue to try to contact the client and not enter an order to buy ABC until he has reached the client. The Model Rules forbid an agent from making a trade without authorization. The rules also forbid exercising discretionary trading authority without the prior written authorization of the client. Discretion as to price and time can be given to an agent until the end of a day of trading, but anything exceeding that time period would have to be in writing or in the form of a discretionary account.
According to the Securities Exchange Act of 1934 and NASAA Regulations, a person exercises discretion with respect to an account if: the person is authorized to determine which securities will be purchased for the account. the person purchases securities for the account at direction of the client. the person is authorized by the client to purchase a security for the account if the price reaches a certain level. (A)I only (B)I, III (C)II, III (D)I, II, III
[A]I only Discretionary authorization can only be used when the person given the authorization will be making all of the investment decisions in the customer's account. Decisions as to time and price only or at the direction of the client would not require discretionary authorization.
According to NASAA's Statement Policy of Unethical Business Practices of Investment Advisers, an Investment Advisory Contract between the adviser and the client must: contain the formula for computing the advisory fee describe whether there is any grant of discretionary power allow the adviser to assign the contract without the client's consent (A)I, II (B)II, III (C)I, III (D)I, II, III
[A]I, II I and II are true as stated. III is incorrect because any assignment of a client's contract by an adviser requires that the adviser notify the client.
A new client opening an account tells the agent of a broker-dealer to enter any orders the agent thinks are appropriate for the customer's account. Under the NASAA Statement of Policy on Dishonest and Unethical Business practices before the first order is entered, the agent should (A)Obtain written discretionary authorization from the customer (B)Get a signed margin agreement from the client (C)Require a deposit of cash from the client (D)Refuse to open the account for the client
[A]Obtain written discretionary authorization from the customer Agents of broker-dealers must have prior written authorization before using discretion in a customer's account.
An investment adviser representative received written discretionary authority to place trades in a customer's account when the account was opened. The account has now existed for over 10 years. The client and IAR had been discussing some parameters for trades in the account related to two specific securities that have been under-performing. The client goes away on business for a week and is unreachable when the IAR notes that one of the securities has reached a previously-discussed parameter. Which of the following is permitted under the regulations of the NASAA? (A)The IAR is permitted to place trades in the account without the customer's consent, because written authority has been granted and has not been revoked. (B)Since the written discretionary authority was granted so long ago, the IAR should not place any trades in the account until the client can be reached. (C)Since the written discretionary authority was granted so long ago, the IAR should contact the client's spouse to receive authorization before executing the trade. (D)As long as the IAR can in some way prove that a discussion previously took place regarding the parameters of trading the security, it would be irrelevant whether written discretionary authority had been granted.
[A]The IAR is permitted to place trades in the account without the customer's consent, because written authority has been granted and has not been revoked. Regulations of the NASAA allow an IAR to place trades in a client's account with written discretionary authority. This written discretionary authority is good until revoked in writing by the client. In this scenario, the IAR would be well within their authority to place the trade without first contacting the customer, since written discretionary authority exists.
Mr. Penske is discussing the investment advisory contract with Natu, a prospective client. Natu reviews the contract and expresses a concern regarding the mediation clause. He reassures Natu that the clause is a customary component of advisory contracts, and also points out that with the market about to open soon, he is unable to disclose his stock recommendations unless Natu signs the contract, including the mediation clause. According to NASAA Model Rules, which of the following is correct regarding this situation? (A)The IAR should not coerce Natu into signing the mediation clause.(B)The prospective client must sign the mediation clause as it is part of the contract. (C)The IAR made factual statements so Natu should sign the clause.(D)There are no concerns in this situation as Natu hasn't signed the clause and contract.
[A]The IAR should not coerce Natu into signing the mediation clause. According to NASAA Model Rules, investment advisers cannot indicate in an advisory contract any condition, stipulation, or provision binding any person to waive any right available under state or federal securities laws. For example, an IA cannot force a client to sign a mediation clause or any type of exculpatory provision. Mr. Penske behaved unethically because his statements are attempting to coerce Natu into signing a clause which he opposes.
Gladys is a registered agent at a broker-dealer. She receives an email from a customer expressing his dissatisfaction with an unauthorized trade in his account. Gladys sees the email come in on her mobile phone but does not respond as she is on a business trip. She plans to call the customer upon her return in two weeks. According to the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is correct regarding the agent's behavior? (A)The agent behaved unethically because she failed to respond to a customer complaint. (B)The agent behaved appropriately because the customer sent an email rather than a written complaint. (C)The agent exhibited unethical behavior by not canceling the trade in question immediately. (D)The agent handled the situation properly as she plans to respond when she returns in two weeks.
[A]The agent behaved unethically because she failed to respond to a customer complaint. Failing to respond to a written (this includes email) customer complaint would be unethical. The agent is aware of the email and elects to not respond. Gladys should have brought this matter to the attention of her broker-dealer promptly so it can respond to the customer.
A client reads that a company recently developed a potential blockbuster pharmaceutical drug. The drug is under review by the FDA and will announce its decision in the next two weeks. If approved, the stock will likely provide significant capital appreciation. The client's stated investment objective is capital appreciation and a low risk tolerance level. He asks his investment adviser representative for her opinion and she suggests placing an order for 10,000 shares at the market (the shares currently trade at $34). Which of the following statements is correct regarding the IAR's recommendation? (A)The recommendation is not suitable given the client's stated risk tolerance. (B)The recommendation is suitable because it meets the client's investment objective. (C)The recommendation is suitable as the investment idea came from the client herself. (D)The recommendation is not suitable given the large order amount.
[A]The recommendation is not suitable given the client's stated risk tolerance. The client is interested in buying a stock that is in a special situation scenario: if the drug is approved, the stock rises significantly. However, if it is not approved, it will most likely decline significantly. Given her stated low risk tolerance, the IAR should have advised her of the risks and reminded her that the investment is inconsistent with her risk tolerance. The IAR can explore with the client other less risky investments that can provide potential capital appreciation. Regarding the size order, we do not have enough information about the client to conclude whether the order amount is appropriate.
Burgess Capital is an investment advisory firm. It is considering entering into an agreement with Morpheus Affiliates, a debt collection company, to borrow funds. The presidents of these two companies are sisters. Under the NASAA Statement of Policy and Model Rules, Burgess Capital (A)cannot enter into an agreement to borrow funds. (B)is free to borrow funds from Morpheus Affiliates. (C)can borrow funds from Morpheus provided it discloses the family relationship between the two heads of the companies. (D)cannot borrow funds from Morpheus but the borrowing of securities would be permitted.
[A]cannot enter into an agreement to borrow funds. According to NASAA regulations, an Investment Adviser, Burgess Capital, could not borrow money or securities from a financial institution if that company is NOT in the business of lending money. Morpheus Affiliates is a collection agency business not a money lender. However, the NASAA Model Rules do permit, under certain conditions, the borrowing of funds from an affiliate broker-dealer or Investment Adviser and could borrow from a bank. The family relationship between the two presidents of these companies is not a factor in this scenario.
An investment adviser puts together a small gathering of her top five clients in order to provide them with information about an investment that she assures them will return at least 7% in less than one year. These clients are accredited investors. According to NASAA Model Rules on Unethical Practices of Investment Advisers, the IA (A)is not allowed to guarantee a client that a specific investment result will be achieved. (B)is allowed to guarantee the 7% return if the IA has received such guarantee from the issuer of the investment. (C)can state a guaranteed return to accredited investors but they have discretion to refuse the advice. (D)is not allowed to guarantee a return unless it can be substantiated with a proven investment performance track record for at least the previous five years.
[A]is not allowed to guarantee a client that a specific investment result will be achieved. Under the NASAA Model Rules on Unethical Practices of Investment Advisers an investment adviser is never allowed to provide investment advice that guarantees the client will realize a specific result will be achieved. Even with a performance track record of 7% or more in the previous five years, future performance cannot be guaranteed based on historical results.
Under the Fiduciary rules of the NASAA Model Rules on Unethical Business Practices, investment advisers are required to (A)provide impartial advice to each individual client based on that client's needs and objectives. (B)conduct quarterly asset allocation assessments of their clients' portfolios. (C)audit randomly-chosen client statements to confirm that securities positions are accurately reflected. (D)select the lowest cost investment option when making a recommendation.
[A]provide impartial advice to each individual client based on that client's needs and objectives. The Model Rules state that investment advisers must provide disinterested and impartial advice to each client based on that client's needs and objectives. All the other options are false. IAs should assess whether their clients have proper asset allocations but there is no mandate to perform this on a quarterly basis. Considering low cost options is expected but the IAR does not have to select the lowest cost investment if it is not in the best interest of the client. Lastly, investment advisers do not have to audit customer statements; however, they are subject to audit by an independent auditor.
Which of the following statements by an agent at a broker-dealer firm would be acceptable? (A)"According to my research, you can expect to see returns of 5% annually from this investment." (B)"Though not all years have shown profits, this index fund has averaged over 6% growth for the past 30 years." (C)"The upcoming IPO has high investor interest so expect to see a spike in its market price once it begins trading." (D)"Tuco Inc. is a large cap company that has paid a quarterly dividend for the past 20 years. I'd buy shares here to take advantage of the next dividend payment."
[B]"Though not all years have shown profits, this index fund has averaged over 6% growth for the past 30 years." Stating historical information related to an index fund's performance and qualifying that with the fact that not all previous years have shown profits is an acceptable statement. Each of the other statements is either misleading or a form of a guarantee. One guarantees a 5% return, another predicts a spike in stock price and the last one bases his recommendation on the fact that because the company has paid a dividend historically, the customer can expect the dividend will be paid again.
Gil goes into an IA firm and opens an account with Cindy. Initially he didn't give Cindy any discretionary authority. However after seeing the amount of time that he has spent researching stocks for himself, he thinks discretionary authority might be a good idea. He calls into the firm and tells Cindy over the phone that he wants her to use discretionary authority in the account starting immediately. Cindy reviews the account for suitability purposes and immediately makes a few changes to the account without receiving anything in writing from Gil. How do NASAA Regulations govern this type of situation? (A)Cindy is acting in violation of NASAA Rules by exercising discretion in the account at this time. (B)Cindy is acting in accordance with NASAA Rules with the use of the discretion at this time, but she is required to ensure that within 10 business days, Gil sends in written discretionary authority. If he does not, she must cease using discretionary authority until it is received in writing. (C)Cindy is acting in accordance with NASAA Rules with the use of the discretion at this time, but she is required to ensure that prior to sending the next statement to Gil, that Gil sends in written discretionary authority. If he does not, she must cease using discretionary authority until it is received in writing. (D)Cindy is acting in accordance with NASAA Rules with the use of discretion in the account and may continue to do so on an ongoing basis because the discretionary orders are suitable and she has received verbal discretionary authority.
[B]Cindy is acting in accordance with NASAA Rules with the use of the discretion at this time, but she is required to ensure that within 10 business days, Gil sends in written discretionary authority. If he does not, she must cease using discretionary authority until it is received in writing. Under NASAA Rules, IAs and IARs may use discretion in accounts pursuant to oral/verbal discretionary authorization by a client as long as written discretionary authorization is received with 10 business days. If Gil fails to send in that written discretionary authorization, then Cindy must cease using discretion in the account until she receives it.
Mrs. Smith's granddaughter is concerned about her grandmother's financial condition and pays a visit to her grandmother's investment adviser. She has a copy of her grandmother's statements and a copy of the advisory agreement. Which of the following would be an unethical practice for the IA: (A)Offer Mrs. Smith's granddaughter a free financial evaluation.(B)Discuss the details of the grandmother's account with the granddaughter since she already has possession of account statements and the advisory agreement. (C)Inform the granddaughter that discussions about any client or any account requires the written consent of that client. (D)Get Mrs. Smith on the telephone.
[B]Discuss the details of the grandmother's account with the granddaughter since she already has possession of account statements and the advisory agreement. According to NASAA regulations, an Investment Adviser may not "disclose the identity, affairs, or investments of any client unless required by law or consented to by the client." Therefore, it would be unethical to acknowledge that Mrs. Smith is a client or discuss any of her investments with her granddaughter or anyone else unless Mrs. Smith has given consent for the IA to do so.
An Investment Adviser Representative buys shares of ABC in his own personal account and then contacts his clients and advises them to buy ABC. This practice is known as (A)Funding (B)Front running (C)Churning (D)Backwardation
[B]Front running Since the Investment Adviser Representative bought the stock before advising clients to buy, he would have been front running since his client's purchases could move the price of ABC up.
Under NASAA Model Rules on Unethical Practices of Investment Advisers and Federal Covered Advisers, past performance of the investment adviser (A)Is indicative of future performance and may be advertised as such (B)Is not required to be disclosed in the investment contract between the IA and client (C)Is indicative of the future strategies that will be employed by the adviser (D)Is never a consideration when choosing an Investment Adviser
[B]Is not required to be disclosed in the investment contract between the IA and client Of the choices offered, the only one that is completely correct is that past performance is NOT required to be disclosed in the investment contract between the IA and the client.
Mark is an investment adviser to several mutual funds within the same family of funds. He even serves on the board of directors of one of the funds. When compared to similar funds, Mark charges an advisory fee that is more than double the fees charged by other advisers. Which of the following is true of this scenario? (A)Mark has not violated any securities laws in this scenario. (B)It is likely that Mark's fees are excessive when compared to similar advisers and that such fees violate securities laws. (C)Mark would never be permitted to serve in so many capacities for a fund or family of funds. (D)In this scenario, Mark is legally required to have a sizable holding in the funds that he advises.
[B]It is likely that Mark's fees are excessive when compared to similar advisers and that such fees violate securities laws As an IA to an investment company, Mark is a Federal Covered Adviser, subject to the 1940 Act. That act prohibits excessive advisory fees. Since Mark's fees are more than double that of other similar advisers, it is likely that the fees are excessive and that Mark has violated securities laws. Mark may serve on the Board of Directors of the fund as an "affiliate" director, he is permitted to act as adviser to multiple funds in a family of funds, and he is not legally required to invest in any of the funds that he advises.
Under NASAA Model Rules for Investment Advisers, which of the following statements would be true in a situation in which the client of an investment adviser representative became incapacitated? (A)If the client became incapacitated, the IAR would be allowed to accept sell orders only from the client's spouse. (B)The IAR would not be allowed to handle orders unless the IAR received a written durable power of attorney from the person acting on behalf of the client. (C)If the client became incapacitated, the IAR would be allowed to handle orders on behalf the client from the client's personal attorney.(D)Although the IAR generally would not be able to place orders on the client's behalf, the IAR would be satisfying his or her fiduciary responsibility by placing sell orders during extreme market volatility only.
[B]The IAR would not be allowed to handle orders unless the IAR received a written durable power of attorney from the person acting on behalf of the client. Under NASAA Model Rules for Investment Advisers, an IA or IAR may not place an order to purchase or sell a security for the account of a client upon the instruction of a third party without first having obtained a written third party authorization from the client, such as a written durable power of attorney. There is no exception for the IAR placing orders on the client's behalf if there is extreme market volatility.
An Investment Adviser with a large client base has a wife who is a successful life insurance agent. The couple decide to team up and share each other's client base. The IA would be prohibited from doing this because (A)It is unethical for the IA to share his client base with anyone (B)The only time the IA can share his client base is if he required to do so by law or if the sharing has been consented to by the client.(C)Securities laws make it unethical for the IA's wife to share her client base with the IA (D)The only time sharing would be allowed would be with SEC approval.
[B]The only time the IA can share his client base is if he required to do so by law or if the sharing has been consented to by the client. The NASAA Statement of Policy on Investment Advisers provides that an IA may not disclose the identities, affairs, or investments of any clients unless required by law or unless consent is given by the client. Insurance laws may make it unethical for the IA's wife to share her client base, but securities laws do not cover insurance practitioners unless they deal with securities.
Jody is your client and she has $100,000 she wants to invest now but will need that money back in 3 years to send her son to college. She would like to have income from her investment but needs to make sure that the money will be available to her when her son is ready for college. Under NASAA Model Rules for Agents which of the following would be most appropriate investment choice? (A)Large cap common stocks that pay a good dividend (B)U. S. Treasury Bonds maturing in 3 years (C)U. S. Treasury Bonds maturing in 10 years (D)Preferred stocks issued by large cap corporations
[B]U. S. Treasury Bonds maturing in 3 years The most appropriate choice would be to invest the money in U.S. Treasury Bonds maturing in 3 years since that is when the client will need the money for her son's college education.
Under NASAA Model Rules for Agents, an agent of a broker-dealer must not make recommendations without reasonable grounds to believe that the recommendation is suitable for the client. All of the following would be considered to be suitable recommendations except: (A)An agent meets with a client to determine if there have been any changes in the client's financial and personal condition over the last year. (B)An agent meets with a client to determine if an investment in a limited partnership would work for the client, since the client expressed an interest in tax write-offs. (C)An agent recommends a common stock listed on the New York Stock Exchange to all individuals that attend an open meet and greet arranged by the agent. (D)An agent provides a prospective client with a prospectus on a mutual fund that the client indicated some interest in.
[C]An agent recommends a common stock listed on the New York Stock Exchange to all individuals that attend an open meet and greet arranged by the agent. All choices would be suitable except "C". The agent would not be allowed to give specific recommendations to individuals who attend a "meet and greet" event sponsored by the agent since the agent would not know the specific investment needs and objectives of each individual in attendance.
Under NASAA Statements of Investment Advisers which of the following factors would be taking into consideration when determining if the IA's trading was excessive in a client's account? The client's financial resources The client's financial objectives The general character of the client's account The profit to the client based on the trades that took place (A)I only (B)II, & III (C)I, II, & III (D)I, II, III, IV
[C]I, II, & III The amount of profit or loss to the client based on the trades that took place would not be a relevant factor when determining if the account was over-traded. Transactions in a client's account must be based on the client's financial resources, objectives, and general character of the account.
According to NASAA's Policy Statement of Unethical Business Practices of Investment Advisers, which of the following is considered to be unethical: requiring a client to provide prior written third party trading authority before placing an order for a client's account on the instructions of the client's wife failing to inquire into a client's investment objectives, financial situation, and needs before making a recommendation charging a fee that is substantially higher than that charged by other advisers for essentially the same service. (A)I, II (B)I, III (C)II, III (D)I, II, and III
[C]II, III I. Is allowed II. Failing to obtain required information from the customer would be deemed unethical. III. Charging excessive fees would be deemed unethical.
An investment adviser has received a phone call from a stock analyst. During the conversation the analyst tells the IA that he plans to downgrade a particular stock that the IA has recently purchased in several client accounts. The analyst will announce the downgrade after the market closes today. Based on this situation the IA should: (A)Immediately report the Analyst to the proper regulatory association. (B)Immediately sell the clients out of the stock that will be downgraded. (C)Re-evaluate the stock and make no trades based on new information until after the public announcement is made by the analyst to avoid "trading ahead" rule violations. (D)Do nothing and pretend that the conversation with the analyst never happened.
[C]Re-evaluate the stock and make no trades based on new information until after the public announcement is made by the analyst to avoid "trading ahead" rule violations. Trading Ahead is a violation and is the trading of a security based on unpublished research reports or trading based on the use of Inside Information. Therefore the only appropriate action the IA could take would be to be prepared to sell the stock once the news is made public. It would not be acceptable to "do nothing" because the IA should be making adjustments to portfolios based on new news and information.
In most cases, investment advisers (IAs) must keep client information and records confidential. Which of the following is an exception to this rule? (A)The IA can divulge former client information as long as the client/adviser relationship has been terminated for at least 5 years.(B)The IA can divulge a client's information to an accountant when the accountant requests it while performing a duty on the behalf of the client. (C)The IA can divulge such information to a state securities commissioner when he is conducting an examination of the records kept by the IA. (D)The IA can divulge the records of registered broker-dealers usually without restrictions.
[C]The IA can divulge such information to a state securities commissioner when he is conducting an examination of the records kept by the IA. The two exceptions to the rule of confidentiality are: 1) When required to do so by law (court orders, state examinations, etc.) 2) with the consent of a client. An IA must submit, by law, to routine examinations by the state Administrator (or securities commissioner). A certified public accountant must have the client's consent to have access to the requested information even if the accountant is performing a duty on behalf of the client.
An investment adviser representative has a client that has suffered trauma in an automobile accident. Doctors are optimistic that the IAR's client will fully recover, but the client is currently in a medically-induced coma. How should the IAR proceed with regards to the handling of the client's account? (A)The IAR should begin a pattern of discretionary trading in the account which may improve profits for the client, but will cause higher commissions for the IAR. (B)The IAR should contact the client's attorney, who has a copy of the client's will. (C)The IAR should follow the directions of the client's wife, who has a durable power of attorney over her husband in the event that the husband is not responsive. (D)The IAR should place an immediate hold on the account, close all open orders, and liquidate all securities positions.
[C]The IAR should follow the directions of the client's wife, who has a durable power of attorney over her husband in the event that the husband is not responsive. When a client becomes incapacitated, the IAR must follow the directions of a person who has a durable power of attorney over the client. The IAR should not begin trading in the account, which could be construed as churning. The IAR would not be concerned with a will at this time, because the client is not dead. The IAR should not go as far as to close all open orders and liquidate all securities positions, unless this is the directive of the holder of the durable power of attorney.
Under the NASAA Model Rules for Broker-dealers, a prospectus must be delivered to a client not later than the date of confirmation of the transaction in which of the following situations? (A)The client wishes to sell a new issue that was purchased by the client 6 months ago. (B)The client wishes to purchase shares of common stock that were part of a new issue handled by the firm 2 years ago. (C)The client wishes to purchase shares of new issue being distributed by the broker-dealer now. (D)The client wishes to sell shares of a new issue in the secondary market that were purchased earlier in the day from the broker-dealer distributing the new issue.
[C]The client wishes to purchase shares of new issue being distributed by the broker-dealer now. Customers purchasing new issues must be provided with a final prospectus not later than with their purchase confirmation by the broker-dealer distributing the new issue. The other items listed would not require delivery of the prospectus, because the transaction takes place in the secondary market.
An investment adviser has put together an advisory contract which waives rights that would normally be provided to clients. Before having clients sign the advisory agreement, the IA explains to the clients the fact that normal rights are being waived when they sign the agreement. Later a client is unhappy with the investment adviser and wants to take action against the IA, but waived that right when they signed the advisory agreement. Under NASAA Model Rules for Investment Advisers, which of the following is correct with regard to this situation? (A)Since the client signed the advisory agreement, the only action allowed for the client would be to take the account away from the adviser. (B)Since the client signed the advisory agreement, the client has no remedy since they agreed to waive their rights. (C)The client would be allowed to take action since the clause where the client waives rights would not hold up in court and is not enforceable. (D)The client would only be allowed to take action that was agreed to in the contract that was signed.
[C]The client would be allowed to take action since the clause where the client waives rights would not hold up in court and is not enforceable. The NASAA Model Rules for Investment Advisers states that an IA cannot indicate in an advisory contract any condition, stipulation, or provision binding any person to waive any right available under state or federal securities laws.
According to the NASAA Model Rules on Investment Advisers (IAs) and Investment Adviser Representatives (IARs) related to client information, which of the following scenarios does not violate NASAA Rules? (A)Tom, an IAR, is asked by his friend Joe to be the best man at Joe's wedding. Joe is also an advisory client of Tom's. During his best man speech, Tom jokes that he hopes that Joe's wife-picking abilities are better than his stock-picking abilities that he's shown in his account at Tom's firm. (B)As a general practice, an IA firm requires clients to sign a written authorization to share client performance results when the IA firm out-performs the client's expectations. (C)With no investigation taking place and no violation suspected, a designated official employed by the State Administrator's office reviews an IA firm's records which include client information. (D)After hiring a third-party marketing firm to attempt to obtain more clients, the IA firm sells the contact information of clients to the marketing firm under the agreement that half of the price per contact be shared with the clients.
[C]With no investigation taking place and no violation suspected, a designated official employed by the State Administrator's office reviews an IA firm's records which include client information. In general, it is a prohibited practice to share client information with third parties unless required to do so by law or unless a client provides written consent. In this question, the review of records by an employee of the Administrator would be required by law and would not violate NASAA Rules.Though the best-man speech may be in jest, Tom is not permitted to acknowledge Joe as a client or discuss his returns without Joe's consent. Firms are not permitted to require customers to waive rights when results exceed expectations, as privacy is a right. Sharing contact information with a marketing firm without client permission is prohibited, even if the firm shares proceeds of the sale of information with clients.
According to NASAA Statement of Policy on Dishonest or Unethical Business Practices an agent may (A)share in the profits and losses in the customer's account.(B)establish an account using inaccurate information about a customer's net worth. (C)divide or otherwise split the agent's commission with any person registered as an agent of the affiliated broker-dealer. (D)lend or borrow money or securities from a customer.
[C]divide or otherwise split the agent's commission with any person registered as an agent of the affiliated broker-dealer. Agents of broker-dealers may split commissions only if they are either employed by the same broker-dealer or by an affiliated broker-dealer. Choice A is incorrect because the written consent of the broker-dealer would also be required
A broker-dealer conducts a securities business at a bank which accepts retail deposits. According to the NASAA Model Rules, the broker-dealer must disclose to their customers that the products the broker-dealer sells are (A)FDIC insured. (B)guaranteed by the bank. (C)subject to investment risks. (D)financial obligations of the bank.
[C]subject to investment risks. If a broker-dealer operates a securities business on the premises of a bank which accepts retail deposits, the broker-dealer must disclose orally and in writing to its customers that the securities products it sells: Are not FDIC insured Are not obligations of the financial institution or guaranteed by the financial institution Are subject to investment risks, including loss of principal
According to the NASAA Investment Adviser Information Security and Privacy Rule, with what minimum frequency must the IA review and modify its physical security and cybersecurity policies and procedures? (A)Monthly (B)Quarterly (C)Semi-annually (D)Annually
[D]Annually Investment Advisers must review, no less frequently than annually, and modify, as needed, the policies and procedures to ensure the adequacy of the security measures and the effectiveness of their implementation.
Under the NASAA Unethical Business Practice Rules of Investment Advisers an investment adviser is allowed to disclose the identity, affairs, or investments of clients in which of the following situations? (A)if the client is a public figure (B)when the adviser has the client's consent (C)if the adviser is required to do so by law (D)B and C
[D]B and C Under NASAA regulations an investment adviser may disclose the identity or affairs of a client if 1) required by law to do so or 2) he/she has received the clients consent .
NASAA Model Rules for Investment Advisers require which of the following? (A)Disclosure to clients of advisory fees charged but do not have to disclose commissions received in addition to the advisory fees.(B)Disclosure to clients of additional commissions received above advisory fees but do not have to disclose advisory fees. (C)Disclosure to clients of advisory fees only and no other additional compensation. (D)Disclosure to clients of all sources of compensation arising from any transactions that the IA recommended or in which the adviser was involved.
[D]Disclosure to clients of all sources of compensation arising from any transactions that the IA recommended or in which the adviser was involved. Investment advisers must disclose to clients compensation as well as any compensation arrangements in connection with their advisory services that are in addition to the normal advisory fees charged by an IA.
Under NASAA Model Rules for Broker-dealers, which of the following would be allowed for a broker-dealer firm? Opening a margin account for a client with signed authorization and then hypothecating the securities purchased in the account. Offering a client shares in a new issue after providing the client with a prospectus on the new issue Advising the client that the investment that they wish to purchase has high risk and the potential for loss is substantial. Offering to buy shares of stock that a client wishes to sell and putting those shares into the firm's inventory account (A)I & III (B)I & IV (C)II & III (D)I, II, III, IV
[D]I, II, III, IV All choices represent actions that would be allowed to be taken by broker-dealers. Remember that hypothecation requires a signed margin agreement and remember that when selling a new issue to clients, the firm is required to provide a copy of the prospectus to the client prior to the end of the transaction meaning, receipt of the customer's confirmation.
Under the NASAA Statement on Investment Advisers, an investment adviser would be considered to have custody of client funds in which of the following situations? The IA has actually taken physical possession of the clients funds The IA has the authority to take possession of client funds The IA has taken possession of client funds and will forward the client a receipt within 10 business days The client has wired funds to the IA for investment purposes. (A)I & II only (B)I & IV only (C)I, III, IV only (D)I, II, III, IV
[D]I, II, III, IV NASAA rules define "Custody" to include actual possession and authority to obtain possession of client funds in their definition therefore all choices would be considered to be custody of client funds. If the IA were unable to take possession for some reason (e.g. failed wire transfer, failure of the client to sign a document), then the IA would not be deemed to have custody until resolution (e.g. successful wire transfer, obtaining the clients signature).
You are an IAR who specializes in small capital securities. After several solicitations, a friend of yours is interested in your services and has a high-risk tolerance. Your friend opens a managed account with over $250,000 to be managed on a fee basis. You suggest small-cap securities and over the next couple of years, the account loses over 10% of its value due to small cap volatility. Your friend sees the losses and wants some sort of remedy for the losses. What is the client entitled to? (A)Full restitution because the investments were in the high-risk sector. (B)Partial restitution because although the client is in the high-risk category the IAR should have changed the investment strategy before getting to a 10% loss. (C)A waiver of future advisory fees to compensate for the loss (D)No remedy since the IAR acted properly and in good faith
[D]No remedy since the IAR acted properly and in good faith When a client invests in securities there can be NO guarantee of profit, as investment losses are normal. This investor is in the high-risk category and therefore was open to investments in small cap stocks. The IAR cannot provide any remedy or reimbursements or discounts to the client in relation to the losses, as it would constitute a guarantee against losses.
According to NASAA Policy Statement on Unethical Business Practices of Investment Advisers, in which of the following circumstances would the Investment Adviser be allowed to make a recommendation to a client? (A)The recommendation is consistent with trades the firm has made for its own account. (B)The adviser has no financial interest in the security recommended for purchase. (C)The recommendation to purchase a security is made only after their own research in the securities prospect for growth. (D)The recommendation is based on the client's investment objectives, financial situation, and needs.
[D]The recommendation is based on the client's investment objectives, financial situation, and needs. The individual client's investment objectives, financial situation, and needs must be the reasons used by an adviser when making recommendations to a client.
A registered investment adviser's fiscal year has ended. When must it file a copy of its balance sheet with the state securities Administrator? (A)Within 30 days (B)Within 45 days (C)Within 60 days (D)Within 90 days
[D]Within 90 days A registered investment adviser must file a balance sheet with the state securities Administrator within 90 days following the end of the IA's fiscal year.
An investor owns a listed stock that is relatively inactive and wants to sell his stock at price higher than where it is trading right now so he sells his stock and buys it back and repeats that process numerous times. This is known as (A)front running (B)insider trading (C)free riding (D)market manipulation
[D]market manipulation This is a form of market manipulation called a Wash Sale. It is prohibited.
