S66: USA Business Practices

A money market fund that charges .10% of annual management fees and .20% of annual 12b-1 fees: A cannot be called "no-load" because the total of these fees exceeds .25% B cannot be called "no-load" because such funds cannot charge 12b-1 fees C can be called "no load" D can be called "low load"

A mutual fund (money market funds are mutual funds) cannot be called a "no-load" fund if it charges 12b-1 fees of more than .25% (25 basis points) annually. 12b-1 fees are charges against net asset value that pay for the cost of soliciting new investment to the fund, and they can be used to compensate salespersons that sell the fund's shares. All mutual funds charge management fees. These have nothing to do with sales loads.

Under NASAA rules, a complaint is defined as one received: I in a written letter II by e-mail III verbally over the telephone A I only B I and II only C II and III only D I, II, III

The best answer is B. A complaint that must be recorded and resolved (if possible) is one received in writing (e-mail is written). Screamers don't count until they put the complaint in writing.

A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action: A is allowed B is not allowed C may trigger a "pay to play" disclosure to customers D may trigger a "soft dollar" disclosure to customers

The best answer is A. There is no prohibition on a broker-dealer compensating its agents with prizes for meeting a sales contest requirement. The broker-dealer will have to report the compensation value as taxable income to the IRS, but this is not part of the question. "Pay to play" refers to the illegal investment adviser practice of "hiring" a third party solicitor (for "pay") who works for, or who has recently left, a government entity such as a government, state or municipal pension plan. For "pay," this person steers that pension plan's advisory business to the adviser (the "play" part of the term). Soft dollar compensation is where a broker-dealer offers "free" services to a mutual fund or investment adviser in return for "directed brokerage" (which is the mutual fund or investment adviser directing its portfolio trades at full commission rates to that broker-dealer). The SEC requires that mutual funds can only accept soft dollars if the services benefit all shareholders of the fund. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific.

A hedge fund offers to provide a minimum level of trades to a broker-dealer in return for receiving below-market office space from the broker-dealer. Which statement is TRUE? A This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator B This is an illegal usage of soft dollar compensation C This is a legal usage of soft dollar compensation D This is an unethical practice unless the broker-dealer is also licensed as a real estate agency in the State

The best answer is A. This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized rents if the hedge fund agrees to direct its portfolio trades to that broker-dealer. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific. Because most hedge fund advisers are set up as partnerships, hedge funds are not subject to the mutual fund soft dollar rule which requires that the soft dollar benefit accrue to the shareholders. All of the "partners" in a hedge fund may get a benefit from the reduced expenses that the hedge fund will enjoy from the subsidized rent. However, the SEC (and also NASAA, because each State uses the same ADV Form) requires that the hedge fund disclose the practice of accepting soft dollars as a line item in the Form ADV and that it disclose that, in return for getting the rent subsidy, it may be paying a higher commission rate to that executing broker-dealer.

Registered Investment Adviser is a general partner in a real estate limited partnership, and receives a management fee for this. The RIA is recommending partnership units to those clients for which the investment is suitable. Which statement is TRUE? A The RIA must disclose to his clients that he will be receiving the partnership management fees when presenting the partnership investment to his clients B The RIA is only required to disclose to his clients the partnership management fees to be received after they buy the partnership units C The RIA is not required to disclose to his clients the partnership management fees to be received since he performed a suitability determination D The RIA is not required to disclose to his clients the partnership management fees to be received since there is no conflict of interest inherent in this arrangement

The best answer is A. All fees taken by an investment adviser relating to investments sold or recommended to customers must be disclosed. Since this adviser is the general partner in the partnership investment that he is recommending to his clients, he must disclose the fact that he is the general partner and that he will be receiving partnership management fees in addition to any overall management fees assessed for managing the customer's portfolio.

An agent of a broker-dealer has hired a sales assistant who is not registered. The sales assistant will answer the telephone, handle customer queries, and perform other clerical duties. What arrangement is acceptable for compensating the unregistered sales assistant under this employment arrangement? A Hourly wage plus a bonus based on an annual performance evaluation B Base salary plus a percentage of the agent's gross commissions C Base salary plus a percentage of any increase in the agent's gross commissions from the time the sales assistant was hired D Percentage of commissions based on the agent's average commissions prior to hire date; and a higher percentage of the agent's average commissions from the time the sales assistant was hired

The best answer is A. An unregistered person cannot be compensated with commissions or pay based on production. An unregistered sales assistant, therefore, is not permitted to share commissions, or share in any business increase, with the registered representative for whom he or she works.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, all of the following are considered manipulative and prohibited practices EXCEPT: A Arbitrage B Churning C Wash trades D Painting the tape

The best answer is A. Buying a security on one exchange and simultaneously selling it on another exchange for profit is a common trading technique known as "arbitrage" and is perfectly legal. Trading a customer account for the purpose of generating commissions to the agent is commonly known as "churning" and is a prohibited practice. Buying a security on one exchange and simultaneously selling it to create the appearance of trading activity is a manipulative and prohibited practice known as "wash trading" (also known as "painting the tape").

Investment advisers, when opening an account for a new client are: A required to have procedures in place to detect and report suspected money laundering B not required to have procedures in place to detect and report suspected money laundering because they are not subject to bank regulation C not required to have procedures in place to detect and report suspected money laundering because they are not subject to broker-dealer regulation D only subject to the anti-money laundering rules if they are Federal Covered Advisers

The best answer is A. Federal anti-money laundering rules apply to all broker-dealers and investment advisers. If an adviser is only state-registered, these rules still apply.

Which of the following statements is TRUE regarding the compensation of an unlicensed solicitor for referring a customer to an investment adviser? A A referral fee cannot be paid to an unlicensed solicitor B A referral fee may be paid to an unlicensed solicitor only if there is a prior written agreement detailing work to be performed and compensation to be paid C A fixed fee may be paid to an unlicensed solicitor only if the investment adviser is a "federal covered adviser" D The referral fee can be paid as long as the amount is fair and reasonable

The best answer is A. Investment advisers do not earn commissions, and the prohibition on sharing commissions with unlicensed persons is not applicable. Investment advisers are permitted to pay referral fees to individuals who solicit business for the adviser, however the State defines the solicitor as an investment adviser representative that must be registered (licensed) with the State. So a referral fee can only be paid to a licensed solicitor; not to an unlicensed solicitor.

A written customer complaint is received by mail that the firm resolves to the customer's satisfaction. Which statement is TRUE regarding keeping this record? A A copy of the original complaint along with its resolution must be retained in the file of the agent by the broker-dealer B A copy of the original complaint along with its resolution must be retained at the firm's supervisory office C A copy of the original complaint along with its resolution must be retained by the State Administrator D There is no requirement to retain a copy of the complaint because it was resolved to the customer's satisfaction

The best answer is A. SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways: The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; or Instead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original."

Under the Uniform Securities Act, if an agent hears material inside information, the agent: I should not transmit the information to others II should not trade based upon the information III must wait 1 year before trading that security IV must notify the Federal Bureau of Investigation within 1 business day A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is A. Under Uniform State Law, the use of "inside information" as the basis for recommending or trading a security is prohibited. If material inside information is received by an agent, this information should not be told to others; nor should it be traded upon. There are no requirements to notify the FBI about the information; nor are there requirements to wait 1 year before trading the security that was the subject of the information. (Please note, however, that FINRA has a rule, requiring that such information, if received, be given to FINRA itself. This is not a State law, and thus, is not covered on this exam.)

A compliance officer is informed by a representative that he has found a forged customer signature in the account papers that were returned by mail by a new customer who is opening an account. How quickly must the compliance officer report the incident? A Promptly B Within 7 business days C Within 30 calendar days D By the end of the fiscal quarter

The best answer is A. We do not know of any rule covering this situation, but common sense says that a forged signature must be reported promptly - to the local police. It would not be reported to FINRA or the State Administrator. (The scenario for this type of event is that the new customer was sent paperwork to sign to open the account and missed one of the required signature lines. So an employee at the broker-dealer simply signs for that customer to get the paperwork processed, and this is prohibited. The firm would have to find out who the employee was who forged the customer's signature; fire him or her; report the event to FINRA only if the forgery were done by a registered employee which would lead to statutory disqualification for this individual; and report the forgery to the local authorities who would prosecute the individual. And, you might ask, how did the firm find the forgery? Well, when any customer paperwork comes into a branch or back office location, as a compliance procedure, it is photocopied before being distributed to the appropriate department(s). So if the customer's signature is missing on the original photocopy, but appears on the copy distributed within the firm, we know there was a forgery!)

Which disclosures are required to be made when a customer opens a brokerage account in a bank branch? I The product being sold is not a bank deposit and is not FDIC insured II The product being sold is not a security and is not SIPC insured III The product being sold is subject to investment risk and may lose value IV The product being sold is not subject to investment risk and may not lose value A I and III B I and IV C II and III D II and IV

The best answer is A. When a customer wishes to buy securities being sold in a bank location, the sales representative must comply with the "Not-Not-May" Rule. The salesperson must inform the customer verbally and in writing (this is done by giving the customer a written brochure) that: Securities are NOT FDIC insured; Securities are NOT bank deposits; and Securities are subject to investment risk and MAY lose value. In addition, the representative must attempt to get the customer to sign a statement that he or she understands this.

A broker-dealer is a syndicate member in a negotiated underwriting of revenue bonds issued by the City of Jacksonville, Florida Industrial Development Authority. If the issue is oversubscribed, under NASAA rules, it would be unethical for the bonds to be sold to: A residents of Florida B employees of the broker-dealer that are Florida residents C institutional investors in Florida D investors that are non-residents of Florida

The best answer is B. When a broker-dealer does a new issue offering, it must make a "bona-fide" sale to the investing public and cannot retain part of the issue for itself or for its employees. If this were permitted, the broker-dealer would have the incentive to "underprice" the issue and then buy it for itself; intending to turn around and resell it for a profit. This would be in addition to any underwriting fees earned by the broker-dealer. The issue can be sold to both Florida and non-Florida residents, as long as it is suitable. While it is typically the case that only State-residents will get the highest tax benefit if they buy an issue of that State, it is not always true. There are situations where out-of-state residents can benefit by buying bonds (for example, by buying taxable bonds of a State, and these are taxable bonds).

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

The best answer is 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. Privacy of customer information is covered under Regulation SP. Customer account information is considered to be "private" and cannot be divulged to others unless the customer consents. A copy of the firm's privacy policy must be given to the customer at account opening and annually thereafter. Cybersecurity covers policies and procedures to stop the theft of customer account information. This includes protecting against unauthorized access and requiring strong customer password protection. Business continuity covers the procedures that the firm would follow to maintain customer access to accounts if there is a significant business disruption or if key personnel were compromised.

A registered agent that oversees discretionary accounts for many clients has been trading the accounts with increasing frequency. It is unlikely that the agent would be accused of "churning" these accounts if: A each transaction is approved by the branch manager promptly B these are wrap accounts charging a flat annual fee C the transactions are suitable for the customers D the securities being traded are exempt

The best answer is B. "Churning" is the excessive trading of a customer's account in order to generate commission income for the representative. Flat fee "wrap" accounts that "wrap" all services into a single annual fee take away the incentive to churn. Even if the transactions are suitable for the customer, excessive trading to generate commissions is still an unethical practice. And it makes no difference if the securities involved are exempt or non-exempt; churning of any account with any security is an unethical practice.

An investment adviser representative (IAR) personally owns 100,000 shares of DEF stock. He believes that the stock is a good long term investment, but that the price will remain flat for the next 18 months. He recommends the purchase of the stock to one of his best customers, who has an investment objective of capital gains, and when the customer agrees, arranges to have his 100,000 shares sold to that customer. This action is: A unethical because the recommendation does not correspond to the customer's investment objective B unethical because the IAR has a conflict of interest that must be disclosed to the customer at the time the recommendation is made and the customer must given written permission to the transaction C unethical because the IAR cannot sell his own personal position to a customer D permitted without restriction

The best answer is B. If this stock is such a good investment, why is the investment adviser representative (IAR) selling? There is a conflict of interest here that must be disclosed to the customer to whom the purchase of the stock is being recommended. In addition, when an investment adviser or an IAR is selling a security to a client that the adviser or IAR personally owns, the customer must give written permission to that transaction (since this is such a major conflict of interest).

The sharing of commissions on securities transactions is: A prohibited without exceptions B permitted between individuals if both hold securities licenses at the same broker-dealer C permitted between individuals if one holds a securities license and the other holds a state insurance license D permitted between individuals who work at the same broker-dealer as long as one of them holds a securities license

The best answer is B. Licensed securities agents may only share commissions with other licensed securities agents at the same broker-dealer. If two licensed individuals work at different broker-dealers, commissions cannot be shared. Commissions may not be shared with individuals that do not hold securities licenses; nor can they be shared with unlicensed individuals.

All of the following actions are violations of the Uniform Securities Act EXCEPT: A deliberately failing to follow a customer's instructions B actively soliciting orders for unregistered exempt securities C making an untrue statement of material fact D omitting a material fact because there was not enough time to cover all items in a presentation

The best answer is B. Solicitation of orders for unregistered non-exempt securities is prohibited under the Act. There is no prohibition on soliciting orders for unregistered exempt securities (such as U.S. Government bonds or municipal bonds). Deliberately failing to follow a customer's instructions; making an untrue statement of material fact; and omitting a material fact are all prohibited actions under the Act.

Under the provisions of the Uniform Prudent Investor Act, a trust: A can only invest in securities that are included on that State's "Legal List" B can customize its investments based on suitability as determined by the needs of the beneficiaries C must determine that each individual investment is prudent D gives the trustee complete discretion as to which investments are suitable

The best answer is B. The Uniform Prudent Investor Act allows the plan trustee to consider overall portfolio composition when determining whether an investment is prudent, with the goal of diversification. The trustee cannot be held liable for a "bad pick" as long as this is adhered to. It also states that when selecting investments, the trustee must take into account the suitability and needs of the beneficiaries. Thus, the trustee has some flexibility as to investment choices. Prior to this, the only permitted investments were those that were included on the State's "Legal List" - and these were typically only investment grade bonds. Note that the trustee does not have complete discretion as to investment choices - for example, the trustee is still liable if the investments are overly speculative.

Which statement is TRUE regarding the use of social media by an Investment Adviser Representative (IAR) who wishes to advertise his or her services? A IARs are prohibited from placing advertisements in social media B IARs can place advertisements in social media, as long as they disclose their affiliation with an Investment Adviser and their credentials C IARs can only place advertisements that consist of unpaid testimonials from satisfied clients D IARs can only place advertisements that consist of paid testimonials from satisfied clients

The best answer is B. Under NASAA rules, testimonials are prohibited in advertising - it makes no difference if they are paid or not. (Note, in contrast, that under federal law, broker-dealers and federal covered advisers can use testimonials in advertising as long as it is disclosed if payment was made.). IARs can use social media to advertise, as long as the affiliation of the IA with the IAR is disclosed in the advertisement, along with the IAR's credentials (such as using the term "Registered" Investment Adviser Representative). All such advertisement must be retained as a record for 5 years under SEC and NASAA rules.

An Investment Adviser Representative wishes to set up a blog on the Internet to provide information to interested persons about current Federal and State regulatory events related to investment advisers. Which statement is TRUE about this? A This action is prohibited under NASAA rules B This action is permitted because the blog covers regulatory issues and is not promotional C This action is permitted only if the Investment Adviser Representative obtains permission of the Investment Adviser firm D This action is permitted only if the Investment Adviser Representative is affiliated with a Federal Covered Adviser

The best answer is C. If an agent of a broker-dealer or an investment adviser representative wishes to publish any content on the Internet, either as a website or on a blog, the Agent or IAR: must disclose his or her affiliation with the Broker-Dealer or Investment Advisory firm; the Broker-Dealer or Investment Adviser (the firm) must approve the content of the Internet Communication; the Broker-Dealer or Investment Adviser (the firm) must authorize the distribution of the Internet Communication; and the Agent or IAR must act within the scope of authority granted by the Broker-Dealer or Investment Adviser (the firm).

Which of the following securities, if purchased by an investment adviser for its own account but not for its client accounts at the same time, is a "red flag" indicator of a potential conflict of interest violation? A The IA buys index funds for its own account B The IA buys Treasury Bonds for its own account C The IA buys an Initial Public Offering for its own account D The IA buys a money market fund for its own account

The best answer is C. This is a little vague, but here's where the question is coming from. A broker-dealer can "reward" an investment adviser for sending it commission trading business by placing IPOs in the adviser's personal account. IPOs are hard to get and often jump in price because of the excess demand, so this gives the adviser a personal gain that his clients do not share in. This is clearly a conflict of interest and is also unethical. With the other choices, the adviser is putting his or her personal funds in a nice, safe, low yielding investment. These are not likely to produce gains that the adviser's other customers will not enjoy.

If an investment adviser is also a registered broker-dealer and will effect recommended trades to customers through that broker-dealer: A a violation of NASAA rules will occur B the relationship between the investment adviser and the executing broker-dealer must be disclosed on each trade confirmation C the relationship must be disclosed to the client, at, or prior to, the signing of the advisory contract D no conflict of interest exists because the investment adviser has a fiduciary relationship with the client

The best answer is C. If an investment adviser will effect its recommended portfolio transactions through an affiliated broker-dealer that will charge commissions for each trade, this is a conflict of interest that must be disclosed, in writing, to the client at the time that the advisory contract is signed.

A block trade is a trade of at least: A 100 shares B 1,000 shares C 10,000 shares D 100,000 shares

The best answer is C. A trade of 10,000 shares or more is a block trade (as in a large block of stock). Such a trade is large enough to strongly influence the market price of a stock, so these are often handled outside of computerized execution systems to avoid a market price distortion.

Which of the following is an unethical business practice? A Publication of a tombstone announcement by a broker-dealer in the local newspaper on the effective date of a registered new issue offering managed by that broker-dealer B Publication of a research report by a broker-dealer that shows the performance of prior recommendations made by that broker-dealer during the prior 12 months C Publication of a report by an agent detailing the performance of transactions recommended by that agent over the prior 12 months D Publication of a report by a broker-dealer written by an agent detailing the performance of transactions recommended by that agent over the prior 12 months

The best answer is C. An agent cannot publish and distribute reports detailing the performance of recommended transactions. Broker-dealers, on the other hand, may do so, but the State Administrator can require the filing of these reports.

Which of the following are unethical practices under the NASAA Statement of Policy? I An investment adviser borrowing securities from a client II An investment adviser disclosing the educational background of its employees to a potential client III An investment adviser disclosing its customers' names to a potential client IV An investment adviser recommending a security to a client based upon a rumor A I and II only B III and IV only C I, III and IV D I, II, III, IV

The best answer is C. An investment adviser disclosing the educational background of its employees is highly ethical - the educational background of an investment adviser's key employees is actually disclosed in the Brochure Supplement (Form ADV Part 2B). Disclosing customer names to potential clients is unethical (unless these customers give approval for such use of their names). An investment adviser borrowing from a client is unethical; as is recommending securities to a customer based upon a rumor.

An agent of a broker-dealer is soliciting potential clients to buy a new issue of corporate common stock. Which of the following is the agent PROHIBITED from doing? I Using the mails or other means of interstate commerce to offer the security to a potential client who resides in a State where the agent is registered II Offering the security to a potential client in another State where the agent is not registered III Selling the security to an existing client in a State where the agent is registered and then mailing the prospectus to that client IV Delivering a prospectus to an existing client who resides in a State where the agent is registered after the client expresses interest in buying the issue A I and II only B III only C II and III only D I, II, III, IV

The best answer is C. As long as the agent is registered in the State, he or she can offer the stock issue to new or existing clients in that State, making Choice I permitted, and Choice II prohibited. Choice III is prohibited because the customer cannot be "sold" the new issue security unless the customer receives the prospectus at, or prior to sale. Delivering the prospectus after the sale is made is not allowed. In Choice IV, since the agent is registered in the State, there is no reason why a prospectus cannot be given to a customer that expresses interest in buying the issue.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following are prohibited manipulative practices? I Buying a security on one exchange and simultaneously selling it on another exchange to create the appearance of trading activity II Buying a security on one exchange and simultaneously selling it on another exchange for profit III Executing a trade for a customer at a price that is unrelated to the current market IV Executing a trade for a customer without the customer's knowledge A I and II only B III and IV only C I, III, and IV D I, II, III, IV

The best answer is C. Buying a security on one exchange and simultaneously selling it on another exchange to create the appearance of trading activity is a manipulative and prohibited practice known as "wash trading." Buying a security on one exchange and simultaneously selling it on another exchange for profit is a common trading technique known as "arbitrage" and is perfectly legal. Both executing a trade for a customer at a price that is unrelated to the current market and executing a trade for a customer without the customer's knowledge (unless discretionary power is granted by the customer) are prohibited practices.

Which of the following is considered to be "churning"? A Exchanging income fund shares for growth fund shares for a customer who has a capital gains investment objective B Day trading by an agent with discretionary authority in a customer margin account where the customer has a speculative investment objective C Recommending trades in a customer account with the objective of producing commissions for the agent D Swapping a municipal bond for another municipal bond to obtain a capital loss deduction

The best answer is C. Churning is the excessive trading of a customer's account with the intention of generating commissions for the agent. Exchanging mutual fund shares for a customer (Choice A) is not churning. Day trading in a discretionary account for a customer who wishes to speculate would be churning only if the trading was considered to be excessive - so Choice B is not churning. Performing a municipal bond tax swap for a customer (Choice D) is not churning either.

A representative at a member firm is approached by a person outside that firm to sell promissory notes through that member's branch office. Which statement is TRUE? A The representative is prohibited from selling the promissory notes B The representative may only sell the promissory notes after receiving verbal permission of the member firm C The representative may only sell the promissory notes after receiving written permission of the member firm D The representative may sell the promissory notes without restriction

The best answer is C. If a representative were to sell these promissory notes offered by an outside individual, then the rep would be "selling away" from his firm - that is selling securities to a customer that are not being offered by that firm. This is a violation of NASAA rules (since the customer thinks he is buying the securities from the broker-dealer and not from some other person!). The only way that a representative can "sell away" is if the representative asks the firm's permission in writing; receives written permission of the firm; and the firm records the transaction on its books and records and supervises it as if it were its own transaction (like that would ever happen!).

An agent of a broker-dealer wishes to create a website to solicit securities business from customers. Based on each customer's responses to questions asked, appropriate investment recommendations will be made. Which statements are TRUE? I The broker-dealer must review and approve the content of the website II The Administrator must review and approve the content of the website III The broker-dealer must be registered in each State where a customer responds to the website IV The agent must be registered in each State where a customer responds to the website A I and II B III and IV C I, III, IV D I, II, III, IV

The best answer is C. If individualized offers are being made to customers via the Internet (as is the case here), then both the broker-dealer and the agent must be registered in each State where the offer is made. In addition, the broker-dealer is always responsible for the actions of its agents - so it must review and approve the content of all communications to the public made by agents. While the Administrator can require the filing of Internet websites, the Administrator does not review and approve their content.

An agent of a broker-dealer: A is prohibited from taking a second job B can only take a second job if he or she gives written notice to the State Administrator C can only take a second job if he or she gives written notice to the employer D is permitted to take a second job as long as it is not with another registered broker-dealer

The best answer is C. In order to take outside employment, agents are required by FINRA and the State to give written notice to their firm, and they must follow any instructions of the firm.

Frederick Kruger, an investment adviser representative, has decided to leave his current firm and accept a position with another investment adviser. Freddy makes an agreement with an investment adviser representative at his old firm to handle his accounts after he leaves. The IAR at the old firm will set aside and pay 50% of any fees that he receives to Frederick for the next 3 years. Which statement is TRUE? This arrangement is: A acceptable because the commissions are being shared between 2 registered individuals B acceptable because an oral contract is binding on both parties under the Uniform Securities Act C prohibited because commissions cannot be shared by individuals that are registered at different advisory firms D prohibited because sharing in commissions is not allowed under any circumstances

The best answer is C. It is an unethical practice to share commissions under NASAA rules, unless they are shared with another registered individual at the same broker-dealer; or a broker-dealer that is under common control.

A mutual fund sponsor is holding an educational seminar at the convention center at a resort hotel near Disney World. The seminar will focus on the features of different bond funds offered by the fund sponsor. Which statement is TRUE about an investment adviser representative (IAR) attending the seminar? A The IAR cannot attend the seminar because it is a breach of the IAR's fiduciary responsibility B The IAR can attend the seminar, but cannot have any of the travel and accommodation expenses paid by the mutual fund sponsor C The IAR can attend the seminar with travel and accommodation expenses paid by the mutual fund sponsor, as long as the conflict of interest has been disclosed to clients D The IAR can attend the seminar with travel and accommodation expenses paid by the mutual fund sponsor without restriction, since the meeting is educational and not promotional

The best answer is C. Mutual fund sponsors often hold large conferences for registered representatives and investment adviser representatives where the travel and accommodation expenses are paid by the fund sponsor. The rules here are that the meeting must be educational, not promotional; the fund cannot pay for the travel expenses of spouses; and the conflict of interest must be disclosed to clients.

As the first purchase in a new cash account, a customer buys a stock that has been trading in the secondary market in your State for 5 years in a solicited transaction. When must the prospectus be delivered to the customer? A Upon learning about the security from the agent B On the date of confirmation of the purchase C On the date payment is made for the purchase D There is no requirement to deliver a prospectus

The best answer is C. Prospectuses cannot be altered or summarized by anyone - to do so would change the content and disclosures made to investors. Prospectuses are legal disclosure documents that are non-promotional, so copies of company advertisements cannot be attached. Similarly, reports showing the prospects of increasing sales for the company cannot be attached because they are promotional. A supplement attached to the prospectus of the company's most recent audited financial statements is non-promotional and can be attached. This is valuable unbiased investment information.

A broker-dealer is offering an IPO to the public. The broker-dealer is: A permitted to withhold shares from sale to the public for its unregistered employees B permitted to withhold shares from sale to the public for its registered employees C permitted to withhold shares from sale to the public for its proprietary trading account D not permitted to withhold shares from sale to the general public

The best answer is D. Broker-dealers and their employees (whether registered or unregistered) are prohibited from buying IPO shares at the offering price in the underwriting. They can, however, purchase the shares in the secondary market. A broker-dealer buying IPO shares for its own or for employee accounts is "withholding the issue from sale to the public" with the intention of taking a "free ride" on the likely upward price movement once the issue opens for trading in the market. This is a violation called "free riding and withholding."

Which statements are TRUE about the Prudent Investor Act? I Only investments that are on the State's "legal list" that are included in the top 4 investment grades published by a nationally recognized ratings agency are permitted to be made by fiduciaries II Fiduciaries can choose investments with higher levels of risk as part of an overall investment strategy that is consistent with the beneficiaries' objectives and needs III Investment authority over the trust account may be delegated to an investment adviser by the fiduciary IV Investment authority over the trust account may not be delegated to an investment adviser by the fiduciary A I and III B I and IV C II and III D II and IV

The best answer is C. The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management.

A new customer wants to open a discretionary account by initially depositing $20,000 in cash. He signs the authorization form and indicates to an agent that his investment objective is long-term growth. He wishes that the agent immediately invest his money to take advantage of market timing. Which statement is TRUE? A As long as the customer is an American Citizen born in the United States and this is verified, the agent may invest the money in a manner consistent with the customer's objective B Once the new account form is approved by the State Administrator, the agent can start investing as long as the investment is consistent with the customer's objective C The agent should contact her branch manager as cash deposits or withdrawals exceeding $10,000 must be reported to the Department of Treasury D The agent should contact her State Administrator as amounts exceeding $10,000 must be reported to the Secretary of the State

The best answer is C. The Department of Treasury requires that any deposits of cash made by a customer; or withdrawals of cash made by a customer; in the amount of more than $10,000, must be reported to FinCEN (Financial Crimes Enforcement Network).

Under NASAA rules, advertisements by investment advisers: I can contain testimonials II cannot contain testimonials III can unconditionally make an offer of free services IV cannot unconditionally make an offer of free services A I and III B I and IV C II and III D II and IV

The best answer is C. The NASAA rule on Investment Adviser advertising is similar to the SEC, with some key differences. IA Advertising: cannot contain false, untrue or misleading statements; cannot contain a testimonial (note, in contrast that under federal law, both broker-dealers and federal covered advisers can include testimonials in advertising as long as it is disclosed if it was paid); cannot state that any report or research will be provided for free unless this is offered without condition; can include a list of recommendations made with their performance as long as all recommendations over that period are included, along with the market price at the time of the recommendation and the current price of the security. This list cannot be deliberately selective. Note that there is no restriction on the offer of free services, as long as they are truly "free" and not conditioned on making a purchase or trade.

The Prudent Investor Act requires that fiduciaries manage the assets of their beneficiaries based upon: A legal list requirements B efficient market theory C modern portfolio theory D value investing theory

The best answer is C. The Prudent Investor Act, adopted in most States, is a modernization of the "prudent investor rule" restricting the investment authority of fiduciaries. Instead of setting forth a list of "approved" securities (a "legal list") for investment, the Prudent Investor Act allows fiduciaries to use modern portfolio theory for investment decision making. Thus, instead of just investing in securities that have minimal risk, the fiduciary can apply risk-return analysis to choose the "best" investments for the level of risk assumed. Investment performance is not measured on each individual investment, but rather by looking at the overall portfolio return.

An agent of a broker-dealer is told, in confidence, by the President of a publicly held corporation, that this quarter's sales have fallen drastically. Which action should the agent take? A The agent should immediately disclose this information to the financial news media B The agent should immediately disclose this information to the firm's proprietary trading desk C The agent should consider the information to be "confidential" and not disclose it to anyone D The agent should execute solicited customer orders to sell based on the information disclosed

The best answer is C. The agent has received "inside information" and cannot tell it to anyone until the news is publicly released by the issuer. If the agent or the firm traded on this information, or tells customers to trade based on this information, the insider trading rules are violated.

An investment adviser buys 1,000 shares of ABC stock for his personal account. Shortly afterwards, the adviser buys 100,000 shares of ABC stock and allocates them to the customer accounts that he manages. This investment adviser has acted: A ethically B ethically as long as he discloses his ownership position to his customers C unethically because he is front running his customers' accounts D unethically because he is trading against his customers' accounts

The best answer is C. This investment adviser bought the stock for his own personal account before placing the big order to buy the shares for his customers' accounts - and such a big order is likely to make the price of the stock rise - giving the adviser a personal profit in his account. This is an unethical practice known as "front running" a customer order. It would be OK for the adviser to buy the shares for his personal account at the same time, or after, the customer order is placed, but never before the customer order is placed.

An agent has heard from a good friend that "ACME Fund has taken a large position in ABC stock." Based on this, the agent calls all of her customers with the recommendation that ABC stock be purchased immediately. This action is: A permitted without restriction B permitted only if the agent files a disclosure form with the Administrator C prohibited, since this recommendation was made based upon a rumor D prohibited, since this recommendation was made based upon inside information

The best answer is C. Trading based on a rumor; or inducing someone else to trade based on a rumor; is an unethical practice.

Under Regulation SP, customers must be given a privacy notice: A prior to each recommendation B prior to each trade execution C prior to the first transaction D with each statement of account

The best answer is C. Under Regulation SP ("Statement of Privacy"), customers must be given a privacy notice at, or prior to, account opening. An account is considered to be opened with the first transaction. Once the account is opened, the privacy notice must be presented to the customer at least annually thereafter.

A customer enters a bank branch where he has a savings account and is approached by the branch manager who asks: "Are you interested in earning a higher rate of return than we offer on our savings accounts? Let me introduce you to our securities representative." If the customer opens a securities account, which disclosures are required to be made? I Securities products are not insured by the Federal Deposit Insurance Corporation II Securities products are not deposits or other obligations of financial institution III Securities products are subject to investment risks, including possible loss of principal IV Securities products are subject to taxation of income and capital gains A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. When a customer enters a bank that has a securities "kiosk," this is called a securities branch in a bank setting. Any salesperson selling the securities in the branch must be properly registered and licensed. Note that this person can be both a bank employee and an employee of a broker-dealer, usually owned by the bank, at the same time. When a customer wishes to buy securities in that location, the sales representative must comply with the "Not-Not-May" Rule. The salesperson must inform the customer verbally and in writing (this is done by giving the customer a written brochure) that: Securities are NOT FDIC insured; Securities are NOT bank deposits; and Securities are subject to investment risk and MAY lose value. In addition, the representative must attempt to get the customer to sign a statement that he or she understands this. There is no requirement to disclose the tax consequences of the investment.

A firm's market making desk, aware that the firm is about to publish a bullish research report on ABCD stock, purposefully increases its long position in order to satisfy anticipated retail demand. This action is: A permitted without restriction B permitted as long as the research report is released within 48 hours of the first trade made to increase the firm's position C permitted as long as the market listing the stock is notified, in writing, of the impending research report D prohibited

The best answer is D. "Trading ahead of research" is prohibited. A member firm cannot alter its inventory position in anticipation of a research report that it is about to release. In essence, the member firm is treated as an "insider." Once the favorable report is released, this may cause the general public to become more bullish and buy the stock, pushing the price up. If the firm were to increase its inventory position prior to the release of the report, it could make a nice profit based on the stock's upward movement once the report is disseminated. This is prohibited.

A salesperson is offering a promissory note to a customer in a State of a start-up company that is developing a luxury resort in the Dominican Republic. All of the following statements made by the salesperson about this security are fraudulent EXCEPT: A "The payment principal and interest on these notes is guaranteed by the Caribbean Regional Insurance Authority" B "These are "prime quality" notes that are risk-free" C "The securities are registered with the Dominican Republic Securities Commission and therefore are approved for sale" D "These securities offer an above-market interest rate that is commensurate with the business risk of this venture"

The best answer is D. Legitimate promissory notes are marketed to sophisticated, corporate investors that have the ability to thoroughly research the company issuing the notes and determine whether the issuer will be able to repay principal and interest. However, there have been many instances of "promissory note fraud" where unlicensed individuals push bogus promissory notes that are sold as investments that offer above-market fixed interest rates and safeguarding of principal - and most of these are frauds. This is a major concern to State regulators. To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000 are exempt from State registration. Thus, smaller note offerings (under $50,000 amount) to smaller investors are non-exempt and must be registered; and unrated note offerings or non-investment grade rated note offerings must also be registered in the State. Finally, the tell-tale signs of fraud in promissory note offerings are: Statements that the notes are "guaranteed" or "insured" - especially by bogus foreign entities Promises of above-market rates of return (an above-market rate of return is not offered by a "low-risk" investment, but rather by a high-risk investment) Statements that the notes are "risk-free" (these are corporate issues that have risk of default) The labeling of a start-up company's notes as "prime" (since only established companies with a history of operations and earnings can be called "prime") Offers of promissory notes from a stranger who does not know the customer's financial situation

A member firm is negotiating with an issuer to underwrite an add-on common stock offering and a registration statement has not yet been filed. A research analyst at the firm has been following the company for the past 5 years and now wishes to change the broker-dealer's rating from "Hold" to "Buy." The member firm should: A issue the report in its normal fashion B issue the report only to its best customers C buy the stock in the market before issuing the report D not issue the report until at least 3 days after the effective date

The best answer is D. This one is a bit sticky. During the period when an underwriter is negotiating with an issuer to do an underwriting, the firm cannot issue research reports on that stock (except under very specific rules where the issuer has always previously been publishing reports about that company; and the new report is NO more favorable than the old reports). The issue here is that a favorable report would tend to influence that issuer's price upward; and then if the underwriter gets the deal, the underwriter could then sell the issuer's shares at a higher price and earn a larger underwriting spread. This is a conflict of interest. Member firms doing underwritings are prohibited from issuing research reports for 10 days following the effective date for IPOs; and 3 days following the effective date for add-on offerings.

A broker-dealer is a subsidiary of a company that is listed on the New York Stock Exchange. An agent of the broker-dealer believes that the parent company's stock is a good investment and wants to recommend it to her customers. Which statement is TRUE about this? A This is permitted without restriction because the parent company is publicly traded B This is permitted because the parent company qualified for a blue chip exemption as it is NYSE-listed C This is permitted only if the agent opens a joint account with the customer to purchase the recommended stock of the parent company D This is permitted only if the agent discloses the existence of the relationship verbally when making the recommendation and it is disclosed in writing on the confirmation

The best answer is D. This question does not address reality! As an internal policy, most broker-dealers prohibit their agents from recommending the stock of their publicly traded parent company - because of the inherent conflict of interest. For example, an agent for Merrill Lynch cannot recommend the purchase of Bank of America stock (B of A owns Merrill). However, let's move to the theoretical and, evidently, the test world. This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the transaction (this is done by disclosing it in writing on the trade confirmation).

Agents of investment advisers are prohibited from: A soliciting business from customers in Internet Chat rooms about investing B making blanket e-mails of personalized advisory services to prospective customers C making blanket e-mails that recommend specific securities to prospective customers D all of the above

The best answer is D. All of the actions listed are prohibited practices. Agents of both investment advisers and broker-dealers are prohibited from making recommendations of securities or soliciting business in Internet chat rooms; and they are prohibited from sending out blanket e-mail solicitations that recommend securities or advisory services to prospective customers.

An agent receives a strongly worded complaint letter from a customer. The agent discards the letter, deciding to handle the situation only if the customer shows up in person. Which statement is TRUE? A This is acceptable, since it is up to the agent to decide the best method for handling customer complaints B This is permitted, since written customer complaints must be sent by the customer to the State Administrator for resolution C This is prohibited, since all written customer complaints must be forwarded by the agent or broker-dealer to the State Administrator for resolution D This is prohibited, since all written customer complaints must be forwarded to the manager or principal of the firm for resolution

The best answer is D. All written customer complaints must be forwarded to the manager or principal of the firm for resolution. They cannot be "buried" by agents, hoping they will go away!

If an agent receives a written customer complaint, the agent should: A wait for the customer to telephone before attempting to resolve the complaint B resolve the complaint without giving notice to the employing broker-dealer C forward the complaint to the State Administrator for resolution D forward the complaint to the manager or principal of the firm for resolution

The best answer is D. All written customer complaints must be forwarded to the manager or principal of the firm for resolution. They cannot be "buried" by agents, hoping they will go away!

An attorney that has been appointed executor of a deceased customer's estate contacts an investment adviser in a State to invest and manage the estate's financial assets until they are distributed to the heirs. The attorney offers to pay an advisory fee that is based on a percentage of assets under management. Which statement is TRUE regarding this arrangement? A The advisory contract must be approved by the probate court judge prior to the adviser taking control of the financial assets B The advisory contract must be approved by the heirs prior to the adviser taking control of the financial assets C The contract is null and void because executors are not permitted to delegate investment and management functions over estate assets D The contract is valid as long as the adviser exercises reasonable care to comply with the terms of the delegation

The best answer is D. An executor or trustee is permitted to delegate investment and management functions as long as the trust or will permits such; and the agent actions are consistent with the purposes and terms of the trust or will.

A Chinese Wall must be maintained by a broker-dealer between all of the following EXCEPT: A Research and Trading B Research and Sales C Investment Banking and Research D Investment Banking and Mergers and Acquisitions

The best answer is D. Chinese Walls to stop information flow must be maintained between: Investment Banking and each of the following: Trading, Sales and Research Trading and each of the following: Research and Sales. The intent of the information barriers around investment banking is to stop the flow of information on upcoming underwritings, mergers or takeover deals being done by the underwriting department to others that might trade on the information for a profit before the public knows about the upcoming deal. Regarding the Chinese Wall required between investment banking and research, the intent is to make sure that research is truly independent and not influenced by the investment bankers at that firm that might demand a "favorable" research report on an issuer so that they can curry favor with that issuer to get future underwriting business. The M & A department and the underwriting department are usually one and the same at investment banking firms. There are no barriers required between these two groups. The intent of the information barrier between research and trading is to stop a trading desk from getting advance knowledge of a research report that the firm will issue and trading on that information before it is publicly released. The intent of the information barrier between trading and retail sales is that if retail brokers know in advance of a broker-dealer's trading strategy, they could use the information to front-run those trades.

All of the following are defenses against identity theft that must be used at a broker-dealer or investment adviser EXCEPT: A encryption of data B installation of anti-malware software C password protection for system entry D cyber insurance

The best answer is D. Data encryption, installation of anti-virus and anti-malware programs, and the use of password-protection are all defenses against identity theft, where customer account data is stolen from broker-dealers or investment advisers. Cyber insurance to protect the firm against the cost of a data breach is a good thing to have, but is not a defense against a data breach.

Which of the following statements is TRUE regarding paying a referral fee for investment advisory business to an unlicensed individual? A A referral fee based on a percentage of assets invested is permitted if there is a prior written agreement between the unlicensed individual and the investment adviser B A referral fee may be paid to an unlicensed individual only if a securities transaction results from the referral and there is a prior written agreement between the unlicensed individual and the investment adviser C A fixed fee may be paid to an unlicensed individual for any referral D The payment of referral fees to unlicensed individuals is prohibited

The best answer is D. Investment advisers do not earn commissions, and the prohibition on sharing commissions with unlicensed persons is not applicable. Investment advisers are permitted to pay referral fees to individuals who solicit business for the adviser, however the State defines the solicitor as an investment adviser representative that must be registered (licensed) with the State. So a referral fee can only be paid to a licensed solicitor; not to an unlicensed solicitor.

A mutual fund sponsor wishes to hold a seminar at the convention center at a resort hotel near Disney World. The seminar will focus on the features of different bond funds offered by the fund sponsor. If an Investment Adviser Representative (IAR) is invited to attend the conference, then: A travel and accommodation expenses must be paid by the IAR B the IAR must decline the invitation C the IAR must favor the fund when making recommendations to clients D the nature of the conflict of interest must be disclosed to clients

The best answer is D. Mutual fund sponsors often hold large conferences for registered representatives and investment adviser representatives where the travel and accommodation expenses are paid by the fund sponsor. The rules here are that the meeting must be educational, not promotional; the fund cannot pay for the travel expenses of spouses; and the conflict of interest must be disclosed to clients.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that covers all of the following items EXCEPT: A the protection, backup, and recovery of books and records B alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel C minimization of service disruptions and client harm that could result from a significant business disruption D announcement to the public in local newspapers and on the internet the fact that a significant business interruption has occurred

The best answer is D. NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for:The protection, backup, and recovery of books and records; Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel; Office relocation in the event of temporary or permanent loss of a principal place of business; Assignment of duties to qualified persons in the event of death or unavailability of key personnel; and Minimizing service disruptions and client harm that could result from a significant business disruption.

A registered securities agent solicits a customer to buy shares of stock that the agent personally owns. The customer buys 100 shares of the stock and sends a check made out to the agent. The agent does not record the trade on the books of the broker-dealer. This action is considered a(n): A allowed exempt transaction B prohibited exempt transaction C allowed private securities transaction D prohibited private securities transaction

The best answer is D. Private securities transactions are a prohibited business practice under the Act. All trades effected by an agent must be recorded on the books of the broker-dealer and must be supervised by the broker-dealer.

Which of the following are requirements for an internet communication (a website) posted by a broker-dealer, agent, investment adviser or investment adviser representative? I The communication must be limited to the dissemination of general information on products or services II The communication must include a firewall or other implemented procedure to ensure that prior to any subsequent communication with prospective clients in the State, that the broker-dealer, agent, investment adviser, or investment adviser representative are registered in the State, or are exempt or excluded from registration III The communication must include a legend that states that: "The broker-dealer, agent, investment adviser or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration" IV The communication must include a legend that states that: "Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site: "The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and"Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). The internet communication cannot be overtly promotional; and the broker-dealer or investment adviser must put in a firewall or procedures that make sure that viewers of the site are not contacted by agents or investment adviser representatives to buy securities or advisory services unless the agent or IAR is appropriately registered in the State.

Which statement is TRUE about the retention of Internet advertising by broker-dealers? A There is no requirement to retain copies of Internet advertising B Only the current web pages must be retained by the broker-dealer C All web pages created and displayed within the past 2 years must be archived D All web pages that have ever been created and displayed must be archived

The best answer is D. The Administrator can request filing of all web pages that have ever been created - so they must be retained and archived!

The Prudent Investor rule prohibits investments in: I Futures II Options III Speculative Stocks A I only B I and II C II and III D None of the above

The best answer is D. The Prudent Investor Rule does not detail the types of investments to be made, nor does it specify that only securities are permitted investments. When investing under the rule, investments must be managed in the way that a prudent investor would.

A Registered Investment Adviser publishes a web-based newsletter. He is approached by a marketing firm for a list of the RIA's customers. The marketing firm is not going to pay for the customer list, but has agreed to give the RIA computer equipment that will be used in publishing the RIA's newsletter. This action is: A permitted because it directly benefits the RIA's customers B permitted because the SEC permits the payment of "soft dollars" C prohibited because the computer equipment qualifies for accelerated depreciation deductions under IRS rules D prohibited because the RIA did not get written permission from each client to release their information

The best answer is D. The names and addresses of an RIA's customers are private and cannot be "sold" or distributed to another person, unless each customer consents in writing. The fact that the RIA was compensated for giving the customer list by receiving computer equipment instead of cash has no bearing on this violation. However, disclosure of customer information to government agencies such as the IRS, and to regulatory organizations such as FINRA and the SEC, does not require customer approval. Finally, if a court of law demands disclosure of customer information, this must be complied with.

A customer of an investment adviser - Joe Jones - has an individual account that is managed on a discretionary basis. The advisory firm receives a subpoena from an attorney that is acting as an officer of the court, demanding the production of Joe Jones' account records pursuant to a divorce action filed by Joe's wife. Which statement is TRUE? A The adviser must obtain the written permission of Joe Jones to release the information B The adviser is only obligated to comply with the subpoena if it comes from the State Administrator as authorized by the Consent to Service of Process filed with the State when the adviser registered C The adviser is only obligated to comply with the subpoena if it comes from the SEC, FINRA or other Federal authority D The adviser must comply with the request promptly

The best answer is D. There is no privacy of customer account records when information is demanded by either the State Administrator, an agency of the Federal government such as the IRS, a Federal Regulator such as the SEC or FINRA, or from a court of law (which is the case here). A Consent to Service of process filed when the adviser registers in the State appoints the State Administrator as the "attorney" for the adviser, who can accept lawsuits or subpoenas filed against the adviser; and will in turn, forward them on to the adviser. Thus, if someone wants to sue an adviser or associated person, they don't have to find them; they can file the lawsuit copy with the Administrator, who will find them! This can only be used for actions being taken for violations of the Uniform Securities Act; not for divorce actions.

While at a country club, an agent of a broker-dealer sees the President of a successful publicly traded company. The agent introduces himself to the President and is told by him that he is going to resign due to a serious illness and that the announcement will be in the Wall St. Journal within a week. The next business day, the agent calls all of his customers who own these shares and advises them to sell the stock. Which statement is TRUE? A The actions taken are legal as long as the agent advises the branch manager of the situation and the branch manager approves of the agent informing the customers B The actions taken are legal as long as the State Administrator is made aware of the situation before the agent informs the customers C The agent's actions are legal since the announcement will be coming out in a recognized newspaper within the week D The action taken is illegal

The best answer is D. This agent is contacting the customers to sell the stock based on the receipt of material, non-public information. It is illegal to effect any securities transactions using this information unless the information has been publicly disseminated.

An agent is conducting securities activities on the premises of a bank. Which statement is TRUE? A This is an unethical practice B This is permitted if the agent discloses orally to the customer that the products offered are not bank products; are not FDIC insured; and may lose value C This is permitted if the agent discloses in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value D This is permitted if the agent discloses both orally and in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value

The best answer is D. This is the "NOT-NOT-MAY" Rule. When a broker-dealer offers securities in a bank setting, it must be disclosed both verbally and in writing that securities are NOT bank products; that securities are NOT FDIC insured: and that they MAY lose value. In addition, the agent must attempt to get the customer to sign a statement that he or she understands this.

Annual audited reports are required to be sent by investment advisers to their clients if the adviser: I holds customer fundsII has discretionary control under a full power of attorney over customer accountsIII has solicited the customer for advisory businessIV has a conflict of interest that has been disclosed to the customer A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is A. If an investment adviser takes custody of customer funds or securities, it must be audited annually and provide a copy of the audit opinion to its customers. The definition of "custody" also includes "any arrangement, including a general power of attorney under which the adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian." Under this definition, an adviser that has discretion under a full power of attorney (which allows withdrawal of funds) would come under the custody rule requirements. Customers who are solicited for advisory business must be provided with a copy of the "brochure" (Form ADV Part 2A), not an audited financial statement of the adviser. All material adviser conflicts of interest must also be disclosed in Form ADV Part 2A.

If a State-registered investment adviser accepts $500 or more of advisory fees, 6 months or more in advance of rendering services: A it is considered to have taken custody of client funds B it is considered to have discretion over client accounts C it has committed a fraudulent and unethical act D it must give the customer the right to a full refund within 30 days of contract signing

The best answer is A. If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers). When a customer signs an advisory contract at the same time as receiving the brochure, the customer is given 5 days to rescind the deal - not 30 days.

Under the NASAA Statement of Policy on unethical practices, written discretionary authority need not be obtained by an investment adviser if the customer: A gives verbal discretionary authority and a written power of attorney from the customer is obtained within 10 days B selects the security to be traded and the price of execution C is an insurance company D effects 5 or fewer trades within a 12 month period

The best answer is A. The NASAA Statement of Policy on unethical practices states that oral discretionary authority can be accepted by an investment adviser; as long as this is followed up by written discretionary authority from the customer within 10 business days. Choice B is incorrect because verbal discretion can only be taken over price and time of execution; it cannot be taken over the size of a trade or the security to be traded.

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

The best answer is B. Because the Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,100,000 invested or a net worth of $2,200,000), 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.

An agent and his customer wish to open a joint account by contributing $10,000 each. All of the following statements are true EXCEPT the: A account must be approved by the broker-dealer in writing prior to any trading B agent and his customer can agree to share profits in the account as they see fit C agent and his customer must share profit and loss on a 50/50 basis D agreement between the agent and his customer must be documented in writing

The best answer is B. Agents are prohibited from sharing in a customer's account unless there is a written agreement between the customer and the agent which is approved by the broker-dealer; and sharing is proportional to the capital contributed. In this case, each person contributed half the funds, so sharing must be 50/50.

In March, an investment adviser wishes to increase its annual management fee from 1% of assets annually to 1.25% of assets annually, starting the following July 1st. In order to do this: I the investment adviser must amend the Form ADV filed with the State immediatelyII the investment adviser must amend the Form ADV filed with the State within 30 daysIII the adviser's customers must approve of the change by July 1stIV the adviser's customers are not required to approve the change A I and III B I and IV C II and III D II and IV

The best answer is C. Any changes to an advisory contract are a material change that must be filed as a Form ADV update with the State within 30 days. In addition, since this is a contract between the customer and the investment adviser, both parties must agree to any changes.

Which of the following is an acceptable investment advisory contract provision under the Uniform Securities Act? A "The investment adviser may assign the contract to another party at any time upon verbal notice" B "The investment adviser shall receive 10% of any capital gains achieved as annual compensation" C "The investment adviser shall receive 1% of all assets invested as annual compensation" D "The investment adviser (if a partnership) may change its management structure without notification to customers"

The best answer is C. Investment advisers can receive a fee based on a percentage of all assets under management; however, they cannot be compensated based solely on capital gains achieved. Investment advisers are prohibited from assigning contracts unless written notice is given to the client. Investment advisers must advise their clients of any management changes in writing (if the adviser is a partnership).

An agent omits to state material facts which are needed by an investor to make an informed decision. Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, this action is fraudulent if the statements refer to: I U.S. Government bonds II Municipal bonds III Corporate bonds IV Corporate stock A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. Omission of material facts that a customer needs to make an informed investment decision is fraudulent for both exempt and non-exempt securities. Remember that fraud applies to everything.

Which order for a customer's account can be accepted by an agent of a broker-dealer? A The order is placed by the customer's attorney, who assures the agent that the customer has given him trading authority B The order is placed by the customer's accountant, who recommended the security to the customer C The order is placed by the customer's attorney in an account where the customer is deceased, and the attorney provides a written power of attorney signed by the deceased customer D The order is placed by the customer's attorney in an account where the customer is deceased, and the attorney provides a written copy of the will appointing the attorney as executor over the estate

The best answer is D. To accept trading orders in a customer account from anyone other than the customer, there must be a written trading authorization signed by that customer. In Choices A and B, there is no written authorization, so orders cannot be taken. Choice C is more subtle - the written power of attorney from the customer becomes void if the customer dies (it dies with the customer), so the attorney could not place the order. In Choice D, the written copy of the will signed by the customer and witnessed, where the attorney is appointed as executor, is the written authorization for that attorney to trade the deceased's account.

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

The best answer is 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. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

A Registered Investment Adviser (RIA) is formed as a partnership. The RIA intends to charge an incentive fee that is based on investment performance. Under NASAA rules, the RIA: A must be able to show that the fee is fair and reasonable to the State Administrator B is not permitted to have an incentive fee under any circumstances C can charge an incentive fee as long as it is included in the partnership agreement D must offer the customer a fee refund if the performance does not meet the benchmark

The best answer is A. This question is misleading because you probably know that investment advisers cannot charge performance or incentive fees. However they CAN do so if the customer is wealthy (defined as a customer with either $1,100,000 of assets or $2,200,000 net worth). Thus Choice B is wrong. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.) Choice C is wrong because the fee arrangement must be disclosed in the advisory contract with the client; not in the partnership agreement. Choice D is wrong because there is no requirement that an incentive fee be refundable. Thus, we are left with Choice A as the best one offered (and it ain't great!). All fees must be fair and reasonable; charging unreasonable fees is an unethical practice.Finally, though not addressed in the question, NASAA requires that advisers that charge incentive fees provide a whole bunch of disclosures. The adviser must disclose in writing: that the fee arrangement may create an incentive for the adviser to make investments that are riskier; that the investment adviser will get compensation based on both unrealized appreciation and capital gains; the basis for valuing any illiquid investments used in computing unrealized appreciation; the periods that will be used to measure performance and their significance to the computation of the fee; and the nature of an index used as a comparison of investment performance, the significance of the index and the reasons why the adviser believes the index is appropriate.

Changes to the terms of advisory contracts must be: I filed with the Administrator on Form ADV within 30 daysII filed at year end with the AdministratorIII approved by the customerIV approved by the Administrator A I and III B I and IV C II and III D II and IV

The best answer is A. Any changes to an advisory contract are a material change that must be filed with the State Administrator within 30 days. In addition, since this is a contract between the customer and the investment adviser, both parties must agree to any changes.

Which of the following would be an unethical practice under the Uniform Securities Act? A Telling a customer that the price of a security is $25 per share if the broker-dealer is the sole market maker in the stock B Telling a customer that the price of a security is $25 per share if the source of the quote is the NASDAQ system C Telling a customer that the price of a security is $25 per share if this is the P.O.P. of the issue in a syndicate distribution D Telling a customer that the price of a security is $25 per share if the source of the quote is the NYSE

The best answer is A. If a broker-dealer is the sole market maker in a stock, then there is no true independent market - the price is whatever the broker-dealer says it is! In such a case, the rule is that the price is "contemporaneous cost" - meaning the last price at which the broker actually bought the stock! On the other hand, the last price reported from the NYSE or NASDAQ is a true market price and can be quoted. Finally, all prospectus offerings are fixed price sales made at the P.O.P. - Public Offering Price, with the price stated in the prospectus. Quoting this price is just fine!

An investment adviser is opening that day's mail and receives a check from a customer for $8,000, however the adviser shows no balance due from the customer - the check was mailed in error to the adviser. 5 business days later, the investment adviser mails the check back to the customer. Under NASAA rules, the investment adviser: I is deemed to have taken custody of the customer's funds II has not taken custody of the customer's funds III must keep a record of the check received IV is not required to keep a record of the check received A I and III B I and IV C II and III D II and IV

The best answer is A. If a client inadvertently gives securities or funds to an investment adviser, as long as they are returned within 3 business days, then the adviser has NOT taken custody. Since the adviser mailed the check back 5 business days later, it is defined as having "taken custody." If the adviser inadvertently receives a check made out to a third party, as long as the adviser mails the check to the third party within 3 business days, then the adviser has NOT taken custody. Regardless, the adviser must keep a record of the receipt of the check.

An investment adviser has determined that ABCD stock would be an appropriate investment for his client, but only if the price falls from the current level of $50 per share to $35 per share. What MUST the adviser do prior to placing an order to buy ABCD stock for the client's account? A Obtain verbal authority for that specific transaction B Obtain verbal authority to exercise discretion over the account C Obtain verbal authority to exercise discretion only over price and time of execution in the account D Secure an appointment as trustee over the account to formalize the fiduciary relationship

The best answer is A. If an adviser wishes to recommend a transaction to a customer, the customer must agree to do the transaction prior to execution (this assumes that the adviser does not have discretion). This is usually done verbally. Written authorization is needed only to take account instructions from someone other than that customer.

An investment adviser may receive a percentage of gains and losses in a client's account: A under no circumstances B only if specifically agreed in writing by both the customer and adviser C only if a written agreement is approved in advance by the Administrator D without restriction

The best answer is A. Investment advisers are prohibited from being compensated based on a percentage of gains and losses in an account. They may be compensated based on a percentage of all assets under management.

An investment adviser, age 33 and married, needs cash for the down payment to buy her first house. She asks her father if he can "help out" with the down payment. Her father is one of her advisory clients. Which statement is TRUE about this situation? A The investment adviser can accept the money from her father if he gives it as a gift B The investment adviser can accept the money from her father if he gives it as a loan C The investment adviser cannot accept the money from the father, whether given as a loan or a gift D The investment adviser can only accept the money from her father if there is a written agreement that details the terms and conditions

The best answer is A. Investment advisers cannot lend money to customers or borrow money from customers. The only exception is if the customer is a bank, broker-dealer, or affiliated company of the adviser. Note that an investment adviser can accept a gift!

Under NASAA rules, a customer must sign and return the margin agreement: A promptly after the initial transaction in the account B prior to settlement of the first trade in the account C within 1 day of the first transaction in the account D within 3 days of the first transaction in the account

The best answer is A. NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question, the answer is their rule!

An agent accepts an unsolicited telephone order from a new customer to buy 200 shares of a listed common stock. The salesman has the order executed and then forwards the new account form, with the executed order ticket, to the manager. Under the Uniform Securities Act, which statement is TRUE? A The agent's actions are prohibited since the account must be approved by the manager prior to opening B The agent's actions are prohibited since the customer must open a new account in person C The agent's actions are allowed as long as the manager approves of the first trade D The agent acted properly

The best answer is A. The procedure to open a new account is to have the manager approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

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

The best answer is 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.

A Registered Investment Adviser (RIA) tells his customers that they can analyze his performance by reviewing charts that he has presented. The RIA must: A tell the customers that charts can be difficult to interpret and there may be hazards in viewing only charts B explain that performance charts cannot be used to compare the past performance of one adviser against the performance of other advisers C explain that current fund performance is predicted by prior years' performance charts D tell the customers that the use of performance charts to assess prior results is approved by the SEC because the Investment Advisers Act of 1940 dictates the content of these charts

The best answer is A. Using performance charts alone is not the best way to analyze an adviser's performance. In their financial statements, advisers also disclose their investment methods, investment objectives, expenses, etc. and these should be considered as well. If an adviser tells a customer to just look at his or her charts to analyze performance, the adviser should also disclose that charts alone do not give the "full" picture, and that making decisions solely on this basis is not really in the customer's best interest.

All of the following information must be included on a customer confirmation EXCEPT: A whether the transaction was solicited or unsolicited B whether a payment for order flow was made C the customer name and account number D the price of execution

The best answer is A. Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The amount of commission charged and if a payment was made for order flow must be disclosed. Finally, the customer name, account number, size of the trade, and price of execution must all be on the confirmation.

Which of the following is a TRUE statement about managed wrap accounts? The customer is charged: A a single annual fee based on total assets in the account for account transactions and maintenance B a commission for each transaction performed C a commission for each recommendation that results in a transaction D both a commission on each transaction performed and an annual maintenance fee based on total assets in the account

The best answer is A. Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account; all services are covered in the single "wrap" fee.

Which investment advisory fee arrangement would MOST likely be viewed as unreasonable for a client with a small amount of assets under management? A Hourly rate B Flat fee assessed for the year C Assessment based on value of the account at the beginning of the month D Assessment based on value of the account at the end of the month

The best answer is B. A flat fee arrangement is permitted, but this question is "digging deeper" and is actually looking at the way advisory fees are charged in the real world. Annual flat fees are typically paid by clients with very large accounts, because advisers will change their fee arrangement for very large customers from a percentage of assets under management to a flat fee. For example, a customer with $10,000,000 to invest, if charged a typical 1% annual management fee, would pay $100,000. This is a very large dollar amount, so the adviser might have a fee schedule of 1% of assets under management for amounts invested up to $2,500,000 and then the schedule shifts to an annual flat fee of $25,000 for amounts invested over $2,500,000. If the adviser were to charge the same $25,000 flat fee for all accounts rather than a percentage of assets under management for accounts under $2,500,000, then, for example, a small account of $100,000, would have a ridiculously large fee. Hourly fees take into account complexity of management - smaller accounts are simpler and get billed fewer hours, while larger accounts are more complex and get billed more hours - this is a reasonable arrangement. Finally, an assessment based on value is reasonable - smaller accounts get a smaller assessment, while larger accounts get a larger assessment.

Which statements are TRUE about the use of testimonials in advertising? I Testimonials are permitted in broker-dealer advertising II Testimonials are prohibited in broker-dealer advertising III Testimonials are permitted in state-registered adviser advertising IV Testimonials are prohibited in state-registered adviser advertising A I and III B I and IV C II and III D II and IV

The best answer is B. Broker-dealers are permitted to use testimonials in their advertising. If they are used, it must be disclosed if the maker of the testimonial was paid; and if the maker of the testimonial is presented as an "expert," the maker's qualifications must be stated. Regarding testimonials by investment advisers, NASAA rules prohibit them for state-registered advisers. Note, in contrast, that federal covered advisers may use testimonials as long as it is disclosed if payment was made. p>

A market maker in ABCD stock is currently quoting the stock in the OTCBB at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to sell 800 shares of ABCD at $42.50, the market maker: A must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C must send the order to a stock exchange floor for execution D is not required to take any action

The best answer is B. Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently offering the stock at $43.00 - this is the price at which he is willing to sell up to 1,000 shares. Since this customer is willing to accept less to sell - $42.50 for up to 800 shares, the customer's offer must be displayed in the market. Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.

Which State-registered investment adviser MUST report that it takes custody on Form ADV? A An adviser that is affiliated with a parent bank or trust company B An adviser that directly deducts management fees each quarter from client accounts C An adviser that has discretionary authority over client accounts under a limited power of attorney D An adviser that receives payments from clients at the time that services are rendered

The best answer is B. Taking custody means that the adviser is holding customer funds or securities or has the ability to access customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition. A limited power of attorney limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody.

Under NASAA rules, the "Brochure" must be: I provided to clients at least 48 hours prior to entering into a written advisory contractII provided to clients at least 48 hours prior to entering into an oral advisory contractIII filed with NASAA at least 48 hours prior to entering into a written or oral advisory contract A I only B I and II C II and III D I, II, III

The best answer is B. The Brochure Rule under NASAA rules requires that the brochure be given to customers 48 hours prior to entering into a written or verbal contract to provide advisory services. Alternatively, the customer can sign a contract without being given the "Brochure" as long as the customer can cancel without penalty within 5 business days of signing. There is no requirement to file the "Brochure" with NASAA 48 hours in advance. As a matter of fact, they already have a copy, since they have the Form ADV Parts 2A and 2B on file - that is the "Brochure" and "Brochure Supplement." Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!

An investment adviser receives a check from a customer made out to the adviser that the customer sent to the adviser inadvertently. This adviser will NOT have taken custody as long as it returns the check to the customer within: A 3 calendar days of receipt B 3 business days of receipt C 9 calendar days of receipt D 9 business days of receipt

The best answer is B. Under the NASAA custody rule, if an adviser inadvertently receives a check from a customer made payable to the adviser, the adviser will NOT be considered to have taken custody of customer funds if it returns the check to the customer within 3 business days of receipt. NASAA has another rule that states that if an adviser receives a check made out to a third party (not to the adviser) from a customer, as long as the adviser forwards it to the third party within 3 business days of receipt, the adviser will NOT be considered to have taken custody. Since these 2 rules are basically the same, it makes it easier to remember this for the exam!

Under NASAA rules, an: I agent is permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed II agent is not permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed III investment adviser representative is permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed IV investment adviser representative is not permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed A I and III B I and IV C II and III D II and IV

The best answer is B. Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in the gain or loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

Which of the following are permitted practices by an investment adviser under the NASAA Statement of Policy? I An adviser exercising discretion under verbal authority from a customer given 5 business days ago II An adviser placing an order to sell a position that is dropping rapidly in price without discretionary authority III An adviser selling all of a security position when the customer authorized the sale of only part of the position IV An adviser selecting the best time to sell a position when the customer authorized the sale A I and III B I and IV C II and III D II and IV

The best answer is B. A representative can exercise discretion over the time or price of a securities transaction without needing a discretionary authority from the customer. A representative cannot exercise discretion over the size of a trade or the security to be traded without discretionary authority from the customer, making Choice II unethical. Verbal discretion may be accepted from a customer under NASAA rules for up to 10 business days, at which point a written power of attorney must be obtained from the customer - so Choice I is permitted. Deliberately failing to follow the customer's instructions is also unethical - making Choice III unethical.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged both the advisory fee and a commission on each tradeII The account may not be charged an advisory fee and a commission on each tradeIII This is an unethical practiceIV This is not an unethical practice A I and III B I and IV C II and III D II and IV

The best answer is B. An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

A broker-dealer buys a large block of bonds into its inventory account at a discounted price. After holding the bonds for a period of time, prices for the bonds have risen. The broker-dealer then sells the bonds at the appreciated price to all of its customers that hold discretionary accounts. Which statement is TRUE? A This action on the part of the broker-dealer is unethical because the broker-dealer made a large profit on the transaction B This action on the part of the broker-dealer is unethical because it was not determined that the purchase was suitable for each discretionary account customer C This action on the part of the broker-dealer is unethical because prior customer approval was not obtained for the purchase made in each customer account D This action on the part of the broker-dealer is legal and permitted

The best answer is B. Broker-dealers are in the business of effecting securities transactions for their proprietary (trading) accounts and for accounts of customers. There is no problem with the broker-dealer buying the securities for its own account and then reselling them to customers at a profit - broker-dealers are in business to do just that. The problem is that the securities cannot simply be placed in all of the firm's discretionary accounts. In order to do so, it must first be determined that the transaction is suitable for each discretionary account customer.

Which statements are TRUE about lending money to a customer? I A broker-dealer can lend money to a customer as long as it complies with the provisions of Regulation T II An investment adviser can lend money to a customer as long as it complies with the provisions of Regulation T III A broker-dealer cannot lend money to a customer IV An investment adviser cannot lend money to a customer A I and III B I and IV C II and III D II and IV

The best answer is B. Broker-dealers are permitted to make loans to customers, where the customers' securities are collateral, as long as they follow the provisions of Regulation T of the Federal Reserve Board. On the other hand, investment advisers cannot make loans to customers, unless this is done through an affiliated entity that is a regulated lender, such as a parent bank or an affiliated broker-dealer.

A registered agent of a broker-dealer solicits a customer to buy ABCD stock. The customer is resistant to the sales offer. The agent would be permitted to: A assure the customer that, if the price of the security does not increase, he will buy back that security at the breakeven price plus interest B determine the customer's suitability for the investment and inform the customer that the security meets the customer's financial objectives and needs C offer to perform the transaction for the customer and refund any commission paid if the price of the security does not appreciate within a stated time frame D guarantee that if the customer buys this security, the agent will put him at the top of the list for the next "hot" issue that comes along

The best answer is B. Guarantees against loss by an agent to a customer are prohibited. Offering to refund commissions if the security does not appreciate is another, more limited, form of a prohibited guarantee. Of course, if the customer is resistant to a sales pitch, the agent can explain, one more time and with feeling, why the investment is appropriate for that customer!

A Registered Investment Adviser that is formed as a partnership has been in business for 15 years. They decide to merge with another investment adviser, in which they will have a 50% ownership interest. The RIA must: A pay a new filing fee to the State B have its existing clients sign an acknowledgment of the change of ownership C liquidate its customer accounts and complete a new account application for each customer D notify its customers of the change

The best answer is B. If the adviser is a partnership, any changes in the composition of the partnership must be told to customers; and if there is a change in the majority of the partners, the customer must sign a new advisory contract (since a majority change in a partnership is deemed to create a new business entity).

All of the following events would result in an advisory contract being considered to have been transferred EXCEPT: A a majority partner in the advisory firm dies B a minority partner in an advisory firm sells his interest to another individual C a controlling block of stock in the investment adviser is sold to another individual D the contract is pledged as collateral for a loan

The best answer is B. If there is an assignment of an advisory contract, then the customer must approve. A "so-called" involuntary assignment occurs if the adviser is a partnership and a majority of the partners are changed. Such an event would require the customer to sign a new contract. A minority of the partners being changed is not considered to be an "involuntary assignment." If the adviser is a corporation, a change in the majority ownership of the corporation would be an "involuntary assignment." Finally, if the contract is pledged as collateral for a loan - then legally, title is now being held by the person to whom the contract is pledged. This is another version of an "involuntary assignment" of the contract.

A customer wishes to buy 1 share of Walt Disney Company stock, which she intends to frame and give to her 6-year old nephew as a present. The stock is trading for $25 per share; however the commission for executing the trade will be $100 since this is an odd lot. Which statement is TRUE? A Prior to buying the share, the written permission of one of the parents of the nephew must be obtained B Prior to buying the share, the fact that the commission will be unusually high must be disclosed C Prior to buying the share, another customer must be located to buy the remaining 99 shares, so that a round lot of 100 shares can be traded D Prior to buying the share, the nephew must provide proof of identity so that the share can be registered in his name

The best answer is B. If there will be unusual charges for effecting a transaction, these must be disclosed to the customer. While this 1 share of stock only costs $25, the commission will be $100 - this is very high relative to the cost of the share and must be disclosed. Also note that in this scenario, the $100 charge seems reasonable, since it costs more to buy an "odd lot" than to buy a round lot of stock.

Investment advisers may be compensated: A based on a percentage of capital gains or losses in the account B based on a percentage of the value of all assets under management C based on the level of trading activity in the account D based on any of the above choices

The best answer is B. Investment advisers cannot be compensated based solely on capital gains achieved. The fee arrangement can be based on a percentage of all assets under management.

Which statements are TRUE about an adviser offering discounted rates? I An investment adviser is permitted to offer a discount from standard rates to selected categories of customers II An investment adviser is permitted to offer a discount from standard rates only if all customers are given the discount III The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable IV The investment adviser can offer the discount as long as the fact that discounts are offered is disclosed in the Form ADV Part 2A A I and III B I and IV C II and III D II and IV

The best answer is B. Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue additional business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount - for example, the discounted fee might apply only to members of a local Rotary Club; or the discount might only apply to customers that invest at least $200,000 with the adviser. The adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the Brochure") that is given to clients.

To get a customer to open an account, an agent tells a client that she will have the manager of any mutual fund that the customer purchases call each month to explain the fund's performance. This statement is: A acceptable B prohibited C allowed if the agent will arrange for the mailing of a statement to the customer each month D allowed if the agent will arrange for someone in the firm's research department to call each month

The best answer is B. It is a prohibited practice to make promises to customers that the agent cannot reasonably expect to honor. In this case, the agent has promised to have the mutual fund manager call the customer each month for any fund that the customer purchases. This is a promise that cannot be kept.

All of the following information must be recorded on an order ticket EXCEPT: A Customer name B Customer social security number C Order size D Execution Price

The best answer is B. Prior to entry of an order, the information required to be noted on the order ticket includes the customer name or account number; registered representative name or number; buy or sell; number of shares or bonds to be traded; description of the security to be traded and execution price. The time that the order was entered must be stamped on the order ticket (this can also be done electronically). There is no requirement for a customer address or customer social security number on an order ticket.

The portfolio construction most suitable for a pension fund seeking current income and safety of principal is: A Treasury bonds, General Obligation bonds and covered call writing B Treasury bonds, Corporate bonds and covered call writing C Corporate bonds, Time deposits and naked call writing D Treasury STRIPs, Corporate bonds and naked call writing

The best answer is B. Selling naked calls is risky; selling covered calls is a conservative income strategy with limited loss. Therefore, the best choice must either be A or B. General obligation bonds are tax-free Municipal bonds that yield less than taxable investments, such as Treasury bonds or Corporate bonds. Since the pension plan is tax-deferred, investing in these lower yielding investments is inappropriate; they are only appropriate for customers that are currently in high tax brackets. Therefore, the best choice is B - a portfolio of Treasury bonds, Corporate bonds and covered call writing.

A customer has a joint account with her husband. She discusses with you a specific NYSE stock in which she wants to invest. She wants to wait for it to move lower before making a purchase. One week later, the stock begins to rise in price and you try, unsuccessfully, to contact the customer. You are concerned that the stock may keep increasing in value, thereby losing an opportunity for your customer. Which action is appropriate? A Purchase the stock since this is what the wife expressed in the phone conversation with you B Purchase the stock upon verbal authorization from the customer's husband C Purchase the stock in your own account and transfer the shares to the customers' joint account upon her approval D Do nothing unless approval to purchase the shares is obtained from both the husband and the wife

The best answer is B. Since this is a joint account, both the wife and the husband can trade in the account. Thus, after obtaining authorization from the husband, you would be able to buy the shares of stock.

Under the Uniform Securities Act, investment advisory contracts: A can be oral B must be in writing C must include a clause that customer statements will be sent periodically D must give a complete description of the investment adviser's prior performance

The best answer is B. The Uniform Securities Act requires that investment advisory contracts be in writing. There is no requirement that customer statements be sent periodically unless the adviser takes custody of customer funds or securities (in which case, statements must be sent quarterly). There is no requirement to give a complete description of the adviser's prior performance in such contracts - this has no bearing on the contractual agreement.

A broker-dealer and its agent are registered in State A. The agent tells a customer in State A that he is prohibited from making an offer of a security in that State because the security is not registered in State A and the security is non-exempt. However, he tells the customer that he can accept an offer to buy that security from the client because then the transaction would be exempt. Which statement is TRUE? A There is no violation of Uniform State Law because the transaction will qualify for an unsolicited customer order exemption B There is a violation of Uniform State Law because the agent has made an offer to sell an unregistered non-exempt security in that State C There is no violation of Uniform State Law because the broker-dealer is registered in the State D There is no violation of Uniform State Law because the agent is registered in the State

The best answer is B. The agent and the broker-dealer are both registered in State A, so there is no problem with their making an offer of securities to customers in State A. However, the agent knows that he is prohibited from offering or selling unregistered non-exempt securities in the State. Non-exempt securities (such as common stock) must be registered to be offered or sold in the State. The agent cannot attempt to get around this by having the customer make an offer to buy those securities, calling the transaction "unsolicited" and therefore exempt. The way the law reads is that making an offer to sell, or soliciting an offer to buy, both constitute an "offer to sell" securities under the Uniform Securities Act.

An agent of a broker-dealer may: I increase a commission retroactively if a recommendation performs well II decrease a commission retroactively if a recommendation performs poorly III not increase a commission retroactively if a recommendation performs well IV not decrease a commission retroactively if a recommendation performs poorly A I and II B III and IV C I and IV D II and III

The best answer is B. The only fee that can be accepted is the original commission charged. It is prohibited to be paid based on the gains in a customer's account - so the commission cannot be increased retroactively for good performance. Similarly, a commission cannot be reduced retroactively if a recommendation performs poorly.

An investment adviser wants to charge a monthly fee to customers that engage in frequent options trading, equal to 6% of monthly options transaction volume. The adviser includes the options transaction fee in the brochure filed with the Administrator and discusses the fee with each customer that engages in options transactions. Which statement is TRUE? A The monthly options transaction fee can be charged to customers because it has been disclosed to both the adviser's customers and to the State Administrator B The monthly options transaction fee cannot be charged to customers because it is excessive C The charging of a monthly options transaction fee is permitted without restriction D The monthly options transaction fee is not permitted because such fees can only be charged quarterly or annually

The best answer is B. The overriding issue here is the fact that charging excessive fees is a prohibited practice - and a fee equal to 6% of options transactions is excessive. You could make an argument that because the fee was discussed with the customers and disclosed in the adviser's brochure, that makes it OK - but this is not the case.

Which of the following is the LAST step in opening a new account for a customer? A Completing the new account form B Executing the first transaction C The manager signing new account form D Completing the order ticket for first order

The best answer is B. The procedure to open a new account is to complete the new account form, qualifying the customer and then completing the first order ticket. The manager receives both of these and must approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

Which form(s) MUST be signed by the customer in order to open a margin account? A New Account Form B Hypothecation Agreement C Loan Consent Agreement D All of the above

The best answer is 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 - this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer. There is no legal requirement for the customer to sign a loan consent agreement (where the customer agrees to permit the lending of the securities held in the account to someone else who wishes to effect a short sale). The customer can choose to sign the loan consent; or can choose not to sign.

.A customer signature is needed to open a: A cash account B margin account C both of the above D neither of the above

The best answer is 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

Under the Uniform Securities Act, which statements are TRUE regarding investment advisers that take custody of customer funds? I The administrator must give written approval before an adviser can take custody of customer fundsII The administrator can require a higher surety bond for advisers that take custody of customer fundsIII Statements of account must be sent to customers whose assets are held in custody at least quarterly A I and II only B II and III only C I and III only D I, II, III

The best answer is B. There is no requirement for an investment adviser to get prior approval from the Administrator to take custody of customer funds. The Administrator may, by rule, prohibit advisers from taking custody; and can require a higher surety bond for advisers that do take custody ($35,000 instead of $10,000). If an adviser takes custody of customer funds or securities; account statements must be sent to the customer by the adviser at least quarterly.

The amount of commission charged to a customer to effect a securities transaction: I is not required to be disclosed prior to executing the transaction II must be disclosed prior to executing the transaction III is not required to be disclosed on the trade confirmation IV must be disclosed on the trade confirmation A I and III B I and IV C II and III D II and IV

The best answer is 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.

An investment adviser that claims that it is a "fee only" adviser could be compensated based on: I a percentage of assets under managementII a flat annual or hourly fee for all work performed for wealthy investorsIII 12b-1 fees paid by mutual fundsIV a performance based fee for wealthy investors

The best answer is 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 $1,100,000 under management or a net worth of $2,200,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it sells. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.

For an investment advisory contract, which of the following is true or possible? A Guaranteeing a client specific investment results B Assigning a contract without client consent C Sharing in the investment gains in a client account D Signing a waiver that the client is not required to be notified of any future investment adviser conflicts of interest

The best answer is C. Guaranteeing specific investment results is prohibited, as is assigning an advisory contract to another adviser without client consent. Sharing in the gains and losses of a customer account is prohibited, unless the client is wealthy (either a client with $1,100,000 of assets or $2,200,000 of net worth) - so this is "possible." Finally, a client cannot sign a waiver to any rights that are given under the law - such a waiver is a violation. The model rules under the Uniform Securities Act (and the Investment Advisers Act of 1940, as well) requires that customers be notified in writing of conflicts of interest. This requirement cannot be waived by having the customer sign a document permitting this. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)

An IAR meets with a client and enters into an agreement to provide advisory services. The IAR provides the customer with the adviser's brochure. After returning to her office, the IAR sees that the customer has failed to sign the contract and calls the customer from her office, stating that once she gets the contract signed, the adviser will allow her 2 days to withdraw from the contract and return her money if she is not happy. Which statement is TRUE about the IAR's actions? A The IAR's actions are in compliance with the requirements of the "brochure rule" B The IAR has violated NASAA rules because all customer signatures on advisory contracts must be made in the presence of a notary C The IAR has violated NASAA rules because the customer must be given 5 business days after signature to terminate the contract without penalty D The IAR has violated NASAA rules because the customer must be given the right to rescind for at least 30 calendar days from entering into either a verbal or written advisory contract

The best answer is C. Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochure at the time of contract signing, as long as the contract provides for a 5 business day period following signing where the customer can terminate without penalty. In this case, the customer did not sign the contract and when the IAR sends the contract back to the customer for her signature, the customer must be given 5 business days from that date to terminate without penalty! (Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!)

An agent has an individual account for a husband. The husband calls the agent and states that he wishes to open an account in his wife's name and buy 500 shares of PDQ stock. Which statement is TRUE? A The agent can open the account B The agent can open the account only if the husband gives authorization C The agent can open the account only if the wife gives written authorization D The account cannot be opened unless the wife orally approves

The best answer is C. A third party is prohibited from opening an account in someone else's name. The customer must open the account personally. A husband (Third Party) cannot open an individual account in his wife's name (Customer). To allow the husband to trade in her account, the wife must open the account and she must sign a Third Party Trading Authorization, giving the husband power of attorney over the account. Only the named customer can open an account; a third party cannot open an account for a customer. However, if the customer has given a full power of attorney in writing to a third party, then that third party would be authorized to open an account on that customer's behalf. The signed third party power of attorney would be required to be kept by the broker-dealer or investment adviser if this were to occur.

A Registered Investment Adviser charges a fee to customers based on a percentage of assets under management. The adviser invests customer funds solely in mutual funds that have a sales charge. Which statement is TRUE? A The only disclosure that the adviser must make to the customer is the asset management fee B The only disclosure that the adviser must make to the customer is the sales charge C The adviser must disclose to the customer both the management fee and sales charge to the customer D The adviser is not required to disclose to the customer neither the management fee nor the sales charge

The best answer is C. All fees associated with the management of a customer's portfolio must be disclosed to the customer by that customer's investment adviser.

Under the NASAA Statement of Policy on unethical practices, which of the following investment advisers would be able to loan monies where securities are collateral for the loan? I An investment adviser that has a registered broker-dealer that lends money to a customer through the broker-dealer affiliate II An investment adviser that is a subsidiary of a parent bank that lends money to a customer through the bank affiliate III An investment adviser that is a partnership lends money to a customer under the provisions of Regulation T of the Federal Reserve Board IV An investment adviser that is a corporation lends money to its officers A I and II only B III and IV only C I, II and IV D I, II, III, IV

The best answer is C. An investment adviser is not permitted to lend money to a customer, unless the investment adviser does so through an affiliated "regulated lender." An affiliated broker-dealer is regulated under Regulation T and can lend money to a customer; as can an affiliated bank. An adviser can lend monies to its officers or employees because they are not customers.

ACME Advisers has as a client, a large broker-dealer - ACCO Brokerage. ACME wishes to open an account to buy securities on margin at ACCO Brokerage. Which statement is TRUE? A This is prohibited because of the inherent conflict of interest B This is prohibited under the Uniform Securities Act C This is permitted because the broker-dealer is in the business of lending money on securities D This is permitted because investment advisers can arrange loans from any willing lenders

The best answer is C. An investment adviser is prohibited from borrowing money from a customer. However, if the customer is a bank or broker-dealer (these are persons who are in the business of lending money); the adviser may borrow funds in an arm's length relationship.

An Investment Adviser has developed a proprietary investment selection program that is based on a statistically validated and proven algorithm. The algorithm minimizes buy and hold investment strategies, and uses multiple data points to determine when to buy and sell the same security position intraday. The program has been tested and shown to produce consistent 20% returns. The Investment Adviser has a client base of around 100 individuals, with an average account size of $1,000,000. The clients range in age from 35 to 75. The Investment Adviser has discretion over these accounts and puts all of its clients into the automated trading program that it has developed. Why is this a violation of NASAA rules? A Because the use of automated trading programs is a violation of NASAA rules B Because automated intraday trading of securities will result in excessive trading and is a churning violation C Because the automated trading strategy has not been shown to be suitable for each of the Investment Adviser's clients D Because the Investment Adviser must register as a Broker-Dealer in order to implement an automated trading program

The best answer is C. Because the clients range in age from 35 to 75, they probably have very different investment objectives - and putting all of the clients into the same strategy without regard to each one's investment objective is the biggest violation here. Rapid-fire automated trading programs are most often based on using very low-cost executing brokers, so trading commissions are not as big a cost - but we don't know this from the question. Whether there is a churning violation would depend on the level of commissions charged. This could be another violation, but putting all the customers into the automated investment program without regard to suitability is the bigger violation.

Which of the following orders would be performed in a discretionary account? A A customer places an order to buy 100 shares of IBM at the best price available B A customer places an order to sell 100 shares of KO at the market C A customer places an order to buy 100 shares of any computer stock priced at under $40 D A customer places an order to sell 100 shares of GE when it gets to a certain level or lower

The best answer is C. 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.

An elderly client is visiting an Investment Adviser Representative (IAR) in the IA's office. He tells the IAR that he is going to have major surgery and is concerned about the safety of his stock certificates that he keeps at home in a small fireproof box. The Investment Adviser Representative wishes to help the client out. Which of the following should the IAR NOT do? A Drive the client to his house to retrieve the stock certificates and then take him to the bank used by the Investment Adviser where the client rents a safe deposit box in the client's name and deposits the securities B Ask the client for the name of his attorney and then call him to ask for his opinion of what should be done in this situation C Drive the client to his house to retrieve the stock certificates and then take him to the Investment Adviser's bank and place the certificates in the Investment Adviser's safety deposit box, making sure to write down all of the certificate numbers and other pertinent information D Drive the client to his house to retrieve the stock certificates and then take him to his bank where the client rents an existing safe deposit box and deposit the securities

The best answer is C. If the investment adviser were to put the certificates in its own safe deposit box, it would be taking custody, and all securities kept in custody must be kept by a qualified custodian - not by the IA. Taking the client to his bank, where he deposits the securities to his existing safe deposit box is OK. (Choice D). The client can rent his own safe deposit box at any bank - even the one used by the IA - so Choice A is OK. Calling the client's attorney for advice (Choice B) is fine as well.

In which situation is the investment adviser NOT exceeding the authority granted by the customer over the account, assuming that the adviser does not have discretionary authority? A Upon seeing that the price of a security that the adviser has purchased in 25 client accounts has started to drop precipitously, the adviser liquidates the position so that there is no loss to his clients B A customer has asked the adviser for a good recommendation and the adviser tells the customer that he will do some research and get back to him. When the adviser calls back the customer with the recommendation, the customer's wife answers the phone and says it is OK to buy that stock, so the adviser follows the wife's instructions C The adviser has received a note from the customer saying that he will be out of town for 1 week, and that he should take instructions during that time from the customer's attorney. The customer's attorney calls and says that he wants a position sold out of the account and the adviser follows the attorney's instructions D The manager of a mutual fund in which the adviser has placed all of his clients, is convicted of insider trading and is replaced by a new manager that the adviser does not like. The adviser sells the mutual fund holding and places his clients in another fund that has a similar investment objective

The best answer is C. In Choice C, the customer has given previous written authorization, so the adviser can take orders from the customer's attorney. In the other choices, the adviser has not received either verbal or written authorization from the customer to effect the trade.

Under the Uniform Securities Act, an Investment Adviser MUST inform a client about: I Change of address II Addition of new partners to the advisory partnership III Change of phone number IV Addition of client accounts from another advisory firm that was "bought out" A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is C. Investment advisers must inform their clients about a change of address or a change or phone number (this is common sense). It is also a requirement to inform clients about the addition of new partners to an advisory partnership. There is no requirement to notify customers of the addition of new advisory clients, since this has no impact on the customer.

Under the Uniform Securities Act, all of the following are requirements for advisory contracts EXCEPT: A the investment adviser cannot assign the contract to another adviser without the written consent of the customer B the investment adviser must notify the customer of any changes in the composition of the partnership, if the adviser is so structured C the investment adviser must notify the customer of its current standing as either a federal covered adviser or state registered adviser D the investment adviser cannot be compensated based on the performance of the securities held in the managed portfolio

The best answer is C. Investment advisory contracts, under State law, cannot base the fee on the performance in the account (unless the customer is wealthy). The fee can either be based on a percentage of assets under management; or can be a flat fee arrangement. Advisory contracts cannot be assigned to another adviser without prior customer consent. If an adviser is a partnership, any customer must be notified of changes in the composition of the partnership within a reasonable time after the change. There is no requirement for an adviser to disclose whether it is a federal covered or state registered adviser.

In which of the following situations has there been NO violation of NASAA rules? A An agent omits mentioning a material fact necessary to make a presentation about a security not misleading, but the customer decides not to buy the security B An agent misstates a material fact to a customer when recommending a security, and the customer buys that security and enjoys a profit C An agent makes a recommendation to a customer, disclosing all relevant information about the issue known to that agent and the customer buys that security and suffers a loss D Any of the above

The best answer is C. Omissions or misstatements of material fact necessary to make a sales presentation about a security are not misleading, they are fraudulent. It makes no difference if the customer decides to buy that security or not, based on that presentation. If all known relevant information is presented and the customer lost money, well, it's a shame that the customer lost money, but that does not make the offer fraudulent. Customers who buy securities are expected to understand that they might have losses instead of having the much more desired gains.

Regarding the use of material facts when effecting customer transactions, which statement(s) is(are) TRUE? I Omission of material facts is fraudulent II If all known facts cannot be presented, the agent must decide which facts are "material" and must be presented III Material facts must only be disclosed if they would have a negative impact on the security's value IV Material facts must be disclosed when making either an offer to buy or sell A I only B II and III C I, II, IV D I, II, III, IV

The best answer is C. Omitting material facts when effecting customer trades is fraudulent; agents must present all "material" facts about a transaction to customers; it makes no difference whether material facts might have either a negative or positive impact - they must be disclosed; and material facts must be disclosed when making an offer to buy or sell securities.

Which of the following is the MOST appropriate investment for an estate account? A Investment grade long term bonds B Long Treasury Bonds C Treasury Bills D Insured Municipal Bonds

The best answer is C. The objective of an estate account is to preserve principal and to effect a timely distribution of estate assets. The best investment of the choices offered is Treasury Bills - they are liquid and have little market risk. Long term bonds (the 3 other choices), even if they are liquid and safe, are subject to substantial market risk.

An agent of a broker-dealer may: A charge a fee for investment advice in addition to any commission charged if a recommendation performs well B increase the commission charged retroactively if a recommendation performs well C charge for clerical services where the charge is not based on performance D charge for clerical services if a recommendation performs well

The best answer is C. The only fee that can be accepted for executing a transaction is the original commission charged. A broker-dealer cannot charge separately for investment advice; any charge for investment advice is included in the broker's commission charge. Charges for clerical services are permitted as long as the charges are fair and reasonable and do not discriminate among customers. A broker-dealer cannot increase commission charges or clerical fees if the account performs well.

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

The best answer is 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 These 4 pieces of information must be used to independently verify the customer's identity (a requirement put in place after September 11th, 2001). There is no requirement for a customer phone number, though, honestly, how would an account be opened without a way to reach the customer? Actually, there might be a situation where a phone number is not needed - for example, an account opened for a military serviceman who is stationed overseas.

An investment adviser has been asked by many of his customers to help with preparation of their tax returns. The adviser does not have much experience with tax preparation. The adviser: A can take on the tax preparation work if he discloses his lack of competence to the client B can take on the tax preparation work if he educates himself in the applicable tax laws C should refer the client to a qualified tax preparer D can take on the tax preparation work if he includes this service in his advertising

The best answer is C. This adviser is not qualified to do tax returns. He should refer the clients to a qualified tax preparer. He or she can accept referral fees from the tax preparer for this, as long as this is disclosed to the clients. The wording in Choice B makes it almost a good choice, but "educating" yourself about the tax laws is not the same as being qualified. If Choice B said instead that this adviser studied and passed the CPA exam, then this would be a good choice.

All of the following actions by an investment adviser are violations of the Uniform Securities Act EXCEPT the adviser: A makes misleading statements to a client, but the client profits from the advice B makes misleading statements to a client, but no transaction results from the advice C discloses the risks of the investment, but the client loses as a result of the advice D makes misleading statements to a client, but the client is an accredited investor

The best answer is C. This is a common sense question. Making misleading statements to a customer is an unethical practice. Choice C is a fine, ethical practice - a client should be informed of the risks of an investment; and if the investment results in a loss - oh, well, - the customer knew what he or she was getting into!

An agent of a broker-dealer has a customer that is a loan officer at ACME Savings and Loan. The agent is purchasing his first house and needs to get a mortgage. The agent only has 10% for a down payment and ACME Savings and Loan only gives mortgages with a 20% down payment. The loan officer wants to make sure that the loan is approved and offers to lend the agent the 10% extra needed for the down payment as a personal loan, as long as the agent agrees in writing that the loan will be repaid with interest within 10 years, plus if the house is sold during this time, the loan officer will get 10% of any gain on the house. This agreement is: A permitted because the loan officer is sharing in profits if the house is sold in an amount that is proportional to the capital that he committed for the purchase of the house B permitted because the loan officer is an existing customer of the agent C prohibited because the agent is borrowing money from the customer D permitted because the customer is a loan officer of a bank

The best answer is C. This is a personal loan from a customer. The exception that allows agent to borrow from customers that are lending institutions applies when the loan to the agent is being made by the lending institution to the agent on the same terms that is gives to anyone else; it does not apply to loans made by employees of lending institutions.

Which of the following information MUST be recorded on an unexecuted order ticket where the trade has been canceled? I Time of execution II Time of receipt III Time of cancellation IV Solicited or unsolicited A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. Time of order receipt is recorded on the order ticket, as is time of order cancellation, if the trade is canceled. Since the trade was not executed, there can be no time of execution recorded. The account name and/or number must be on the order ticket and it must be recorded whether the trade was solicited or unsolicited.

An elderly widow, age 81, is seeking to supplement her retirement income with an investment that will provide income that will grow with inflation. Which statement about variable annuities could be made to this client? A "A variable annuity is guaranteed to give a rate of return that matches the inflation rate" B "A variable annuity is backed by the investment assets of the insurance company, which are always growing" C "A variable annuity will give a rate of return that closely matches the performance of the mutual fund that you select" D "A variable annuity will give a rate of return that is adjusted each year by the growth in the CPI"

The best answer is C. Variable annuities give a rate of return that is tied to the performance of the underlying mutual fund shares held as the asset that will fund the annuity. Thus, Choice C is a true statement. The backing for the variable annuity is the mutual fund shares held in a separate investment account - the annuity is not funded by the insurance company's general investment account. The rate of return may or may not match the inflation rate and the rate of return is not CPI (Consumer Price Index) adjusted.

All of the following orders must be retained as a record by broker-dealers EXCEPT: A executed orders B unexecuted orders C canceled orders D subscription orders

The best answer is D. 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. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

Under NASAA rules, which of following are unethical practices when recommending a mutual fund to a customer? I Recommending a letter of intent if the customer does not have the immediate funds to reach a breakpoint II Not disclosing to a customer the sales charge discount if a purchase is made at the breakpoint level III Not disclosing to a customer that dividends can be automatically reinvested without any sales charge imposed IV Recommending the purchase of shares which results in the customer simultaneously holding shares in different investment company portfolios with similar investment objectives A I and III B I and IV C II and III D II and IV

The best answer is D. If a customer is getting "close" to the purchase amount needed to qualify for a breakpoint (a reduced sales charge), it is unethical under NASAA rules not to make the customer aware of the relevant sales charge discount on the purchase of shares in dollar amounts at or above the breakpoint. Thus, the agent must tell the customer the amount of any additional investment needed to qualify for the next breakpoint. Furthermore, the customer must be made aware of any letter of intent (LOI) feature that can be used to reduce the sales charge (the LOI gives the customer 13 months to complete the breakpoint). A way that an agent could maximize his or her compensation would be to recommend that the customer buy mutual fund shares with similar objectives in different fund families, so that the customer does not reach a breakpoint (Choice IV). This is an unethical practice. There is no requirement to make the customer aware of automatic dividend reinvestment when recommending mutual funds.

An investment adviser may be compensated with which of the following? I Wrap fees charged to customers for all services rendered by the adviserII Soft dollars paid by an executing broker to the adviser in return for trades sent to the broker by the adviserIII 12b-1 fees paid by a mutual fund to the adviser based on annual net assetsIV Commissions paid to an affiliated broker-dealer on trades recommended by the adviser A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is D. Investment advisers can collect wrap fees. This is a flat annual fee covering all services rendered, including recommendations, asset allocation and trade execution - so all services are "wrapped" into a flat annual fee. Investment advisers can receive "soft dollar" compensation. In return for directing full commission trades to an executing broker, the executing broker gives the adviser research, recommendations, trading algorithms, and similar items of value. The SEC permits these "soft dollar" items to be given by the broker-dealer to the adviser as long as they ultimately benefit the adviser's investors. Investment advisers can receive 12b-1 fees. These are flat annual fees paid by mutual funds to brokers and advisers that place customers in the fund. The 12b-1 fees are used to attract new investment in the fund. The typical fee is .50% of assets under management annually, paid by the fund to the broker or adviser. These mutual fund share purchases have no up-front sales charge. Investment advisers cannot take commissions on trades that they do, but they can direct their trades to an affiliated broker-dealer for execution. The affiliated broker-dealer is permitted to charge commissions. Also note that such an arrangement is a conflict of interest that must be disclosed to the customer at the time of entering into the advisory contract.

Under the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain all of the following EXCEPT: A person connected with the Investment Adviser who recommended the transaction to the client B person who placed the order C date of order entry D time of order execution

The best answer is D. Order ticket information required for investment advisers is different than that required for broker-dealers. The IA writes an order and sends it to a broker-dealer or bank for execution. The IA must keep a record of the order as it was sent; the IA does not keep the record of the actual execution of the order - this is the responsibility of the executing broker-dealer. The record must contain the terms and conditions of the order; name of the person at the IA who recommended the transaction; name of the person who placed the order; date of order entry; name of account for which order was entered; name of broker-dealer or bank to which the order was sent for execution; and whether the order was discretionary.

An investment adviser is considered to "take custody" of funds or securities from a customer if it: A exercises discretionary authority by placing trades of securities for that customer B accepts a check from the customer made payable to the fund custodian to buy a mutual fund C accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D is appointed as trustee for a customer's trust account under a legally binding trust document

The best answer is D. Taking custody means that the adviser is holding customer funds or securities. The securities must either be held in customer name, or held in adviser name, with the adviser being the trustee for the customer. Thus, if the adviser is appointed as trustee over the customer's account, custody has been taken. Exercising discretionary authority limited to trading only and accepting commissions are not "taking custody." Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

A customer calls his agent on Friday after the markets have closed and tells him to sell his position in XYZ stock when the market opens on Monday. The customer is holding the XYZ shares at his home, but is leaving tomorrow on a 2 week vacation. The customer asks the broker to come over to his house tonight to pick up the securities. Under the Uniform Securities Act, the agent should: A have the customer execute a stock power before taking custody B put the stock in his personal safe deposit box over the weekend C tell the customer to wait until he returns from the vacation to execute the trade D not take custody of the securities but should have the customer send the securities directly to the brokerage firm by registered mail or delivery service

The best answer is D. Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take these customer securities into his possession - this is a violation. He can have the customer send them directly to the broker-dealer for delivery on the sale, however.

In order for an agent to share in the gains and losses of a customer's account, all of the following statements are true EXCEPT the: A client must approve in writing B agent must approve in writing C broker-dealer must approve in writing D agent cannot invest any of his own funds into the account

The best answer is D. Agents are prohibited from sharing in the gains and losses of a customer's account unless there is a written agreement between the customer and the agent which has been approved by the broker-dealer; and the agreement specifies that sharing in gain and loss is proportionate to the capital contribution of each participant in the account.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices are prohibited? I Guaranteeing a client against loss for non-exempt securities II Guaranteeing a client against loss for exempt securities III Borrowing money or securities from a customer IV Lending money or securities to a customer A I and II B III and IV C II, III, IV D I, II, III, IV

The best answer is D. Agents may not personally guarantee a customer's account against loss, regardless of the securities being exempt or non-exempt. Borrowing money or securities from a customer; or lending money or securities to a customer; is a prohibited practice.

In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed in writing EXCEPT: A that the fee arrangement may create an incentive for the adviser to make investments that are riskier B that the fee arrangement is based on both unrealized appreciation and realized capital gains C the nature and significance of any index used as a comparative measure and the reason why the adviser believes that any comparative index used is appropriate D that the fee computation can be based on periods ending no earlier than the last day of each calendar quarter

The best answer is D. Before entering into an advisory contract that charges a performance fee, the adviser must disclose in writing: that the fee arrangement may create an incentive for the adviser to make investments that are riskier; that the investment adviser will get compensation based on both unrealized appreciation and realized capital gains; the basis for valuing any illiquid investments used in computing unrealized appreciation; the periods that will be used to measure performance and their significance to the computation of the fee; and the nature of any index used as a comparison of investment performance, the significance of the index, and the reason why the adviser believes the index is appropriate. Any fee calculation must cover minimum periods of 1 year; the fee cannot be computed and charged quarterly.

Which statement CAN be made to a customer under the provisions of the Uniform Securities Act? A "If you purchase 20 year 6% Treasury Bonds at par, you are guaranteed to earn a 6% yield on the investment" B "You should buy ABCD common stock now at $20 per share because it will go up to $35 per share once it publishes its next quarterly earnings report" C "This REIT pays a 4% dividend. Buying it now means that you will receive the next scheduled dividend payment that will be made in 1 week" D "Your investment portfolio needs to be rebalanced - you have appreciated stocks that should be sold, with the proceeds invested in long term corporate bonds"

The best answer is D. Choice A is prohibited because the 6% return is only guaranteed if the customer holds the bond to maturity. If the bond is sold prior to maturity, the market value at the time of sale can result in either a gain or loss on the bond that will change the yield. Choice B is prohibited because the agent is predicting a future price for the stock - and no one knows what the future price of a stock will be! Choice C is the prohibited practice of "selling dividends" - that is, inducing a customer to buy stock in order to receive a dividend. If the customer waits until after the "ex-dividend date" to buy the stock, the price is reduced for the dividend that the customer will no longer receive - so the net effect is a "wash." Choice D is just fine - telling a customer that his or her portfolio should be rebalanced (as long as the statement is truthful) is probably good advice.

Which of the following must be included in an investment advisory contract under NASAA rules? I The formula for computing the advisory feeII The amount of prepaid fees to be returned if the contract is terminated earlyIII Whether the contract grants discretionary authority to the adviserIV Disclosure that the fee for managing equity securities may be higher than for managing fixed income securities A I and II only B III and IV only C I, II, III only D I, II, III, IV Review

The best answer is D. Consider this to be a learning question. The advisory contract, under NASAA rules, must include: Description of services provided; Term of contract; Formula for computing fees; Amount of prepaid fees to be returned if contract is terminated early; Assignment of the contract is not permitted unless the customer approves; Whether the contract grants discretionary authority to the adviser; and Disclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.

A customer buys 500 shares of ABCD stock in a cash account and pays for the securities in full on settlement date. The customer requests that the broker-dealer transfer the securities into the customer's name and ship them to his home address. Which statement is TRUE? A This request cannot be honored because equity securities are only issued in book-entry form B This request cannot be honored because all customer securities must be held in a depository C This request cannot be honored unless the customer makes it in writing D This request should be honored as given

The best answer is D. Fully paid customer securities can either be held in custody of the firm (where they must be segregated and kept in safekeeping); or the customer may request that the securities be transferred into his or her name and shipped to the customer. Note that securities held in margin accounts cannot be transferred and shipped - they are kept in "street" name as collateral for the customer margin loan. There is no requirement for such a request to be made in writing.

A customer wishes to open a margin account at a broker-dealer. The customer provides all of the necessary information to open the account, but refuses to sign the margin agreement when the agent gives it to the customer. Which statement is the correct course of action to be taken? A The firm should approve the opening of the account since the customer provided all of the necessary information B The agent should have the customer sign a waiver, obviating the need for the customer to sign a margin agreement C The agent should sign the customer's name to the margin agreement, since all of the necessary information has been provided by the customer D The account cannot be opened because the customer did not sign the margin agreement

The best answer is D. If a customer refuses to sign a margin agreement, then a margin account cannot be opened. When the agreement is signed, the customer is legally pledging the securities in the account to the broker-dealer as collateral for the margin loan made from the broker-dealer to the customer. Unless this agreement is signed, the broker-dealer cannot make the loan!

Under the Uniform Securities Act, if an investment adviser wishes to take custody of customer funds or securities, it MUST: A notify each customer of the location where the funds are held no later than on the first account statement sent to the customer B submit to an annual audit conducted on a random basis by the Administrator C perform a quarterly physical count of securities and funds held and reconciliation with the adviser's records D hold the assets in either a bank or brokerage account where the adviser is the trustee acting for the benefit of the customer

The best answer is D. If an adviser wishes to take custody, it must give prompt notice to the customer of the qualified custodian's name and address - notice given on the first quarterly account statement is not acceptable. The annual audit is performed by an independent certified accountant, not by the Administrator. The physical count of securities and funds must be performed annually, not quarterly, by the independent certified accountant. Finally, the securities and funds must be held either in a separate account under client name or in a trust account where the adviser is the trustee for the client.

Which of the following is (are) prohibited in a margin account? A A customer buying a security without the intention to pay on settlement B A customer selling a security without the intention to deliver on settlement C A customer selling short a security that cannot be borrowed and delivered on settlement D All of the above

The best answer is D. In any account, whether it be a cash or margin account, a customer cannot buy a security without intending to pay on settlement, and cannot sell a security without intending to deliver on settlement. Short sales can only be effected in a margin account. Selling short a security means that the security to be sold is borrowed from another customer of the broker-dealer. A short sale is not permitted unless it is first determined that the security to be sold can be borrowed and delivered by settlement.

An investment adviser wishes to offer all of the medical professionals at a local hospital a reduced advisory fee in the hopes of attracting new assets to manage. Which statement is TRUE about an adviser offering discounted rates? A The investment adviser is permitted to offer a discount to any potential customer in order to attract new business B The investment adviser is not permitted to offer the discount unless the Administrator is notified that a discount may be offered C The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable D The investment adviser can offer the discount as long as the fact that non-medical professionals that are unaffiliated with the hospital pay a higher fee is disclosed in the Form ADV Part 2A

The best answer is D. Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue group business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount (in this case, they must be medical professionals at the hospital); and the adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the brochure") that is given to clients.

Which of the following statements may be made by an agent about a new securities issue that is being registered by filing? A "Because these securities are being registered by an issuer that has previously filed in the state, you are guaranteed that the issue is safe" B "Once registration is effective, this means that the Administrator has approved of the offering" C "Registration of the issue in the State guarantees the safety of your investment" D "The security is being registered in the State"

The best answer is D. Making untrue or coercive statements is a violation of the Act. Stating that the security is registered with the State is true. Stating that "you are guaranteed" or "Administrator approved" are either untrue or coercive and are prohibited.

Under NASAA rules, within 120 days of fiscal year end, each customer must be sent a(n): A brochure B updated brochure C brochure and brochure supplement D an updated brochure and brochure supplement

The best answer is D. NASAA rules require that within 120 days of fiscal year end, the adviser must send each customer a revised Brochure (Form ADV Part 2A) and Brochure Supplement (Form ADV Part 2B) if there are material changes. Instead of sending the entire Brochure, the adviser can simply send the "Summary of Material Changes" section to the Brochure, along with an offer of the revised Brochure. Also note that this annual procedure is not required if there are no material changes to the Brochure.

All of the following are violations of the "suitability" rule EXCEPT: A recommending speculative common stocks to a customer who has income objectives B recommending to a customer who is 3 years from retirement that he get a second mortgage on his home to invest in growth stocks C recommending trades of excessive size to a customer D recommending municipal bond funds to a customer who seeks income that is exempt from Federal income tax

The best answer is D. Since municipal bonds offer income that is exempt from Federal income tax, they would be suitable for a customer seeking tax free income. Recommending speculative stocks to a customer with income objectives is unsuitable; recommending that a customer mortgage his house to invest in growth stocks when he will need retirement funds soon is unsuitable (and unethical); and recommending trades that are beyond a customer's financial capacity is unsuitable.

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: A restricted for 30 days B frozen for 30 days C restricted for 90 days D frozen for 90 days

The best answer is D. The Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required "promptly," but no later than the 4th business day past trade date. If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 4 business days from trade date.

The wife of a customer who maintains an individual account with your firm telephones, and states that they are short of money, and that they will not be able to pay for the most recent securities purchase in the account. The securities have appreciated substantially since trade date, and the trade settles in 3 business days. The wife tells the agent to liquidate the position. Which actions by the agent are NOT allowed? I The agent may arrange for a loan to the customer of the money needed to purchase the securities II The trade may be canceled III The agent may sell the securities in the account; and may send the customer a check for the profit when that trade settles IV The agent may sell the securities in the account; but cannot send the customer a check for the profit until the original purchase is paid A I and II only B III only C III and IV only D All of the above

The best answer is D. The wife has no authority over the husband's individual account. The wife would only be permitted to effect transactions in the account; or draw checks from the account; if the husband had given the wife authorization to do so in writing. This is not the case, so the agent cannot follow the wife's instructions to liquidate the transaction. The agent cannot arrange for a loan to the customer - lending money to customers is prohibited under State law, making choice I prohibited. The trade cannot be canceled. All trades are binding on the customer, making choice II prohibited. The agent cannot sell the securities in the account at a profit. To do so would require that instructions be given directly by the husband to this effect; or the instructions would have to be given by someone with written trading authorization. Thus, choices III and IV are also prohibited.

A retired 81 year old customer has $36,000 of annual income from a pension and social security. She has no investments other than a fully-paid home worth $120,000. She has just inherited $75,000 that she would like to invest for supplemental monthly income with minimum default risk. The BEST recommendation is for the customer to purchase: A AAA rated municipal bonds B a variable annuity C whole life insurance D U.S. government bonds

The best answer is D. This customer is past her life expectancy, so she is not insurable, making Choices B and C incorrect. She only has $36,000 of annual income, so she is in a low tax bracket, making tax-free municipal bonds an inappropriate investment. U.S. Government bonds give a higher (taxable) yield than municipals, but since she is in a low tax bracket, she will keep more of the return "after-tax." And they are a top credit, so there is minimum default risk.

An adviser is permitted to exercise discretion over a customer account when such trades: A are not too frequent in the account B are not too large relative to the amount of capital in the account C are effected only after new funding is placed in the account D occur under a written power of attorney

The best answer is D. To exercise discretion in a customer account, an investment adviser must have a written power of attorney. Note that such written power is needed for the adviser to select the security to be traded or the amount to be traded. No written power of attorney is needed to select price or time in a securities transaction.