Series 63: Ch 5 Q&A

A client and an agent are close personal friends. The client places an order for a new issue of stock that the agent's firm is underwriting. The client does not have enough money to pay for the stock on the settlement date. The agent deposits enough of her own funds in the client's account to cover the shortfall, which the client pays back within five business days following settlement. Which of the following statements is TRUE? - Since the loan was repaid within five business days following settlement, this is not a violation of the Uniform Securities Act - Because the agent extended the loan as a friend and not as an agent of the broker-dealer, this activity is acceptable - This may be undertaken only if the broker-dealer grants permission in writing prior to settlement of the trade - This is not an acceptable practice

- This is not an acceptable practice Under the Uniform Securities Act, this is never acceptable. It is considered an unethical practice for agents to engage in the practice of lending to or borrowing money or securities from a customer.

A client wants to invest a rollover from a 401(k) account into an IRA upon retiring. Which of the following choices would be the most suitable recommendation? A large-cap stock fund A balanced fund Treasury bonds An annuity

A balanced fund A person who has just retired is presumably seeking income. However, it may be advisable to invest a portion of her assets in growth-oriented investments as well since she may be retired for 20 to 30 years. Of the choices given, a balanced fund, which invests in both stocks and bonds, is the best answer. A balanced fund would provide the investor with both income and capital appreciation because it invests in both stocks (appreciation) and debt securities (income). A large-cap stock fund, choice (a), would provide capital appreciation, but probably little income. It would also be risky. Treasury bonds, choice (c), would provide safety and income, but little appreciation. An annuity, choice (d), would probably have a surrender period and high expenses. Additionally, the annuity provides tax-deferred income. Therefore, buying an annuity in an IRA or other tax-deferred account would be counter-productive.

A new client approaches an agent regarding opening a new account but refuses to discuss his financial status. The agent should: - Sell any type of securities - Accept only unsolicited orders until more information is known - Not open an account for this individual - Sell only high-grade securities

Accept only unsolicited orders until more information is known An agent may not solicit orders from a client when no information about the client's financial status is known.

A high-ranking executive wants to sell his shares of his company's stock. The company is about to announce its quarterly earnings. The executive may sell this stock: - After the company issues a press release stating its earnings - Before the company issues a press release stating its earnings - If permission is received from the Administrator - Under no circumstances

After the company issues a press release stating its earnings The executive will need to wait until after the company has publicly announced its earnings and the information has been disseminated to investors. Otherwise, he risks being charged with insider trading. Insider trading is defined as selling or buying securities based on nonpublic material information. Earnings are material information, which the executive is likely to be privy to before being announced to the public. Once the company issues the press release, the information is public, and the executive may sell his shares. Note that many companies have internal policies forbidding their executives from trading in their companies' shares for a period beginning a month or so before earnings are announced and ending a few days after the information is released

Which of the following actions are dishonest and unethical practices if committed by an agent or investment adviser representative? I) Telling clients that exchange listing of a security is anticipated, without knowledge of the truth of such a statement II) Providing inaccurate market quotations, such as a bond is yielding 10% when it really is yielding 1% III) Failing to inform a client of larger-than-ordinary commissions on a transaction IV) Compensating an investment adviser on the basis of a share of capital gains I and II only I, II, and III only II, III, and IV only I, II, III, and IV

All of the items listed are considered dishonest and unethical

An agent handling a client's account may share in the profits or losses as long as all of the following conditions are met, EXCEPT: - The client has approved of it in writing - The broker-dealer employing the agent has approved it - The client and agent have a mutual agreement as to the proportion of profits and losses the agent will share - The agent may only share in direct proportion to the amount the agent has contributed to the client's account

An agent is permitted to share in the profits or losses of a client's account if the client has approved of the arrangement in writing (joint account papers must be signed), the broker-dealer employing the agent has approved of the arrangement in writing, and the gains and losses shared are in direct proportion to the funds contributed. (Answer: C)

An investment adviser may exercise discretion for ____ period of time, if provided with oral authorization

An investment adviser may exercise discretion for __[10 days]__ period of time, if provided with oral authorization

What information must be disclosed to a client when she does a trade with a broker-dealer? The brochure or Form ADV A prospectus Any excessive fees The reason the trade was suitable

Any excessive fees A broker-dealer or agent of a broker-dealer is always required to notify a client if the fees that she is going to be charged are excessive or out of the ordinary. Only investment advisers are required to provide Form ADV Part 2 or a brochure, and a prospectus is required only in the primary market, not when trading stocks on an exchange. While all recommendations should be suitable, there is no requirement to explain in advance why each trade is suitable

Under the Uniform Securities Act, which of the following choices is NOT disclosed in an investment advisory contract? - Any other states in which the investment adviser is registered - The manner in which the advisory fee will be computed - A provision disallowing the investment adviser to assign the contract to another party without client consent - A provision prohibiting the investment adviser from being compensated based on a share of capital gains

Any other states in which the investment adviser is registered

If a broker-dealer transfers a customer's securities into the firm's trading account, the firm is guilty of: Parking Commingling Coordinating Asset allocation

Commingling Under the Uniform Securities Act, broker-dealers are prohibited from commingling client securities with the firm's securities. Broker-dealers *may* commingle clients' cash with the firm's cash. Investment advisers *may not* commingle either client's cash or securities with their own. Customer securities *may not* be commingled with broker-dealer securities, even if the stock is all held in street name.

mutual fund may be described as a no-load fund only if the fund has no: I) 12b-1 fees in excess of .25% of the fund's average annual net assets II) 12b-1 fees in excess of .50% of the fund's assets under management III) Front-end loads IV) Back-end loads I only I and III only I, III, and IV only I, II, III, and IV

I, III, and IV only According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices in Connection with Investment Company Shares, a no-load fund may not have any sales charges (loads). It is also prohibited from charging 12b-1 fees that are greater than twenty-five basis points (.25%) of the fund's average annual net assets

A client has a $5,000,000 account with an objective of income only. Under the Uniform Securities Act, an agent who has discretionary authorization for the account could: - Not buy a speculative stock without the client's approval - Speculate with 5% of the client's assets - Speculate with any amount that could be reasonably justified - Not purchase equities in the account

Not buy a speculative stock without the client's approval Regardless of the account size, any amount of speculative investing would be inappropriate in an account with an objective of income only.

Under the Uniform Securities Act, a person who sells securities in violation of state securities law is civilly liable for which TWO of the following penalties? Fines Interest Punitive damages Attorney fees

Fines & Attorney fees A person who sells securities in violation of state securities law is civilly liable for principal, interest, reasonable attorney fees, and court costs.

A client may bring civil action if: I) An agent is not registered II) An offer is made but no sale occurs III) Misleading statements are made and the client relies on those statements to make a purchase IV) Client securities are commingled with other client securities I and III only II and IV only I, II, and III only I, II, III, and IV

I and III only Any individual may sue in the civil courts, but *civil liability is limited to monetary damages*. In choice (II), an offer is made, but no sale occurs, so damages cannot exist. Therefore, a client could not sue in civil court for damages. An Administrator has jurisdiction over the offer, and could still act. Under state securities law, the broker-dealer and the agent must be registered in all the states in which the agent transacts business. If an agent makes misleading statements and a client purchases a security, the client could sue for damages on the grounds that he was misled. *Broker-dealers may commingle client securities, but not client and broker-dealer securities*.

A broker-dealer is registering a new issue with the Administrator of State A. What information must be sent to the Administrator? I) The number of shares II) The Articles of Incorporation III) The financials IV) The tax identification number filed with the IRS I only II and III only I, II, and III only I, II, III, and IV

I, II, and III only This is an example of the detailed nature of the examination. You are expected to know that the number of shares, the issuer's financial information, and Articles of Incorporation (the charter) generally are all required by the states. A tax identification number is not required by the Administrator.

A no-load mutual fund has no: I) 12b-1 fees II) Front-end sales charges III) Contingent deferred sales charges I only I and II only II and III only I, II, and III

II and III only A no-load mutual fund may not have any front-end sales charges (loads) or any contingent deferred sales charges (back-end loads). It may have a 12b-1 fee as long as this fee does not total more than .25% of the fund's *average annual net assets*.

An agent inadvertently sold an unregistered, nonexempt security to a client. Under the Uniform Securities Act, which of the following actions may be taken? I) Getting the security registered as soon as possible II) Buying the security back from the customer III) Paying the customer the maximum legal rate of interest, less dividend or interest income received from the date of purchase I and II only I and III only II and III only I, II, and III

II and III only If an agent discovers that she has inadvertently sold an unregistered, nonexempt security to a customer, the agent may offer to repurchase the security from the customer through a letter of rescission and pay the customer the maximum legal rate of interest less dividend or interest income received from the date of purchase. *The customer must respond to the letter of rescission within 30 days or the customer waives the right to sue*.

According to the Uniform Securities Act, a security is said to be guaranteed as to: I) Prevention of investment loss II) Interest III) Dividends IV) Principal I only I and IV only II and IV only II, III, and IV only

II, III, and IV only Under the Uniform Securities Act, by definition, the term guaranteed refers to a security for which payment of dividends, interest, and principal are guaranteed. For example, the U.S. Treasury guarantees the interest on the bonds it issues. A utility can also guarantee payments of dividends on its securities, though, of course, if the utility goes bankrupt, the guarantee does not mean much. This is a definitional term only. Do not confuse this with guaranteeing a customer profits or something similar.

Which of the following brochure delivery periods applies to investment advisers under the Uniform Securities Act? - If an ADV or brochure is not provided, clients must be given 10 days to rescind the contract - Clients must receive the adviser's brochure or ADV Part 2 five business days prior to signing a contract or the client has 48 hours to cancel without penalty - If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty - Clients must receive the adviser's brochure or ADV Part 2 at least 48 hours prior to signing a contract in order to rescind

If an ADV or brochure is not provided at least 48 hours prior to signing the contract, clients must be given five days to rescind without penalty Under the Uniform Securities Act, all clients must receive the adviser's brochure or ADV Part 2 no later than the time they enter into an agreement with the adviser. If the client is not given an ADV Part 2 or brochure at least 48 hours before signing the contract, then the contract must specify that the client has five days to rescind the contract.

Which of the following statements about a cease-and-desist order is NOT TRUE? - It is issued when or before a violation has occurred - It must have been issued by the SEC - It must have been authorized by the Administrator - It may be issued against anyone who is engaging in activities prohibited by the Uniform Securities Act

It must have been issued by the SEC Administrators will authorize a cease-and-desist order if they believe a violation of the Act is about to occur or if the Act has already been violated. The order does not need to come from the SEC.

A client buys unregistered securities at the suggestion of an agent. The agent has the client sign a waiver as to the noncompliance of the transaction with law, absolving the agent of any wrongdoing. The waiver the client signed is: Acceptable Acceptable with the Administrator's approval Null and void Subject to civil liability and criminal penalty

Null and void Clients may not sign waivers absolving agents from wrongdoing. Such statements are sometimes called exculpatory clauses. These waivers would be null and void under the Uniform Securities Act.

True or False: A broker-dealer may require that a client pay for securities purchased by settlement date instead of payment date

True A broker-dealer may require that a client pay for securities purchased by settlement date instead of payment date

Define Agent

Under the Uniform Securities Act, agent means any individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. However, excluded from the definition is an individual who represents an issuer in effecting transactions in certain exempt securities or who represents an issuer in an exempt transaction.

A customer's investment objectives are capital preservation and current income. The agent recommends that the client purchase an S&P 500 Index fund. The agent then advises the client to sell shares in the fund every two weeks to generate income. According to NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents, the agent's recommendations represent: Churning Unauthorized trading Unsuitability Front-running

Unsuitability An S&P 500 Index fund is not a suitable investment for someone whose investment objectives are *capital preservation and current income*. Arguably, the agent has also churned the account, choice (a), by advising the client to sell shares in the fund every two weeks, that should otherwise be a long-term investment. However, choice (c) is the best answer here since the fund was not a suitable recommendation in the first place. Choice (b), unauthorized trading, takes place when an agent places an order from a client without permission. Choice (d), front-running, is an illegal practice where an agent buys or sells a security hoping to benefit from a large order placed by a client.

An agent has willfully violated a provision of the Uniform Securities Act. If the agent can prove she had no prior knowledge of the rule violated, which of the following choices is the maximum penalty? No maximum penalty $5,000 fine and three years in prison $10,000 fine and five years in prison $5,000 fine

$5,000 fine The maximum criminal penalty is a $5,000 fine and three years in prison. Under the Act, there can be no prison sentence imposed if the person can prove she had no prior knowledge of the rule

An investment adviser representative is reviewing the account of two clients, a husband and wife in their 70s who are retired. Their investment profile indicates that they have an annual income of less than $30,000 per year, which consists of a small pension and Social Security benefits. They have investable assets of $225,000. Which of the following investment allocations should the IAR recommend? - 30% domestic equities, 30% domestic fixed income, 30% international equities and fixed-income securities, and 10% cash - 10% domestic equities, 40% domestic fixed income, 40% international equities and fixed-income securities, and 10% cash - 50% domestic equities, 0% fixed-income securities, 0% cash, and 50% international equities - 25% domestic equities, 5% international equities, 60% domestic fixed-income securities, and 10% cash

- 25% domestic equities, 5% international equities, 60% domestic fixed-income securities, and 10% cash Considering the customers' ages and limited incomes, investing a greater portion of their assets in bonds and cash is prudent. The fixed-income securities will provide additional income, while the equities will provide the potential for growth. One rule of thumb used by many professionals is to subtract a client's age from 100 to determine the percentage of assets that should be invested in stocks—the older the client, the less their risk tolerance and the less money that should be invested in equities. Only a small percentage of a client's assets should be allocated in the international marketplace.

A broker-dealer is participating in an initial public offering of a security that will be listed on Nasdaq. Which of the following documents is the broker-dealer required to deliver to a client who purchases in the after-market immediately after completion of the offering? - There is no requirement for additional documentation - A research report - A final prospectus - A list of all of the broker-dealers involved in the offering

- A final prospectus A client purchasing securities as part of an offering must receive either a final prospectus or a preliminary prospectus along with an additional document from the broker-dealer executing the transaction. The final prospectus must be provided for a certain period after the completion of the offering. For an IPO, if it is listed on the NYSE or Nasdaq, after-market prospectus delivery is 25 days. If the security will be quoted in the OTCBB or Pink Market, the period is 90 days for an IPO, and 40 days for a subsequent (follow-on) offering.

An investment adviser's compensation could be based on: - A share of capital gains - Any agreement that the client and investment adviser mutually sign - A percentage of capital appreciation of the net assets in the client's account - A percentage of the value of the fund averaged over a prescribed period

- A percentage of the value of the fund averaged over a prescribed period An investment adviser's compensation could be based on a percentage of the value of the fund averaged over a prescribed period. An investment adviser may not receive compensation on the basis of sharing in capital gains or a percentage of the appreciation in the account, even if the client signed an agreement to do so.

When a broker-dealer exercises discretion in a client's account: - A power of attorney should be obtained before the settlement date - A power of attorney should be obtained before the first order is submitted - The state requires that a client provide the firm with a cash deposit - The state must be notified that an agent will exercise discretion

- A power of attorney should be obtained before the first order is submitted A power of attorney should be obtained before the first order is entered.

According to the Uniform Prudent Investor Act (UPIA), a trustee is prohibited from making which of the following investments on the trust's behalf? - Collateralized mortgage obligations (CMOs) - A second mortgage on property owned by a real estate partnership for which the trustee is the general partner - Shares in a publicly traded Fortune 500 company on whose board of directors the trustee serves - Nontraded real estate investment trusts (REITs)

- A second mortgage on property owned by a real estate partnership for which the trustee is the general partner The UPIA does not categorically prohibit any class of investments. Thus, a trustee could invest a portion of trust assets in CMOs or nontraded REITs, or second mortgages. A trustee is a fiduciary and, as with all fiduciaries, has a duty of loyalty. He is not permitted to use the trust to pursue his own financial interests. It would be a conflict of interest for the trustee to use the trust assets to get a second mortgage for a piece of property in which he has a significant interest. Choice (c) also describes a potential conflict of interest, but a much smaller one

Your client is planning a two-week fishing expedition. His friend appears at your office with a handwritten note from the client, giving the friend trading authorization over the account. According to the Uniform Securities Act: - This is too informal - A person cannot grant a temporary authorization to another person if they are not related - Because the authorization is in writing, it is acceptable - Only clients who prepay their fees can grant a third-party trading authorization

- Because the authorization is in writing, it is acceptable This arrangement would be referred to as a third-party trading authorization. The standard requirement is that it be in written form. The handwritten note from the client would be acceptable

IA Incorporated is an investment adviser. BD Securities is a brokerage firm with offices down the hall. IA Incorporated and BD Securities have an agreement under which IA directs brokerage transactions to BD and receives a 15% rebate on the commissions that BD charges. This arrangement is: - A conflict of interest and an unethical business practice - Acceptable, provided BD is also registered as an investment adviser - Acceptable, provided IA discloses the arrangement to its clients in writing - Acceptable, provided the arrangement is in writing and filed with the Administrator

- Acceptable, provided IA discloses the arrangement to its clients in writing The IA does NOT have to file the arrangement with the Administrator The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that an investment adviser must disclose all conflicts of interests in writing to clients. These conflicts include the scenario described in this question where the investment adviser (or any of its employees) is receiving compensation (a rebate) for the execution of client transactions.

A securities agent and an investment adviser have offices next door to each other. The adviser directs brokerage business to the agent for execution and, in return, the agent rebates the adviser 10% of the commissions generated by these transactions. According to NASAA Model Rules, this practice is: - Acceptable, provided the agent is also registered as an investment adviser representative - Acceptable, provided it is disclosed on the adviser's Form ADV - A violation of the Uniform Securities Act - Unethical according to NASAA

- Acceptable, provided it is disclosed on the adviser's Form ADV According to the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this practice is acceptable provided it is disclosed in writing as a conflict of interest. Disclosing the practice on Form ADV, a copy of which all clients must receive, should be sufficient. This would be an unethical practice if the adviser did not disclose the rebate to its clients. Please note, this is a very narrow definition of rebate. It comes under the concept of a business relationship between the adviser and the broker-dealer. ***This is not the same situation as where an agent rebates a customer a commission as an incentive to enter into a transaction. That scenario is prohibited.***

According to the NASAA Model Rule on the Ethical Business Practices of Investment Advisers, which of the following statements is TRUE regarding investment advisory fees charged to customers? - There is no limit on the size of the fee that may be charged as long as the customer understands and agrees to the method of computation and the method is disclosed in writing to the client - Investment advisory fees may not exceed an annual rate equivalent to 5% of the total assets under management at the end of the computation period - Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services - Fees charged by an investment adviser on an annual basis may not exceed the gains in the portfolio during the same period

- Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical.

Which of the following practices is NOT prohibited under the Uniform Securities Act? - An agent making an untrue statement of a material fact - An agent omitting a material fact because the agent did not have time to cover everything in a short presentation - An agent deliberately failing to follow a client's instructions - An agent actively soliciting orders in unregistered exempt securities

- An agent actively soliciting orders in unregistered exempt securities If a security is exempt, it does not need to be registered. All other choices would be considered prohibited practices under the Uniform Securities Act.

Which of the following actions would be a violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? - An agent sells viatical settlements in her spare time with her firm's written permission - An agent encourages her clients to purchase an IPO by implying that the firm will repurchase the shares at the POP if they do not increase during the first day of trading - An agent encourages her clients to purchase shares in a company after hearing its CEO during a public Webcast that they are about to announce a large increase in earnings - An agent who does not have written discretionary authority sells his client's entire position in a security after being told by the client to "dump that stock whenever you think the time is right"

- An agent encourages her clients to purchase an IPO by implying that the firm will repurchase the shares at the POP if they do not increase during the first day of trading The agent in choice (b) would be guaranteeing the clients against losses, which is an unethical practice according to NASAA's Statement of Policy. The agent described in choice (a) is not selling away since she has received the written permission of her employer. The agent in choice (c) is basing her actions on public information. The agent in choice (d) does not need written discretionary authority from the client since the customer has already specified the security to be sold, merely leaving the price and time up to the agent.

Offering which of the following goods or services would be a violation of soft-dollar practices if the broker-dealer provides them to the adviser in exchange for executing transactions? - Third-party research - Market data services - Trading software used to route orders to a market center - Assistance concerning its compliance responsibilities

- Assistance concerning its compliance responsibilities An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. This practice is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, or the correction of trading errors

An agent may NOT: - Call a prospective client after 9:00 p.m. - Call an existing client before 8:00 a.m. - Sell nonregistered, exempt securities - Split commissions with another agent who works for an affiliated firm

- Call a prospective client after 9:00 p.m. The Telephone Consumer Protection Act of 1991 bans all *cold calls* except during the hours of 8:00 a.m. to 9:00 p.m. An agent may not call a *prospective* client before 8:00 a.m. or after 9:00 p.m. She may, however, call an existing client after 9:00 p.m. or before 8 a.m., choice (b), to service his account. *This Act also requires agents who place cold calls to state their name and company and to give either the company's phone number or address. Agents may not make calls to emergency numbers, or cell phones, or send unsolicited faxes. Anyone who states that she does not want to be called again must be placed on the firm's Do Not Call List*

A broker-dealer keeps customer-owned, street-name securities and the broker-dealer's securities together in a way that may not clearly indicate who owns which shares. This could be considered: - Sharing in profits and losses with a customer - A fraudulent act - Commingling - Conversion

- Commingling Commingling refers to the practice of intermixing securities belonging to customers with securities belonging to the broker-dealer. This is prohibited in order to assure that customer securities are not misused. Street-name securities are held in the name of a broker-dealer instead of the customer's name. This occurs when the securities have been bought on margin or when the customer (the beneficial owner) wishes the security to be held by the broker-dealer (the nominal owner). (89574)

The Administrator of State X has reason to believe that a broker-dealer registered in State Y is violating the law in that state. The Administrator of State X will: - Issue a temporary restraining order (TRO) - Issue a cease-and-desist order - Coordinate an investigation with the Administrator of State Y - Suspend the firm's registration

- Coordinate an investigation with the Administrator of State Y The Administrator may not suspend the registration of a broker-dealer that is not registered in her state, choice (d). She also does not have the authority to issue a cease-and-desist order, choice (b). She could issue this order if she believed that the broker was violating the laws of State X. A temporary restraining order (TRO) must be issued by the courts, not the Administrator, choice (a). The Administrator's only option is to coordinate an investigation with the Administrator of State Y.

An agent selling investment products on the premises of a bank should: - Disclose all relevant FDIC information - Explain that SIPC covers both banking and investment products - Collect signed waivers of compliance from clients - Explain that banking products are insured by the Federal Reserve Bank

- Disclose all relevant FDIC information An agent selling investment products on the premises of a bank must always disclose that these products are NOT FDIC-insured, that they are not bank deposits or guaranteed by the bank, and that they are subject to investment risks, including the loss of principal. Keep in mind that SIPC is not insurance in the same fashion that FDIC coverage is. SIPC protects investors if a broker-dealer goes bankrupt, not against principal loss. In either case, SIPC does not apply to banks. Bank products are guaranteed by the U.S. Treasury, not the Federal Reserve Bank.

A brokerage firm that operates on the premises of a bank must do all of the following, EXCEPT: - Locate its activities in a separate area if possible - Conspicuously display its name in the area where it conducts business - Make sure its services are easily distinguished from the services provided by the bank - Disclose that it is a member of both FINRA and the FDIC

- Disclose that it is a member of both FINRA and the FDIC A brokerage firm would be a member of FINRA, but not the FDIC. The firm must do all of the things listed in the other choices.

An agent selling investment products on the premises of a bank should always: - Disclose to clients that these products are not FDIC-insured - Explain the differences between the FDIC and SIPC - Collect signed waivers of compliance from clients - Disclose to clients that she is an employee of the broker-dealer and not an employee of the bank

- Disclose to clients that these products are not FDIC-insured An agent selling investment products on the premises of a bank must always disclose that these products are NOT FDIC-insured, that they are not bank deposits or guaranteed by the bank, and that they are subject to investment risks, including the loss of principal.

A customer wishes to liquidate $50,000 from her existing holdings and invest the proceeds in three different mutual fund families. The agent fails to notify the customer that it may be advantageous to invest the entire $50,000 with one fund family. This activity could potentially be: - Churning - Switching - Selling dividends - Engaging in breakpoint sales

- Engaging in breakpoint sales The registered representative should advise the client that she could save money because of the quantity discount option on large purchases available through purchases at sales charge breakpoints. Failure to notify a client that they would be eligible for a breakpoint could be considered a breakpoint sale.

Under the Uniform Securities Act, a state Administrator may NOT: - Conduct investigations involving broker-dealers domiciled in other states - Conduct an investigation without proof of wrongdoing - Enjoin an investment adviser from participating in the securities business - Issue subpoenas to individuals outside the state

- Enjoin an investment adviser from participating in the securities business A court has the power to enjoin (prohibit) an investment adviser from participation in the securities business, but the state Administrator does not.

A broker-dealer is a registered market maker in a Nasdaq security. The broker-dealer's current quote states that the firm is prepared to sell to clients 200 shares at $21.00 per share and buy from clients 200 shares at $20.50 per share. Which of the following activities by the broker-dealer would NOT be considered an unethical or dishonest business practice? - Failing to sell 100 shares to a client at $21.00 per share - Failing to buy 100 shares from a client at $20.50 per share - Failing to sell 200 shares to a client at $20.75 per share - Failing to buy 200 shares from a client at $20.50 per share

- Failing to sell 200 shares to a client at $20.75 per share A broker-dealer is required to buy from a client or sell to a client any security at its stated or quoted prices. This broker-dealer's quotes reflect the fact that it is willing to buy up to 200 shares at $20.50 and sell up to 200 shares at $21.00. The broker-dealer is not required to sell shares at a price superior ($20.75) to its quoted prices. The broker-dealer could sell the securities at the superior price, but is not required to do so.

When providing advice according to prudent investor standards, an agent should perform all of the following activities, EXCEPT: - Focus on the avoidance of risk - Diversify appropriately - Develop an investment policy/strategy - Pay close attention to the goals of the client

- Focus on the avoidance of risk When providing advice according to prudent investor standards, an agent should: - Pay close attention to the goals of the client - Develop an investment policy/strategy - Focus on the management of risk (not the avoidance of risk) - Determine the risk tolerance of the client - Diversify appropriately

Gene is an agent of Broker-Dealer Z. Broker-Dealer Z is underwriting a new offering of stock for ShortSight Company, and Gene has sold some of the stock to one of his clients. The client quickly decides she does not want to keep the stock and tells Gene to sell it at the market. Broker-Dealer Z has worked hard to win ShortSight's investment banking business and does not want to alienate the company. It has, therefore, told its agents to discourage customers from reselling the new stock too quickly. Gene holds on to his client's sell order for several days before finally executing it. The client actually receives a better price than she would have obtained if the order had been entered immediately. Which of the following statements is TRUE in this situation? - Gene acted improperly since new issues may not be resold within the first six months - Gene acted properly in getting best execution for the client - Gene would have acted improperly only if the customer had lost money on the trade - Gene acted improperly

- Gene acted improperly Gene acted improperly because it is always an unethical practice to knowingly fail to follow the customer's instructions. Even if the agent believes that not following the customer's instructions would be in the best interests of the client, the agent is not permitted to ignore the customer's directions. *Private placements sold under Regulation D may not be sold for six months.*

An investment adviser is managing a trust that is scheduled to terminate in 50 years. The beneficiaries will receive the income that the trust generates until that time. Once the trust terminates, the corpus will be distributed among the remaining beneficiaries. According to the Uniform Prudent Investor Act, which of the following investment strategies is NOT suitable for this trust? - Allocating the portfolio between stocks, fixed-income securities, and cash equivalents - Dividing the trust assets among several different mutual funds - Investing in Treasuries and money-market securities - Reallocating the portfolio on an annual basis

- Investing in Treasuries and money-market securities The question states that the trust will be in existence for 50 years, which is a very long time. Inflation could significantly erode the trust assets over this period. According to the commission that drafted the Uniform Prudent Investor Act, "By far the most insidious damage to trust assets comes from inflation." This is the reason why choice (c) represents an inappropriate strategy for this trust. The real value of a portfolio invested solely in these securities is likely to decline over the long term. However, if the trust is going to be in existence for only a short time, a year or two, for example, then choice (c) would be a suitable investment strategy.

Which of the following choices is a custodian's primary goal under the Uniform Prudent Investor Act? - Limiting capital losses - Maximizing return - Preserving purchasing power - Investing with an eye toward the risk/reward profile of the entire account

- Investing with an eye toward the risk/reward profile of the entire account No class or type of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and assesses the risk/reward composition of the account when determining if an asset mix is acceptable. The standard of prudence is applied to the entire portfolio as opposed to individual investments.

A client lists capital preservation as his only investment objective. The agent recommends that the client purchase blue-chip stocks and investment-grade bonds. The agent then tells the client to sell some of the stock every two weeks. According to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the agent has: - Engaged in unauthorized trading - Churned the account - Made unsuitable recommendations - Done nothing wrong

- Made unsuitable recommendations Stocks (even blue-chips) and bonds are not appropriate investments for someone whose sole objective is capital preservation. Money-market securities or a money-market fund would be the only appropriate recommendation under these circumstances. Arguably, the agent has also churned the account, choice (b), by advising the client to sell some of these securities every two weeks. However, choice (c) is the best answer here since the securities were not suitable in the first place. Both recommendations to purchase these securities and then sell them were unsuitable.

A broker-dealer is opening securities accounts for retail customers at a bank branch. According to the NASAA Model Rules for Sales of Securities at Financial Institutions, what must the broker-dealer's agents do as part of the account opening process? - Verify that the client is a qualified investor - Provide the client with a written copy of the networking arrangement between the broker-dealer and the bank - Make a reasonable attempt to obtain a written acknowledgement from the client that he has received the disclosures required under this rule - Notify the client of the address and telephone number of the state securities Administrator where he can lodge complaints

- Make a reasonable attempt to obtain a written acknowledgement from the client that he has received the disclosures required under this rule The NASAA Model Rules for Sales of Securities at Financial Institutions state that a broker-dealer must make a reasonable attempt to obtain a written acknowledgement from a customers that he has received the disclosures required under these rules. Under NASAA rules, a client who opens a brokerage account at a bank must be *informed both orally and in writing*, that securities: - Are NOT insured by the FDIC (Federal Deposit Insurance Corporation) - Are NOT the same as bank deposits or obligations and are not guaranteed by the bank - Have risks—the investor may lose her principal A networking arrangement means a contractual or other arrangement between a broker-dealer and a financial institution pursuant to which the broker-dealer conducts broker-dealer services on the premises of the financial institution where retail deposits are taken. A copy of this document does not need to be provided to clients. There is no requirement that a client be verified as a qualified investor. There are no qualifications to be an investor. An agent may notify the client of the address and telephone number of the state securities Administrator where the client can lodge complaints, but it is not a requirement

A licensed insurance agent and an investment adviser have offices next door to each other. The insurance agent refers clients to the investment adviser, who pays the agent a referral fee plus a percentage of the management fee for each client who opens an account with the adviser. The insurance agent: - Is exempt from registration - May be required to register as an investment adviser representative - Would be considered a captive agent - Would need to disclose the arrangement on Form ADV

- May be required to register as an investment adviser representative Under the Uniform Securities Act, an investment adviser representative includes anyone who "solicits, offers, or negotiates for the sale of or sells investment advisory services." Therefore, the states often require solicitors to register. Note that some states, however, have special registration provisions for solicitors. *The adviser, not the insurance agent, would need to disclose this arrangement on Form ADV, which is the reason that choice (d) is not the correct answer*.

A client who is interested in buying shares in an IPO asks an agent to underline the most important parts of the preliminary prospectus. The agent: - May not do this without violating the federal securities laws - May do this since the client has requested it - May do this as long as the broker-dealer retains a copy of the underlined document for at least 5 years - May do this without restrictions or approvals

- May not do this without violating the federal securities laws An agent or an investment adviser representative should never alter a final or preliminary prospectus (red herring) during a client presentation

ohn is an agent who just opened an account for Mary, a new client. Unfortunately, Mary is very tight-lipped about her finances. She gives John very little information, saying only that she is a conservative investor whose objective is growth. What type of securities may John recommend for her account? - None whatsoever - Money-market securities only - Mutual funds that meet her risk tolerance and investment objectives - Anything as long as it is not too speculative

- Mutual funds that meet her risk tolerance and investment objectives According to the North American Securities Administrators Association (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may recommend only securities that are suitable for a client, given the client's investment objectives, financial situation, and needs, plus any other relevant information of which the agent is aware. In this scenario, John's job is complicated by the fact that the client refuses to give him much information. He may, however, recommend securities that are suitable based on the information that the client has provided. For example, he could recommend a conservative, growth-oriented mutual fund, choice (c). Money-market securities, choice (b), are usually an acceptable choice when you have little information about the client, but they are not the only option in these circumstances.

A broker-dealer employs several agents who conduct business on the premises of a federally chartered bank. The broker-dealer just fired one of these agents. The broker-dealer also suspects that the agent may have falsified client records. Under the NASAA Model Rules for Sales of Securities at Financial Institutions, the broker-dealer must: - Submit the matter to mandatory mediation - Retain counsel promptly - Notify the bank promptly - Notify the state attorney's office

- Notify the bank promptly The agent described in the question was terminated for cause. The broker-dealer must notify the bank promptly about the agent's termination

A radio program is broadcast from a bank on the weekend. Which of the following actions would be prohibited by the Administrator? - Mentioning that the broker-dealer that sponsored this show is affiliated with the bank - Mentioning the advantages of investing in mutual funds without sending a prospectus - Omitting the name of the broker-dealer in any 30-second ads during the show - Omitting the name of the bank during any 30-second ads during the show

- Omitting the name of the broker-dealer in any 30-second ads during the show You need to understand which action would be prohibited at all times. The best answer is choice (c). In general, the name of the broker-dealer that approved the ad is required on all advertisements. Broker-dealers and agents are not allowed to publish a blind ad unless it is a recruiting advertisement for a new hire. This is the exception. A blind ad is one where the name of the broker-dealer or agent is not mentioned in the ad. Broker-dealers are allowed to mention that they are affiliated with or subsidiaries of banks, choice (a). They must make the distinction that the products they offer are neither deposits, nor guaranteed, but there is no requirement to mail a prospectus with those statements, choice (b). This would be difficult to achieve since the radio programs' sponsor, (the broker-dealer) has no idea how many people may be listening at a given time, as well as where those listeners are located. Banks are regulated by entities other than the Administrator, so (d) is not a good choice.

The Administrator of State P requests that the Administrator of State Q issue a cease-and- desist order. May the Administrator of State Q grant this request? - Not under any circumstances - Only if the person against whom the order is being issued is a resident of State Q - Only if there is a reciprocal agreement between the two states - Only if the Administrator of State Q believes that the laws of that state are being violated, or will be violated

- Only if the Administrator of State Q believes that the laws of that state are being violated, or will be violated The USA gives the Administrator the power to issue a cease-and-desist order anytime he believes that someone has violated one of the provisions of this Act or believes that someone is about to violate one of its provisions.

Which of the following investors may be charged performance fees by investment advisers? - Accredited investors under Regulation D - Exempt investors - Qualified clients - None, since investment advisers are prohibited from charging performance

- Qualified clients Under the Investment Advisers Act of 1940 and the NASAA Model Rules, advisers are prohibited from charging performance fees—fees that are tied to the account's performance. There is an exception for qualified clients. A *qualified client* is an institutional or retail client with at least $1,000,000 under management with the adviser or who has a net worth in excess of $2,000,000. If the client is an individual, then the net worth calculation may NOT include the value of the client s primary residence. An *accredited investor under Regulation D* is not the same as a qualified client, choice (a). For example, someone with a total net worth of $1,000,000 excluding their home, would be an accredited investor according to Regulation D, but not a qualified client.

A broker-dealer has been selling unregistered, nonexempt securities in nonexempt transactions without the permission of the state securities Administrator. What action would the state Administrator most likely take? - Require the broker-dealer to offer letters of rescission - Bring an action in criminal court against the broker-dealer - Sue the broker-dealer in civil court - There is no violation and therefore no action will be taken by the Administrator

- Require the broker-dealer to offer letters of rescission In the absence of fraud, there is a violation if securities are illegally offered in a particular state when they should have been registered. The Administrator would most likely require the broker-dealer to offer a *letter of rescission* - whereby the broker-dealer must offer to repurchase the securities at their original cost plus interest.

Paul is the CEO of STP, a publicly traded company. Paul has a sizeable position in his company's stock and would like to sell some of it. This would NOT be permitted if: - STP issued a press release announcing its earnings last week - STP is scheduled to announce its earnings next week - The board of directors approved the transaction - Paul failed to file Form 10b5-1 with the SEC

- STP is scheduled to announce its earnings next week Paul could be liable for insider trading if he sells his shares before the company announces its earnings. This is material, nonpublic information that Paul is presumed to know. In choice (a), the information about earnings has already been released to the public, and Paul may sell his shares (assuming, of course, there is no other material information of which he is currently aware).

An agent of a broker-dealer is prohibited from engaging in any of the following business, EXCEPT: - Borrowing money from a client - Recommending a security to a client based on material insider information that has not been disseminated to the public - Inducing transactions exceeding a client's financial resources - Selling a security short on one exchange and buying it back on another exchange for the purpose of making a profit

- Selling a security short on one exchange and buying it back on another exchange for the purpose of making a profit An agent would be prohibited from engaging in all of the business practices except selling a security short on one exchange and buying it back on another for the purpose of making a profit. This is a trading strategy known as arbitrage and is legal.

An Administrator has determined that a broker-dealer has sold private placement securities to 35 retail investors in the Administrator's state. Which of the following statements is TRUE if the broker-dealer does not comply with the cease-and-desist order issued by the Administrator? - The broker-dealer will be required to send the clients a letter of rescission - The broker-dealer is required to participate in a hearing - The broker-dealer will be required to register the securities - The Administrator may bring action in a court to request an injunction

- The Administrator may bring action in a court to request an injunction The Administrator may take more severe action if a broker-dealer does not comply with a cease-and-desist order to stop selling unregistered securities in the Administrator's state. This would entail the Administrator going to state court to ask for an injunction.

An agent is concerned that many customers do not bother to read the prospectus before investing in a mutual fund. Under SEC rules, the agent may take which of the following actions to help his clients become better-educated investors? - The agent may type a large font version of the prospectus for the clients' benefit, provided the large print version has been reviewed and approved by the firm's chief legal counsel - The agent may underline or highlight key content areas within the prospectus, but must remind customers that the points emphasized are of no more or no less importance than the balance of the material contained in the full prospectus - The agent may give clients a summary prospectus - The agent may summarize the prospectus, provided a registered principal approves the resulting abbreviated document and attaches a written notice to all recipients that a full version of the prospectus is available upon request

- The agent may give clients a summary prospectus In the case of mutual funds, clients may be given a copy of a summary prospectus instead of the entire (statutory) prospectus, provided the whole prospectus is available free of charge on the fund's Web site. A copy of the statutory prospectus (electronic or paper) must be made available to any investor that wants this document at no charge and within three business days of the request. An agent or IAR should never underline, highlight, or summarize any portion of the prospectus or preliminary prospectus for a client, even if the agent's or IAR's intentions are simply to help the client (as in this question). Pointing out specific information implies that certain portions of the prospectus are more important than others and that the customer does not need to review the entire document.

Under NASAA's Statement of Policy on Unethical Business Practices, in which of the following circumstances may a security be sold without first receiving written discretionary authority from the client? - The client discloses the name of the security he wants to purchase - The agent's only decision relates to the price and time of the transaction - The agent's only decision relates to the amount of money involved in the transaction - The transactions involve less than $10,000

- The agent's only decision relates to the price and time of the transaction If a client does not give written discretionary approval, an agent may only decide the time and price involved in the transaction.

Which of the following statements is TRUE regarding the sharing of profits and losses in a client's account by an agent? - The client's consent is not required - The consent of the agent's employer is not required - The sharing is strictly prohibited - The agent's profits and losses must be in proportion to the percentage of his contributions

- The agent's profits and losses must be in proportion to the percentage of his contributions If an agent opens a joint account with a client, the agent may share in the profits proportionate to his investment, provided employer and client approval was obtained.

In a soft-dollar arrangement between an adviser and a broker-dealer, the broker-dealer would be permitted to pay: - The cost of a coach flight for a portfolio manager to attend a conference - The cost of a conference concerning the future of the computer software industry - The cost of computer terminals used to deliver market data services - A percentage of the salaries of the adviser's internal research staff

- The cost of a conference concerning the future of the computer software industry An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.

The state Administrator has suspended Heathrow Securities, a broker-dealer. Which of the following statements concerning the broker-dealer is TRUE? - The firm is allowed to accept unsolicited orders - The only activity the firm may not participate in is new issue distributions - The firm may apply to the state court for a review of the order - The firm may continue business as usual during the appeal process

- The firm may apply to the state court for a review of the order Although the firm may apply to the state court to review the Administrator's order, there is no stay of the order. The firm is still suspended during the appeal process and cannot participate in any securities-related activities in that state.

An agent's recommendations have made a client a lot of money over the last two years. The client is so pleased that he tells the agent that she can keep 5% of any gains in his account from now on. Which of the following statements is TRUE? - This is acceptable as long as the broker-dealer and the client agree in writing - This is acceptable if the broker-dealer is also registered as an investment adviser - This is not acceptable unless the agent is also registered as an IAR - This is not acceptable since it is considered to be sharing in the client's profits

- This is not acceptable since it is considered to be sharing in the client's profits Sharing in the profits and/or losses in a client's account is generally not permitted. There is an exception if the client and the agent have a joint account, the client and the broker-dealer consent to the arrangement in writing, and profits and losses are shared in proportion to the capital that each contributed to the account. Choice (a) is only partially correct since there is no mention of a joint account and the agent did not contribute capital to the account. Under certain circumstances an investment adviser may charge a performance fee, but the clients must be qualified. To be qualified, the client must have either $1 million managed by the IA or a net worth of $2 million

An agent takes the prospectus for a new issue and creates a marketing piece that includes all the positive facts from the prospectus but none of the risk factors. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the agent may give this marketing piece to a client: - Only if the prospectus is included - Only if it is approved by a principal and filed with an Administrator - Only if the issue is exempt - This type of communication may never be provided to a client

- This type of communication may never be provided to a client Any materials distributed to clients must be fair and balanced. They must include both positive and negative facts about the security and must not be designed to "detract from, supersede or defeat the purpose or effect of any prospectus or disclosure." A marketing piece that includes only positive facts from the prospectus would be misleading and deceptive, according to NASAA's Statement of Policy.

An IA would like to change the method it uses to calculate the fees it charges for certain clients. The new fee would be performance-based and would be calculated over a specified period. According to the NASAA Model Rule, which of the following statements is TRUE? - This would be allowed if the state securities Administrator approved the method of calculating the fee prior to any contracts being signed - This type of fee arrangement is not permitted and would be a violation - This type of fee arrangement is permitted only for clients that are business development companies or private funds - This type of fee arrangement is permitted for qualified clients

- This type of fee arrangement is permitted for qualified clients Under the NASAA Model Rule and the Investment Advisers Act of 1940, performance fees generally, are prohibited. Exceptions include clients who have at least $1,000,000 under management with the adviser or who have a net worth in excess of $2,000,000. They would be defined as qualified clients. Clients who are not U.S. residents and certain employees of the adviser may also be charged performance-based fees. The Administrator does not need to approve the method used to calculate the fee, but it must be disclosed to clients.

Zweispiel Company is registered as both a broker-dealer and an investment adviser. As a broker-dealer, the firm makes a market in WXYZ stock. Zweispiel believes that this stock would be a very good investment for one of its advisory clients and would like to sell the client some stock from its market-maker account. Which of the following statements is TRUE? - Zweispiel may sell the stock to the client as long as the security is suitable for the account - Zweispiel may sell the stock to the client as long as it does not charge a commission for the transaction - Zweispiel may sell the stock to the client as long as it discloses, prior to the completion of the transaction, that it is acting as a principal and it obtains the client's written consent - Zweispiel is not permitted to effect this transaction under any circumstances due to the conflict of interest

- Zweispiel may sell the stock to the client as long as it discloses, prior to the completion of the transaction, that it is acting as a principal and it obtains the client's written consent An investment adviser that wishes to act as principal for its own account must (1) disclose the capacity in which it is acting prior to the completion of the transaction, and (2) obtain the client's written consent.

An investment adviser is entering into a contract with a new client. The adviser wants to include a provision in the contract that says it will be compensated based on a share of the capital gains or capital appreciation of the account. According to the NASAA Model Rule on Performance-Based Compensation Exemption for Investment Advisers, the adviser may insert this provision in the contract if the client is: - A company that will have $500,000 under management with the adviser once the contract is signed - A natural person who together with a spouse has a net worth of $2.5 million including $1 million in home equity - A natural person who has a net worth of $2 million excluding the value of that person s primary residence - An employee of the investment adviser who is the assistant to one of the partners

A natural person who has a net worth of $2 million excluding the value of that person s primary residence According to the NASAA Model Rules and the Investment Advisers Act of 1940, advisers are generally prohibited from charging clients performance fees (fees based on the capital gains or appreciation in the client's account). The concern is that advisers who are receiving performance fees will be tempted to invest in speculative securities in order to increase their fees which might not be in their clients long-term interests. However, there are exceptions to this prohibition for qualified clients—clients who are considered sophisticated enough to look out for their own interests. Qualified clients include companies and natural persons (individuals) who have at least $1,000,000 under management with the adviser or who have a net worth in excess of $2,000,000. For individuals, the net worth calculation must exclude the value of that person's home. This is the reason why choice (c) is correct and choice (b) is not.

An agent contacts a client and provides seven valid reasons why Dolphin Corporation shares represent an attractive purchase. He neglects to mention that the Chief Financial Officer has just resigned and that Dolphin is under investigation by a number of regulatory authorities. The client makes a purchase of Dolphin shares. Which of the following statements is NOT TRUE? - The agent faces no civil liabilities since he gave valid reasons why the client should purchase Dolphin stock - The client could recover the full purchase price paid for Dolphin stock - The agent has committed a civil violation - The client may file a lawsuit in state court

A purchaser has the right to bring a civil lawsuit if he believes the seller of the securities omits or makes an untrue statement concerning a material fact. This is a civil violation of the Act. The client has the right to recover the full purchase price + interest + court costs and attorney fees. (Answer: A)

Which of the following actions would violate the NASAA Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? - A broker-dealer executes a transaction in a margin account shortly before the client's signed margin account agreement arrives in the mail - A broker-dealer states that it will charge extra for certain transactions - An agent creates a marketing brochure for distribution to clients that includes only the positive facts from the prospectus - An agent opens a joint account with a client with the written permission of her employer

An agent creates a marketing brochure for distribution to clients that includes only the positive facts from the prospectus A marketing brochure that contained only the positive facts from the prospectus and none of the negative ones (risk factors) would be considered misleading and deceptive. A broker-dealer may execute an initial transaction in a margin account as long as a properly executed (signed) written margin agreement is obtained promptly afterward. A broker-dealer may charge a client a higher-than-normal commission under certain circumstances, such as when a security is particularly difficult to obtain, as long as this is disclosed to the client. An agent may open a joint account with a client as long as she has the written permission of both the broker-dealer and the client.

Under the Uniform Securities Act, which TWO of the following practices are prohibited? IV) Accepting orders from a client's brother with written, third-party authorization II) Recommending securities without regard for the client's financial resources III) Quoting a price that is marked up from the current offering price IV) Crediting a portion of mutual fund s sales load back to a client's account I and III I and IV II and III II and IV

II and IV Under the Uniform Securities Act, recommending securities without considering a client's resources or rebating commissions (loads) are considered prohibited practices. It is acceptable to take an order from someone with written, third-party authorization. Quoting a price that includes a mark-up is an acceptable practice.

Persons who violate federal insider trading regulations are subject to all of the following penalties, EXCEPT: Treble damages Prison terms Civil lawsuits by traders FINRA fines

FINRA fines Insider traders face SEC civil penalties of up to three times the amount gained or loss avoided (treble damages). Criminal penalties for individuals can be as much as a $5,000,000 fine and 20 years in prison. In addition, private individuals who believe their investments were harmed by the actions of an insider trader may file a civil lawsuit to recover damages. However, FINRA fines may be assessed only against FINRA members and their associated persons. FINRA has jurisdiction only over members while anyone can be held civilly or criminally liable for insider trading. FINRA may not take action against someone who is not a FINRA member.

An advisory fee that increases and decreases proportionately with the investment record of an appropriate securities index is called a(n): Participation fee Fulcrum fee Index fee Revolving fee

Fulcrum fee A fulcrum fee is averaged over a specific period. It increases and decreases proportionately with the investment performance of a client's account, in relation to the investment record of an appropriate index of securities. If the client's account outperformed the index, the adviser would be entitled to an additional fee. If the client's account underperformed the index, the fee would be reduced.

Sales of viatical investments can be made only to suitable investors. Which TWO of the following investors are considered suitable? I) An accredited investor under Regulation D II) Anyone with a minimum net worth of $150,000 and gross income last year of at least $100,000, or a minimum net worth of $250,000 III) Anyone who is in the highest marginal tax bracket and is in need of liquidity IV) Anyone who has been specifically approved by the state Administrator I and II I and III II and III III and IV

I and II A viatical investment involves the purchase of an interest in an insurance policy covering the life of an individual. The purchase may be for a whole or fractional interest in the policy. Since it is unknown when the insured will die and the funds invested are not readily accessible on demand, NASAA has established specific suitability requirements for viatical investments, which are stated in choices (I) and (II). Viatical investors must either be accredited investors according to Regulation D or must meet one of the following financial standards. Minimum net worth of at least $150,000 (not including their residence) and an annual income of $100,000, or Minimum net worth of at least $250,000 (not including their residence)

When must action be taken for recovery on a transaction made in violation of a registration provision? - Within two years of occurrence or three years of discovery, whichever occurs last - Within three years of occurrence or two years of discovery, whichever occurs first - Within three years of notification - Within five years of notification

If an agent sells a security in violation of a registration provision, a client must take action for recovery within three years of the occurrence of the sale or two years of the discovery of the violation, whichever occurs first.

Which of the following written disclosure statements is prohibited under NASAA's Model Rule on Unethical Business Practices of Investment Advisers? - If there is a monetary dispute, the client must agree to arbitration to settle the dispute - The investment adviser is an affiliate of a broker-dealer - The investment adviser receives a management fee for a mutual fund it recommends - The employees of the investment adviser may receive a commission for the sale of its recommended products

If there is a monetary dispute, the client must agree to arbitration to settle the dispute Unlike a broker-dealer that may have a pre-dispute arbitration agreement, an investment adviser may not compel an investor to settle disputes through arbitration. The client may sue in a court of competent jurisdiction. Any material fact that may be construed as a conflict of interest and can impair the objective investment advice of an investment adviser must be disclosed to a client, in writing, prior to the recommendation of any product or service provided. The affiliation with a broker-dealer, a fee from a mutual fund, or other payments received by the investment adviser may be construed as a conflict of interest and, therefore, must be disclosed.

In reviewing prices for a mutual fund, an investor notices that the fund has three listings, one for Class A shares, another for Class B shares, and a third for Class C shares. The distinctions among the three classes of shares would most likely reflect different: Investment objectives Minimum purchase requirements Distribution arrangements Sales charges and 12b-1 fees

Sales charges and 12b-1 fees Classes of shares in mutual funds are distinguished by their sales charges. Generally, Class A shares have front-end sales charges and low or no 12b-1 fees. Class B shares have contingent deferred sales charges and higher 12b-1 fees and often convert to Class A shares after a set number of years. Class C shares have a higher 12b-1 fee than Class A shares and they might also have a small front-end load or a small contingent deferred sales charge if the investor sells the shares within 12 to 18 months.

Which of the following actions by an agent of a broker-dealer is considered an unethical business practice? - Soliciting a client to sell a specific security while simultaneously recommending to another client to buy the same security - Accepting an unsolicited trade for an unregistered, nonexempt security - Placing a discretionary order in a margin account - Selling shares in a friend s business outside the agent s normal course of employment

Selling shares in a friend s business outside the agent s normal course of employment It is considered an unethical business practice for an agent of a broker-dealer to effect transactions in securities and not record them on the books of the broker-dealer. While choice (d) doesn't clearly state that the agent is failing to notify the broker-dealer, it can be inferred from the phrase "outside the agent's normal course of employment." The other choices represent honest and ethical activities that agents of a broker-dealer should take regarding transactions by their clients.

According to the NASAA Model Rules for Sales of Securities at Financial Institutions, a networking arrangement between a financial institution and a broker-dealer must: - Be renewed every year by December 31 - Be filed with the state securities Administrator - Set forth the compensation schedule for both parties - Specify which functional regulator will be in charge of examining the broker-dealer's operations at the financial institution

Set forth the compensation schedule for both parties A networking arrangement is an agreement between a broker-dealer and a bank (or a savings and loan or credit union) under which the broker-dealer does business at a retail banking location. According to the NASAA Model Rules, these agreements must be in writing and must specify how both the bank and the broker-dealer will be compensated. The agreement must also state the duties and responsibilities of both the broker-dealer and the bank, and must provide that the broker's supervisory personnel and state regulators will have access to the bank to examine the records maintained there.

Kermit is an agent for a broker-dealer in North Dakota state. Kermit may NOT take which of the following actions? - Solicit orders for municipal bonds issued by the Dry Gulch, North Dakota school district - Accept unsolicited orders for common stock in the Dry Gulch Mining Corporation if the stock is not registered in North Dakota - Solicit orders for the Dry Gulch Mining Corporation bonds that are registered in North Dakota - Solicit orders for the Dry Gulch Mining Corporation preferred stock if the stock is not registered in North Dakota

Solicit orders for the Dry Gulch Mining Corporation preferred stock if the stock is not registered in North Dakota Agents may not solicit orders for unregistered, nonexempt securities. Kermit may solicit orders as described in choice (a) *because he is registered in North Dakota. The fact that the securities are exempt is not relevant*. In choice (b), the fact that the order was unsolicited provides an exemption for the transaction. In choice (c), the securities are registered. Only in choice (d) are the securities neither registered nor exempt. Agents may not solicit business in states where they are not registered. For example, if Kermit wants to contact investors in Wyoming about North Dakota municipal bonds, he and his firm must be registered in Wyoming.

An agent has a client who is in his late twenties. The client's investment profile indicates that his primary objective is capital appreciation and that he has a moderate risk tolerance. The customer also told the agent that he is concerned about inflation and taxes, and wants to keep his portfolio liquid. Which of the following investments should the agent recommend? Stock index funds Corporate bonds Municipal bonds Variable annuities

Stock index funds The client's objective is capital appreciation, and he is willing to accept a moderate degree of risk. He is concerned about inflation and tax reduction, and wants to keep his portfolio liquid. Of the choices given, stock index funds would be the most appropriate. Bonds, choices (b) and (c), will not be good hedges against inflation. Stock index funds will provide better returns and index funds tend to be tax-efficient. (Since their portfolios mirror indexes there is not a lot of turnover to generate capital gains taxes.) Variable annuities, choice (d), might also be a good choice, if the client did not want to keep his portfolio liquid. Variable annuities are usually not a good option for investors who want liquidity. They often require investors to lock up their money for a number of years or face early withdrawal penalties. Variable annuity holders who are under the age of 59 1/2 may also be subject to tax penalties if they withdraw money.

An agent received a written complaint from a client. The next day, the client called the agent to apologize for the anger and tells the agent to disregard it. Which of the following statements is TRUE? - The agent must forward the complaint to a supervisor - The agent must forward the complaint to a supervisor who will then file it with the state Administrator - The agent may disregard the complaint since the client rescinded verbally within 24 hours - The agent may not contact the client until the issue is resolved

The agent must forward the complaint to a supervisor An agent must forward all written complaints to a supervisor even if the client rescinds the complaint. The supervisor is not required to submit the complaint to the Administrator. A copy of the complaint and any response must be maintained by the broker-dealer.

Micro Manager Partners is an investment advisory firm. Micro is creating a new standard contract for its advisory clients. Which of the following clauses should NOT appear in the contract? - The Adviser [Micro] will provide the following services to the Client: management of the Client's portfolio on a discretionary basis, quarterly written summaries of account activity, and quarterly personal review of the Client's assets under management of the Adviser - The Client agrees to pay a quarterly fee to the Adviser consisting of (i) .25% times the value of the portfolio at the end of each quarter, plus (ii) 2% of any increase in the value of the portfolio compared to the end of the previous quarter. Part (ii) of the fee will not be assessed if the portfolio declines in value - The Adviser may not assign this contract to another party without the prior written consent of the Client - If any partner leaves the business of the Adviser, or if the Adviser adds any partner, the Adviser will notify the Client within a reasonable period, but not more than ten business days after any such change

The Client agrees to pay a quarterly fee to the Adviser consisting of (i) .25% times the value of the portfolio at the end of each quarter, plus (ii) 2% of any increase in the value of the portfolio compared to the end of the previous quarter. Part (ii) of the fee will not be assessed if the portfolio declines in value An investment adviser may not charge a fee which is based on a share of the capital gains in the account or a share in the capital appreciation of the funds in the account. The part of Micro's fee that consists of 2% of any increase in the value of the portfolio each quarter would not be permitted.

An agent receives a letter from an irate client. The letter is the fifth in the last six months and the language is abusive. The agent forwards it to his supervisor. The supervisor decides against a reply and discards the letter. In this instance, which of the following statements is TRUE? - The supervisor is entitled to decide how to handle such situations - If the supervisor forwards the complaint to the Administrator, this is acceptable - The Uniform Securities Act requires that all material complaints be forwarded to the Administrator - The Uniform Securities Act requires that a response be made to all written complaints

The Uniform Securities Act requires that a response be made to all written complaints When an agent receives a complaint in *writing*, it must be *forwarded to a designated supervisor*. The complaint must be *kept on file*, along with *any action taken to remedy* the complaint. The fact that the complaint was the fifth in the last six months and the language abusive has no bearing on how the complaint should be handled. By discarding the letter, the supervisor acted in a prohibited and improper manner.

An agent, offered and sold an unregistered, nonexempt security to several of his clients in State A. These clients subsequently lost a considerable amount of money in this investment. Under the Uniform Securities Act, which of the following statements is TRUE? - The clients may initiate a civil lawsuit to recover their losses with treble damages - The clients may initiate a civil lawsuit to recover their losses - This is not a violation of the Uniform Securities Act if the security is registered within 30 days of the sale - The clients may initiate a criminal action against both the agent and the broker-dealer

The clients may initiate a civil lawsuit to recover their losses Clients may sue in civil court on the basis that the security was unregistered and nonexempt in an attempt to recover their financial losses, reasonable attorney fees, and interest. ***Treble damages apply only to insider trading.*** Even if the security is subsequently registered, if it was not registered at the time of the trade, it is prohibited. ***Clients do not initiate criminal actions. Criminal action must be initiated by a governmental authority***

Ron X, an agent, offered and sold an unregistered security to several of his clients in State W. These clients subsequently lost a considerable amount of money in this investment. Under the Uniform Securities Act, which of the following statements is TRUE? - The Administrator may initiate a civil lawsuit - The clients may initiate a civil lawsuit to recover their losses - While unethical, this is not a violation of the Uniform Securities Act - This is a violation of the Securities Act of 1933

The clients may initiate a civil lawsuit to recover their losses Clients may sue on the basis that the security was not registered and subsequently attempt to recover their financial losses

An agent for a broker-dealer finds a handwritten note on her desk left by a client. The note states that the client is unhappy with the recommendations the agent made recently. The agent recommended stocks that the firm's research department had on its buy list. The client lost money on some of the recommendations that she accepted. Which of the following statements is TRUE regarding this situation? - The note should be given to a principal - The agent must send the client a written acknowledgement immediately and record the actions taken in the firm's complaint file - The agent should send the client a written acknowledgement of the complaint that explains to the client that investing in securities involves risk, that investors may lose money, and that recommendations do not imply that past results are not guarantees of profitability - The note should be forwarded to the supervisor of the analyst who made the recommendation

The note should be given to a principal It is an unethical practice for agents to fail to notify a supervisor of written customer complaints. Agents should NOT handle complaints. This is the role of a principal (supervisor). Complaints do not need to conform to a specific format—any written grievance from a customer should be considered a complaint. The decision regarding how to respond to a complaint is a supervisory or management issue. The actions taken by the agent in choices (b) and (c) will eventually occur, but they will be undertaken by the principal, not the agent. This is why these are wrong choices for this question. The complaint should be handled by the principal who supervises the agent, not the supervisor of the analyst who made the recommendation.

Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is: One year Three years Five years There is no time limit for criminal violations

The statute of limitations for criminal violations under the Act is five years.

XYZ Inc. is an investment adviser. One of its institutional clients would like to sell 1,000 shares of ABC stock. XYZ believes that this would be a suitable investment for another institutional client. XYZ proposes to arrange a trade between the two clients and would charge each customer a small fee for its services. This would allow each client to receive a better price than either could obtain in the open market. Which of the following statements is TRUE in this situation? - This is permitted since the two clients are institutional investors, but would not be permitted if they were not institutional investors - This is permitted if XYZ discloses to each client that it is acting as a broker for both parties in the trade and receives each client's written consent - This is permitted if XYZ discloses to the buyer that it is representing the seller in the transaction and receives the buyer's written permission - This is not permitted under any circumstances unless XYZ waives any fee for arranging the transaction

This is permitted if XYZ discloses to each client that it is acting as a broker for both parties in the trade and receives each client's written consent An investment adviser that wishes to act as a broker for both a client and another person when effecting a securities transaction for a client must (1) disclose the capacity in which it is acting prior to the completion of the transaction and (2) obtain the client's written consent. Since both parties to the trade are clients, the disclosure and consent requirements apply to both.

The maximum civil penalty for insider trading violations is: - $5,000,000 and/or 20 years in prison - $25,000,000 - $10,000 and/or five years in prison - Treble damages

This question is one that requires you to memorize some facts, specifically the differences between civil and criminal penalties. A person who engages in insider trading will be subject to both. This question specifically asks you for the civil penalties. The maximum civil penalty for insider trading violations is three times the amount gained or loss avoided (treble damages). The maximum criminal penalties per violation for individuals are a fine of $5 million, 20 years in prison, or both. Only corporations are subject to a criminal penalty of $25 million per violation

An agent located in State W is employed by a broker-dealer that is owned by a bank. The bank is headquartered in State I. If the agent sells securities issued by the bank to clients in State I, the agent: - Does not need to disclose the affiliation since the clients are located in the state where the bank is headquartered - Does not need to disclose the affiliation since the bank issues exempt securities - Would need to disclose the affiliation only if the clients have nondiscretionary accounts - Would need to disclose the affiliation to the customer under any circumstances

Would need to disclose the affiliation to the customer under any circumstances *Failing to disclose that a broker-dealer is affiliated with or controlled by an issuer of securities is considered a dishonest and/or unethical business practice. The agent would need to disclose the affiliation before entering into any contract with a customer to buy or sell securities. The disclosure may be made verbally prior to the trade if written disclosure is made at or before the completion of the transaction (usually the settlement date). The disclosure would need to be made to all accounts of a broker-dealer.*