Series 63
All of the following information would be found on a trade ticket EXCEPT
The price at the time of the order is of no significance. The execution price, of course, is.
Under the Uniform Securities Act, which of the following is NOT excluded from the definition of broker-dealer?
A person with an office in this state whose securities business is limited to effecting transactions with institutional investors The definition of a broker-dealer is a person in the business of effecting transactions in his account or for the account of others. If the person has an office in this state, regardless of who the clients are, registration with this state is necessary. Under the USA, one is not defined as a broker-dealer if there is no office in the state and transactions are limited in this state to other broker-dealers.
Which of the following would have to register as an investment adviser under the Uniform Securities Act?
A petroleum engineer who frequently is a paid speaker at seminars dealing with investment opportunities in oil and gas exploration limited partnerships Although engineers are included in the list of professionals excluded from the definition of investment adviser, that is only the case when any advice they give is incidental to the practice of their profession. Acting as a paid speaker for an investment seminar "crosses the line".
Which of the following firms would be a federal covered adviser?
ABC Money Managers, a partnership with $112 million under management The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker-dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.
An agent's customer says that ABC Corporation is about to be bought out. The customer wishes to place an order to buy ABC common stock based upon this yet unreleased information, which he claims he learned from an officer in the company. How should the agent respond in this situation?
Bring the information to the attention of the firm's supervisory individual named to handle such matters in the Supervisory Procedures Manual The customer seeks to place an order based on inside information or rumor. The agent should not accept the order before discussing it with her supervisor/principal. Under no circumstances should the agent repeat the information to fellow agents. There is no requirement that such information be reported to the state securities Administrator.
Which of the following is exempt from state registration under the USA?
Common stock of the First National Bank of Boston, a major American commercial bank with branches and representative offices in the United States and abroad Securities of domestic banks are exempt from state registration under the USA.
Which of the following is required to be maintained by financial institutions such as banks and broker-dealers (BDs) by the USA PATRIOT Act to prevent the financing of terrorist operations and money laundering?
Customer identification programs (CIPs)
An investment adviser is registered in New Jersey and has offices in Georgia and Arkansas. One of their IARs lives in Georgia and in addition to his local clients, has one client who lives in Arkansas. The IAR would be required to register in
Georgia The IAR is living in Georgia and has local clients so must be registered there. With only one client in Arkansas, the de minimis exemption would apply to the IAR. There is no need to register in New Jersey because the IAR has no clients there.
What is the smallest order that can be placed for an institutional account?
There is no limit on institutional order sizes
An agent working for a brokerage firm and his client both live in Illinois, and the agent makes an offer to the client by phone while the client is vacationing in California, which he accepts. The client travels to Texas before returning home and sends payment for the security from there. He makes his payment by sending a check from a money-market fund based in Ohio. The Administrators of which of the following states have authority over the sale? Illinois California Texas Ohio
I and II Because the offer was made from Illinois to a person in California, the state Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money-market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.
Securities exempt under the Uniform Securities Act are exempt from registration requirements antifraud provisions of state securities laws sales and advertising literature filing
I and III An exempt security is exempt from the registration requirements and the provisions that require the filing of advertising and sales literature. Exempt securities are never exempt from the antifraud provisions of the act.
Under the Uniform Securities Act, a security that is exempt from the registration requirements is also exempt from the requirements for filing of advertising and sales literature antifraud provisions civil liabilities provisions
I only An exempt security is exempt only from the registration requirements and the requirements for filing of advertising and sales literature. There are no exemptions from the antifraud provisions. Civil liability arises anytime a security is sold or advice is rendered in violation of the act, regardless of whether any security involved was registered or exempt.
Which of the following securities is(are) exempt from state registration and filing of advertising materials? New York City municipal revenue bonds Montreal bonds guaranteed by the province of Quebec Preferred stock of the National Bank, N.A., a member of the Federal Reserve System Preferred stock of Local County Bank, organized and regulated solely by the banking laws of the state of Illinois
I, II, III, and IV Any security issued by a bank that is federally regulated is exempt under the USA. State banks are exempt if regulated by that state. Municipal bonds are exempt if issued by a municipality in the United States or Canada.
If a broker-dealer wishes to conduct operations on the premises of a financial institution, it is required to disclose both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution make a reasonable attempt to be in a location physically distinct from that where retail deposits are taken attempt to obtain written acknowledgement from customers that they have received and read the disclaimers be under common control with the institution
I, II, and III It is a NASAA model rule that broker-dealers operating on the premises of a financial institution make certain disclosures. Every attempt should be made to locate separately from the banking operation and to obtain something in writing from the clients indicating that they have received the disclosures. It is not necessary that there be any relationship between the BD and the institution other than a business one.
Which of the following transactions would constitute a violation of the Uniform Securities Act? An individual representing the issuer of a non-exempt security in an exempt transaction without registration as an agent While acting on behalf of an issuer, an individual, who is not registered as an agent, sells shares of an unregistered nonexempt security to fewer than 15 noninstitutional clients The sale of a Canadian government bond to the resident of a state in which the agent is not registered Representing an issuer of municipal bonds without being registered as an agent in the issuer's state
II and III Representing an issuer of certain exempt securities (the municipal bond) or of a non-exempt security that is sold in an exempt transaction, (choice I) does not require registration. If the sale is of an unregistered nonexempt security, the only way the individual could sell on behalf of the issuer without being an agent is if it was in an exempt transaction, one of which is the limited offering exemption (private placement). That applies when there is a maximum of 10 offers to retail clients within a 12 month period and choice II uses the term, sells. Without knowing the number of offers, we cannot determine if the individual's actions qualify as an exempt transaction. In the case of doubt, assume they don't. Even though the Canadian bond is an exempt security, any agent must be registered in the state(s) in which the security is sold - the exemption applies to the security, not the agent.
A broker-dealer with an office in this state must register as an investment adviser if it charges commissions for selling securities commissions for selling securities while offering investment advice incidental to the sale of the securities a fee for selling investment research and additional fees in the form of commissions for the sale of securities fees for investment research sold exclusively to institutions located in this state
III and IV A broker-dealer must register as an investment adviser if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm must register as an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer need not register as an investment adviser because it is not compensated for the research.
An investment adviser is preparing an advertisement. Which of the following would be acceptable? An endorsement on radio or TV from a celebrity who is a client of the firm Identifying its best investment recommendations for the past 6 months Offering to provide its investment recommendations for the past 12 months Promoting its system of charts and formulas while mentioning its limitations and difficulties
III and IV Any mention of investment recommendations in any investment adviser's advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the investment adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. No outside endorsements are ever allowable on the exam.
Which of the following statements relating to termination of registration of a securities professional registered under the USA is TRUE?
Once the withdrawal is effective, the Administrator retains the right to commence an action for a period of one year. A person may request a withdrawal of a registration. Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process. However, there remains a one year period during which the Administrator may commence an action for activity that occurred when the professional was registered.
Under the Uniform Securities Act, which of the following is TRUE regarding the registration of securities?
State registration by coordination is only available if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering.
A broker-dealer provides HotScores, a portfolio analysis tool which allows clients to indicate their retirement goal. After disclosing age, current financial condition, and risk tolerance, those participating will receive a list of specific securities the customer could buy or sell to meet the investment goal. Which of the following is TRUE?
This would be regarded as making a recommendation. An example of what the regulators have determined to be a recommendation would be if a broker-dealer provides a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The broker-dealer then sends the customer a list of specific securities the customer could buy or sell to meet the investment goal the customer has indicated.
If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar securities, which of the following parties must notify the Administrator of Wallace's move?
Wallace, Rockland and Gibraltar When an agent with one broker-dealer resigns and affiliates with another, both broker-dealers and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U-5 and U-4 with FINRA's CRD.
Under the Uniform Securities Act, an officer who sells an issuer's nonexempt securities to the public is considered
an agent of the issuer subject to registration An officer of an issuer who sells the issuer's nonexempt securities to the public is acting as an agent and must register. Don't assume the sales are made in an exempt transaction unless something indicates that to be the case. However, an officer who sells an issuer's securities, exempt or not, to existing employees without compensation, is not an agent.
Under the Uniform Securities Act, an application for registration as an agent will, in the absence of any order, become effective
at Noon of the 30th day after filing Unless accelerated by the Administrator, registration as an agent (or BD, IA, or IAR), becomes effective at Noon of the 30th day after submission of a competed application. Registration remains in effect until the renewal date of December 31st.
A new issue is being sold by a registered broker-dealer. An agent for the firm prepares a sales brochure that contains only positive information gleaned from the prospectus. The sales brochure is handed out along with a copy of the effective prospectus. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this
would be prohibited because material information is being omitted Sure, the sales piece is being handed out with the prospectus, but the folks at NASAA were not born yesterday. They know the client will most likely ignore the hard-to-read prospectus and just focus on the glossy, slick looking brochure. That is why this is a prohibited practice—disclosure of the risks and expenses will be left out.
Jackie Jackson is an agent with Hamilton Securities Co, an SEC-registered broker-dealer. Jackie's father, Andy, founded a start-up venture several years ago and the company, with Andy as its CEO, had its initial public offering 4 months ago. Jackie wishes to recommend shares of this company to clients, Jackie
would have to disclose the potential conflict of interest When an immediate family member is in a control position with a recommended security, the agent must make disclosure of the potential conflict of interest. Consent of the client is not required, and we don't have enough information to know anything about the risk profile of this company that would require greater a suitability standard. Trades are approved by principals, not recommendations.
Which of the following persons are NOT excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act?
A broker-dealer with no office in the state that has no more than 5 retail clients resident in the state within a 12 month period Even without a place of business in a state, once a broker-dealer has even a single retail client residing in that state, registration is required. Unlike investment advisers, there is no de minimis exemption for broker-dealers. As long as a broker-dealer does not have an office in the state, it is possible to qualify for exclusion from the definition. The primary requirement for the exclusion is that the broker-dealer confines trading to financial institutions, issuers of the security being traded, or other broker-dealers. Trust companies are excluded from the definition of broker-dealer; the place of business is irrelevant.
Which of the following transactions is NOT exempt from registration?
A sale of an exempt security to an individual customer as a result of an agent's solicitation Solicited trades with individuals are not exempt transactions, even when the security being traded is exempt. Transactions between issuers and underwriters or between underwriters are exempt from registration and advertising filing requirements.A bona fide pledge of securities is not a transaction and this question is looking for a nonexempt transaction. Transactions with banks, savings and loan associations, and other financial institutions are exempt from registration and advertising filing requirements.
The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket?
Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order This is one of those questions where the best way to find the answer is by determining what is NOT correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed) and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.
Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers?
Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation. Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.
Harrison is a Certified Financial Planner (CFP) with an office in the state and a telephone directory listing under the category "Financial Planners." Harrison has, for fees, written more than 100 comprehensive financial plans for various individual clients. However, only 20% of the plans' content entails advice regarding securities and investments. Which of the following statements best describes Harrison's status as an investment adviser under the USA?
Harrison is required to register as an investment adviser because he regularly offers advice and receives compensation for advice concerning securities and investments, and holds himself out as a financial planner. Under the Uniform Securities Act, an investment adviser is a person, corporation, partnership, or sole proprietorship who, in the regular course of business, advises others as to the advisability of selling securities. Harrison holds himself out as a financial planner and normally includes a section on investments in his plans. Furthermore, Harrison is compensated for his services-yet another standard of the definition, investment adviser. Under the USA, certain recognized professional designations are exempt from having to qualify by passing the licensing exam but not from registration.
Which of the following situations would require registration as an investment adviser? A broker-dealer provides investment research services to a customer and charges a fee for the service An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission An agent of a broker-dealer prepares a complete financial plan for a customer with a one-time charge of $950. The plan recommends specific securities transactions, which the customer orders. The agent earns commissions on the securities transactions A broker-dealer charges its customers a fee for collecting dividends and account maintenance, in addition to commission charges for transactions executed
I and III Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. A charge for creating a comprehensive financial plan is considered to be a charge for investment advice, even if it is only a one-time expense. It could also be considered that the commissions earned from the recommendations are indirect compensation (which is still looked at as advisory compensation). Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.
The term "sale" includes which of the following? A contract of sale A contract to sell The disposition for value of an interest in a security A warrant (for common stock of the issuer) given with the purchase of a bond
I, II, III, and IV "Sale", used interchangeably with "sell", is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. The sale of a corporate bond is a sale with or without a warrant attached and involves the disposition of an interest in a security of the issuer. Because the distribution of the warrant is conditional upon the purchase of the bond, the acquisition of the warrant is considered to be a sale.
An Administrator may summarily suspend a registration pending final determination of proceedings under the USA. However, the Administrator may NOT enter a final order without appropriate prior notice to the registrant an opportunity for a hearing findings of fact and conclusions of law prior written acknowledgment of the registrant
I, II, and III Prior to the entry of a final order, the Administrator must provide appropriate prior notice to the registrant, provide the opportunity for a hearing, and present findings of fact and conclusions of law. A registrant is not required to provide written acknowledgement before an order is issued.
An Administrator does not have jurisdiction over an offer to sell that is made in a TV broadcast originating outside the state newspaper published outside the state newspaper published inside the state where more than two-thirds of its circulation is outside the state
I, II, and III Under the broadcast and publishing exceptions, the Administrator does not have jurisdiction if the offer is made in a TV or radio broadcast originating outside the state or in a newspaper published outside the state. Furthermore, if a newspaper is published inside a state but more than two-thirds of its circulation is outside the state, the Administrator does not have jurisdiction.
Which of the following are exempt transactions under the Uniform Securities Act? XYZ Company signs an agreement to sell 1 million shares of its stock to ABC broker-dealer, who will then act as an underwriter in marketing the shares to the public. A non-issuer sale of securities listed on the Nasdaq Stock Market to several individual clients of the agent. Mr. Jones sells 100 shares of an unregistered security he owns to his next--door neighbor for $1,000. A customer calls a registered agent and asks to buy 1,000 shares of SPHG, a company the agent is not familiar with, and the agent fills the order.
I, III, and IV Transactions between an issuer and an underwriter, isolated nonissuer transactions (Mr. Jones), and unsolicited nonissuer transactions (SPGH) are exempt under the Uniform Securities Act. Transactions in federal covered securities (listed on national exchanges or the Nasdaq Stock Market) are transactions in an exempt security, but, because the sales are being made to individual clients, the transactions might not be exempt.
Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act,
Sharon must be registered in State X in order to accept the order Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state which is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside.
Under the Uniform Securities Act, which of the following is NOT a requirement for a preorganization subscription to be an exempt transaction? A) There may be no more than ten subscribers. B) No commission may be paid to anyone for soliciting potential subscribers. C) The offer of the security may not be advertised. D) No payment may be made by any subscriber.
There are three requirements for a preorganization subscription to qualify as an exempt transaction. A preorganization subscription may be advertised.
The NASAA Model Rule on Agency Cross Transactions requires that an investment adviser send a written disclosure document to affected clients that includes such items as the total number of agency cross transactions during the period for the client, as well as the total amount of all commissions or other remuneration the investment adviser has received in connection with agency cross transactions for the client during the period no less frequently than
annually The NASAA Model Rule requires that these disclosures regarding agency cross transactions by an investment adviser must be made no less frequently than annually. Most students choose quarterly and with good reason—you've seen quarterly requirements before. For example, when an investment adviser maintains custody of client assets, reports must be sent no less frequently than quarterly. Broker-dealers must send account statement to clients no less frequently than quarterly. When there is a new issue, the Administrator can request reports on a quarterly basis. But, this is different and the rule says annually.
When a broker-dealer furnishes clearance, settlement, and custody services for an investment adviser who directs client brokerage transactions to that broker-dealer, the adviser is
receiving soft dollar compensation Under Section 28(e) of the Securities and Exchange Act of 1934 (and NASAA Policies), broker-dealers are permitted to provide services to investment adviser in exchange for directed securities transactions as long as the services benefit the clients.
Under the Uniform Securities Act, the requirements for filing of advertising and sales literature dealing with an exempt security with the Administrator
do not apply An exempt security or transaction is exempt from the registration requirements and the requirements for filing of advertising and sales literature. It is not exempt from the antifraud provisions of the act.
Under the Uniform Securities Act, the Administrator is empowered to do all of the following EXCEPT
file a civil suit against a broker-dealer who has sold an unregistered non-exempt security to a resident of this state If you follow our exam-tips blog, you know that we have a poor opinion of some of NASAA's questions. This is a prime example. Nowhere in the Uniform Securities Act does it specifically state that the Administrator may initiate a civil action. However, if you check the court dockets of many states, you will see that, in fact, a number of civil cases have been brought by the Administrator. When you have a question like this, you get it right by knowing that, without question, the Administrator is empowered to perform the other listed actions.
Under the USA, a person who has passed the appropriate NASAA examination but whose license has not yet been issued can participate in
giving a seminar on the benefits of whole life insurance versus term insurance A person who has passed the NASAA exam cannot transact securities business until the Administrator notifies the employer that the registration is effective. Insurance, unless variable, is not a security.
Under the Uniform Securities Act, all of the following are specifically excluded from the definition of a broker-dealer EXCEPT
investment advisers Banks, issuers, agents, and certain out-of-state broker-dealers are excluded from the definition of broker-dealer. However, investment advisers frequently also carry registration as a broker-dealer.
A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use
notice filing Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.
Your friend is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent, and your friend wants you to sell the policy and split commissions with him. Splitting commissions
on variable annuity sales is allowable only if the agents involved are both licensed in life insurance and maintain their securities licenses at the same or affiliated broker-dealers You must be licensed in both insurance and securities to sell variable annuities or to split commissions. Commissions on securities transactions may only be split with registered agents of the same or affiliated broker-dealers.
A sales agent who is only registered in Nebraska works for a broker-dealer that is registered in all 50 states. A customer who is a resident of North Dakota calls the representative in Nebraska and offers to purchase securities. Under the Uniform Securities Act, the agent should
reject the order because she is not registered in North Dakota Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in North Dakota. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.
Under which of the following circumstances may an Administrator revoke an adviser's registration?
the adviser has been convicted of a nonsecurities-related felony. If an adviser committed a felony or participated in unethical business practices, its registration will be revoked, not canceled. An adviser's registration may be canceled if the adviser is found to be mentally incompetent, cannot be located, or is no longer in business. The difference between canceling and revoking a registration is subtle; cancellation is not punitive while revocation involves some sort of wrongdoing.
An individual employed by a federal covered adviser would be required to become registered as an IAR in the state if
the only clients receiving the individual's advice are large pension plans organized for employees of municipalities located in the state where that individual maintains an office Individuals performing the duties of an IAR for a federal covered investment adviser are only required to register in states in which they maintain a place of business. Although pension plans (as long as the total assets of the plan are at least $1 million) are considered institutional investors for exemption purposes, that exemption only applies when the individual has no place of business in the state.
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts,
the schedule should be made available on the broker-dealer's public website without requiring any login or password Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.
Each of the following statements about postregistration provisions is true EXCEPT
the securities Administrator does not have the authority to conduct an on-site examination of an investment adviser registered in his state if the adviser does not have an office in that state Administrators have the authority to conduct an on-site examination of a registered investment adviser even if there is no place of business maintained in the Administrator's state. Under the Act, Administrators may require the filing of advertising used by broker-dealers and investment advisers, who must also comply with certain recordkeeping requirements and file correcting amendments.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be prohibited for an agent
to borrow money or securities from a client who is a member of his immediate family The only circumstances under which an agent may borrow from a client is if the client is in the lending business, and something to that effect would have to be stated in the choice. This means you can't borrow from clients who are family or friends. Although the unsolicited order from the client who lives in a neighboring state is an exempt transaction, the agent could not accept it if he was not licensed in that neighboring state. How do we know he is? If he was not, then he could not have a client there.
A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. This individual calls the client and suggests the purchase of 500 shares of RMBM common stock as an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted:
unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity. The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.
