Chapter 4 Quiz 63
Which of the following would NOT be grounds for denial, suspension, or revocation of registration of a broker-dealer or agent in connection with solicitation or recommendation of investment company shares? [A] Broker-dealer ABC recommends to its client, Bob, that he purchase Class A shares of an investment company in connection with an investment company offering multiple classes of shares after analyzing his investment objectives and financial situation. [B] Sharon, who is an agent, recommends to her client, Molly, that she liquidate her current holdings to purchase investment company shares similar to shares she just redeemed without considering whether or not the recommendation is suitable for Molly. [c] Heiser is a customer of broker-dealer XYZ and the firm recommends he purchase $100,000 of investment company shares without disclosing to Heiser the sales charge discount available, which will reduce his overall sales charge. [D] Broker-dealer Last Chance recommends to its client, Tamara, that she purchase investment company shares without consideration if it is the most suitable choice, with the outcome that she has two portfolios with Growth-related investment objectives.
[A] Broker-dealer ABC recommends to its client, Bob, that he purchase Class A shares of an investment company in connection with an investment company offering multiple classes of shares after analyzing his investment objectives and financial situation.
All of the following statements are true about Cybersecurity and Data Protection, Except [A] Client's data should be stored on the firm's internal server, to increase the level of safety [B] The firm must require all third party system providers to sign confidentiality agreements [c] Always use two ID's for the staff to access all systems at work [D] Install anti-virus software on devices used to access client data and all updates should be automatically installed
[A] Client's data should be stored on the firm's internal server, to increase the level of safety
An investment adviser rep. is a general partner in Melenki Properties, a real estate limited partnership and is paid a management fee. One of the lAR's clients contacts her to express an interest in buying limited partnerships. The IAR provides three options-one of which is Melenki Properties. In their discussion, she also discloses her involvement in Melenki. The client decides to purchase interests in Melenki Properties. Did the lAR conduct herself properly in accordance with the Model Rules? [A] The IAR should have disclosed her participation in Melenki Properties in writing before presenting it as an option to the client. [B] The lAR conducted herself properly by providing three options from which the client can choose. [C] The IAR must sell her interests in Melenki Properties investments before she is permitted to offer it as an investment option [D] The lAR conducted herself in accordance with the Model Rules by providing proper disclosure and offering various options to the client.
[A] The IAR should have disclosed her participation in Melenki Properties in writing before presenting it as an option to the client.
Gladys is a registered agent at a broker-dealer. She receives an email from a customer expressing his dissatisfaction with an unauthorized trade in his account. Gladys sees the email come in on her mobile phone but does not respond as she is on a business trip. She plans to call the customer upon her return in two weeks. According to the NASA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is correct regarding the agent's behavior? [A] The agent behaved unethically because she failed to respond to a customer complaint. [B] The agent behaved appropriately because the customer sent an email rather than a written complaint [c] The agent exhibited unethical behavior by not canceling the trade in question immediately. [D] The agent handled the situation properly as she plans to respond when she returns in two weeks.
[A] The agent behaved unethically because she failed to respond to a customer complaint.
Under NASA Model Rules, which of the following entities would not be allowed to exercise any discretionary power in effecting a transaction for a customer's account without first obtaining written discretionary authority from the customer, unless the discretionary power relates solely to the time and or price for the execution of orders? I. A broker-dealer II. An investment advisory firm III. An agent of a broker-dealer IV. An Investment Adviser Representative [A] I & II [B] I & IIII [c] I & IV [D] I, II, III, IV
[B] I & IIII
Stan is a registered IAR and recently resigned from the lA firm he was affiliated with and is now starting his own lA firm and is taking many of his clients with him. As part of the new lA he is establishing he would like to include a mandatory mediation clause that he will have all of his clients sign in order to avoid the future possibility of costly litigation. Which of the following statements is true with regard to this action under NASAA Model Rules? [A] Stan would be allowed to have his clients sign the mandatory mediation clause since his customers are existing clients who have a history of investing with Stan. [B] Stan would not be allowed to have his clients sign the mandatory mediation clause since he is not allowed to cause his clients to waive any rights they may have under state or federal securities laws. [c1 Stan would be allowed to have his clients sign the mandatory mediation clause if his clients read, understood and agreed to give up other state and federal rights. [d] Stan would not be allowed to have his clients sign the mandatory mediation until his new lA firm has been established for at least several years.
[B] Stan would not be allowed to have his clients sign the mandatory mediation clause since he is not allowed to cause his clients to waive any rights they may have under state or federal securities laws.
You are working as both a registered investment adviser representative (IAR) and as a licensed agent of a broker-dealer. Your brother has established a start-up company and comes to you asking that you sell shares of the start-up in a private placement in exchange for a healthy commission on the sale. You are allowed to make the offering if [A] the clients are informed that the owner of the start-up is your brother. [B] you receive permission from your broker-dealer before making the sale. [c] you also purchase shares in your personal account before selling them to clients. [D] the offering is made to institutional accounts only.
[B] you receive permission from your broker-dealer before making the sale.
Chase works with clients as an agent of Broker- Dealer A. After a call initiated by Chase to discuss possible investments, one of Chase's clients enters a large order for 10,000 shares of XYZ Common Stock, a stock in which Broker-Dealer A makes a market. The client is using a third- party quotation system and states that the bid/ask is $50-$50.25. Without checking, Chase immediately informs the client that Broker-Dealer A can fulfill the order at those prices. According to the NASAA Model Rules, which of the following is TRUE? [A] Broker-Dealer A is prohibited from lending on margin in relation to this trade, because the order was solicited and the firm is acting in a principal capacity. [B] Prior to completion of the transaction, Chase would be required to disclose the control relationship that exists between Broker-Dealer A and XYZ Corporation, since Broker-Dealer A makes a market in XYZ Common Stock. [C] Chase and Broker-Dealer A have acted in violation of NASAA Rules by promising to fulfill the order at the price stated by the customer without first checking Broker-Dealer A's inventory and pricing. [D] Prior to executing the order, Chase and Broker- Dealer A would be required t
[C] Chase and Broker-Dealer A have acted in violation of NASAA Rules by promising to fulfill the order at the price stated by the customer without first checking Broker-Dealer A's inventory and pricing.
Bison LLC is an investment advisory firm and is registered at the federal level. It requires prepayment of fees nine months in advance. Which of the following prepaid fee amounts would require the firm to file an audited balance sheet with its state securities Administrator? [A] $500 [B] $501 [C] $1,200 [D] $1,500
[D] $1,500
A report is purchased from an economic research firm by an investment advisory firm. The companies are not affiliated. According to the NASAA Model Rule on Unethical Business Practices of Investment Advisers and Federal Covered Advisers, all of the following statements are false EXCEPT [A] As long as the research firm is compensated fairly for the use of the report, the report can be handed out to the investment adviser's clients without restriction [B] There are no restrictions in this situation and the lA is free to provide the report to any of its clients [c] Clients of the lA firm must not be given a copy of the report under any circumstances [D] Copies of the report may be distributed to clients of the lA under the condition that the clients are informed of who prepared the report
[D] Copies of the report may be distributed to clients of the lA under the condition that the clients are informed of who prepared the report
Under the NASA Statement on Investment Advisers, an investment adviser would be considered to have custody of client funds in which of the following situations? I. The lA has actually taken physical possession of the clients funds II. The lA has the authority to take possession of client funds III. The lA has taken possession of client funds and will forward the client a receipt within 10 business days IV. The client has wired funds to the IA for investment purposes. [A] I & II only [B] I & IV only [c] I, III, IV only [D] I, II, III, IV
[D] I, II, III, IV
When selling customers into shares of a mutual fund, which of the following are requirements of an agent of a broker-dealer firm under NASA Regulations? I. The agent must ensure that the securities are suitable for the client. II. The agent must ensure that the securities are appropriate for the client. III. The agent must disclose all sales charges, including asset-based and contingent deferred sales charges which may be imposed with respect to the purchase, retention, or redemption of such shares. IV. The agent must disclose all relevant sales charge discounts on the purchase of shares in dollar amounts at or above a breakpoint. [A] I and II only [B] I and III only [c] II, III, and IV only [D] I, II, III, and IV
[D] I, II, III, and IV
IA's who have discretion over client funds have a responsibility to select portfolios for such clients that will: [A] Offer a strategy that is the same for all clients [B] Result in the highest returns for the client [c] Result in the preservation of principal in the account [D] Offer a strategy for each specific client
[D] Offer a strategy for each specific client
A client has a stated investment objective of current income with a medium-term time horizon on her account profile. Her portfolio consists of fixed income securities. Her lAR recommends building the portfolio further with another fixed income security, a zero coupon bond maturing in seven years. The client agrees. Has the IAR made an appropriate recommendation? [A] The recommendation is appropriate as it is a fixed income security, consistent with the client's current portfolio. [B] The IAR made a proper recommendation as it matches the client's medium-term time horizon. [c] The IAR should have recommended selling some current postions in order to fund the purchase of the zero coupon bond [D] The recommendation is inappropriate as the client's investment objective is current income.
[D] The recommendation is inappropriate as the client's investment objective is current income.
An investment adviser experiences a catastrophic event at one of its branch offices and temporarily cannot continue operations. According to the NASA Model Rule on Business Continuity and Succession Planning, the A must [A] relocate branch operations to the home office within 30 calendar days. [B] temporarily suspend operations until an expedited internal investigation is completed. [c] temporarily re-assign customers to another investment adviser representative. [D] employ alternate means of communication with affected customers.
[D] employ alternate means of communication with affected customers.
An lA amends its standard investment advisory contract to require mandatory mediation in the event of a dispute between the lA and the clients. This amendment is: [A] permissible if the client agrees to it [B] permissible because mediation is a fair way to resolve disputes [C] impermissible because mediation may not work [D] impermissible if it would require a client to waive any legal rights available under federal or state securities laws.
[D] impermissible if it would require a client to waive any legal rights available under federal or state securities laws.
The state Administrator receives notice from an IA firm that the firm's net capital has fallen below the Administrator's minimum requirement. NASA regulations pertaining to this scenario require immediate filing of which of the following? 1. The contact information for qualified custodians handling client funds. II. A balance sheet calculated up to the present. III. A tally of client ledger balances in aggregate IV. A statement that shows all non-segregated funds and securities of all clients [A] I only [в] I, II, and III only [c] I, III, and IV only [D] I, II, III, and IV
[c] I, III, and IV only
Joe is an investment adviser representative and agent who works for ABC Advisory and Broker Services. A client comes in seeking advisory services. Joe charges the client a fee and creates a financial plan for the client, including several recommendations for investments in order to put the client's free capital to work. The client comes back to Joe and informs him that they don't have an account at a broker-dealer and they are interested in putting Joe's plan to work through the broker-dealer services offered by ABC, with Joe as their agent. Under NASA Rules, which of the following is TRUE of this scenario? [A] Because Joe acted as an investment adviser representative to the client, he is not permitted to function as an agent for the client as well, and must refer the client to another agent at another firm. [B] Joe is permitted to act as both investment adviser representative and agent for this client's account without restriction. [c] Joe is permitted to act as both investment adviser representative and agent for this client, but only if Joe properly discloses how he is compensated via fees and commissions in writing to the customer prior to putting the plan to work. [D] Joe is pe
[c] Joe is permitted to act as both investment adviser representative and agent for this client, but only if Joe properly discloses how he is compensated via fees and commissions in writing to the customer prior to putting the plan to work.
Julie is a customer at ZZZ Broker-Dealer Inc. She will be going on an extended vacation and during a call with her agent at ZZZ, she tells the agent to "call her if there are any issues with my account, and take necessary action with regards to sales if any of the stocks fall by more than 15% in value." Which of the following are TRUE of this scenario? [A] Julie has given verbal authority to trade in her account, and the agent is now permitted to trade in the account without talking to Julie. [B] Julie has given specific instruction to the agent with regards to the decrease in value, so the agent doesn't need discretionary authority to trade. [c] Julie needs to give prior written authorization to her agent at ZZZ in order for the agent to act on her instructions while she is away on vacation. [D] Julie's agent can use time and price discretion in Julie's account on the day that this matter was discussed, even though no security or volume was discussed.
[c] Julie needs to give prior written authorization to her agent at ZZZ in order for the agent to act on her instructions while she is away on vacation.
Maria works on a financial news network for many years, reporting business news and information relevant to the stock market. She decides to get out of the spotlight and start her own investment advisory firm. On her website and in her brochures, Maria mentions that she has been approved by the State Administrator as an IA and that she has many years of advisory experience. According to NASA Regulations, which of the following is TRUE of this scenario? [A] Maria has violated NASA Regulations, but only because she claimed she was "approved" by the State Administrator. [B] Maria has violated NASA Regulations, but only because she claimed to have many years of advisory experience. [c] Maria has violated NASA Regulations, both because she has claimed to be "approved" by the Administrator and because she has misrepresented her level of experience in the advisory industry. [D] Maria has not violated NASA Regulations, because the Administrator did permit her registration to become effective and because she does have many years of experience reporting on the financial industry.
[c] Maria has violated NASA Regulations, both because she has claimed to be "approved" by the Administrator and because she has misrepresented her level of experience in the advisory industry.
An Investment Adviser, as a Fiduciary, is mandated under the Model Rules to: [A] Obtain discretionary authorization from all clients so that the lA can trade the clients account as the lA deems fit for that client. [B] Obtain the clients investment objectives but trade the account as the lA interprets how the clients account should be traded. [c] Provide impartial advice to each individual client based on that client's needs and objectives. [D] Enter only orders directed by the client and not provide advice unless the client requests such advice in writing.
[c] Provide impartial advice to each individual client based on that client's needs and objectives.
According to NASA's Statement of Policy of Unethical Business Practices, all of the following are required to be disclosed by investment advisers to clients except: [A] That the investment adviser will be buying recommended securities for his personal account. [B] That the investment company whose shares are recommended by the investment adviser compensates the investment adviser with management fees. [c] That the investment adviser will buy back any recommended securities at the original purchase price upon request. [D] That the broker-dealer that effects recommended securities trades compensates the investment adviser with commissions.
[c] That the investment adviser will buy back any recommended securities at the original purchase price upon request.
A Federal Covered Adviser is the adviser for a large family. The family is wealthy and there are accounts set up for the grandparents, parents, as well as the adult and minor children in the family. There are two lARs at the firm that handle these accounts. Based on this information, which of the following would be FALSE with regard to the lA Firm? [A] The advisory firm must have written policies and procedures in place. [B] The advisory firm is required to create and maintain updated advisory contracts for these family accounts. [c] The advisory firm is required to provide each family member account with a discount since there are more than two accounts established for the same family group. [D] The advisory firm shall not disclose the identity, affairs, or investments of any client accounts unless required to do so by law or if consented to by a client in writing.
[c] The advisory firm is required to provide each family member account with a discount since there are more than two accounts established for the same family group.
An Investment Adviser employs several IA's. The IA is required to maintain a copy of which of the following with regard to its lARs? [A] Securities screening and background checks that were performed on each IAR [B] A copy of their driver's license [c] The initial application completed by each lAR [D] A copy of each IAR's fingerprints obtained from a police department
[c] The initial application completed by each lAR
The Administrator of a given state may be able to force an investment advisory firm to abide by the minimum capital requirements of the Administrator's State under NASA regulations in which of the following cases? [A] The IA is registered in the State. [B] The lA has clients in the State. [c] The lA has its main office in the State. [D] The lA has a place of business or has registered investment adviser representatives in the State.
[c] The lA has its main office in the State.
An investment adviser representative has a client that has suffered trauma in an automobile accident. Doctors are optimistic that the AR's client will fully recover, but the client is currently in a medically- induced coma. How should the lA proceed with regards to the handling of the client's account? [A] The lAR should begin a pattern of discretionary trading in the account which may improve profits for the client, but will cause higher commissions for the lAR. [B] The lAR should contact the client's attorney, who has a copy of the client's will. [c] The lAR should follow the directions of the client's wife, who has a durable power of attorney over her husband in the event that the husband is not responsive. [D] The IAR should place an immediate hold on the account, close all open orders, and liquidate all securities positions.
[c] The lAR should follow the directions of the client's wife, who has a durable power of attorney over her husband in the event that the husband is not responsive.
Investment advisers are fiduciaries to customers. This being said, they have a responsibility to [A] manage all of their client's accounts in the same way with the same strategy. [B] use the arbitration process to settle any and all disputes. [c] give their clients disinterested and impartial advice as well as advice that is not based upon other client's actions or accounts. [D] manage each of their client's account differently placing discrete and separate orders for each client.
[c] give their clients disinterested and impartial advice as well as advice that is not based upon other client's actions or accounts.
A married person has an individual account at an investment adviser firm. This client owns ABC shares. ABC Inc. announces that it will miss its earnings projection by a significant amount, and the shares begin to drop significantly. The lAR who covers this account tries to contact the client but she can't be reached. The IAR does not have discretionary trading authority. The IA should [A] sell a portion of the position and immediately leave a voicemail for the client to update her. [в] contact the client's spouse for written authorization to sell the stock. [c] hold the stock because the IAR does not have trading authority. [D] in adherence to his fiduciary responsibility sell all shares to avoid further losses.
[c] hold the stock because the IAR does not have trading authority.
Shawna is a young investor with no need for income from investments due to a high salary for her age. She historically has chosen very conservative investments such as blue-chip stocks and index funds, and she re-invests all dividends. Bob is Shawna's IAR and agent. He has discussed higher- risk investments with Shawna several times, believing that she would benefit from increasing her risk tolerance but she has been resistant. After some research, Bob calls Shawna and strongly recommends investment in a small-cap fund for some extra capital that Shawna is investing, fully discussing the pros and cons of the small-cap fund. In this case, Bob has [A] Shawna's best interest in mind, despite her resistance to taking on investments with greater levels of risk. [B] made a suitable investment recommendation to Shawna, given her age and income level. [c] made an unsuitable investment recommendation to Shawna. [D] failed to make proper disclosure of material facts related to the small-cap fund.
[c] made an unsuitable investment recommendation to Shawna.
An investment advisory firm carries discretionary authority over a number of accounts held at the firm. The firm also provides customers with the option of keeping their fund's "in-house", meaning the firm maintains custody of the clients' money. Which of the following is true regarding the investment adviser's obligation in this case? [A] The IA firm must file audited financial statements with the SEC because of the discretionary authority. [B] The lA firm must file audited financial statements with the SEC because the firm maintains custody of client funds. [C] The lA firm must file audited financial statements with the State Administrator because of the discretionary authority. [d] The lA firm must file audited financial statements with the State Administrator because the firm maintains custody of client funds.
[d] The lA firm must file audited financial statements with the State Administrator because the firm maintains custody of client funds.
A client of yours expresses interest in giving trading authority to a third party on their account held at your Investment Advisory firm. Regulations from the NASA pertaining to this scenario require which of the following? [A] Written authority would only be required in the event that the client wants the third party to be able to effect transactions on margin. [B] Verbal authorization is acceptable, as long as the third party is only making decisions as to time and price in relation to trades in the account. [C] Written authority will always be required in order to allow trades from a third party. [D] Written authority will only be required if the account held at the firm already is authorized for discretionary trading with the firm.
[C] Written authority will always be required in order to allow trades from a third party.
By the standards set forth in the Uniform Securities Act, an investment adviser (IA) is MOST LIKELY to have breached his or her fiduciary duty to a client by performing which of the following actions? [A] A year ago, the lA performed an analysis and found that the expected return for the client's portfolio was 6% for the year, but after the year had passed, returns were only 5% to the client. [B] After convincing a client to take on more risk by investing in equity securities, an IA places a large order to buy shares of an aggressive growth fund for a client who historically has invested only in US Government debt securities. [c] In an account where the lA's advice has lost the client 25% of total value over the past year, the lA bills the client for the IA's 2% of assets under management fee. [D] Following a discussion with a client where the client expressed her frustration with her brother, who has third-party authorization to trade in the account, the client's brother calls in and enters an order and the lA executes the order.
[B] After convincing a client to take on more risk by investing in equity securities, an IA places a large order to buy shares of an aggressive growth fund for a client who historically has invested only in US Government debt securities.
Under NASAA statements of policy on dishonest and unethical business practices by Broker-Dealers and Agents, which of the following statements would be true when an Agent of a Broker- Dealer creates a summary sheet or sales piece which will accompany the prospectus on the sale of a new issue of common stock? I. The Agent of the Broker-Dealer is not allowed to create summary sheets or a sales piece. II. The Agent of the Broker-Dealer would be allowed to provide a potential customer with such a sales piece or summary if it does not omit any relevant information that the client would need to determine if they would like to buy the security. III. The Agent of the Broker- Dealer would not be allowed to provide clients with summary sheets or a sales piece until the client has received and had an opportunity to read the prospectus. IV. The Agent of the Broker- Dealer, when creating a summary or sales piece, is required to present a fair and balanced presentation of all material information from the prospectus. [A] I & III [B] I & IV [c] I & IV [D] II & III
[B] I & IV
George is an Investment Adviser registered in the state of Idaho. One of George's clients travels constantly for his business. While the client is out of town, George sees that some questionable news has come out regarding ABC Co. George calls the client, who gives George verbal authority to take any necessary action with selling ABC, whenever George deems it appropriate. George decides to sell half of the client's ABC shares. Based on this information which of the following is true with regard to NASAA Model Rules for Investment Advisers? [A] In order for George to be able to follow his client's instructions he would have to obtain prior written discretionary authority from the client. [B] In order for George to follow the client's instructions he would be required to obtain written discretionary authority from the client within 10 business days following the trade date for the stock sold. [c] George would be allowed to execute the order without any written authority since he received verbal instructions from the client. [D] George would not be allowed to execute the order without first contacting the client when he decides it is time to trade the security.
[B] In order for George to follow the client's instructions he would be required to obtain written discretionary authority from the client within 10 business days following the trade date for the stock sold.
When an agent of a broker-dealer does not have discretionary authorization from a client, when would it be acceptable for the agent to enter an order on behalf of the client without the client's approval? [A] Such activity would be allowed if the unauthorized transaction resulted in a profit for the client. [B] Such activity would not be allowed under these circumstances. [c] Such activity would only be allowed if it occurred in order to prevent a margin call when the client couldn't be reached. [D] Such activity would be allowed if the client gave the agent verbal discretionary authorization.
[B] Such activity would not be allowed under these circumstances.
Jody is your client and she has $100,000 she wants to invest now but will need that money back in 3 years to send her son to college. She would like to have income from her investment but needs to make sure that the money will be available to her when her son is ready for college. Under NASA Model Rules for Agents which of the following would be most appropriate investment choice? [A] Large cap common stocks that pay a good dividend [B] U. S. Treasury Bonds maturing in 3 years [C] U.s. Treasury Bonds maturing in 10 years [D] Preferred stocks issued by large cap corporations
[B] U. S. Treasury Bonds maturing in 3 years
A broker-dealer conducts a securities business on the premises of a bank. The bank accepts retail deposits. According to NASAA Model Rules, the customer confirmations provided by the broker-dealer must clearly indicate that the broker-dealer services are provided by the [A] bank. [B] broker-dealer. [c] broker-dealer with the bank's oversight. [d1 the broker-dealer except for cash deposits made to customer securities accounts.
[B] broker-dealer.
An IA is registered in several states, including the state in which it has its principal place of business. Which of the following statements is true concerning the IA's obligation to maintain a minimum net capital? [A] The lA must satisfy the requirements of the SEC. [B] The IA must satisfy the requirements of the state. [C] The IA must satisfy the requirements of the state where it has its principal place of business only. [D] The lA must satisfy the requirements of the state in which it has the highest number of clients.
[C] The IA must satisfy the requirements of the state where it has its principal place of business only.
Under the NASAA Unethical Business Practice Rules of Investment Advisers, an investment adviser is allowed to disclose the identity, affairs, or investments of clients in which of the following situations? [A] if the client is a public figure [B] when the adviser has the client's consent [C] if the adviser is required to do so by law [D] B and c
[D] B and c
Under NASA Unethical Business Practices of Investment Advisers, in which of the following circumstances may an investment adviser loan money to a client: [A] The client is an old and close friend that needs the money for a margin call. [B] The client lost a lot of money based on the adviser's unsound advice wants the money to hide the losses from his dying wife. [C] The client was laid off from his job and needs the money. Liquidation of his security positions would provide funds, but if he waits, his returns will be much greater. [D] The client is an affiliated general partner of the adviser to whom the adviser would loan his excess cash to enhance the general partner's cash flow.
[D] The client is an affiliated general partner of the adviser to whom the adviser would loan his excess cash to enhance the general partner's cash flow.
