Business Practices Quiz # 2 missed questions
A customer that typically buys NYSE-listed stocks places an order to buy a very thinly traded stock that is quoted only in the Pink Sheets. Because of the extra work involved in handling this transaction, the firm imposes an extra $150 charge in addition to the regular commission. Which statement is TRUE? A. The extra charge must be disclosed to the customer at the time that the order is placed B. The extra charge must be disclosed to the customer no later than on the confirmation of the transaction C. The extra charge must be disclosed to the customer no later than on the next account statement D. There is no requirement to disclose the extra charge
A Unusual charges or fees involved with a transaction must be disclosed to the customer at the time that the order is placed. Disclosure cannot be made "after the fact" - which would be the case if the fee were disclosed on the trade confirmation or on the next account statement.
An agent may engage in which of the following? I Soliciting orders for exempt unregistered securities if he is registered in the State II Soliciting orders for non-exempt unregistered securities if he is registered in the State III Effecting transactions in a State where he is not registered, but the broker-dealer is registered IV Effecting transactions in a State where the broker-dealer is not registered, but he is registered A. I only B. I and II C. III and IV D. I, II, III, IV
A Agents cannot solicit orders for unregistered non-exempt securities (but they can solicit orders for unregistered exempt securities such as U.S. Governments or Municipals; and registered non-exempt securities such as common stock). Agents cannot effect trades in a State where they are not registered; or where their broker-dealer is not registered.
Which of the following would constitute an "involuntary assignment" of an investment advisory contract under the Uniform Securities Act? I An investment adviser formed as a corporation sells all of its stock to an acquiring broker-dealer II An investment adviser formed as a partnership has a partner with a 25% interest resign III An investment adviser formed as a partnership has 1 partner leave and take the contract to a new advisory firm A. I only B. I and III C. II and III D. I, II, III
B If an investment adviser formed as a corporation sells all of its stock to an acquiring broker-dealer, then all of the investment adviser's contracts have legally been assumed by that broker-dealer. This is the same as an assignment. If a partner at an advisory firm leaves and takes the contract with him or her to a new firm, again this is an assignment of the contract to the new firm.
An agent has heard from a good friend that "ACME Fund has taken a large position in ABC stock." Based on this, the agent calls all of her customers with the recommendation that ABC stock be purchased immediately. This action is: A. permitted without restriction B. permitted only if the agent files a disclosure form with the Administrator C. prohibited, since this recommendation was made based upon a rumor D. prohibited, since this recommendation was made based upon inside information
C
An Investment Adviser Representative enters into a contract with a new client for advisory services and provides the client with a glossy copy of Form ADV Part 2 (the "Brochure") and the Brochure Supplement. When he gets back to the office, he realizes that he forgot to have the client sign that the Brochure was received. The IAR: A. is not required to do anything because the customer received the Brochure and Brochure Supplement B. must have the customer sign within 48 hours that the Brochure was received C. must have the customer sign the contract and give the customer 5 business days to terminate the contract without penalty D. must rescind the contract immediately
C In this case, because the customer did not receive the brochure 48 hours to signing the advisory contract, the customer must be given 5 business days to rescind.
Customer privacy rules allow the disclosure of a specific customer's account information: A. under no circumstances B. to any third party that makes the request in writing C. to a third party as necessary to complete a transaction requested by that customer D. to any government agency that makes a request for information
C The customer privacy rules do not permit firms to disclose specific customer account information to third parties - unless the customer authorizes this. D is incorrect because "any government agency" cannot request customer account information.
Under the Uniform Securities Act, which of the following are allowed forms of investment adviser compensation? I Charging a flat fee only if the portfolio increases in value II Charging an hourly rate which includes the time it takes to get to the client's office and back III Charging a fee based upon a fixed percentage of assets under management IV Charging a flat fee per year regardless of the portfolio size A. I only B. III only C. II and IV D. II, III, IV
D Fees based upon a percentage of assets under management and flat fees (including hourly and annual fees) are permitted as long as the details are fully disclosed to customers. Performance fees are prohibited.
An Investment Adviser has adopted an internal Business Succession Plan. Who is responsible for servicing the IA's client accounts if the managing director of the Investment Adviser suddenly dies? A. Another Investment Adviser Representative currently in the firm B. Another Investment Advisory Firm to which investment management has been transferred C. The custodian bank that holds client funds and securities positions D. An immediate family member of the deceased managing director
A NASAA has a model rule on "Business Continuity and Succession Planning" for Investment Advisors. In an "internal plan," the Adviser transfers the advisory responsibilities to another IAR currently in the firm.
A customer buys 1,000 shares of XYZZ stock in a margin account and pays the required 50% margin on settlement date. The customer requests that the broker-dealer transfer the securities into the customer's name and ship them to his home address. Which statement is TRUE? A. This request cannot be honored because the securities must be paid for, in full, to process a transfer and ship request B. This request cannot be honored because all customer securities must be held in a depository C. This request cannot be honored unless the customer makes it in writing D. This request should be honored as given
A Securities held in margin accounts cannot be transferred and shipped - they are kept in "street" name as collateral for the customer margin loan. The customer must pay off the loan on the securities in order for the brokerage firm to transfer them into his or her name and ship them. There is no requirement for such a request to be made in writing.
The CEO of a publicly traded company is a large client of an investment adviser representative. The CEO, who is a member of the prestigious River Rocks Country Club, tells the IAR that he will refer other club members to the IAR if the IAR will give the referred clients a discount, and will give the CEO the same discounted rate. Which statement is TRUE about this situation? A. The IAR is prohibited from giving a group of individuals a discount that is not being offered to all of the IAR's clients B. The IAR can offer the discount as long as the fact that non-club members pay a higher fee is disclosed in the Form ADV Part 2A C. The IAR can offer the discount as long as charges to all of the IAR's customers are fair and reasonable D. The IAR is prohibited from offering the CEO the discount since he or she is an existing client, but can offer the discounted rate to any new clients that belong to the country club
B Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue group business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount (in this case, they must be members of the country club); and the adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the brochure") that is given to clients.
The purchase of a security on one exchange and the simultaneous sale of the same security on another exchange is: I known as "arbitrage" II known as "churning" III considered to be a fraudulent transaction IV not considered to be a fraudulent transaction A. I and III B. I and IV C. II and III D. II and IV
B Simultaneously buying a security on one exchange and selling it on another exchange is a legitimate trading technique called "arbitrage" and is performed to profit from small price differences that may arise between exchanges.
For an adviser to charge a performance fee, the Investment Advisers Act of 1940 requires which minimum financial standards from customers? I A customer that deposits $1,000,000 or more with the adviser II A customer that deposits $2,100,000 or more with the adviser III A customer with a $1,000,000 or higher net worth IV A customer with a $2,100,000 or higher net worth A. I and III B. I and IV C. II and III D. II and IV
B Because the Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,100,000), NASAA cannot prohibit the charging of a performance fee for these customers. Remember that Federal law supersedes State law; in the absence of a Federal law, then only that State law applies.
The person named as the executor over an estate would be found in the: A. affidavit of domicile B. letters testamentary C. proof of domicile D. certificate of incumbency
B Letters testamentary is the legal term for the will (as in "last will and testament"). The name of the executor chosen by the person who is now deceased would be found in the will.
Under NASAA rules, if a customer wishes to trade a margin account prior to returning the signed margin agreement, such an action is: A. prohibited B. permitted only if the customer returns the signed margin agreement promptly C. permitted only if the customer returns the signed margin agreement within 1 day of the first transaction in the account D. permitted only if the customer returns the signed margin agreement within 3 days of the first transaction in the account
B NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. Since this is a NASAA question, the answer is their rule!
A salesperson is offering promissory notes for a company selling coffee at drive-through kiosks. The notes pay a 13% interest rate and mature within 9 months. The salesperson tells a potential investor that the notes are "risk-free" and that the kiosks are collateral that secure the note. The salesperson is not registered in the State and the notes are not registered in the State. Which statement is TRUE? A. There is no requirement for the promissory notes to be registered in the State because they are exempt securities due to the fact that their maturity does not exceed 9 months B. The offer is a violation of State law because the salesperson must be registered or licensed in the State and the promissory notes must be registered in the State C. The offering is fraudulent because the notes pay a rate of interest that is higher than the legal maximum rate permitted under State law D. The offering is a violation of State law because the promissory notes are an unsecured obligation that cannot be backed by collateral
B To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000 are exempt from State registration. Thus, smaller note offerings (under $50,000 amount) to smaller investors are non-exempt and must be registered; and unrated note offerings or non-investment grade rated note offerings must also be registered in the State.
An agent is permitted to say which of the following? A. "Because I have passed the Series 63 examination, I am approved as an agent in the State" B. "Because I am registered in the State, this means that the State Administrator has approved me" C. "To be registered in the State, I had to qualify by passing the Series 63 (or Series 66) examination" D. "I am one of the few persons who has qualified for registration in the State by passing the extremely difficult Series 63 (or Series 66) examination"
C As a general rule, an agent cannot state that he or she is approved by the Administrator; he or she is simply registered in the State. However, it can be stated that the agent has passed the required qualification examination (the Series 63 or 66), since this is a true statement. Choice D is untrue - many, many persons have passed the Series 63 and Series 66 examinations - they may be hard tests, but not extremely difficult ones.
An investment adviser is opening that day's mail and receives a check from a customer made out to the "Jones Cleaning Service" - the check was mailed in error to the adviser. The same day, the investment adviser mails the check back to Jones Cleaning Service. Under NASAA rules, the investment adviser: I is deemed to have taken custody of the customer's funds II has not taken custody of the customer's funds III must keep a record of the check received IV is not required to keep a record of the check received A. I and III B. I and IV C. II and III D. II and IV
C If a client inadvertently gives securities or funds to an investment adviser, as long as they are returned within 3 business days, then the adviser has NOT taken custody. If the adviser inadvertently receives a check made out to a third party (as is the case here), as long as the adviser mails the check to the third party within 3 business days, then the adviser has NOT taken custody. Regardless, the adviser must keep a record of the receipt of the check.
The fiduciary engaged in the administration of a trust finds that, under the directions of the trust document, there is a conflict of interest relating to a proposed investment. Under the provisions of the Prudent Investor Act, the fiduciary: A. should do nothing and permit the investment to be made B. is permitted to allow the investment as long as it is made in accordance with the Prudent Investor rule C. should ask the settlor of the trust to amend the trust document by express provision, expanding or restricting the provisions of the trust document for this investment D. should not permit the investment, otherwise the fiduciary is subject to liability for breach of fiduciary responsibility
C If the document does not give enough guidance for the investments that are permitted to meet these needs where there is such a conflict, then the trustee should go to the trust grantor or settlor for specific guidance on the permitted investments and the trust document must be amended for this.
A broker-dealer is a subsidiary of a company that is listed on the New York Stock Exchange. An agent of the broker-dealer believes that the parent company's stock is a good investment and wants to recommend it to her customers. Which statement is TRUE about this? A. This is permitted because the company qualifies for a "blue chip" exemption under the Uniform Securities Act B. This is an unethical business practice and is prohibited C. This is permitted only if the agent discloses the existence of the relationship verbally when making the recommendation and it is disclosed in writing on the confirmation D. This is permitted only if the agent opens a joint account with the customer to purchase the recommended stock of the parent company
C This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the transaction (this is done by disclosing it in writing on the trade confirmation).
An elderly widow, age 81, is seeking to supplement her retirement income with an investment that will provide income that will grow with inflation. Which statement about variable annuities could be made to this client? A. "A variable annuity is guaranteed to give a rate of return that matches the inflation rate" B. "A variable annuity is backed by the investment assets of the insurance company, which are always growing" C. "A variable annuity will give a rate of return that closely matches the performance of the mutual fund that you select" D. "A variable annuity will give a rate of return that is adjusted each year by the growth in the CPI"
C Variable annuities give a rate of return that is tied to the performance of the underlying mutual fund shares held as the asset that will fund the annuity. Thus, Choice C is a true statement. The backing for the variable annuity is the mutual fund shares held in a separate investment account - the annuity is not funded by the insurance company's general investment account. The rate of return may or may not match the inflation rate and the rate of return is not CPI (Consumer Price Index) adjusted.
Regarding the use of material facts when effecting customer transactions, all of the following statements are true EXCEPT: A. omission of material facts is fraudulent B. if all known facts cannot be presented, the agent must decide which facts are "material" and must be presented C. material facts must only be disclosed if they would have a negative impact on the security's value D. material facts must be disclosed when making either an offer to buy or sell
C Omitting material facts when effecting customer trades is fraudulent; agents must present all "material" facts about a transaction to customers; it makes no difference whether material facts might have either a negative or positive impact - they must be disclosed; and material facts must be disclosed when making an offer to buy or sell securities.
An IAR discusses a trading strategy with one of her clients, who tells the IAR to sell her ABC stock position whenever you see an opportunity. After this conversation, the client leaves the IAR's office for a vacation. Two days later, the IAR sees that ABC stock has risen in price and believes that this is an opportune time to sell the position. The IAR should: A. not place the order and try and contact the client B. place the trade and notify the client in writing within 2 business days C. place the trade and get written discretionary authority from the customer within 10 business days D. get approval from his or her direct manager before placing the trade
C Unlike the rule for broker-dealers written by FINRA, where a written power of attorney is required prior to exercising discretion, the NASAA rule for investment advisers is that verbal discretion can be exercised, as long as the written power of attorney is obtained from the customer within 10 business days.
Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, all of the following are prohibited business practices EXCEPT: A. being deliberately selective in the information told to a customer B. giving inaccurate statements about an issuer's projected earnings C. telling a customer that a company is about to be listed on the New York Stock Exchange without knowing the truth of the statement D. telling a customer that a listed security being recommended is registered with the Securities and Exchange Commission
D Choices A, B, and C are all violations of the Act - being deliberately selective in the information told to a customer; giving inaccurate statements about an issuer's projected earnings; or telling a customer that an exchange listing is expected without knowing the truth of the statement.
Which of the following is (are) prohibited in a margin account? I A customer buying a security without the intention to pay on settlement II A customer selling a security without the intention to deliver on settlement III A customer selling short a security that cannot be borrowed and delivered on settlement A. I only B. I and II C. II and III D. I, II, III
D In any account, whether it be a cash or margin account, a customer cannot buy a security without intending to pay on settlement, and cannot sell a security without intending to deliver on settlement. Short sales can only be effected in a margin account. Selling short a security means that the security to be sold is borrowed from another customer of the broker-dealer. A short sale is not permitted unless it is first determined that the security to be sold can be borrowed and delivered by settlement.
Which statement is TRUE under NASAA rules? Within 120 days of fiscal year end, the customer must be given a copy of the: A. Form ADV Part 1 B. Form ADV Part 2 C. Form ADV Part 1 only if there are material changes D. Form ADV Part 2 only if there are material changes
D NASAA rules require that within 120 days of fiscal year end, the adviser must send each customer a revised Brochure (Form ADV Part 2A) and Brochure Supplement (Form ADV Part 2B) if there are material changes.
Which of the following are requirements for an internet communication (a website) posted by a broker-dealer, agent, investment adviser or investment adviser representative? I The communication must be limited to the dissemination of general information on products or services II The communication must include a firewall or other implemented procedure to ensure that prior to any subsequent communication with prospective clients in the State, that the broker-dealer, agent, investment adviser, or investment adviser representative are registered in the State, or are exempt or excluded from registration III The communication must include a legend that states that: "The broker-dealer, agent, investment adviser or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration" IV The communication must include a legend that states that: "Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
D So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). The internet communication cannot be overtly promotional; and the broker-dealer or investment adviser must put in a firewall or procedures that make sure that viewers of the site are not contacted by agents or investment adviser representatives to buy securities or advisory services unless the agent or IAR is appropriately registered in the State.
All of the following information is required on an order ticket EXCEPT: A. time of order receipt B. time of order execution C. whether the trade was solicited or unsolicited D. whether the order was placed verbally or in writing
D There is no requirement to record the manner in which the order was received. Time of order receipt is recorded on the order ticket, as is time of order execution. Both of these are required to permit regulators to be able to detect "front running" violations. They are also needed to resolve customer complaints about possible execution errors. The account name and/or number must be on the order ticket. It must be recorded whether the trade was solicited or unsolicited.
A member firm is negotiating with an issuer to underwrite an add-on common stock offering and a registration statement has not yet been filed. A research analyst at the firm has been following the company for the past 5 years and now wishes to change the broker-dealer's rating from "Hold" to "Buy." The member firm should: A. issue the report in its normal fashion B. issue the report only to its best customers C. buy the stock in the market before issuing the report D. not issue the report until at least 3 days after the effective date
D This is a conflict of interest. Member firms doing underwritings are prohibited from issuing research reports for 10 days following the effective date for IPOs; and 3 days following the effective date for add-on offerings.
A Registered Investment Adviser pays a flat fee to a Certified Public Accountant for client referrals. The RIA charges his clients a fee based on a percentage of assets under management. Which statements are TRUE regarding required disclosures to customers? I No disclosure of fees paid by the adviser to the CPA is required II Disclosure of the fees paid by the adviser to the CPA is required III No disclosure of the management fees to be paid by the customer is required IV Disclosure of the management fees to be paid by the customer is required A. I and III B. I and IV C. II and III D. II and IV
D Disclosure of all fees paid must be made to customers. Thus, the Registered Investment adviser must disclose that he pays the CPA for referrals; and management fees charged by the adviser to the customer must be disclosed as well.
The Department of Treasury requires notification for which of the following instances? A. A deposit of $5,000 cash B. A withdrawal of $5,000 cash C. The deposit of $20,000 worth of bonds in fully registered form D. The withdrawal of $11,000 cash
D The Department of Treasury requires that any deposits of cash made by a customer; or withdrawals of cash made by a customer; in the amount of more than $10,000, must be reported to FinCEN (Financial Crimes Enforcement Network).