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Series 66 Chapter 7

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Which of the following would NOT be considered an unethical practice for a registered investment adviser? A) Acting as a trustee for a client's trust B) Acting as a principal in a recommended transaction without consent of the client prior to completion of the trade C) Unfairly criticizing an estate plan prepared by the client's attorney D) Failing to notify the Administrator that the adviser is maintaining custody of client funds and securities

An investment adviser has discretionary power over the account of a 66-year-old client preparing for retirement once reaching full Social Security age. During the past year, the firm has invested a significant portion of the client's funds in call options and highly leveraged speculative investments. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this investment adviser engaged in A) unauthorized trading. B) unsuitable recommendations. C) illegal activity. D) excessive trading.

Which of the following practices violates the Uniform Securities Act? A) Failing to charge a markup B) Failing to follow a customer's instructions C) Failing to state every fact D) Deliberately not charging a commission

A broker-dealer holds fully paid-for customer securities for safekeeping. Under the NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker-Dealers and Agents, the broker-dealer A) may lend them to make delivery on short sales B) would be in violation unless a properly executed margin agreement was in effect C) must pay interest to the clients D) must segregate them

An investment adviser representative who makes extensive use of third-party research to formulate portfolio recommendations to clients A) must obtain consent of the clients to use third-party research B) must disclose that fact to the clients C) is in violation of his fiduciary responsibility as IARs may only use research provided by the firm D) need not disclose that fact to the clients

Currency Transaction Reports must be filed for cash transactions that exceed A)$25,000.00 B)$100,000.00 C)$50,000.00 D)$10,000.00

There are certain circumstances under which clients might wish to give their agents discretionary power over their account. An agent empowered to do which of the following would be considered using discretion? A)Determining the specific time to execute the order B)Making the decisions in the account while awaiting delivery of the proper paperwork C)Determining the specific price to be paid D)Picking the specific security

Under both federal and state law, the concept of a discretionary account is defined. It would be considered discretion when an agent A)can decide the specific price B)makes the decisions in the account once the client assures the agent that the proper authorizations are in the mail C)can decide the specific time at which the transaction will be made D)picks the specific security that is the subject of a transaction

Which of the following documents must an existing customer sign to establish a discretionary account? A)New account application B)Customer's agreement C)Options agreement D)Trading authorization

Which of the following would NOT be considered a fraudulent practice under the Uniform Securities Act? A) An adviser tells a client that registered securities are approved by the SEC. B) An adviser omits a material fact, but the sale is not made. C) An adviser omits a material fact to a client during the sales presentation, but the client ends up making money. D) An adviser correctly advises a client, but the client ends up losing money.

Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? Client prepayment of $1,000 of advisory fees, 6 months in advance Having temporary custody of a client's securities Depositing client funds in bank accounts accessible by the investment adviser

1 "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but it does not include the acceptance by the adviser of prepaid advisory fees.

Under the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the Administrator may bring an action against an agent's registration if the agent borrows money from his wealthy clients' accounts solicits orders for nonexempt unregistered securities buys and sells securities in accounts to generate a high level of commissions alters market quotations to induce a client to invest in an attractive growth stock

1, 2, 3, 4 x

According to the Uniform Prudent Investors Act , it is NOT a breach of fiduciary duty if investment advisers do not inquire into a client's A) Social Security or tax ID number B) specific financial needs C) investment objectives D) financial situation

Paradigm Investors Group (PIG), LLC, is an investment adviser registered with the SEC. Larry Small is an IAR with PIG. The firm's research team has just completed a webinar for the firm's IARs where they gave their strongest possible buy recommendation to JKL common stock. After the report is released to the media, Larry immediately sends out a blast email to all his advisory clients urging them to add JKL to their portfolio. This would probably be viewed as A) the unethical practice of making a blanket recommendation. B) adding value to the service Larry provides. C) an improper action unless Larry discloses that he is also buying JKL. D) using material nonpublic inside information.

After receiving complaint letters from an irate customer, the agent decides against a reply and discards the letters. Under the Uniform Securities Act, A) the agent must forward all written complaints to a supervisory person B) the Administrator may, by rule, dictate how this should be handled C) the agent is entitled to decide how to handle such situations D) the agent must forward material complaints to the Administrator

A The Uniform Securities Act requires an agent to forward written complaints to a person who supervises that agent. Complaints need not be forwarded to the state securities Administrator.

If an investor bought stock on one exchange and sold it at a higher price on another exchange, this practice constitutes A) a perfectly acceptable market arbitrage B) a violation under both the Uniform Securities Act and federal law C) a violation of the Uniform Securities Act D) an offense punishable by three years in the county jail

A This common practice is perfectly acceptable. Arbitrage is the practice of buying on one exchange and selling on another to take advantage of market disparities.

A client approaches an agent about investing in a risky security and insists on doing so, even when told by the agent that the security is not suitable for that client. What should the agent do? A) The agent should refuse the transaction because it is unsuitable for the client. B) The agent should explain the risks of investing and, if the client still insists, place the order and mark it unsolicited. C) The agent should contact a supervisor and accept the order only with the supervisor's approval. D) The agent should suggest that the client engage the services of another broker-dealer.

An order is received from one of your clients to purchase 200 shares of GEMCO common stock at 45 GTC. Two days later, while at a luncheon meeting with a different client, you are informed by that individual that the inside scoop is that GEMCO is going to be the subject of an FBI investigation. An hour after you return from lunch, you see an execution report for the 200 shares at 44.90. Under the Insider Trading and Securities Fraud Enforcement Act of 1988, you A) are not in violation because the trade was the result of an unsolicited order B) are not in violation because the order was placed before you learned of the inside information C) are in violation because you should have called the client immediately and had the ordered canceled D) are in violation because you should have canceled the order the moment you received the tip

FinCEN Form 112, the Currency Transaction Report, is filed with A) the National Security Agency B) the Department of the Treasury C) the Federal Bureau of Investigation (FBI) D) the SEC

Peculator Advisory Services (PAS) is known for its outstanding research department. The head of research has notified the firm's IARs that she has uncovered a "sleeping giant" that is about to take off and strongly urges the retail staff to pass this information on to clients for whom this security is suitable. Bruce is an IAR with PAS with a clientele ranging from recent college graduates to retirees with everything in between. He sends a blast email to all of his clients informing them of this rare investment opportunity. More than likely, Bruce A) needs to validate the research himself before contacting his clients. B) is committing the violation of blanket recommendations. C) is churning his client's accounts. D) is properly following instructions.

All of the following activities could result in the revocation of an agent's registration EXCEPT A) excessively trading for the purpose of generating commissions B) failing to state all known facts about an investment when presenting it to a client C) borrowing from retail customers D) making recommendations based on material nonpublic inside information

B Failure to state all known facts about an investment is not a violation of the Uniform Securities Act; omitting material facts, however, would be a violation of the act. Excessive trading, making recommendations on material nonpublic information, and borrowing from retail customers are prohibited business practices that could result in revocation of a registration.

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, if an investment adviser has custody of customer funds and securities, how often must the adviser send the customer a statement of account activity? A)Monthly B)Within 3 business days after any transaction C)Annually D)Quarterly

One of the most significant features of the UPIA is the ability of a trustee to delegate investment decisions to a qualified third party. Delegation is permitted as long as the fiduciary to whom the powers are delegated A) avoids diversification. B) acts with skill and caution. C) considers the risk/reward tradeoff of each individual security in the portfolio. D) avoids high-risk investments.

B The UPIA specifically uses the terms, skill and caution, when describing the actions of the fiduciary. Other components of the UPIA state that, rather than viewing individual securities, the overall effect on the entire portfolio is considered. This means that high-risk securities can have a place, as long as the overall portfolio meets the objectives. That is the benefit of diversification, something that is considered essential to prudent investment of money belonging to others.

An investment adviser registered in State A decides it wishes to maintain custody of customer assets. As long as the securities laws of State A do not prohibit custody, the investment adviser would have to promptly notify A)the SEC on Form ADV that it is going to maintain custody. B)the Administrator on Form ADV that it is going to maintain custody. C)the Administrator in a letter that it is going to maintain custody. D)the Administrator electronically (email) that it is going to maintain custody.

B The notification to the Administrator (as a state-registered IA, the SEC has nothing to do with this) must be made promptly on the Form ADV.

All of the following industry violations would probably constitute fraud EXCEPT A) inaccurate market quotations B) misrepresentation of the status of a client's account C) charging unreasonable commissions D) omitting material facts in the offer/sale of securities

A client's investment objective is safety of principal and income, and the client places an order with his agent to buy a speculative investment. The agent strongly encourages the customer to reconsider because he believes that the transaction would be unsuitable. If the customer insists that the trade proceed, the agent should: A) obtain a written statement of indemnification from the customer before effecting the unsuitable trade B) obtain prior approval from one of the firm's general securities sales principals before effecting the trade C) complete the trade D) refuse to make the unsuitable trade, notify the customer of this by telephone, then send written notification by first-class mail or other prompt means

A client who has a margin account is out of town for a week. The securities in the client's account fall dramatically, which requires the client to make immediate deposits into the account. Which of the following can the agent do to assist the client? A) Arrange for the firm to give the client another loan B) Deposit funds into the client's account on behalf of the client C) Make every reasonable attempt to contact the client D) Arrange for a different client to give his client a loan

An agent learns of material, inside information regarding a company that is publicly held. Which of the following with respect to the information would NOT violate the Uniform Securities Act? A) Discussing the information at a seminar but not making an investment recommendation B) Soliciting orders based on this information C) Discussing the situation with a superior or compliance officer in the agent's firm D) Trading for the agent's personal account based on this information

An agent tells his customer that a corporation has graduated to the level of quality acceptable for trading on the New York Stock Exchange and, therefore, has less market risk. If he recommends the stock to the customer based on the exchange's listing requirements, the agent has acted A) properly, because the New York Stock Exchange requires that the companies it lists are substantially capitalized B) properly, because returns were not guaranteed C) fraudulently, because listing on the New York Stock Exchange does not reduce the client's loss exposure and, therefore, the agent misled his client D) fraudulently because the NYSE listing requirements are not a matter of public knowledge

An income-oriented customer has a discretionary account with an agent. If the agent purchases speculative growth stock on behalf of the customer, under the Uniform Securities Act, this is considered A) a matching activity B) a wash trade C) an unsuitable transaction D) an acceptable transaction

Prohibited business practices under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would NOT include A) making specific investment recommendations to the group attending a free lunch seminar B) sharing commissions with an agent of a nonaffiliated broker-dealer C) sharing in the profits and losses in a client's account without making a financial contribution to the account D) borrowing money for graduate school tuition from a client who happens to be the agent's father

Which of the following is an unlawful activity for an agent? A) Stating that a security's registration has been declared effective by the SEC B) Stating a belief that a security's price will fall C) Artificially creating the impression of market activity D) Stating a belief that a security's price will rise

All of the following are unethical business practices of investment advisers as determined by NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers EXCEPT A) exercising discretionary authority in a client's account within 15 business days of the account being opened without written authorization B) inducing trading in a customer's account that is excessive in frequency C) omitting material facts about the nature of the advisory services offered D) releasing confidential customer information because of a court subpoena

Under rule 206(4)-7 of the Investment Advisers Act of 1940, each investment adviser registered with the SEC is required to adopt and implement written policies and procedures designed to prevent violation of the federal securities laws. Ensuring that this is done is the role of A) the chief executive officer (CEO) B) the chief operating officer (COO) C) the chief financial officer (CFO) D) the chief compliance officer (CCO)

All of the following would be prohibited practices under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers except A) maintaining custody of a customer's funds and securities without notification to the Administrator B) using an endorsement from an existing client in an advertisement. C) charging fees that were higher than customary, but offering a performance guarantee to compensate for the higher fees D) accepting an order from a client's spouse shortly after receiving a written trading authorization

An agent has a client who is relatively new to investing in securities, having been a bank CD purchaser most of her life. One of the client's holdings is a stock that the agent recommended, and its market price has recently fallen by over 10%. Knowing her fear of loss, the agent comforts her by continuing to report that the stock is moving upwards with the market. This action is A) fraudulent unless the agent receives permission from a designated supervisor B) permitted because the client is not selling anytime soon and why cause her to be upset C) fraudulent because the agent has a fiduciary responsibility to the client to manage the account in her best interests D) fraudulent because it is equivalent to giving fictitious quotations

Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, discretionary authorization is not required when the IAR is going to determine A)the number of shares when a client has named the stock to be purchased for the account B)the specific stock to be purchased when the client has indicated the industry group C)which assets will be sold and purchased to meet a specific asset allocation mix D)the price at which at specified security will be sold

Under the Uniform Securities Act, an agent who deliberately gives a fictitious quote to a customer A) is guilty of a felony and subject to criminal penalties B) must execute at the price quoted, regardless of the market C) is committed to selling or buying only 100 shares at that price D) has committed a fraudulent and unlawful business practice

Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of these EXCEPT A) engaging in any practice that the Administrator defines by rule as unethical B) engaging in any fraudulent or deceitful practice in the normal course of business C) employing any device, scheme, or artifice to defraud D) failing to state nonmaterial facts

Under Rule 206(4)-7, it is unlawful for an investment adviser registered with the Commission to provide investment advice unless the adviser has adopted and implemented written policies and procedures reasonably designed to prevent violation of the Advisers Act by the adviser or any of its supervised persons. Under this rule, investment advisers are required to perform a review of the adequacy of the policies and procedures established pursuant to this section and the effectiveness of their implementation no less frequently than A) semiannually. B) biannually. C) annually. D) quarterly.

An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with individuals who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A)is guilty of selling away. B)performed a matched order. C)is required to register as a broker-dealer. D)engaged in an agency cross transaction.

A When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization. x

A customer suspiciously makes deposits totaling $12,000 in 4 installments of $3,000 each. This attempt to circumvent the currency reporting rules is known as A)placement. B)structuring. C)layering. D)laddering.

A pattern of currency deposits designed to avoid currency reporting requirements is termed A) laddering. B) structuring. C) spinning. D) layering.

If a new customer will not state investment objectives and will not provide a financial statement, the agent may A) sell only securities listed on a national exchange B) accept unsolicited orders until the customer's suitability is determined C) solicit orders for any security without restrictions D) sell only stocks recommended by the broker-dealer

Under the Uniform Securities Act, which of the following statements regarding the use of material facts is TRUE? A) The client is the final arbiter on what is material and what is not. B) Omitting material facts when selling securities is a fraudulent practice. C) The agent must not use material facts, unless they are the only ones available. D) Restrictions apply only to sales as to the use of material facts, not to the purchases of securities.

Under which of the following circumstances may an agent borrow money from a customer? A) With written permission from NASAA B) If the customer is a bank C) Upon notification to his firm D) Under no circumstances

Which of the following is TRUE regarding the antifraud provisions of the Uniform Securities Act? A) They prohibit the receipt of both fees and commissions on transactions that result from advisory recommendations. B) A failure to adequately disclose material information to a client would violate these provisions. C) They prohibit fraud only in connection with securities transactions. D) They apply only to investment advisers who are registered under the act.

B The antifraud provisions prohibit a failure to disclose material information, as well as misstatements of fact and deceptive practices. An investment adviser is not exempt from the antifraud provisions even if exempt from registration.

Agent A with Firm Y and Agent B with Firm Z conduct a joint seminar. They agree to share the commissions on any resulting business. Under the Uniform Securities Act, which of the following statements regarding sharing commissions is CORRECT? A) Sharing commissions that are a result of a joint seminar is never permitted. B) Sharing of commissions by agents of two unrelated firms is prohibited. C) Only an agent who makes a sale is eligible to earn a commission. D) In this instance, sharing of commissions could only be done with the approval of both firms.

B Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker-dealer.

The compliance rules of the Investment Advisers Act of 1940 require all of the following EXCEPT A) appointment of a chief compliance officer (CCO) B) independent review of an advisory firm's compliance procedures C) annual compliance review D) written compliance policies and procedures

B While the rules require annual compliance reviews, such reviews may be conducted internally by the firm's appointed chief compliance officer rather than an independent party. The rules require written policies and procedures, an annual compliance review, and the appointment of a chief compliance officer (CCO).

Excessive activity in a customer's account primarily for the purpose of generating excess commissions for the agent is called A) hypothecating B) commingling C) churning D) selling dividends

If a customer is upset with her agent and sends him a letter of complaint, under the Uniform Securities Act, the agent should A) do nothing B) call the customer, apologize, and attempt to correct the problem C) bring the customer complaint to a supervisory person immediately D) tell the customer he is willing to make rescission

If an agent thought that a technology stock was undervalued and actively solicited purchase order from all of her customers, the agent A) did not commit a violation if all clients were accurately informed of the price of the stock B) did not violate the Uniform Securities Act if all material facts were disclosed C) committed an unethical business practice D) committed an unethical sales practice because the firm has not recommended this technology stock

In addition to the normal required filings, an investment adviser who maintains custody of client funds and/or securities will be required to complete A) Form ADV Part 1 B) Form ADV Appendix 1 C) Form ADV-E D) Form ADV-W

Mary bought 1,000 shares in the morning and sold 1,000 shares of the same security in the afternoon. Under the Securities Exchange Act of 1934's rules dealing with the regulation of the use of manipulative and deceptive devices, which of the following statements is TRUE? A) She has violated the act if a profit was made. B) She has violated the act. C) She has violated the act only if she was trying to create market activity for the security to give a misleading appearance. D) Her broker has violated the act.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who buys securities with material, privileged, nonpublic information may be subject to a civil penalty of A) an amount equal to the amount of violation B) $20,000.00 C) up to 3 times the amount of gain or prevention of loss D) the amount paid or saved on the securities trade

Which of the following statements regarding an investment adviser representative is TRUE? A) It is unlawful under the USA for an adviser to deceive another person when engaged in non-securities-related activities. B) The investment adviser representative is not subject to the antifraud provisions of the USA when engaged in securities sales activities. C) It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities. D) The investment adviser representative is exempt from the USA's antifraud provisions if the adviser has fewer than 3 clients residing in the state.

Anderson is a longtime customer of Baird, an agent of Gibraltar Securities. Anderson mentioned that if the common stock of GEMCO drops 10 points, he might consider buying it. Anderson has a long history of trading high-quality, large-cap stocks with Baird in his nondiscretionary account. If GEMCO stock falls by 10 points but Anderson cannot be reached and Baird purchases the stock in Anderson's account, Baird has A)engaged in the prohibited practice of front running B)engaged in the prohibited practice of unsuitable trading C)acted ethically in fulfilling her client's wishes D)engaged in the prohibited practice of unauthorized trading

During your training, you overhear your manager discussing the Chinese wall. This is probably referring to A) the increasingly high percentage of U.S. government bonds held by the Chinese B) takeout for lunch C) a leading tourist attraction in China D) internal provisions enacted to prevent material, nonpublic information from leaking from one department of the firm to another

If an agent has been given limited power of attorney to exercise discretion in an account by the account holder, which of the following statements is TRUE? A) The account holder is not permitted to enter new orders independently. B) Each order must receive the prior approval of the agent's manager before it is entered. C) The power of attorney must be renewed annually by the account holder. D) A designated supervisory individual must frequently review the account.

If an agent executes a transaction for a customer but uses the wrong account number, he should A) delay sending the confirmation to the customer until the error is rectified B) report the mistake to the manager C) transfer the shares into the correct customer account D) inform the customer that the trade is binding, but the firm will compensate for any losses

In which of the following cases is a 3rd-party trading authorization acceptable? A)The spouse of a client sends an email to the investment adviser saying that the client has given authorization to the spouse to trade in the account. B)An investment adviser makes a hospital visit to a client who was critically injured. While there, the client gives oral instructions to permit her daughter to trade in the account. C)A client's secretary presents a card signed by the client stating that the secretary can trade in the account while the client is on a business trip. D)The trades will be made through a broker-dealer under common control with the investment adviser.

C Third-party trading authorization must be in writing; oral authority is never acceptable. If the email came from the client directly instead of the spouse, it would be acceptable.

Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases except A) CIA has a power of attorney granting authority to withdraw funds from the custodian B) CIA's advisory contract calls for the automatic deduction of advisory fees C) checks made out to 3rd parties are forwarded within 3 business days D) checks made out to CIA are deposited into the client's account within 3 business days

C When a check made payable to a third party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser for deposit to the client's account, it must be returned to the sender within 3 business days or it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody. Please note that a payment to the investment adviser for advisory fees is not considerred custody (it is the adviser's money now).

There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT A)0.25% of the asset per quarter B)1% of the average annual assets C)hourly fees D)1% of the increase in account value over the next quarter

D Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation.

Under the rules of the Securities Exchange Act of 1934, trading in a client's account would be considered excessive if the agent receives a commission from trading trading is conducted without considering the client's investment objectives trading is inappropriate in view of a client's resources

2, 3

Which of the following statements are TRUE of a discretionary account at a broker-dealer? It must be approved by a designated supervisory individual of the firm. It must be reviewed frequently to minimize the chances that the account has been churned. A discretionary order may be placed once the customer has placed a power of attorney in the mail. It must be approved by the Administrator of the state of residence of the client.

1, 2

The Securities Exchange Act of 1934 requires written authority for a discretionary account, unless the securities professional's discretionary authority is limited to determining the price of the stock the amount of the stock the time of the order

1, 3

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must notify a client when the client's funds are moved to another location segregate client's funds and keep them identified by client not move the client's funds without prior notification and specific written authority from the client

1, 2 Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts that contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every 3 months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser.

It would not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits, or other compensation from the purchase or sale of securities with any person also registered as an agent for the same broker-dealer with any person also registered as an agent for a broker-dealer under direct or indirect common control as long as the arrangement is in writing as long as the client has approved of the sharing arrangement

1, 2 NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter. x

Which of the following would be causes for concern about cybersecurity? A broker-dealer keeps all the firm's financial records in a ledger book A broker-dealer stores some of the firm's financial records electronically A broker-dealer's agents operate as independent contractors and maintain devices that access personally identifiable information about clients A broker-dealer's bookkeeper prefers to do the books from home on a personal computer

2, 3, 4

Which of the following is NOT true regarding the Securities Exchange Act of 1934? A) The act bars the use of arbitrage by broker-dealers. B) The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading. C) The act prohibits the spread of false rumors to induce others to trade. D) The act proscribes the use of wash trades.

An agent has a new client who is prone to tergiversation. As such, it would probably make sense to: A) accept unsolicited orders only B) open a discretionary account C) make recommendations on a frequent basis D) obtain permission from both the client and the broker-dealer before sharing in the profits and losses in the account

A Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders. x

According to the Uniform Securities Act, which of the following is an example of market manipulation? A) Omitting material facts in a presentation B) Creating the illusion of active trading C) Guaranteeing performance of a security D) Transactions in excess of a customer's financial capability

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case, the agent acted A) properly because the agent saved the client money B) improperly; the order should have been placed on Thursday C) improperly; the order should have been placed on Monday D) properly because the agent used discretion as to price and time

An investment adviser registered in State A decides it wishes to maintain custody of customer assets. As long as the securities laws of State A do not prohibit custody, the investment adviser would have to promptly notify A) the Administrator electronically (email) that it is going to maintain custody. B) the Administrator by filing an amended Form ADV that it is going to maintain custody. C) the Administrator in a letter that it is going to maintain custody. D) the SEC on Form ADV that it is going to maintain custody.

Thomas Smith, a registered agent of XYZ Broker-Dealer, believed that his client's security was overvalued. If Smith exaggerated the amount by which the security was overpriced to protect the client from a downturn in the price of the security, each of the following statements is true EXCEPT A) Smith made an untrue statement in connection with the sale of a security B) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice C) Smith engaged in fraud in connection with the sale of a security D) Smith acted in a dishonest and unethical manner

An investment adviser may release confidential information about a client in all of the following instances EXCEPT A) when the law requires such release B) when the client also maintains an account at an affiliated broker-dealer C) with the client's consent D) with the consent of the client's spouse who is a signatory to the advisory contract

B The adviser may disclose client information with the client's consent, the consent of a joint account holder, or if the disclosure is required by law. Having an account at an affiliated broker-dealer is irrelevant. It is unethical conduct for an investment adviser to disclose the identity, business affairs, or investments of a client to any third party. The adviser has a fiduciary responsibility to respect the confidential nature of the relationship.

A broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to immediately A) freeze the client's account B) reply to the client in writing C) notify the Administrator D) notify NASAA

B When a broker-dealer receives a written complaint from a customer, it must document that complaint and begin an investigation as to the complaint's merits. Part of that procedure would be sending a written acknowledgment to the client that the complaint has been received. x

The institutional trading desk of a major broker-dealer receives a substantial purchase order for XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decides to purchase shares of XYZ for its proprietary account. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) this would be considered market manipulation B) the purchase could only be made with prior disclosure to the client C) this would be the prohibited practice of front running D) the broker-dealer has the right to purchase shares of XYZ whenever it wishes.

The unethical business practice of purchasing and selling a security for the purpose of creating an appearance of market activity is known as A) spinning B) front running C) matched orders D) arbitrage

Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT considered when determining excessive trading in a client's account? A) Character of the account B) Investment objectives of the client C) Length of association with the agent D) Client's financial status

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who has violated the prohibition against insider trading is liable for a civil penalty of A) the amount of the profit gained or loss avoided on the transaction B) twice the amount of the profit gained or loss avoided on the transaction C) 3 times the amount of the profit gained or loss avoided on the transaction D) 10 times the amount of the profit gained or loss avoided on the transaction

Under the Investment Advisers Act of 1940, cash payment to a broker-dealer from an investment adviser in return for client referrals is A)permitted only if the investment adviser and broker-dealer are affiliated B)not permitted under any circumstances C)permitted if the investment adviser makes certain disclosures to the clients and meets other requirements D)permitted with no restrictions

Sally is an agent with a broker-dealer. She has used her degree in computer science to develop her own stock-picking software program. The program creates a model portfolio with a 70-30 ratio of equity to debt securities. Backtesting has shown that the program is likely to produce returns that beat the overall market. As a result, Sally plans to use this model portfolio for each of her clients. Sally A) is going to make her clients very happy. B) is engaging in an unethical business practice. C) is likely violating suitability requirements. D) must make the details of how the program works available to all who request it.

C The point here is not whether Sally's program works. The point is that it would be unlikely that all of her clients have the same objectives and financial resources. In fact, some of them might be suitable for a higher percentage of debt securities rather than equities. Therefore, using the software program to create the same model portfolio for every client would probably be violating the rules dealing with suitability. This would be the same if Sally were an IAR. Please note that while this might be considered an unethical business practice, the suitability choice is more to the point. x

If an agent thinks that a technology stock is undervalued and actively solicits all customers, which of the following is TRUE of the agent? A) He did not violate the Uniform Securities Act if all material facts are disclosed. B) He did not commit a violation if all clients are accurately informed of the price of the stock. C) He committed an unethical sales practice because the firm has not recommended this technology stock. D) He committed the unethical business practice of blanket recommendations.

Rachel is an agent registered with a broker-dealer in this state. It would prohibited for her to A)share in the profits and losses in a client account without a financial contribution to the account B)disclose to a client that a transaction in a thinly traded stock will result in a higher-than-normal commission C)execute a transaction in a discretionary account after having received the necessary documentation D)solicit sales of a security whose registration is not yet effective

Under the Uniform Securities Act, the Administrator may institute an action if an agent borrows money from his wealthy clients' accounts solicits orders for nonexempt unregistered securities buys and sells securities in accounts to generate a high level of commissions alters market quotations to induce a client to invest in an attractive growth stock

1, 2, 3, 4

When must an investment adviser disclose personal securities transactions to a client? If the adviser makes trades in his own account that are inconsistent with advice given to a client If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients Investment advisers must disclose all personal transactions to clients

1, 2 SEC Release 1A-1092 requires certain disclosures under the antifraud provisions of the Investment Advisers Act. They must disclose an affiliation with a securities broker-dealer if the advisory service is independent of the broker-dealer, if the adviser only recommends products offered by the broker-dealer, if the adviser will be compensated by the broker-dealer for the transaction, or if the products recommended by the adviser are available from other broker-dealers. The adviser must also disclose personal securities transactions if they are designed to take advantage of the market impact caused by recommendations to clients or if personal transactions are inconsistent with the advice given to clients. Advisers must disclose the amount of compensation received from transactions through any broker-dealer, from any issuer, and from sales of nonsecurities products. They are not required to disclose all personal transactions. x

Adell, a retiring social worker, has some money to invest. An agent suggests she look into investing in a private placement security that is raising money to build apartment buildings in Puerto Rico. According to the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents building projects are not appropriate for retirees who typically need immediate income private placements are not usually appropriate for retiring individuals because they are not liquid no rule has been violated because the customer has only been offered the product if the customer lives in Puerto Rico, the proposed investment may be suitable because there may be a ready market

1, 2 This is not a suitable recommendation for a social worker about to retire. Based on the information given, one would expect that her objectives would be income with a high degree of safety, yet this building project will give her neither. Additionally, the private placement suffers from a lack of liquidity, something that could be an important factor in Adell's future. x

The term "churning" means switching a client's account from an income fund to a growth fund excessively trading securities in the account of a client primarily for the purpose of generating commissions for the agent trading unsuitable securities in a client's account a bond swap in a customer's account for tax benefits

An investment adviser representative is required to make disclosure to the client when the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale transactions recommended to a specific client are inconsistent with those for other clients with objectives that are identical to that particular client transactions recommended to the client are inconsistent with those for the IAR's own account

2, 4

Under the NASAA Model Custody Rule, an investment adviser would be considered to have custody of client assets if that adviser inadvertently receives a check from a client for a purchase that is made payable to the investment adviser and does not return the check within 24 hours a check from a client for a purchase that is made payable to a third party and does not forward the check within 3 business days stock certificates from a client and does not forward them within 3 business days stock certificates from a client and does not return them within 3 business days

2,4 Checks made payable to a third party must be forwarded to that party within 3 business days of receipt or the IA will be considered to be maintaining custody. In the case of certificates or checks made out to the IA for a securities purchase, return must be made within 3 business days of receipt in order to avoid custody issues; they are never forwarded.

Allen Richards is the next-door neighbor of Marc Terry, the CEO of a Nasdaq Stock Market security. Mr. Terry tells Mr. Richards that a major NYSE-listed corporation is in the process of submitting an offer to buy out his company at a very handsome premium over the current market price. Mr. Richards would be permitted to immediately purchase shares of Mr. Terry's company immediately purchase shares of the NYSE-listed company purchase shares of Mr. Terry's company once the news becomes known to the investing public purchase shares in the NYSE-listed company once the news becomes known to the investing public

3, 4

If a new customer opens an account with a broker-dealer and tells the agent to buy investments at his discretion, before engaging in any transactions in the account, the agent must A) receive a written discretionary power from the customer B) register as an investment adviser C) designate which investments will be purchased D) have the customer supply letter of credit from a bank

One of the distinguishing characteristics of an investment adviser is that of fiduciary responsibility to clients. That responsibility specifically requires the IA to A)always place the client's interest ahead of its own B)charge fees that are reasonable under the circumstances of the account C)disclose all potential conflicts of interest D)be sure that all recommendations to clients are suitable

A Although each of these is a requirement for acting ethically as an investment adviser, the only choice that specifically reflects the obligation as a fiduciary is to place the interest of the clients first.

James Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is TRUE? A) The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security. B) The antifraud provisions of the USA do not apply to Jones because he is not suitably trained nor does he have a securities license. C) Jones's failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration. D) As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act.

A The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.

If an agent receives a written customer complaint from his stepmother regarding the handling of her account, under the current regulations, the agent A) does not have to refer the complaint because the stepmother has provided written documentation B) must refer the complaint to the manager, who must retain the document on file for the time period specified under current regulations C) must refer the complaint to the manager, who does not have to retain the document because family disputes are confidential and need not be disclosed to a third party D) does not have to refer the complaint to his manager because the correspondence is considered a private communication

An account where a securities professional may invest the client's money, without consulting the client about the amount or type of security for the trades that are placed for the account, is known as A)an advisory account B)a discretionary account C)a wrap account D)a margin account

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? A) Accept the customer's order and mark it solicited B) Bring the information to the attention of the firm's supervisory principal named to handle such matters in the Supervisory Procedures Manual C) Bring the information to the attention of the state securities Administrator D) Discuss the matter with other, more experienced agents of the firm to evaluate the validity of the information

If an investment adviser purchases a research report from the advisory arm of a nonaffiliated broker-dealer, the adviser may distribute this report to clients A) under no circumstances B) if the clients are told that the report was prepared by a third party C) provided a fee is paid to the broker-dealer for each copy distributed D) without restriction

It is not uncommon to find financial planners who use their home as the base of their operations. When a financial planner who works from home is also registered as an agent of a broker-dealer, she must A) not remain open during hours when the broker-dealer is closed B) not use personal computers to store client information C) have cybersecurity policies and procedures in place to protect customer data D) ensure that her office is separate from her living quarters

Which of the following must be disclosed during a transaction recommendation under the Investment Advisers Act of 1940? A) All facts needed to assess the risks of an investment B) All facts C) All material facts D) All facts in the prospectus

A broker-dealer's research department is bullish on a particular stock. Minutes after the firm publicly releases a buy recommendation, orders from institutional clients start pouring in. Bob, an agent with the firm, purchases the stock for his own account before submitting those orders. Bob would probably be guilty of A) failure to supervise. B) market timing. C) churning. D) front running.

Examples of identity theft would include taking over an individual's credit card account applying for new credit cards in the compromised individual's name lending money in the name of the compromised individual purchasing lottery tickets in the name of another individual

1, 2 When an individual's identity is stolen, it is common to find that the thief takes over the current credit card accounts and also applies for new ones. Identity thieves borrow money in the name of the compromised individual, they don't lend it, and—although buying a lottery ticket in the name of someone else could help evade taxation on a big prize—the publicity attached to the winning ticket would certainly not be something the thief would relish.

In which of the following third-party transactions would an investment adviser be required to make disclosure to the client of compensation received? An investment adviser recommends an affiliated realtor to a client and receives compensation from the realtor. An investment adviser, who is also an agent for an insurance company, sells policies from the company to his clients. An adviser who is affiliated with a broker-dealer receives commissions on sales recommended to clients through the broker-dealer.

1, 2, 3

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser who has custody of clients' securities or funds must keep funds deposited in accounts containing only client funds be subject to a surprise audit performed at least annually by an independent accountant send clients' statements at least once every 3 months showing balances

1, 2, 3

Under the Uniform Securities Act, which of the following agents are in violation of the act? An agent persuades a client to cosign for a loan and does not disclose that he is facing financial difficulties. An agent's customer instructs her to buy shares in ABC Pharmaceuticals. ABC is experiencing financial troubles, so the agent buys shares in XYZ Health Care instead. An agent purchases shares of a new issue and hopes to cause the price of the shares to rise by recommending that all her clients purchase the stock. She does not tell clients that she owns the stock.

1, 2, 3

Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? Commissions on recommended securities transactions Commissions on insurance sales Incentives from the issuer of a recommended security

1, 2, 3 Advisers must disclose compensation received on sales of securities and nonsecurities products and also compensation received from the issuer of a recommended security.

Discretion is exercised when a securities professional determines all of the following EXCEPT A)time or price B)dollar amount of trade C)to buy or sell a particular security D)number of shares

When it comes to borrowing and lending money, the Uniform Securities Act (USA) prohibits activity that would compromise the objectivity of securities professionals. Which of the following is (are) NOT a prohibited practice(s)? A broker-dealer lending money to a client to purchase additional securities An agent taking out a car loan from a bank whose branch manager is a client of that agent An investment adviser borrowing money from an affiliated broker-dealer An investment adviser lending money to a client to enable that client to maintain the minimum required asset level in the account

1, 2, 3 Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker-dealers are also in that business. When a client has a margin account, the broker-dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation because the loan is from the bank, not the manager. Loans are also permitted between affiliates. x

A customer needs $10,000 to pay for a new house within the next year. His agent suggests that he invest in a stock that has been performing extremely well the past year and assures the customer that he cannot go wrong. According to the Uniform Securities Act, this is an unethical business practice an example of guaranteeing a profit an example of flamboyant language an unsuitable investment

1, 2, 3, 4

The industry is concerned about the protection of both firm and customer data. It would be acceptable to store this information on a cloud-based server in paper form on computer disks on microfiche

1, 2, 3, 4

Which of the following is (are) unethical business practices of investment advisers? Charging a client an unreasonable advisory fee Guaranteeing a client that a specific result will be achieved as a result of advice that will be rendered Recommending an investment to a client without reasonable grounds to believe the investment is suitable for that client Continuing to exercise discretionary investment authority under an oral agreement with the client

1, 2, 3, 4

According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following business practices are dishonest or unethical and may constitute grounds for denial, suspension, or revocation of an agent's registration? Executing a transaction on behalf of a customer without authorization to do so Sharing in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer that the agent represents Splitting commissions from a securities purchase or sale with an agent of a different broker-dealer, or a broker-dealer not under direct or indirect common control Recommending securities that possess a high probability of loss and a low probability of gain

1, 2, 3, 4 According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is a dishonest or unethical business practice to execute a transaction on behalf of a customer without authorization to do so; share in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer that the agent represents; and split commissions or profits from the purchase or sale of securities with any person not also registered as an agent for the same broker-dealer, or a broker-dealer under direct or indirect common control. It would likely be considered dishonest or unethical for an agent to sell securities that possess high probabilities of loss and low probabilities of gain.

Which of the following transactions are prohibited? Borrowing money or securities from a high-net-worth customer Selling speculative or hot issues to a retired couple of modest means on a fixed income Failing to follow a customer's orders to prevent investment in a security not adequately covered by well-known securities analysts Backdating confirmations for the benefit of the client's tax reporting

1, 2, 3, 4 An agent may not borrow money or securities from a customer unless that customer is a bank or broker-dealer in the business of lending money and/or securities. Selling speculative or hot issues to a retired couple of modest means is an unsuitable transaction because it is not consistent with the client's objectives. An agent must follow legal orders of the customer, even if the agent believes the order is unwise. An agent may not backdate confirmations for the benefit on the client.

Under the Uniform Securities Act, which of the following would constitute a fraudulent practice in connection with a sale or offer of securities? Susan tells a client that she is good friends with the CFO of a listed company and has the "inside track" on what is going on. Susan has never met the CFO. John makes a material misstatement during a sale, but the sale is not made. Joe omits material facts while making an offer, but the client makes money on the securities. Harold, who is excluded from the definition of investment adviser, omits material facts during an offer.

1, 2, 3, 4 Failure to state material facts that are known to the agent or adviser and that would make other statements not misleading is fraudulent. Securities professionals may not be deliberately selective of which material facts to present to clients or prospective clients. In recommending the purchase or sale of a security, misleading or untrue statements of material facts include inaccurate market quotations; incorrect statements of earnings or projected earnings; inaccurate statements of commissions, markup, markdown, or other charges; implying approval by the SEC or state Administrator; using rumors or inside information to induce transactions; indicating approval of a security by any regulatory body; or failure to describe important facts or risks.

Which of the following would most likely be considered a prohibited practice under the Uniform Securities Act? Recommending tax shelters to low-income retirees Stating that a state Administrator has approved an offering based on the quality of information found in the prospectus Soliciting orders for unregistered, nonexempt securities Employing any device to defraud

1, 2, 3, 4 x

Which of the following are discretionary orders? A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time or price determined by the agent. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time or price appropriate.

1, 3

Your manager is reviewing the activity in your customer accounts to detect trading irregularities. Among the factors the manager will look for to determine if churning is occurring are the financial resources of the account the number of winning trades versus losing trades the objectives of the account the marital status of the customer

1, 3

Which of the following are discretionary orders? A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate.

1, 3 Discretion authorizes a representative to choose the security, the amount of shares, or whether to buy or sell. Time and price alone are not discretionary decisions.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, it is unethical for an investment adviser representative to tell clients that fees will be reduced by the amount of any commissions earned, when in fact a reduction will be made only if the client brings it to the adviser's attention avoid mentioning to clients that she was expelled from college before graduating tell clients that her firm's system for timing the market is based on technical factors, when in fact she uses intuition

1, 3 It is unethical for investment advisers to misrepresent their qualifications or those of their employees, their fees, or their services. Telling clients that fees will be reduced by the amount of commission is misleading. Falsely leading clients to believe that an adviser is using technical factors when the adviser is actually using intuition is misrepresenting facts about the services. The adviser is not obligated to mention that she did not graduate from college; it would be misrepresentation only if she said that she had graduated when she had not.

Which of the following statements relating to Form ADV-E are CORRECT? The form is completed by an investment adviser who maintains custody of customer funds and/or securities. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form may be used to amend the IA's registration.

1, 3 The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.

Which of the following could be a red flag regarding identity theft? Receipt of a credit card for which no application was made Receipt of a replacement credit card 2 months before the expiration date of the current card Receipt of a notice of a change of address on a credit card account that was not made by the account holder Receipt of a notice from the credit card company of an offer for a 0% balance transfer

1, 3 When a credit card is received (and the recipient did not file an application), or a notice is received of a change of address (and the account holder's address has not been changed), a red flag should go up indicating possible identity theft. Replacement cards are expected before the current card's expiration date, and credit card companies often send offers for balance transfers at low rates.

John is a client of Greater Growth Opportunities, Inc. (GGOI), a state-registered investment adviser. Which of the following constitute(s) John giving the GGOI authority to trade his account? John tells his adviser representative over the telephone to buy 200 shares of a certain security and when to make the purchase. John tells his adviser representative to be on the lookout for securities that seem likely to fit his investment objectives. John gives his adviser representative a written discretionary authorization form to buy or sell securities for his account as she sees fit.

1, 3 When the client specifies all three "A's" (the asset, the action, and the amount) as is done in choice I, that gives the authority to the securities professional to act on the client's behalf and place the trade. Nothing is required in writing because no discretion has been used. The universal industry standard is that a securities professional can exercise discretion once a written authorization form has been received by the firm. A unique condition exists in the case of investment advisers and their representatives in that oral discretion may be used for a period of 10 business days following the initial discretionary trade in the account. After then, without the proper written authorization, further discretion may not be employed.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? Attorney who writes an offering circular for a company An investor holding 4% of the company's stock The next-door neighbor of a board member of a company Brother of a company's president

1, 4

Which of the following actions, if performed by a registered investment adviser representative, would not be considered inappropriate under the Uniform Securities Act? Recommending suitable securities to a client Lending money to a client who is a regular member of your Sunday group at the country club Misappropriating client assets to benefit the client's favorite charity Without having discretionary power, determining when would be the most opportune moment to sell a specific security holding the client has indicated he wishes to liquidate

1, 4

Which of the following statements regarding email communications are correct? They are sometimes referred to as electronic communications. Customer complaints received by email are not considered to be in writing. Once received and reviewed, they may be discarded. They must be retained in the same fashion as any other record.

1, 4

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account.

1, 4 One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account.

Fraud would include the willful omission of A) any material fact B) the public offering price in a preliminary prospectus C) a material fact, but only one that might be pertinent to making an investment decision D) any fact

Under which of the following conditions does NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permit an investment adviser to divulge personal information about a specific client? When it will be used in a testimonial regarding the advisory services offered When the investment adviser has received a subpoena from a court of competent jurisdiction When the client has given the investment adviser specific permission to do so With the approval of the Administrator

2, 3

Which of the following are required to execute orders in a customer's discretionary account? The customer must authorize each transaction in writing. Trades must be in accordance with the account holder's investment objectives. The rules relating to best execution are the same as for a nondiscretionary account. Discretionary orders must take place before nondiscretionary orders.

2, 3

NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would likely consider which of the following to be prohibited activities? A client is rather insistent on purchasing a security deemed unsuitable by the agent. In an effort to dissuade the client, the agent furnishes several websites of analysts who have issued negative reports on that security. An agent takes an order from the client's attorney without written trading authorization. An agent takes an order from the secretary of a nondiscretionary client who is too busy to give the order herself. An agent encourages a client to acquire a security on the basis of research recently published by the broker-dealer for its institutional clients.

2, 3 An agent cannot take trading orders from anyone but the client unless he has written authorization on file. Using publicly available information to encourage clients to change their opinion about an unsuitable investment is acting in the clients' best interest and there is nothing wrong with using "house" research reports to develop client recommendations, as long as they are suitable. x

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, Investment Adviser Representatives, and Federal Covered Advisers. when may an adviser borrow money from a client? When the loan is negotiated at arm's length When the client is a broker-dealer When the client is a bank in the business of loaning funds

2, 3 Borrowing money or securities from a client is an unethical business practice, unless the client is a broker-dealer, a bank or other financial institution in the business of loaning funds, or an affiliated person of the adviser.

Which of the following are examples of the prohibited business practice known as front running? An investment adviser publishes a strong buy recommendation for XYZ common stock and then purchases a large block for the firm's own account several days later. An investment adviser publishes a strong buy recommendation for ABC common stock several days after purchasing a large block for the firm's own account. An analyst informs an IAR that he is going to discuss the fact that he has changed a recent buy recommendation to a sell when he appears on cable TV later that afternoon. The IAR immediately establishes a large short position in that stock. An IAR purchases 10,000 shares of DEF 6% preferred stock for 4 of her income-oriented clients. It takes several separate trades to fill the entire order, and the prices range from $24.25 to $24.33. The IAR allocates the shares, giving price preference to clients taking the largest positions.

2, 3 Front running is the prohibited practice of placing an order to benefit from news not yet released or orders that will impact the market. An adviser acquiring stock and then publishing a buy recommendation or an IAR benefiting from an analyst's news before public release are examples of this type of wrongdoing. Although allocation based on client positions is a prohibited practice, it is not front running.

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice? Stating material facts in such a manner that they may be easily understood by a prospective client Making unsuitable investment recommendations even when the client agrees with your assessment Exercising discretion without previous written authority Using inside information, but only if the client makes money as a result of the trade

2, 3 No broker-dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them.

Areas of concern for protecting customer data would include agents recommending securities that are unsuitable for the customer a vendor misusing, or inadequately protecting, confidential customer information a retail customer loaning money to the agent handling the account a vendor possibly failing adequately to protect confidential customer information after its relationship with the firm is terminated

2, 4

Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE? Funds may be deposited in any account as long as the adviser is named as trustee for the client and adequate records are maintained. Clients must be kept informed in writing of the location of their funds and securities and of any changes. Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period.

2, 3 The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC.

Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to fail to make prompt delivery of certificates when requested by the customer fail to obtain written authorization for a discretionary account prior to the first trade in that account accept an order from a client's spouse without written trading authorization prior to receiving the order share commissions with another agent registered with Garden City Securities

2, 3 NOT 1 This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer. x

When describing the differences between an investment adviser and an investment adviser representative, it would be correct to state that the investment adviser may exercise discretion in an account, whereas an IAR may not maintain custody of client funds and securities, whereas an IAR may not be required to be bonded, whereas an IAR may not be required to maintain a minimum net worth, whereas an IAR may not

2, 3, 4 Registered investment advisers, but not their representatives, are permitted to maintain custody of client assets (if not prohibited by the Administrator). There is no minimum net worth standard for IARs, as there is for IAs. Both may be granted written discretionary powers, and if so, only the IA may be required to be bonded (adequate net worth will suffice).x

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, under which of the following circumstances may an investment adviser disclose a client's account performance? Under no circumstances If the IRS has issued a summons for the client's records For a promotional campaign on the firm's track record of successful recommendations If a divorce court has issued a subpoena for the records and the client has given written permission

2, 4

An investment adviser is a member of the board of directors of a privately held corporation that has just gone public. The adviser would like to recommend the stock to several of his advisory clients. Which of the following statements are TRUE? The adviser can do so without restriction. The adviser must disclose the existence of a control relationship. The adviser may base his recommendation on all information at his disposal. The adviser must base his recommendation on publicly available information.

2, 4

Under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, in which of the following situations has an agent acted properly in placing an order for a client's account? The client agrees with an agent's recommendation of a particular security and the amount that should be purchased. The client then tells the agent to proceed with the purchase when the timing seems best. Because the market as a whole is dropping, the agent waits two weeks until the economy looks brighter before making the purchase. The agent does not have written discretionary authority. The agent obtains written discretionary authority to manage the client's account. The agent then proceeds to restructure the entire account without further consultation with the client. The agent obtains an existing client's oral agreement that shares of XYZ fund are a good buy right now. The client gives the agent oral authority to determine how much of his account should be allocated to XYZ shares. Without written discretionary authority, the agent places an order. A client supplies the agent with written trading authorization. The client proceeds to request the agent to purchase $7,000 of any ADR that would be appropriate for the account. The agent goes ahead and purchases $7,000 of a Taiwanese computer chip company's ADRs.

2, 4

An agent would be engaged in a prohibited practice if he split commissions with other agents of his broker-dealer sold a nonexempt, unregistered security to a CPA who specialized in auditing financial institutions shared both the gains and losses in a client's account with written approval of both the client and the employing broker-dealer aggressively traded a discretionary account on a daily basis with long-term growth as an objective

2, 4 An agent cannot lawfully sell an unregistered, nonexempt security unless in an exempt transaction. The sale to the CPA is not an exempt transaction, as would be the sale to a financial institution. Day trading in an account with long-term growth as an objective would constitute unsuitable activity and, therefore, is prohibited under USA. Sharing commissions is only permitted with agents of the same or affiliated broker-dealers. Remember that investment adviser representatives may never share in the gains and losses in a customer's account in the same fashion that agents can. x

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it is unethical for an investment adviser to lend money to an investment adviser representative registered with the firm lend money to a bank that is a client of the advisory firm earn a fee that is based on a sliding scale depending on the amount of assets under management borrow money from a mortgage broker who is an advisory client of the firm

2, 4 Investment advisers may lend money only to persons affiliated with the firm (as the IAR is) or if the adviser is in the money-lending business. We borrow money from banks because they are in the business of lending money, but we don't lend money to the money lenders. An IA may only borrow from lending entities, and a mortgage broker does not lend money; the broker arranges the loan but does not act as a principal. Most investment advisers base their fee on a sliding scale. That is, the more money under management, the lower the percentage charged. x

Under the Uniform Securities Act, an investment adviser may legally have custody of money or securities belonging to a client if the investment adviser has insufficient net worth or is not appropriately bonded Administrator has not issued a rule prohibiting custody investment adviser does not also have discretionary authority over the account investment adviser has notified the Administrator that custody is maintained

2, 4 The Administrator may, by rule, prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a bond or sufficient net worth is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.x

Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? An adviser who exercises discretion in client accounts An adviser who maintains custody over client funds and securities An adviser who maintains less than $35,000 in net worth An adviser who, 6 or more months in advance, collects prepaid fees of more than $500

2, 4 The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees.

Without prior authorization from the client, an investment adviser could release information relating to the client's account in order to comply with the brochure delivery requirements of the USA when requested by the IRS as part of litigation against the client for the purpose of furnishing information for a statistical survey being compiled by the Administrator upon the receipt of a subpoena from a court of competent jurisdiction

2, 4 Without the prior consent of the client, an IA may disclose information relating to specific accounts only when requested by the IRS or by court order.

One of the prohibited practices under the Uniform Securities Act is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? Arbitrage Churning Matched orders Wash trades

3, 4

Which of the following would be prohibited practices under state securities law? Soliciting orders for exempt securities Making recommendations on the basis of nonpublished analysts' reports Failing to inform a client of unusually high commissions because the client does not complain Failing to obtain prior written authority for orders from a third party

3, 4 Failing to inform a client of unusually high commissions and not obtaining prior written approval for orders from a third party are prohibited practices. Soliciting orders for a security that is exempt from registration is a normal business practice. An agent may use the nonpublished reports of his firm's securities analysts as a basis for recommendations providing the nonpublished reports do not contain inside information.

With regard to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, proscribed actions would include accepting an order from a third party after written trading authorization has been received forwarding a written complaint from a customer to the appropriate supervisory person offering to repurchase a security at its original cost if it does not increase in value borrowing money from a client who was the agent's college roommate

3, 4 Prohibited actions under the policy would be guaranteeing a client against loss by agreeing to repurchase a security at its cost and borrowing money from a client who is not in the money-lending business. proscribed = prohibited

Which of the following statements regarding brokerage and advisory activities under the USA are TRUE? It is not unlawful for an investment adviser or broker-dealer to employ any device, scheme, or artifice to defraud in the sales of securities to institutional investors because the USA is designed to protect individual investors. Under the USA, it is unlawful for an investment adviser to deceive a person when not providing advice to that person. Sanctions for both investment advisers and broker-dealers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities.

3, 4 Sanctions for violations are administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is also true that any individual, whether technically defined as an adviser or not, may not deceive another person when providing investment advice if he is compensated for providing the advice. However, the Uniform Securities Act has no jurisdiction over an investment adviser when the deceitful action occurs in a nonadvisory situation, such as social interaction. x

Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act? The value of a client's account at the start of the year is subtracted from the value at the end of the year. The adviser's compensation is 5% of the difference. The adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. The adviser charges a fee of 1% of the average value of the account portfolio during the year. The adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more.

3, 4 Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the adviser or more than $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.

A customer asks an agent for a valuation of his securities portfolio. Because the agent does not want to cause the customer to panic and sell his shares at a loss, the agent inflates the value of the stock. Under the Uniform Securities Act, this action is A) not permitted because the agent must not deceive the customer by misstating a material fact B) permitted because the agent determined that selling the securities was not suitable C) not permitted because the agent must not attempt to influence the market value of a security D) permitted because the agent was not recommending a transaction

A customer of an investment adviser inadvertently mails some stock certificates to the IA. The IA does not maintain custody of customer assets. If the certificates were received on a Monday, NASAA rules would requires that the certificates be A) returned no later than Thursday B) returned no later than Tuesday C) returned the same day D) forwarded to the broker-dealer promptly

A review of an agent's client's account indicates daily trading with rapid portfolio turnover. Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this would NOT be considered excessive trading activity (churning) if A) the client's investment objective is quick return, the client has the financial resources necessary for such activity, and the agent uses a sophisticated technical program designed to cut losses and take profits quickly B) the client's account shows a profit C) the client has approved each trade D) each security purchased is suitable for the client

According to NASAA's Statement of Policies Regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may A) exercise discretionary investment authority over an account providing the client provides written discretionary authority B) borrow funds from a client only if the debt is formally documented and possesses a fixed maturity date, a stated rate of interest, and a schedule of repayment C) not exercise discretionary authority until 30 days after receipt of a written power of attorney from the client D) not recommend a specific professional money manager to those clients who want professional investment management services

According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, all of the following practices are considered unethical for an agent except A)selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. B)selling 3,000 shares of ABC at a price the agent determines is the best the client can get, without oral or written discretionary authority. C)determining the quantity of a specific security to purchase once the client has designated that security and the action to be taken. D)receiving written discretionary authority from a client within 10 business days of first executing a discretionary trade with oral authority from the client.

According to the Uniform Securities Act, all of the following are violations of suitability requirements EXCEPT A) failing to know the terms and conditions of the customer's will B) failing to determine the customer's ability to assume risk C) failing to make reasonable inquiry of the customer's security holdings D) failing to identify customer objectives

According to the Uniform Securities Act, to determine whether an investment adviser is trading excessively in a customer's account, regulators primarily examine whether A) the transactions matched the investor's objectives B) the adviser received compensation for the trades C) the adviser acted as a principal or an agent D) the customer approved the transactions in writing

All of the following are unethical business practices for an agent of a broker-dealer EXCEPT A) borrowing money or securities from a client who is a broker-dealer, an affiliate of the broker-dealer, or a financial institution engaged in the business of loaning funds B) deliberately misinforming a client regarding the agent's age C) placing an order to purchase or sell a security for a client's account without specific authority to do so D) placing an order to purchase or sell a security for a client's account per the instruction of a third party, without having first obtained a written third-party trading authorization from the client

An agent follows the recommendations of another agent in the office with an impressive performance record, and based on the security the successful agent recommends, the representative recommends it to all his clients. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this activity is prohibited A) because he failed to determine suitability for his clients and the reasonableness of the recommendations B) because it tends to induce excessive trading in the security C) as long as he discloses the source of the recommendation D) because the other agent's recommendations are confidential

An agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for both exempt and nonexempt securities B) not fraudulent if there was willful intent to omit the information C) fraudulent for nonexempt securities only D) fraudulent for exempt securities only

An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when A) receiving a check made payable to that broker-dealer B) receiving performance-based compensation C) having the power to make buy-and-sell decisions in an account D) charging fees on an hourly basis

An investment adviser has recommended funds sponsored by the GEMCO Fund group for many years. One of his clients who has been in several GEMCO Funds for over 10 years sends the IA a referral suggesting that the IA put his friend into the same GEMCO Funds as he owns. Under what circumstances would this be the appropriate action to take? A) GEMCO Funds are suitable for the referred client. B) The IA discloses that GEMCO Funds provides the firm with soft-dollar compensation. C) The referred client says that he wants just what your existing client owns. D) GEMCO Funds have had outstanding performance for the past 10 years.

If an agent is assigned to an account previously handled by an agent who has since left the firm, which of the following actions should the agent take first? A) Verify the account information B) Suggest the customer buy one of the stocks the firm is currently recommending C) Require the customer to sign a trading authorization naming the agent as the party with authority D) Liquidate the portfolio for immediate reinvestment in stocks the firm is currently recommending

If an agent misrepresents the price of a customer's stock by $10 per share to encourage the client to sell, this activity is A) a misrepresentation and a fraudulent act B) a misrepresentation but not a fraudulent act C) allowed if the customer ultimately makes a profit in the account D) allowed if the agent views the difference as a service charge

In response to high stock market volatility, if an investment adviser has all clients immediately sell their equity holdings and reallocate the proceeds to Treasury bills, under the Uniform Securities Act, this is A) unethical because Treasury bills may not be appropriate for all the adviser's clients B) ethical because the adviser is recommending a lower-risk investment C) ethical because the adviser is responsive to current market conditions D) unethical because the adviser may receive commissions when his customers sell their stock

In which of the following situations has the investment adviser acted properly in disclosing confidential information about clients under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) A client is unaware that he is under secret investigation by the Department of Homeland Security. Without consulting the client, an adviser turns files over to investigators under a court order. B) A prospective client asks for 3 current clients as references, which the adviser provides without consulting those clients because he knows they are pleased with his performance. C) Without a client's permission, the adviser identifies the client in an interview for an article to be published in a trade magazine; the article contains no information about the client's account. D) A client who is running for public office is slandered by false reports regarding finances. When a reporter calls the client's adviser, he corrects misconceptions regarding the client's financial affairs without consulting the client.

In which of the following situations is an agent committing a prohibited practice? A) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority B) Buying a security on behalf of a customer and then reselling it before the customer has paid for it C) Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account D) Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity

It is a violation of the Uniform Securities Act if an agent A) files a fraudulent application B) makes any material representation in the offer or sale of a security C) splits commissions with another agent in the office and fails to disclose this to clients D) offers or sells any security unless it is registered

It would be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to A) purchase a stock for her own account knowing that a large institutional buy order is about to be processed for that same stock B) attempt to convince a client that a specific mutual fund is a suitable investment for that client C) promise to provide a service that the agent is capable of performing D) effect a securities transaction not recorded on the books of the broker-dealer after having received written authorization from the firm to do so

NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents lists which of the following as an unethical business practice by a broker-dealer? A) Engaging in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers B) Segregating customers' fully paid-for securities C) Charging a higher than usual commission on a thinly traded stock D) Entering into a transaction with a customer at a price related to the current market price

NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents prohibits excessive activity in the account of a client for the purpose of generating commissions. This activity, frequently called churning, would likely be excused A) under no circumstances B) when the agent has been granted discretionary authority C) if the investor is considered an accredited investor under SEC Rule 501 D) when the account has outperformed the S&P 500 Index

Richard Alan is a longtime customer of yours and usually calls in orders identifying himself as Dick. Today, you receive a call requesting that half of the available funds in his account be wired to an offshore bank. When you say that his voice sounds different, he replies that he has a sore throat and that is why he doesn't sound like himself. Then you recall, when you answered the phone, he said that this is Mr. Richard Alan calling. At first you thought he was having fun, but now you might suspect A) identity theft B) he is having financial difficulties he wishes to hide from you C) his illness is more serious than a sore throat D) this is a different Richard Alan who is a client of the firm

Which of the following practices is fraudulent? A) Marking up a security by 5%, but indicating to the client that the markup is only 2% B) Failing to state all the facts related to a security C) Selling a security to a customer with a commission that exceeds industry standards D) Marking up a security by 10% more than industry standards with the customer's knowledge and consent

Which of the following statements regarding matched orders is TRUE? A) Matched orders violate trading rules because they create the illusion of trading volume where such volume would not otherwise occur. B) Matched orders reflect the timing of capital gains to be offset by capital losses and are considered an effective and permissible tax minimization strategy. C) Advisers should pursue matched orders because they mirror an investor's trading objectives and time horizon. D) Matched orders are a prohibited practice because they entail allocation of IPO stock in proportion to the level of customer trading activity.

You are an agent for a fully licensed broker-dealer, and one of your clients is the chairman of a drug company who tells you that the government will shortly disapprove a patent for a new drug. According to the Uniform Securities Act, you should A) promptly inform your supervisor B) sell the company's shares short for your discretionary customer accounts C) tell your best customers to sell their holdings of the corporation immediately D) contact the SEC because you have inside information

The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight, this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an investment adviser representative, you would A) not be permitted to contact your clients until it was ascertained that the report was general public knowledge B) be required to send your clients to the firm's website before making comments regarding this security C) be permitted to contact your clients with this recommendation right now D) be permitted to contact your clients with this recommendation tomorrow

A A firm's internal research may be considered inside information. Clients may be contacted as soon as the IAR has access to the report.

Which of the following would NOT be an example of market manipulation? A) A specialist on the NYSE buys and sells stock for his own account B) A principal in a broker-dealer leaks a rumor that ABC is going to acquire LMN—after a few days, the broker-dealer sells short LMN for its own account C) A wash trade D) Three market makers intentionally start buying and selling the same security simultaneously in their own accounts

A A specialist that buys or sells for its own account is not engaged in market manipulation. The function of a specialist is to act as a broker for orders that other members left with them, and to act as a dealer in buying and selling for their own account. Market makers who buy and sell the same security simultaneously in their own accounts are manipulating the market by creating false trading volume. A principal in a broker-dealer that trades on a rumor that he leaked is manipulating the market for personal gain.

Written policies and procedures reasonably designed to safeguard customer information from cyber security threats would include all of the following EXCEPT A) maintaining the minimum required cybersecurity insurance coverage. B) encrypting personally identifiable information. C) conducting periodic risk assessments. D) implementing a firewall.

A All of these choices are important components of a broker-dealer's or investment adviser's cybersecurity program. However, there is no minimum insurance coverage specified by any of the regulatory bodies.

Which of the following statements regarding investment adviser compliance rules is TRUE? A) Compliance procedures should be designed to prevent violations, as well as detect existing violations. B) Compliance procedures should review the accuracy of disclosures made to clients and investors, although it is not necessary that they review disclosures made to regulators. C) The CCO must have at least 3 years' experience in securities industry compliance. D) If the chief compliance officer (CCO) conducts appropriate annual compliance reviews, interim review is generally not necessary.

A Although the CCO should conduct annual compliance reviews, he should also recognize the necessity for interim reviews in light of such events, including changes in business arrangements and regulatory developments. There is no specific experience requirement that the CCO must fulfill; however, the CCO should be knowledgeable in securities law. Compliance procedures should review the accuracy of disclosures made to regulators, clients, and investors.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may NOT borrow money from which of the following clients? A) A federal covered investment adviser not affiliated with this adviser B) A finance company not affiliated with the adviser C) A broker-dealer not affiliated with the adviser D) A bank not affiliated with the adviser

A An investment adviser may only borrow from a client that is in the business of loaning money, such as a bank or a broker-dealer, or a client that is affiliated with the investment adviser. Investment advisers are not in the business of loaning money and the only way this could be done is if the 2 firms were affiliated. x

Over which of the following would the investment adviser representative have discretionary authority? A) An account in which the investment adviser representative chooses portfolio securities on behalf of the client B) An account in which a customer has power of attorney over another individual's account C) An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative D) An account in which a trustee has power of attorney over another individual's account

A An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.

Chuck is a registered investment adviser and a highly respected investment analyst. He has prepared a research report that is highly bullish on Monolith Industries, Inc., common stock. The report has not been released because it is still under review by the compliance department of Chuck's firm. Chuck has been asked to participate in a radio interview show in which he will be asked questions about this stock. Which of the following statements best describes how Chuck may communicate about this stock to others? A) Chuck may not discuss this security because his report has not yet become available for public distribution. B) Chuck may recommend this security following disclosure of any position he or his firm holds in Monolith Industries, Inc. C) Chuck may recommend this security without restriction. D) Chuck may recommend this security to existing clients but not to prospective clients.

A Because the information in Chuck's research report will not be available for public distribution until after approval by the compliance department, he may not discuss the security with clients or prospects until the report is cleared. There are court cases where the SEC has prevailed, claiming use of internal research prior to public distribution is using inside information.

All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) hypothecating customer securities held in margin accounts B) conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer C) effecting a transaction with no change in beneficial ownership D) recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy

A Effecting transactions with no change in beneficial ownership is a form of market manipulation in conflict with NASAA's Statement of Policy. Conducting securities transactions not reflected on the books of the employing broker-dealer and without the employing broker-dealer's prior written authorization is known as selling away, considered by NASAA to be an unethical practice.

Agents A and B work for the same firm and wish to share commissions. Agent A is licensed in states X, Y, and Z. Agent B is licensed in states X, Y, and C. Which of the following statements is TRUE in regard to their sharing commissions? A) Only the commissions from states X and Y could be shared. B) All commissions from agents A and B can be shared. C) Commissions cannot be shared. D) Only the commissions from states Z and C could be shared.

A In order to share commissions, agents must be registered as an agent for the same broker-dealer or for an affiliated broker-dealer. Additionally, in order to receive a commission, an agent must be registered in the state where the transaction is made.

Which of the following is an unethical practice for agents of broker-dealers? A) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization B) Failure to make a bona fide public offering of all securities acquired as an underwriter C) Borrowing money from a commercial bank that has investment accounts at the broker-dealer D) Effecting securities transactions not recorded on the books of the employing broker-dealer with the employing broker-dealers' approval in writing

A It is an unethical practice for an agent of a broker-dealer to effect securities transactions not recorded on the books of the employing broker-dealer, unless prior written authorization is secured. Broker-dealers, acting in the capacity of underwriters, not their agents, must make a bona fide public offering in underwritings.

An investment adviser representative recommends that a customer purchase shares of Silicon Switches. The representative indicates that the company has reduced market risk because it has graduated to the level of quality acceptable to the New York Stock Exchange. According to the Uniform Securities Act, the adviser's statement is A) not permitted because it is misleading to imply that meeting listing requirements reduces market risk B) permitted because an investment adviser may recommend listed stocks C) not permitted because the transaction is not suitable for the customer D) permitted because the NYSE sets stringent earnings requirements for listed stocks

A Meeting the listing requirements of the New York Stock Exchange does not reduce the risk of loss to the client, so the agent's statement is misleading and therefore prohibited. NYSE listing requirements are numerical standards and do not imply that the exchange has passed on the quality of the issue.

An agent registered with a broker-dealer in this state would be permitted to do all of the following EXCEPT A) borrow money, with written permission of the customer and the broker-dealer, from an immediate family member who is a client B) share in the profits in an account with a customer with written permission of the customer and the broker-dealer C) solicit transactions in unregistered exempt securities D) split commissions with another agent at an affiliated broker-dealer

A Money may never be borrowed from a client, unless something in the question indicates that the client is in the business of lending money or an affiliate of the firm. As a testing matter, that will only be banks or broker-dealers in margin accounts. Exempt securities are unregistered because they are exempt and solicitations for trades are no problem. Sharing in the profits in an account with a customer is permitted under these conditions, and splitting commissions with agents of the same broker-dealer or different broker-dealers under common control is also permitted. However, two registered agents representing nonaffiliated broker-dealers may never share commissions.

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices. However, it would NOT be considered a violation A) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client B) to borrow money from a client who is not in the lending business C) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account D) when a broker-dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity

A Properly registered individuals employed by the same or affiliated broker-dealers are permitted to split their commissions. Because there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only be done with the written consent of the client and the agent's broker-dealer. It has nothing to do with the time spent on the account. A broker-dealer selling out of inventory must disclose that the firm acted in a principal capacity. No BD or agent may ever borrow money from a client who is not in the money-lending business unless that client is an affiliated person. x

Jonathon is employed by Frederick's Investment Advisory Service strictly to telemarket for prospective new clients. Which of the following is TRUE under the Uniform Securities Act? A) He is subject to the antifraud provisions of the act. B) He is only subject to the antifraud provisions of the act if the prospects actually utilize the firm's services. C) He is not subject to the antifraud provisions of the act. D) He is only subject to the antifraud provisions of the act if his compensation continuously increases.

A Remember, there are no exemptions from the antifraud provisions of either the Uniform Securities Act or the Investment Advisers Act. Fraud is defined as unlawful practices by any person involved with the purchase or sale of a security, whether registered or exempt from registration. This includes any act to defraud, untrue statements of a material fact, and omissions of a material fact. The act covers any person and there are no exemptions from the fraud provisions.

When an investment adviser chooses to use a promoter to solicit new business, the Investment Advisers Act of 1940 requires all of the following conditions except A)the solicitor must register with the SEC as an investment adviser B)either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement C)the solicitor must not be subject to disciplinary actions involving finance or dishonesty D)the promoter and investment adviser must enter into a written agreement if the compensation exceeds $1,000 over a 12-month period.

A There must be a written agreement between a solicitor and an adviser if the compensation exceeds the de minimis amount. The solicitor is required to provide the customer with a copy of the adviser's brochure. The adviser or the solicitor must disclose any additional costs that the customer will pay due to the use of the solicitor. The solicitor cannot be subject to disciplinary actions involving finance or dishonesty. Although the investment adviser must be registered, there is no requirement for a solicitor to register with the SEC.

The Uniform Securities Act prohibits broker-dealers from engaging in activity that has the effect of manipulating stock market prices. These would include: A) churning B) matched orders C) selling unregistered nonexempt securities D) higher than reasonable commissions or markups

The federal law dealing with privacy matters for financial institutions is A) Regulation FD B) Regulation S-P C) HIPAA D) the ACA

The practice of stealing an individual's personal information for criminal activity is generally referred to as A) credit monitoring B) identity theft C) felonious assault D) an unethical business practice

Baird, a registered agent, receives an order from Miller, her customer, for an unusually large order of common stock in XYZ Incorporated. He states that he overheard the CFO of XYZ, Inc., telling his golfing partner that XYZ was close to being acquired by Monolith Communications, Incorporated. In light of ethical standards under the Uniform Securities Act, which of the following actions is most acceptable? A) Within the trading day, Baird recommends XYZ to 20 of her customers who have indicated aggressive growth as their main trading objective. B) Baird tells her immediate supervisor (principal) of Miller's intent to trade based upon nonpublic (inside) information. C) Baird purchases 1,000 shares of XYZ for her personal account. D) Baird takes Miller's order and does not discuss the conversation she has with Miller regarding XYZ and Monolith with anyone.

Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not A) examine customers' stock certificates B) have physical custody over its clients' monies and certificates C) refer clients to an affiliated broker-dealer D) manage client accounts on a discretionary basis

In an effort to make things easier for her clients, an agent redacts certain material information from sales literature relating to a sophisticated investment product her firm is offering. The agent A) has violated the Uniform Securities Act by adding information to sales literature B) is acting in a fraudulent manner by failing to include material information C) is properly including information necessary for an investor to make an informed investment decision D) is offering better service to her clients by making the decision-making process easier

One of the most prevalent schemes abusing seniors is one where the individual or couple receives an invitation to attend an educational seminar held at an upscale location. This scheme is commonly referred to as A) a senior seminar B) a free lunch seminar C) a wealth preservation session D) a lunch and learn seminar

Review of an SEC-registered investment adviser's policies and procedures designed to prevent violation of the federal securities laws must take place no less frequently than A) semiannually B) annually C) monthly D) quarterly

Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following is an acceptable third-party trading authority? A) John tells his investment adviser that he has full confidence in his wife's ability to manage his money. Later, she calls the adviser to place an order for him. B) Phil sends his investment adviser written notice that his attorney has authority to execute trades on his behalf. Later, his lawyer places an order on Phil's account. C) Frank orally declares to his investment adviser that his lawyer has full authority to trade on his account. Later, the lawyer calls to place an order on Frank's behalf and properly identifies himself to the investment adviser. D) George tells his accountant that he has authority to trade for him. The accountant then calls the investment adviser for an order.

Walt and Bryan are old friends who are agents with different broker-dealers. Bryan attends one of Walt's investment seminars and, at a prearranged point in the presentation, stands up and exclaims that his rich brother-in-law wisely purchased the same investment. This action is A) only problematic if someone invests in the product and loses money B) a deliberate attempt to mislead and deceive investors C) a dubious sales practice but not strictly prohibited D) a legitimate sales tactic known as priming the pump

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A)Instruct the client to send the certificate to the transfer agent because you cannot accept it. B)Accept the certificate and give the customer a receipt. C)Accept the certificate and send the customer a receipt within 24 hours of the delivery. D)File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000.

Which of the following actions by an agent would NOT constitute fraud as defined in the Uniform Securities Act? A) Purchasing a security on an exchange and simultaneously selling it on another exchange to create the impression of increased trading volume. B) Purchasing a security for the account of a client and then buying 100 shares of it for her own account C) Executing a trade for a customer at a price that is unrelated to the current market D) Executing a trade for a customer without the customer's knowledge

Which of the following constitutes a discretionary account? A)The broker-dealer's trading account B)An account in which the investor gives the broker-dealer written authority to buy or sell securities C)The agent's personal trading account D)An account in which the investor gives the broker-dealer authority as to pricing or timing of an investment

Which of the following is the most appropriate action for an agent to take after receiving a written complaint letter from a client? A) Commence a thorough investigation and provide a report of the results to the agent's employer B) Turn the letter over to the agent's supervisor C) Place a telephone call to the client to resolve the issue D) Forward the complaint to the Administrator and maintain a copy in the agent's records

Which of the following statements regarding discretionary accounts is TRUE? A) A branch manager must approve discretionary orders before entry. B) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary. C) A principal must approve discretionary orders before entry. D) The rules regarding churning of accounts do not apply to discretionary accounts.

A major stockholder of XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as A) pegging B) wash trades C) front running D) positioning

B A wash trade occurs when there is no real change in beneficial ownership. Purchases and sales are offset, but the volume of trading creates the illusion of substantial interest in the stock.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding the distribution of reports prepared by 3rd parties that are not affiliated with the adviser is TRUE? A) An adviser is prohibited from basing recommendations on work that is wholly the product of someone else's efforts. B) An adviser may use a report prepared by someone else if the source of the report is disclosed. C) An adviser need not disclose the author of any outside 3rd-party report unless the client asks. D) An adviser is required to disclose any source of information used in making recommendations to clients.

B An adviser is not prohibited from providing clients with reports prepared by others, but when this is done, the adviser must disclose the true source of the report. However, the disclosure requirement does not apply to the research an adviser uses in rendering investment advice.

Which of the following activities by a registered agent of a broker-dealer would constitute a prohibited practice under the Uniform Securities Act? A) Informing a customer of a negative research report recently published on a stock that represents the client's largest holding B) Personally raising capital, without written authorization from the broker-dealer, for a new high-tech venture being run by the agent's former college roommate C) Refusing to lend money to clients D) Failing to disclose a nonmaterial fact

B By attempting to effect securities sales by circumventing his broker-dealer, the agent has committed the prohibited practice of a private securities transaction, referred to as selling away. Failure to disclose a material fact would be prohibited, but nonmaterial facts do not carry that burden. One would expect an agent to keep the client informed regarding news about securities held in the account, and agents would be expected to refuse to make loans to customers because that is a prohibited practice.

The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a code of ethics. Which of the following is charged with the responsibility of enforcing that code? A) Each individual IAR B) Chief compliance officer of the IA C) The SEC D) Administrator of the state in which the IA has its principal office

B Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the code of ethics is being followed. Although each individual IAR must follow that code, it is the CCO with the supervisory responsibility.

If a licensed agent believed that interest rates were about to fall and contacts all of her clients and suggests they purchase high-quality debt securities with long-term maturities, this action A) is probably not in violation of any suitability standards as long as the bonds are of high quality B) has probably violated the Uniform Securities Act's suitability standards C) is in error because a drop in interest rates will cause bond prices to fall, leading to a loss in the client's accounts D) may be acting on material inside information

B If interest rates fall as the agent guesses, debt securities with long-term maturities will increase in price. However, the agent is at fault for making the same recommendation to all of her clients, because the same product cannot be suitable for everyone. This may be called a blanket recommendation on the exam. Even U.S. Treasury bonds, with the highest degree of safety available, are not always suitable based upon the specific objectives of the investor.

A client with a margin account notifies an agent of his vacation next week. The day after the client departs, there is a substantial market sell-off, and the drop in the value of the client's portfolio requires additional money deposited in the client's account immediately. Which of the following actions of the agent would NOT be prohibited? A) Contacting the client's banker and arranging a loan on behalf of the client to meet the margin maintenance call B) Doing his best to reach the client, and if unsuccessful, notifying his principal, in order that sufficient securities in the account be liquidated to meet the margin maintenance call C) Transferring funds from the client's spouse's account to meet the margin maintenance call D) Lending the client sufficient funds to meet the margin maintenance call

B If the client cannot be reached, or otherwise does not come up with funds, the only way to satisfy the margin maintenance call is through the liquidation of shares in the account. The broker-dealer determines which securities are to be liquidated. None of the other actions described here would be permitted. An agent can never lend money to a client, nor may loans be arranged through banks. To transfer funds from another account, permission of all owners of that account must be obtained.

An agent who carefully evaluates a client's risk tolerance, financial situation, and investment objectives engages in an unethical practice when he: A) buys or sells securities with exceptionally high commissions or transaction costs B) automatically recommends securities that are highly regarded by other agents in the office C) underestimates a company's interest rate risk as a result of cautious accounting practices recently adopted by the company D) fails to discuss a company's working capital position (because the client does not want to be bothered by details) if the securities are fundamentally suitable for his portfolio

B It is a prohibited practice to automatically recommend securities without having a reasonable basis for the recommendation; other agents recommending the security is not a reasonable basis for recommendation. Purchasing securities with high transaction costs is not prohibited, provided that disclosure is made to the client. An agent is not required to describe all facts surrounding an investment, but he must present all those that are material. Regarding estimates of a company's interest rate risks, the representative did not misrepresent a material fact that would have otherwise precluded the client from purchasing the security. x

Jessica is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former college friend requesting a contribution to the friend's political campaign for governor of State Y. As it happens, Jessica's firm provides advisory services to State Y's employee retirement fund and Jessica actively solicits business from other state agencies. Which of the following actions would be permitted to Jessica under the SEC's pay-to-play rule without causing any concerns to her firm? A) Donating a maximum of $250 to the campaign B) Donating a maximum of $150 to the campaign C) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign D) Donating a maximum of $350 to the campaign

B Jessica's solicitation activities define her as a covered employee. The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state that Jessica cannot vote, the lower limit applies.

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) permitted if the secretary is also registered as an agent B) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement C) a violation under all circumstances D) a violation in certain states

B Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor.

John, a newly registered agent with a broker-dealer in Illinois, violated the Uniform Securities Act if he A) told his clients, against his better judgment, that past performance is no guarantee of future performance B) knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk C) deliberately omitted the number of employees at a corporation making its first issue of securities to the public because he did not consider that fact relevant to the investor's decision making process D) mistakenly told a client that the dividend yield on a common stock selling at $75 per share was 5%, though he accurately indicated that the dividend payment was $.75 per quarter

B Knowingly selling revenue bonds as general obligation bonds is a misstatement of material fact and therefore fraudulent. An agent, when making a sale to a client, need not include all facts, such as the number of employees. The agent must not deliberately fail to mention the material facts regarding the nature of the investment. For example, it is not fraud to make a mathematical mistake, such as inadvertently misquoting the dividend yield on a common stock as 5% when in fact it is 4%, while accurately indicating that the actual dividend payment is $.75 per quarter. An agent may never state that past performance is expected to be replicated.

Which of the following is most likely to be the most important factor in determining whether market manipulation has occurred? A) The scope of the action. B) The intent of the action C) The type of security. D) The market in which the action took place

B Market manipulation is considered fraud. Because fraud involves a willful or deliberate action, the intent to mislead is the important factor. Market manipulation can occur with any type of security or in any securities market. The definition of the crime is the same whether it is 100 shares or 100,000 shares.

If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the Uniform Securities Act, this omission constitutes A) a misdemeanor B) no violation C) a criminal violation punishable by up to three years in prison D) a civil violation punishable by a fine up to $5,000

B No violation occurs because the Uniform Securities Act requires the disclosure of only material facts. Material facts are those that could influence the price of a security. Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision.

This morning's financial section of your newspaper has an article discussing several significant material facts relating to a stock held in the portfolio of several of your clients. You would be able to share these facts with your clients A) only if the customer did not work for the issuer and did not know this information B) with or without the issuer's permission C) only if the statement without this fact would make your previous statements misleading D) under no circumstances until the clients have had a chance to read the article themselves

B Public information may be disseminated with or without the permission of the issuer, even if it is material information that casts the issuer in an unfavorable light.

Under the Uniform Securities Act, it is NOT considered fraudulent if an agent A) omitted a material fact because she knew she did not have time to cover everything in a short presentation B) actively solicited orders in unregistered exempt securities C) deliberately failed to follow a customer's instructions D) made an untrue statement of a material fact

B Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions.

Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA's principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC's pay-to-play rule, A) WCA's contribution is within the de minimis limitation because their principal office is located in State L B) WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years C) WCA could be subject to disciplinary action D) WCA would be prohibited from rendering any advisory services to any agency of State L for 2 years

B The SEC's pay-to-play rule prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision), for 2 years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. Please note that the advisory relationship can continue, just without any compensation. The de minimis exemption of $350 applies to an individual, as long as that person is eligible to vote for the candidate ($150 if he is not), but it never applies to the firm. x

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT A) if not held by a qualified custodian, deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held B) send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period C) have client funds and securities examined at least once a year by an independent public accountant on a surprise basis D) notify the Administrator in writing

B The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. Unless using a qualified custodian, the adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.

Under the Securities Exchange Act of 1934, which of the following statements regarding reports required to be filed with the SEC is TRUE? A) Persons who become the beneficial owner of more than 2% of a security registered under the Securities Exchange Act of 1934 must file a report within 5 days. B) Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly. C) Institutional investment managers who exercise discretion over accounts valued at $100 million or more need not file reports if all their clients are insurance companies. D) Persons who become the beneficial owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within 2 days.

B The requirement for reports of beneficial ownership is that anyone who becomes the owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within 10 days; therefore, neither 2 days nor 5 days is correct. The requirement for institutional investment managers is that they must file reports quarterly (13F) if they exercise discretion over accounts valued at $100 million or more of 13(f) securities. Whether the institutional investment manager's clients are insurance companies is not relevant.

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices, but concludes with the statement that the list is not inclusive. This means that even practices not specifically enumerated will be prohibited if they are in violation of the standards of ethical behavior. One such circumstance that may arise is an agent making an initial sale of shares of an open-end investment company in a quantity just below a breakpoint published in the fund's prospectus. In this case, the agent A) recognized the limitations of the client's ability to invest any further sum of money B) has violated the suitability standards by failing to explain the risks inherent in making an investment below a breakpoint C) would violate those ethical standards by failing to disclose that adding a small amount to the purchase would save a significant amount of sales charge D) must explain the procedure for taking advantage of rights of accumulation on future purchases

Which of the following statements best reflects how front running is regarded by NASAA? A) Front running is not a prohibited practice under the Uniform Securities Act and is considered normal practice in the securities industry. B) Front running is a prohibited practice for the broker-dealer, but not for the agent. C) Front running is a prohibited practice for all securities industry professionals because it subordinates the interest of the customer. D) Front running is a prohibited practice for the agent, but not for the broker-dealer.

Which of the following is NOT a fraudulent business practice when committed by a registered broker-dealer? A) Engaging in trades between other broker-dealers to increase or decrease the price of securities B) Conducting transactions that do not result in the transfer of ownership between buyers and sellers C) Acting as agent for both buyer and seller on a transaction D) Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security

C A broker-dealer may act as agent for both buyer and seller in a transaction. In other words, the BD can have one client sell and another client buy and act as the go-between. All the other activities represent market manipulation and are therefore fraudulent practices.

Why do matched orders result in painting the tape? A) Matched orders are generally executed outside of normal trading hours. B) Matched orders generally result in meaningful profits for such traders. C) The phony trades make the stock appear more frequently on stock tickers. D) Matched orders will appear on the OTC Link.

C A matched order is an order to buy or sell securities that is entered with knowledge that a matching order on the opposite side of the transaction has been or will be entered for the purpose of (1) creating a false or misleading appearance of active trading in any publicly traded security or (2) creating a false or misleading appearance with respect to the market for any such security.

A risk-averse investor wants to invest in Treasury securities. The investor's agent recommends Treasury notes, pointing out that federal government-backed securities are default-free securities not subject to interest rate risk. In the above situation, the agent has acted A) fraudulently because Treasury notes are unsuitable for a risk-averse customer B) properly because Treasury notes carry no risk of principal default C) fraudulently because the agent failed to disclose that the investment carries interest rate risk D) properly because Treasury notes are suitable for a risk-averse customer and are free of all investment risk

C Although Treasury securities (such as T-notes issued by the federal government) do not carry default risk, the customer who buys them bears interest rate risk because the value of the notes will fall if interest rates rise. The agent has acted fraudulently in not disclosing this risk to the customer.

When does a deliberate omission of a fact in a securities sale constitute fraud? A) Only when a new issue of securities is being offered B) Only if the information was known to be true C) If a reasonable person would base an investment decision on the omitted information D) Anytime the information is known by more than 15 people

C Deliberate omission of a fact constitutes fraud if the omitted information is material in nature (i.e., if a reasonable investor would use the information in making an investment decision). This is true whether the information is made in connection with a primary offering or a secondary market transaction.

Which of the following practices is prohibited under the Uniform Securities Act? A) Participating in active trading of a security in which an unusually high trading volume has occurred B) Failing to inform the firm's principal of frequent verbal customer complaints C) Offering services that an agent cannot realistically perform because of his broker-dealer's limitations D) Altering the customer's order at the request of a customer, which subsequently results in a substantial loss

C An agent may not offer services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints if they are serious.

All of the following actions, if performed by a registered agent, would be considered a prohibited activity under the Uniform Securities Act EXCEPT A) the agent backdates customer confirmations in order to enable the client to achieve a long-term holding period, thereby saving considerable income taxes B) the client informs the agent that the appropriate written discretionary authorization forms are being hand-couriered to the agent and should arrive within the hour. Knowing the required paperwork is on its way, the agent begins discretionary trading in the account. C) accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state D) the agent saves the client money by deliberately withholding the client's buy order for a stock when the agent sees the stock price is trending down. When the order is finally placed later in the day, the execution price is $1 less than when the agent received the order.

C An unsolicited order is an exempt transaction, so accepting this from the agent's client would not be a prohibited practice. There is never a case when backdating of confirmations is permitted, even by 1 day. No discretionary activity may take place until the written authorization is actually received by the firm. Although an agent can use discretion as to time and price without written authority, oral instructions from the client are required, and nothing in the question indicates that the client instructed the agent to "buy when you think the price is right."

According to the Uniform Securities Act, a state-registered investment adviser may have custody of a customer's funds and securities if A) it does not share in the capital gains and losses of the account B) it has received the permission of the Administrator C) the Administrator has been notified of the custody arrangement D) it has received permission from the state banking authorities

C As long as retaining custody of funds is not prohibited, an investment adviser may have custody of a customer's account after providing notice to the Administrator. Performance-based compensation is not related to the custody rules.

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered a prohibited practice for a broker-dealer to A) inform customers that past performance is no guarantee of future results B) maintain an office in the state, but fail to register with the Administrator C) have a history of repeatedly delaying the delivery of securities to its customers D) fail to maintain the required net capital

C Broker-dealers are obligated to make prompt delivery of securities to their clients. Failing to maintain the required net capital and failing to register are violations of the law, not prohibited business practices.

Your client has given you discretionary authority to trade her account with a beginning balance of $100,000. Market conditions have been volatile for the past 6 months, and her primary objective is long-term growth with low to moderate risk. A review of the account at the end of that period shows that while the Dow Jones Industrial Average has dropped by 2.2%, the client's account value is $105,300. During the period, if commissions from trading totaled a bit over $6,000, it is likely that your principal will A) inquire as to why a $100,000 account only generated $6,000 in commissions in a 6-month period B) congratulate you on helping your client beat the averages C) discuss the possibility that you may have been churning the account D) suggest that you contact the client about investing more money with the firm

C Churning can occur even when an account makes money. If the amount of commissions generated is out of line with the account's objectives and resources (and 12% annual charges, in this case), churning will probably be suspected.

Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Recommending securities that result in losses in the customer's account B) An agent with discretionary authority enters a buy order for a security when its price is rising C) Splitting commissions with a customer service representative who is not registered but works for the same firm D) Telling a customer that the investment being recommended will be sold from the inventory of the agent's firm

C Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transaction-based compensation. We can never guarantee that our recommendations will be successful, and sometimes they do result in losses.

A client of an investment adviser needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers A) the loan would not be permitted under any circumstances B) the loan could be made if the IA was affiliated with a bank C) the loan could only be made after the advisory contract was terminated D) the loan could be made if the client was an institutional investor

C First of all, a "bridge" loan has nothing to do with a bridge. The client is not trying to cross over anything. The term is used to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've got that out of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business of lending money. Because this IA states that it is not their business model, the only way this loan could be made is if there was no adviser/client relationship. x

In which of the following situations has the investment adviser NOT violated the antifraud provisions of the Investment Advisers Act of 1940? A) Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known. B) Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer. C) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. D) George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client.

C If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as an agent of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own account only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice.

An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if A)the customer has not received a wrap fee brochure B)the adviser is not a registered broker-dealer C)there is a rule in the state barring such custody D)the customer fails to tell the adviser that he has custody

C If there is a rule barring custody, under no circumstances may the adviser have custody of customer funds or securities. It is the adviser who must notify the customer that custody is being maintained, not the reverse.

The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers generally prohibits an IA from disclosing any confidential account information without specific consent of the client. However, disclosure would be permitted to A) the client's accountant who is representing him before the IRS B) the client's friends on his Facebook account C) the client's spouse when this is a joint account D) the client's attorney representing him in a lawsuit

C In the case of a joint account, all owners are entitled to any information relating to the account. The trick here is that the IRS can compel disclosure in a tax case, but the client's CPA can't.

Under the ethical conduct provisions of the Uniform Prudent Investors Act, which of the following statements is TRUE regarding an investment adviser's recommendations to clients? A)They may only rely on their experience in making recommendations. B)Investment advisers will make suitable recommendations if they exercise due diligence in investigating securities before recommending them. C)Investment advisers must inquire into the client's financial situation, investment objectives, needs, and goals. D)The suitability requirement is necessary to ensure conflicts of interest are avoided.

C It is a primary responsibility of the adviser to make reasonable inquiry as to the client's financial situation, investment objectives, and needs, before making recommendations. Recommendations must be suitable in light of any other information known to the adviser.

An elderly widower explains to his investment adviser representative that he requires his investments to provide the maximum current income. The IAR should recommend A) a zero-coupon bond B) a widow fund, structured specifically for this type of investor C) a mutual fund that matches the investor's stated objective D) a growth fund

C Recommendations should always be investments that match the investor's stated objective. Growth funds are not designed to meet the requirement of providing maximum current income. Zero-coupon bonds do not pay out any interest until maturity and, therefore, are unsuitable for an investor looking for current income. Although the name of a fund should bear a resemblance to its objective, the investor and the IAR should read the fund's prospectus carefully to ensure that the fund's objective matches the investor's.

Which of the following would be considered unethical under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) An investment adviser representative receives an order to buy XYZ stock from an advisory client and simultaneously recommends that another advisory client sell that stock in an agency cross transaction. B) An investment adviser varies the annual fee based upon each client's assets under management, charging less for those with higher balances and more for those meeting the account minimum. C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. D) An investment adviser discloses in its brochure that, from time to time, it may sell securities recommended to clients directly out of the firm's inventory.

C It is an unethical and prohibited business practice for investment advisers and their representatives to borrow money from clients who are not in the business of lending money. In this case, the loan officer is the one who is doing the lending, not the bank. IAs are permitted to base their fees on the amount of assets under management, generally charging a lower percentage to those with higher balances. IAs are permitted to act as principals in recommended trades, but appropriate disclosure must be made. In an agency cross transaction, a recommendation may be made to either, but not both, parties to the trade. x

It would be considered a prohibited activity for an agent to engage in any of the following activities EXCEPT A) trading in the account of a conservative client exclusively in initial public offerings with proper trading authorization from the client B) failing to record exempt transactions on the broker-dealer's books and records C) executing a transaction in a nonexempt security in a discretionary account D) sharing in profits of an account as a reward for the agent's recommendations exceeding the S&P 500

C Once a discretionary account has been properly documented, the agent handling the account can trade exempt and nonexempt securities. Nothing in this answer choice implies that the nonexempt security is unregistered. All transactions, no matter in exempt or nonexempt securities, must be recorded on the books of the broker-dealer. As a rule, initial public offerings tend to be on the speculative side, suitable for aggressive, not conservative investors. Therefore, even with the client's authorization, this trading profile would be unsuitable and, as a result, a prohibited activity. Sharing in profits of an account as a reward for exceeding the S&P 500 (or any other benchmark) is prohibited under any circumstance. This is not the same as sharing in the profits of an account with consent of the client and the employing broker-dealer, because this is based on the performance of the agent's recommendations and not on a mutually agreed sharing arrangement. x

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following is unethical? A) Borrowing funds for personal use from a client that is a bank B) Exercising discretion with regard to the time or price of an order without written authorization from the client C) Recommending a certain limited partnership investment to all clients D) Omitting nonmaterial facts in a presentation to an advisory client about a recommended investment

C Recommending an investment without determining its suitability to each client is considered unethical. When the same investment is recommended to all clients, it is called a blanket recommendation and almost always raises the suitability question. Time and price are not considered to be discretion, so no written authority is needed. While borrowing from clients is usually prohibited, that rule is suspended when the lender is a person in the business of lending money, such as a bank or a broker-dealer. Omitting nonmaterial facts is permissible when recommending securities to a client; the material facts must be disclosed.

If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) not violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made B) committed a prohibited business practice by selling an unsuitable investment C) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents D) not committed a prohibited business practice

C The agent has violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security. x

An agent wants to sell a highly valuable unregistered, nonexempt security to a customer. The agent has the client sign a waiver indicating that the security is not registered, so the security may be sold legally per the Uniform Securities Act. This sale of the security is A)perfectly legal with disclosure and waiver on registration B)appropriate providing the client does not request a rescission of the sale C)illegal because provisions of the Uniform Securities Act cannot be waived D)perfectly legal because unregistered nonexempt securities need not be registered

C The agent's sale of the security is illegal because provisions of the Uniform Securities Act cannot be waived. x

An investment adviser's contract contains the following statement: "While GEMCO Advisers agrees to use its best efforts in the management of the portfolio, GEMCO shall not be responsible for errors in judgment or losses incurred on investments made in good faith, and its liability shall be limited expressly to losses resulting from fraud or malfeasance, or from violation of applicable law." Under the USA, this statement A)clearly defines the parameters of the adviser's responsibilities B)offers protection to the client by limiting those acts for which the adviser can be sued C)is an improper waiver and makes the contract null and void D)complies with the investment adviser's fiduciary liability

C The regulators tend to be quite strict on the use of hedge clauses waiving certain rights of clients or obligations of IAs. More than likely, the Administrator would view this language as potentially misleading to clients, given the adviser's duties as a fiduciary. Moreover, the adviser's statement that it assumes liability for "violation of applicable law" only compounds the problem because it was unlikely that the client would realize that "applicable law" does, under several circumstances, provide a right of action for even good faith "errors in judgment."

If two agents of a broker-dealer agree to work together as a partnership in soliciting business and they agree to split commissions, this practice is A) permitted only if the broker-dealer's compliance department audits the partnership's financial performance B) in violation of the Uniform Securities Act's prohibition against sharing in the profits of an account C) permitted D) permitted, but only with the prior written consent of the affected clients

C There is nothing in the USA that prohibits agents registered with the same broker-dealer from forming a partnership to conduct business or solicit clients. Under the USA, the compliance department need not audit the financial performance of such an arrangement. It is considered an unethical business practice for agents who are not licensed with the same or affiliated broker-dealers to share commissions.

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 A) would be allowable if the securities representative receives at least 60% of the commission and the insurance agent receives no more than 40% B) is an unethical trade practice C) in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain their securities licenses at the same or affiliated broker-dealers D) in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain securities licenses with broker-dealers registered with the Administrator

C 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. x

A customer buys 200 shares of a common stock at $30 per share. On a day when the stock's price is down $5, the customer calls her agent and inquires as to its current price, and the agent tells her the price is around where she bought it. In the next few weeks, the stock's price turns around and the customer liquidates the shares at $35 per share realizing a $5 per share profit excluding commission. In the above situation, the agent has acted A) properly, because he prevented the customer from losing a profit opportunity B) properly, because the interim price fluctuation did not impact the customer's results C) fraudulently, because the customer could easily discern that the price quoted by the agent did not match readily available quotes in the financial media D) fraudulently, because accurate quotes must be provided to the customer at all times

A unique requirement for those investment advisers who maintain custody of customer assets is the filing of A) the Form ADV Part 1 B) the Form ADV-H C) the Form ADV Appendix 1 D) the Form ADV-E

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, under which of the following circumstances has the investment adviser acted properly? A) An adviser tells a client that, by keeping his entire portfolio invested in government securities, he will not experience a great deal of appreciation but is guaranteed not to lose money. B) An advisory firm states in the advisory contract that if the investor does not experience a minimum return of 6%, the firm will pay the client out of its own funds to make up any difference. C) An adviser promises a client that by following the firm's trademark investment program, the returns will exceed those of the previous 12 months or all fees paid will be returned. D) An adviser discloses confidential information about an advisory account to the spouse, who is a joint owner of the account.

Which of the following actions taken by an agent is not prohibited? A) Selling speculative issues to a retired couple of modest means on a fixed income B) Backdating confirmations for the benefit of the client's tax reporting C) Failing to follow a customer's order to buy a stock in an attempt to prevent a loss in the value of the client's account D) Borrowing money from a bank who is the agent's client

Which of the following activities would NOT be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents? A) In order to meet production quotas, an agent opens several accounts under fictitious names B) An agent purchases a suitable stock for a client's account prior to receiving written discretionary authorization C) An agent opens a brokerage account at his employing broker-dealer in his wife's maiden name in order to purchase an IPO being underwritten by the firm D) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account

Your advisory customer calls to check on her account value at 9:00 am, but you were unavailable at the time. It is now 2:00 pm and you are able to call her back. If between 9:00 am and 2:00 pm her account value dropped from $711,500 to $710,000, what should you tell her? A) Your account was down to $699,700 earlier today but is up to $711,500. B) Your account has a value of $711,500. C) Your account value cannot be determined until the market closes. D) Your account is valued at $710,000 at this time.

Palpable Retirement Options (PRO) is a sole proprietorship investment adviser registered in States M and P. The owner of PRO is also a registered agent with Magnificent Financial Futures (MFF), a large broker-dealer registered with the SEC and many states. After a hearing conducted by the Administrator, PRO's owner has been found guilty of selling away to clients in state M. What effect might that have on MFF? A) None because PRO is a separate legal entity responsible for the activities of its CEO B) Disciplinary action brought by the Administrator of State P if it is found that MFF failed to supervise its agent's activities C) Disciplinary action brought by the SEC if it is found that MFF failed to supervise its agent's activities D) Disciplinary action brought by the Administrator of State M if it is found that MFF failed to supervise its agent's activities

D A significant portion of this exam deals with legal issues, and Latin is a commonly used language in the law. Here is an example of such usage: under the doctrine of respondeat superior, a broker-dealer is responsible for the actions of any of its registered agents, even those who operate an independent investment advisory firm. In this case, because the agent's violation occurred in State M, only that state's Administrator has jurisdiction. Selling away is the prohibited practice of an associated person, such as an agent, engaging in private securities transactions without the knowledge and consent of the employing broker-dealer. This violates the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. This is not a federal violation which is why the SEC doesn't get involved here. x

Under the Investment Advisers Act of 1940, which of the following statements is not true regarding custody of a client's funds or securities? A) The adviser must be named as agent or trustee for a client's account or else use a qualified custodian. B) The adviser must arrange for an audit of the client's accounts at least once annually and arrange for the results to be forwarded to the SEC. C) Client securities must be segregated and kept safe. D) The adviser must report the location of funds or securities at 6-month intervals.

D Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange (hire the accounting firm) for an independent surprise audit of all custodied client accounts and the results must be forwarded to the SEC. Thus, the adviser reports to clients every 3 months, not every 6 months.

If having discretion over $100 million or more in 13(f) securities, which of the following would be exempt from filing a Form 13F? A) A trustee B) A natural person who exercises investment discretion over the account of any other natural person or entity C) An investment adviser that manages mutual fund assets D) A natural person who exercises investment discretion over her own account

D An institutional investment manager is also a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. For example, an investment adviser that manages private accounts, mutual fund assets, or pension plan assets is an institutional investment manager; so is the trust department of a bank. A trustee is an institutional investment manager, but a natural person who exercises investment discretion over her own account is not an institutional investment manager.

Protection of the investing public is one of the major objectives of the SEC. Much of the protection comes from the disclosure requirements enveloping the industry. Among the disclosure forms used is Form 13F. To come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) more than 10% of the outstanding voting securities of a reporting company B) a portfolio of at least $50 million C) a portfolio of at least $100 million D) a portfolio of at least $100 million of 13(f) securities

D An institutional money manager, with at least $100 million in 13(f) securities under discretionary management, is required to file Form 13F. This form must be filed within 45 days of the end of the quarter.

An investment adviser new to the business is engaged by an elderly client who, on the grounds of privacy, refuses to disclose his annual income or net worth. The client merely asks the adviser to establish and manage a $50,000 portfolio. If the client brings a cashier's check for $50,000 to the initial meeting, which choice below reflects the best action on the part of the adviser? A) Decline the client because he is difficult to work with B) Accept the client but acknowledge in writing the client's refusal to provide financial information C) Accept the client but only allocate his funds to money market type securities D) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial informa

D An investment adviser cannot perform effectively for a client who refuses to provide information necessary for determining the suitability of investments or a portfolio. Unlike the broker-dealer, who may act merely as order filler, the investment adviser has a fiduciary responsibility and is obligated to determine suitability.

An adviser has custody of a client's securities or funds if the adviser A)accepts prepayment of advisory fees or has discretion over a customer's account B)maintains the customer's funds and securities in a joint account with the registered investment adviser C)uses a broker-dealer to hold the customer's funds and securities and has limited trading authority over the account D)has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees

D Custody is the physical possession of the asset. Discretion is the authority to make decisions independent of the authorization of the account holder on a trade-by-trade basis. Authorization is in a blanket form in the existence of either a limited trading authority or full trading authority. Acceptance of prepayment of adviser's fees or discretionary authority does not constitute custody. The ability to withdraw funds for the purpose of paying quarterly advisory fees from a customer's accounts is deemed to be custody of the funds. A broker-dealer holding a customer's funds and securities would have custody, but the adviser who has trading authority over the account would only have discretion. If the funds and securities of the client are held with the funds and securities of the adviser in a joint account, the adviser would be involved in commingling (or theft), not custody.

An agent is employed by a broker-dealer that sets a high minimum net worth requirement for clients to open margin accounts. In an effort to ensure that a client qualifies, the agent adds $100,000 to the value of the client's assets. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this would be A) prohibited only if this is done without the client's written consent B) permitted because margin trading can lead to greater client profits C) prohibited because margin trading is not suitable for this client D) prohibited because the agent is entering fictitious information on the client account form

D Even though the agent thinks this action is beneficial for the client, the NASAA policy prohibits entering any fictitious information on a client's account records, even when suggested by the customer.

The SEC has enumerated specific items that must be included in Investment Adviser written compliance manuals EXCEPT A) the advisory firm should implement procedures for allocating investment opportunities such as best executions among clients B) the advisory firm must review policies and procedures at least on an annual basis C) the advisory firm must monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements D) the advisory firm should indicate the educational requirements necessary for employment

D Guidelines under SEC rules require (at minimum) that the chief compliance officer of each federal covered investment adviser conduct an annual review of its compliance procedures. Among the duties of the compliance officer is to monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements. The firm should implement procedures for allocating investment opportunities such as best executions among clients. If the firm does have internal educational requirements, that would be found in its HR manual, not in its compliance manual.

An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A)must notify the client that the recommendation was based on the broker-dealer's research document B)must share the commission with the broker-dealer that prepared the research document C)must provide the client with a copy of the research document D)need not disclose the source of the information

D If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as a support to its own recommendation to its client, it does not have to disclose this information. x

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, when is it unethical for an investment adviser to borrow money from a client? A) When the client is an affiliate of the investment adviser B) When the client is a bank or financial institution in the business of loaning money C) When the client is a broker-dealer D) When the client is an immediate family member

D It is unethical to borrow money or securities from a client, unless the client is a broker-dealer, a bank or other financial institution in the business of loaning money, or an affiliated person of the adviser. Owing money or securities to a client is not only unethical, it could also influence advice rendered to a client, creating a potential conflict of interest. Even when the client is an immediate family member, borrowing must not take place unless it meets one of the conditions state above. How do we know the family member does not meet one of those conditions? We know because nothing in the question indicates such and, on the exam, if such is the case, it will be clearly spelled out.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) who was in the money-lending business B) borrowing under the same terms and conditions as the client could find at a commercial bank C) who was an immediate family member of the adviser D) who was an affiliate of the adviser

D Loaning money to a client is prohibited unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA's client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money. x

An agent employed at First Securities, an independent broker-dealer, shares commissions with his uncle, who is employed at ABC Securities, an independent broker-dealer with offices in the same state. This arrangement is A) prohibited because the broker-dealers must be in separate states to justify sharing commissions B) prohibited because the broker-dealers are not private partnerships C) not prohibited if the agents have written permission from their respective clients D) prohibited because the broker-dealers are not under common ownership or control

D Sharing commissions is generally prohibited unless the broker-dealers with which the agents are associated are under common ownership or control.

The Administrator may, by rule, A)suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract B)allow an agent to waive provisions of the USA C)suspend federal law if the Administrator believes it to be in the public interest D)forbid investment advisers registered in that state from taking custody of client funds

D The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes.

It is unlawful for a state-registered investment adviser to do any of the following EXCEPT A)unilaterally transfer an account to another firm if the assets fall below a minimum level B)share in the profits of an account in relation to the amount of time devoted to the account C)fail to disclose the departure of a general partner of an investment advisory partnership who only had a minority interest in the firm D)take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator

D The NASAA Model Rule on Custody provides that an investment adviser may maintain custody over an advisory client's assets unless the Administrator, by rule, prohibits all advisers in his state from taking custody. Under the brochure rule, an investment adviser cannot share in the profits of an account based on time devoted and may not assign an account without the written permission of the client. An investment adviser organized as a partnership must disclose to clients when any partner, minority interest or not, departs from the firm.

An investment adviser representative borrows $10,000 from his mother-in-law, who is also a client. He signs an agreement to pay back the loan in 5 years at below market interest. This arrangement is A) acceptable because the client is considered an immediate family member B) acceptable if any profits and losses in the customer's account are shared in proportion to each party's financial contribution and with the firm's prior permission C) unacceptable because the interest rate is too low D) unacceptable because it is considered an unethical business practice to borrow from a client not in the lending business

D The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permits borrowing from clients only when they are in the lending business or are affiliates of the firm. x

An IAR handling the portfolio of a senior citizen with diminished mental capacity is deemed to be acting as a fiduciary and, therefore, bound by the provisions of the Uniform Prudent Investor Act. Compliance with the act would require the IAR to do all of the following EXCEPT A) use skill and caution in making investment recommendations B) seek to meet the client's objectives with minimum risk C) carefully consider the risks of all investments D) make sure that the investment allocation is done prior to the renewal date of the contract

D The UPIA requires that fiduciaries act with skill and caution in an effort to meet their clients' objectives. In so doing, they should attempt to maximize returns while minimizing risks. What does making the allocation prior to contract renewal have to do with properly serving your client?

Which of the following statements regarding advisers who maintain custody over client accounts is NOT true? A) If customer funds and securities are deposited in a bank, the bank account must only contain customer funds and identify the adviser who is acting as an agent for the customers. B) The adviser must maintain complete and accurate records of all accounts and ensure that the funds and securities are segregated by client. C) Advisers must send clients quarterly statements that itemize the funds and securities in the adviser's possession. D) The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year.

D The adviser must arrange for the audit of client accounts by an independent public accountant without prior notice to the adviser, and not on a systematic basis (hence the surprise audit). The adviser must send quarterly statements to clients itemizing the funds, securities, and transactions that have occurred. The adviser must maintain accurate records of all accounts and ensure that the funds and securities are segregated by client.

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) An account in the name of the Wells Morgan Bank B) An account in the name of the State of X employee pension fund C) A margin account in the name of the Interglobal Hedge Fund D) A margin account in the name of Mary Beth Simmons

D The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.

All of the following statements regarding the role of the chief compliance officer of an investment adviser are correct EXCEPT A) the identity of an investment adviser's chief compliance officer must be disclosed on the Form ADV B) the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser C) the chief compliance officer should be competent and knowledgeable regarding the applicable federal securities laws D) the chief compliance officer should have a minimum of 5 years' experience in securities compliance in matters involving public customers or accounts

D There is no specific experience requirement for the chief compliance officer of an investment adviser; he should be competent and knowledgeable regarding the applicable federal securities laws. Additionally, the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser.

Bryan, an agent registered with a broker-dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is A) only unethical if Bryan sells his shares after informing his clients of his intention to do so B) only unethical if investors lose money in the investment C) an illegitimate sales tactic D) not an unethical sales practice

D This practice is ethical, providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem.

MaryBeth is an agent with QuickTrade Securities, a subsidiary of QuickLoan Bankcorp, a holding company that also owns QuickIssue Capital Markets, an underwriter specializing in bringing new issues to market. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, MaryBeth would be permitted to split commissions resulting from securities transactions with any of the following individuals EXCEPT A) an agent registered with QuickIssue Capital Markets B) another agent registered with QuickTrade Securities C) the principal supervising her activities at QuickTrade Securities D) an agent properly registered with USATrade Securities

D Under the NASAA Policy, in order to split commissions, both individuals must be licensed as agents with either the same broker-dealer, or ones under common control (ownership). What about sharing with your principal? Why not? In fact, many managers (principals) have commission overrides as a fundamental part of their compensation package. Remember, as we state in your License Exam Manual, under the Uniform Securities Act, there is no separate principal registration as there is with FINRA; all principals are registered as agents (or IARs as the case may be), just the same as you.

Under which of the following circumstances can an agent conduct customer transactions without the activity being recorded on the books and records of his broker-dealer employer? A) The customer is a member of the agent's immediate family. B) The securities are exempt under the Uniform Securities Act. C) The agent will receive no compensation. D) The transactions are authorized in writing by the broker-dealer before execution of the transactions.

D Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered contrary to the standards imposed for an agent to effect securities transactions not recorded on the regular books or records of the broker-dealer that the agent represents, unless the transactions are authorized in writing by the broker-dealer before execution of the transaction.

Under which of the following circumstances would it most likely be presumed that an adviser holds custody of client property? A) Ellen engages Sam, a representative of a registered investment adviser, to prepare a financial plan. In conjunction with the plan preparation, Ellen provides Sam with access to all her brokerage account statements and tax returns. B) Paul is a client of Gibraltar Advisers. Although he makes deposits to his investment accounts by checks payable to Delta Securities, checks for his semiannual financial planning fees are made payable to Gibraltar Advisers. C) Carol gives her investment adviser associate a check made payable to the custodian of Carol's IRA. D) Harold, a client, makes a check intended for his investment account payable to Gibraltar Advisers, which is dually registered as investment adviser and broker-dealer. Harold's fee is automatically withdrawn from his account on a semiannual basis.

D When fees are automatically withdrawn from the client's account, custody of client funds can be presumed. Merely handing an adviser a check payable to a third party, such as a retirement account custodian, does not represent custody, nor are direct payments of advisory fees to the adviser considered custody. In the context of this question, account statements are considered to be information rather than property. Stock and bond certificates, as well as cash, are examples of client property.

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an adviser who has custody of client securities or funds must submit to a surprise audit of client accounts by an independent accountant each year provide an audited balance sheet to the Administrator each year and include a balance sheet with his disclosure statement (brochure) to all prospective clients send monthly statements to clients on the status of their accounts

1, 2

Which of the following statements are TRUE of a discretionary account at a broker-dealer's? The opening must be approved by a supervisory person of the firm. It must be reviewed frequently. A discretionary order may be placed once the customer has placed a power of attorney in the mail. It must be approved by the SEC.

1, 2

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? Transaction-based compensation, such as commissions on recommended securities 12b-1 trails on no-load mutual funds in the client's portfolio Expenses reimbursed by third-party sources Compensation-sharing arrangements between the investment adviser and its representatives

1, 2, 3 All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure.

An investment adviser is required to disclose to a client the amount of compensation received from which of the following third parties? Compensation on the client's transactions executed through a broker-dealer Compensation received from an issuer of a security recommended to the client Compensation received from any nonsecurities products recommended to the client

1, 2, 3 Investment advisers must disclose the amount of compensation received or to be received from any third party in connection with recommendations made to a client. This includes compensation from any broker-dealer, compensation from any issuer, and compensation from any nonsecurities entities.

The Investment Advisers Act of 1940 addresses the issue of investment advisers (IA) maintaining custody of client funds and/or securities. In which of the following cases would that act consider the IA to have custody? Possession of client funds or securities Any arrangement under which the IA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the IA's instruction to the custodian Any capacity that gives the IA or a supervised person legal ownership of or access to client funds or securities Receipt of a check made out to a third party

1, 2, 3 One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a third party other than the IA is not considered to be custody.

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? The client must initially have $1.1 million under management or a net worth in excess of $2.2 million. Compensation paid in this way must be for gains reduced by losses. Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee.

1, 2, 3 The NASAA Model Rule permits performance-based fees if the client has at least $1.1 million in assets under management or a net worth in excess of $2.2 million, provided the compensation is based on gains and losses. Unlike the Investment Advisers Act of 1940, under the NASAA Model Rule, state-registered advisers must make additional disclosures, including the incentive to take additional risk.

Under NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. Once a year, an adviser sends each client a report on the securities and funds in the adviser's custody.

1, 3 Client funds must be deposited in separate bank accounts. Each year, accounts must be audited by an independent public accountant in an unannounced examination. Clients must receive statements quarterly (not yearly). Clients must also be notified in writing of the location of their property and any change in that location. Client securities must be properly segregated and identified.

Which of the following would justify an investment adviser's use of a full-service broker? Obtaining special reports dealing with economic projections from the broker Expense-paid business trips paid for by the broker The use of the research analysis provided by the broker

1, 3 Full-service brokerage firms often provide research reports, securities and portfolio analysis, and special reports without specific charges, but are usually compensated by their higher commissions. Nothing in industry rules prevents an adviser from using a full-service broker to effect customer transactions. However, it would be unethical if the adviser were to benefit personally from the direction of the client business.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. The fee is projected to consistently be more than the expected return in the portfolio.

1, 4 The Model Rule specifically refers to the authority of the Administrator to determine whether an adviser's fee schedule is competitive. Logic would dictate that fees that consistently exceed the return earned on the portfolio should not be acceptable. Investment advisers, upon making proper disclosure, are permitted to charge both fees and commissions, and there is no requirement to discount one's hourly fee, regardless of the size of the client's portfolio.

An investment adviser representative must exercise due diligence to obtain what information before recommending the sale or purchase of a security to a customer? Verification that the customer has at least 3 years' trading experience Changes in the customer's investment objectives (if any) since the account was opened Changes in the customer's financial situation (if any) since the account was opened Changes in marital status

2, 3

Under the Investment Advisers Act of 1940, it is legal for an investment adviser to rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice keep the commission on a mutual fund sale when the client who purchased the shares has already paid for investment advice reduce a client's advisory fee by any commissions earned on mutual fund sales to that client

2, 3 Rebating commissions on mutual fund sales is prohibited. However, because mutual fund commissions are not negotiable (as are secondary market transactions), the adviser may reduce the client's advisory fee by the commission or, with appropriate disclosure, keep the commission.

An investment adviser wishes to engage the services of a third party to solicit new clients for the firm. To be in compliance with the Investment Advisers Act of 1940, the solicitor must be registered as an IAR compensation may not be sales related the solicitor must not be subject to statutory disqualification disclosure of the solicitation arrangement must be made to clients upon request

2, 3 Third-party solicitors are not required to be registered as IARs and therefore may not receive sales-related compensation. However, they must not be subject to statutory disqualification that would prevent them from becoming registered. Disclosure is necessary, whether or not it is requested.

If a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE? The solicitor must be a registered investment adviser representative with the state. The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940. There must be a separate written agreement between the solicitor and the registered investment adviser. The agreement between the solicitor and the registered investment adviser is contained as part of the investment adviser's brochure.

2, 3 Under federal regulations, if an investment adviser intends to pay a third party (nonemployee) solicitor to solicit clients for investment advisory services, the investment adviser must be properly registered with the SEC, there must be a written agreement between the investment adviser and the solicitor, and there can be no outstanding or pending orders or disciplinary actions against the solicitor involving finance or dishonesty. The solicitor does not have to be registered as a registered investment adviser representative because he is not representing the registered investment adviser in the giving of investment advice, in the management of accounts, or in the supervision of anyone else working for the registered investment adviser in these areas. The solicitor is being paid a fee for the solicitation of business for the registered investment adviser with a requirement of full disclosure to the client of the relationship with the adviser. There is no provision in the Uniform Securities Act that permits an individual to solicit business on behalf of a state-registered investment adviser without IAR registration.

An agent for a broker-dealer member of FINRA may exercise his judgment as to which of the following without written authorization from the customer? Quantity Time Security Price

2, 4

As an investment adviser, you feel that RAN common stock is an appropriate addition to the portfolio for several of your clients. You enter an order to purchase 1,000 shares and receive two 500-share confirmations, but they are not at the same price. Which of the following is the proper procedure for you to follow? A)Allocate using the average of the two prices B)Allocate using the random selection method C)Allocate the lowest price shares to those clients who have been with you the longest D)Allocate the lowest price shares to those clients with the greatest amount of assets under management

In the securities industry, the term "discretionary" refers to an A)account in which the agent has the power to decide which securities to buy or sell without customer authorization for those specific trades B)account in which a person has power of attorney over an incompetent individual's account C)account in which someone has been given custodial power over another individual's account D)order that specifies size, security, or action but leaves the choice of time or price up to the agent

Strategic Investment Managers Company (SIMCO) is an investment adviser registered with the SEC. They have over 1,000 clients, about 53% of whom have granted SIMCO discretionary authority. From time to time, SIMCO feels the same security is appropriate for a number of their accounts and turns in a bunched order. When the order is filled at different prices, the shares are allocated A)to all accounts proportionately, regardless of the size of the individual account B)to the $1,000,000+ accounts first C)on a FIFO basis D)through a formula developed by SIMCO and used on a consistent basis

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee A)may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services B)may not be based on a percentage of the client's assets under management C)must reflect the amount of time the adviser spends managing a client's account D)is not subject to regulatory oversight by the Administrator if the client may be considered financially sophisticated

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following practices is appropriate for an adviser who does not have custody or discretion over clients' assets? A)Tom manages 35 clients who suffer financial loss while he is trying to contact them for authorization to trade. B)Chris purchases shares of a stock without discussing it with his client. The client had previously agreed to buy another stock, but at the time of purchase, it was losing heavily. To spare his client from a loss, Chris purchased the stock. C)Vanessa discusses a security with a client who agrees it is a good buy. A short time later, she learns shares are available and purchases them for the client. D)Without authority, Shawna trades a security that is losing heavily for a similar security that she had recently discussed with her client.

Under industry regulations, when may an agent be given discretionary power to buy or sell securities for a client? A)When authority is given by a written document B)Never C)Only when the authority is specific, provided in advance, and specifies the amount, type, and timing of the transaction D)If authority is given within one week after the discretionary act

Under the Investment Advisers Act of 1940, which of the following compensation arrangements would generally be prohibited? A)Alan waives a client's fee if the client experiences a loss for the year. B)George's fee varies with the amount of time he spends managing an account. C)Carla charges clients a percentage of assets under management. D)Wendy charges a set fee, regardless of how long it takes her to generate her recommendations for a given client or how well those recommendations turn out.

Which of the following is responsible for administration of the Bank Secrecy Act? A)The Financial Crimes Enforcement Network B)Security Services C)Department of Health and Human Services D)Securities and Exchange Commission

Which of the following statements regarding a state-registered investment adviser with custody of customer assets is TRUE? A)Every three months, the adviser must send an itemized account statement to each customer whose assets are held in custody. B)The Administrator must give written approval before the adviser may hold customer assets in custody. C)An adviser who has discretion over customer accounts faces a higher net worth requirement than an adviser who has custody. D)Customer assets may be commingled with assets of the investment adviser.

Which of the following would probably be an acceptable hedge clause under SEC interpretations? A)A clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, natural disasters, new government restrictions, market fluctuations, or communications disruptions B)"Kapco Advisers shall not be liable for any loss or depreciation in the value of the account unless it shall have failed to act in good faith or with reasonable care." C)"It is understood that we will expend our best efforts in the supervision of the portfolio, but we assume no responsibility for action taken or omitted in good faith if negligence, willful or reckless misconduct, or violation of applicable law is not involved." D)A hedge clause that seeks to limit liability to acts done in bad faith or pursuant to willful misconduct but also explicitly provides that rights under state or federal law cannot be relinquished

Which of the following would NOT be considered evidence of custody of a client's funds or securities? A)The investment adviser has discretionary authority over the client's account. B)The adviser writes checks on the client's account to pay for client's securities. C)Client funds and securities are kept at a qualified custodian. D)The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made.

A "Custody" means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.

Under the Investment Advisers Act of 1940, cash referral fees may be paid by an investment adviser to a promoter for soliciting for new accounts A)when a written agreement providing certain disclosures has been entered into between the investment adviser and the third party if the compensation exceeds $1,000 over a 12-month period. B)under no circumstances. C)with no restrictions. D)only if the referring party is registered as an investment adviser representative.

A A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures. That written agreement is required only when the compensation exceeds the de minimis amount.

Matt, a registered investment adviser, operates an office down the hall from Jane, a CPA. Because Jane has no interest in portfolio management, she frequently refers her clients to Matt for investment advice. When one of Jane's client signs a letter of engagement with Matt, Matt sends Jane a $200 referral fee. This occurred 5 times in the previous year. This situation is A)permitted if the referral fee is disclosed to the appropriate clients B)permitted because there were fewer than six occurrences involving referral fees C)permitted without restriction D)prohibited

A Although neither the Investment Advisers Act nor the Uniform Securities Act specifically prohibits investment advisers from paying referral fees, both acts require that such fees be appropriately disclosed.

Malcolm Munger, CLU®, is an insurance agent catering to highly successful business executives. During a routine servicing call, one of those clients asks Malcolm if he knows anyone who is sharp enough to handle his $50 million investment portfolio. Malcolm refers the client to Superb Asset Managers Company (SAMCO), an investment adviser doing business in this state. The CEO of SAMCO meets with Malcolm's client and an advisory contract is signed. To show their appreciation, Malcolm receives a $500 finder's fee from Superb Asset Management Company (SAMCO). Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A)SAMCO must disclose the existence and circumstances of the finder's fee to the client B)The finder's fee would be disallowed if the IA did not have an insurance license C)No disclosure is necessary unless it will result in the IA's fee being higher than it would have been without the finder's fee D)SAMCO must make sure that Malcolm discloses the fee to his client

A Finder's fees are permitted, but it is the obligation of the IA to make full disclosure to the client. Because nothing here indicates that Mr. Munger is registered, he does not have any responsibility under NASAA regulations to make disclosure to his client. There really is a lot more required here, but there are no alternative choices (and it may be like that on the exam).

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser would be permitted to maintain custody of customer cash and/or securities if A)notification was given to the Administrator and custody was not prohibited by that state's rules B)customer permission was obtained prior to entering into the contract C)permission was obtained from the Administrator and custody was not prohibited by that state's rules D)the IA maintained net worth of at least $10,000

A In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about net worth? Under the USA, in order to maintain custody, an IA must have net worth in the amount of no less than $35,000, or provide a suitable surety bond.x

An investment adviser representative, who also receives commissions as an agent at a brokerage firm, has opened an account with a client whose net worth is $200,000. The customer wants the account aggressively traded and wishes the investment adviser to be compensated based on the account's performance. In this account, payment on a performance basis is A)not permissible B)permissible if the customer's net worth is a minimum of $1 million C)permissible D)permissible with approval from the agent's supervisor and written permission from the customer at the time the account is opened

A It is not permissible to trade this account on a performance basis; the investment adviser representative must be paid on commission or through a fixed-fee arrangement. Under the Investment Advisers Act of 1940, performance fees are allowed only for clients with a minimum of $1 million invested or a minimum net worth in excess of $2.1 million.

Which of the following activities would NOT be a violation of the ethical standards to be followed by investment advisers and their representatives? A)Recommending an estate-planning attorney to clients who have inquired about ways to potentially reduce their estate tax liability B)Preparing trust documents for clients using forms you acquired on the Internet C)Lending money to a client to pay her income tax bill and avoid penalties D)Rewarding one of your college fraternity brothers with a cash gift for each client he refers to you

A It would not be a violation to recommend the appropriate professional for your client's legal needs. If you were to be compensated for the referral, disclosure would have to be made. Cash gifts to friends for referrals are not permitted, unless a formal solicitor's agreement has been entered into. Under certain circumstances, this would involve registration as an IAR by the individual. Legal documents should be prepared by attorneys, not IAs. Lending money to clients, regardless of the reason, is an unethical practice unless certain requirements are met, none of which are described here.

Which of the following does NOT violate the ethical requirements of the Investment Advisers Act of 1940? A)An IA tells clients that the time is right to convert shares of a money market fund to shares of a growth stock mutual fund family. Without telling clients, he makes a similar conversion for his own account. B)An IA's financial plan uses products available through a number of different broker-dealers. In implementing a portion of the plan, the IA intends to act as an agent of a broker-dealer with whom he is associated, but he does not make this intention known to his client. C)An IA intends to implement a financial plan using only products available through a broker-dealer with whom she is associated, but she does not make this intention known to the client. D)An IA is affiliated with a broker-dealer but does not tell clients that the investment advice he offers is outside the scope of his employment with that broker-dealer.

A Making personal investments consistent with recommendations to clients is not a violation of the Investment Advisers Act of 1940. Release of IA-1092 does not impose an obligation on an investment adviser representative to disclose this fact to clients. The investment adviser representative is obligated to disclose any plans to act as an agent of a broker-dealer with whom the individual is associated. An investment adviser representative must disclose to clients that the investment advice rendered is outside the scope of employment with the broker-dealer, if that is the case. Finally, if the investment adviser representative only offers that broker-dealer's products, that fact must be disclosed.

With regard to an SEC-registered investment adviser employing the services of a promoter to solicit business, it would be correct to state that A)the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. B)delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract. C)cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. D)referral fees may be paid only if the solicitor is also registered with the SEC.

A One of the important requirements when hiring a solicitor is making sure that the person is not statutorily disqualified from registration. That is, any person who would be unable to register as a securities professional because of prior conduct cannot act as a solicitor for a registered investment adviser. Promoters do not have to prepare (much less deliver) a brochure. If the promoter is to be compensated more than the de minimis amount, there must be a written, not oral, agreement.

It would not be considered a prohibited or unethical business practice for an investment adviser to A)pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals B)pay a nominal fee, based on account size, to certain professionals as a form of thanking them for client referrals C)borrow money from clients who are seeking a higher rate of return on their fixed income investments D)charge a performance-based fee to an individual who meets the SEC's accredited investor standard detailed in Rule 501 of Regulation D

A Referral fees (not cash fees for full-time soliciting) may be paid to certain professionals (lawyers, accountants, insurance agents, etc.) as long as the fee is both a nominal amount (up to several hundred dollars) and is the same amount for any referral. That is, it is not based on the size of the account. In order to charge a performance-based fee, investors must have a net worth in excess of $2.2 million while they can meet the accredited investor standard when their net worth exceeds a much lower amount: $1 million. Finally, under both state and federal law, investment advisers may never borrow money from clients unless the client is in the money-lending business or is affiliated with the firm.

A state-registered investment adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be complied with except A)the clients must sign the advisory contract at the same time that they receive the investment adviser's brochure B)the terms of the investment adviser's compensation must be spelled out C)disclosure of the arrangement must be made to the clients if it results in an increased cost to advisory clients D)the solicitor must be registered as an investment adviser representative in order to receive compensation based upon advice

A The investment adviser's brochure must be delivered no later than at the time the advisory contract is signed. In most cases, especially with state-registered advisers, the brochure is delivered in advance. In fact, because of the USA's 48-hour rule dealing with a penalty-free withdrawal, the brochure is typically delivered well ahead of signing. As a practical matter, signing of the contract won't take place until the prospective client decides to engage the services of the IA. If an individual is compensated based on assets under management, registration as an IAR is required. Any contract for advisory services will always disclose the terms of the adviser's compensation. If the use of a solicitor increases the cost to advisory clients, the arrangement must be disclosed.

Which of the following statements would NOT be allowable under the rules regarding an investment adviser's contract? A)If you make money, I make money because my compensation is based on how well your account performs. B)I charge a flat fee of $1,500 per year. C)I charge 1% per year on the value of your assets, plus any commissions I earn on sales done through me. D)My hourly charge is $300.

A Unless an exception is stated in the question, performance-based fees are never permitted. As long as disclosed, fees plus commissions on transactions is an allowable form of compensation.

Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP), a state-registered investment adviser, and receives a referral fee for each person who becomes a client of RIP. The practice A)is acceptable because the referral fee is being paid to a registered investment adviser. B)is prohibited under any circumstance. C)would only be acceptable if the fee was used to reduce the referring client's advisory fees. D)would only be acceptable if the fee was nominal and not based on the size of the account.

A When a referral fee is paid to another registered firm, there is no problem. The only other requirement is that disclosure of this relationship and any additional cost possibly resulting from the referral fee must be made to each client who signs up with RIP as a result of the referral.

A client with a net worth of $5 million is compensating an investment adviser with a performance-based fee. According to the Investment Advisers Act of 1940, this arrangement must be based on A)This arrangement is not permitted because the client has not met the minimum invested assets requirements B)capital gains minus capital losses, including both realized and unrealized gains and losses C)the S&P 500 index performance D)a period of no less than 6 months

Although the regulations permit a number of different methods of investment adviser compensation, it would NOT be considered proper for an IA to A)charge an annual fee equal to 1% of assets under management B)tell clients that the fee will be 5% of the profits that exceed a stated benchmark, but nothing if the benchmark is not reached C)charge $2,500 for developing a financial plan for a client D)charge an annual fee equal to 1% of the first $250,000 in assets under management and 1/2% for all assets above that amount

An agent has municipal bonds available at a favorable price for the next five minutes and a customer who expressed interest in purchasing municipal bonds for his account. These bonds appear perfectly suited to the customer's objectives, but the agent cannot get in contact with the customer. What should the agent do? A)Place bonds in the customer's account, mark the order ticket pending, and send a fax for the customer's signed acceptance of the transaction B)Do nothing without the customer's authorization C)Purchase bonds for the agent's account for a later resale to customer D)Put bonds in the customer's account

The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following incorrectly states one of these changes? A)Delegation of trust investment and management functions is permitted, subject to safeguards. B)The standard of prudence is applied to each investment individually. C)The trade-off between risk and return in all investing is the fiduciary's central consideration. D)Prudent investing requires that fiduciaries diversify their investments.

Under Section 28(e) of the Securities Exchange Act of 1934, which of the following is allowable soft-dollar compensation from a broker-dealer to an investment adviser under the safe harbor provisions? A) Cell phones to rapidly communicate with clients B) Custodial services provided by the broker-dealer C) Office rental payments D) Vacations

Under the Investment Advisers Act of 1940, an investment adviser would be prohibited from engaging in which of the following practices, even if disclosed in writing to the customer? A)Providing advice to the customer and receiving compensation for the resulting sale of products B)Putting the adviser's own interests before those of the customer C)Employment with a broker-dealer and also serving as an investment adviser D)Using advice she provides to customers regarding securities transactions as a basis for her own investment account trades

Which of the following compensation arrangements is typically NOT allowed under the Investment Advisers Act of 1940? A)An adviser varies fees according to the time spent managing the account. B)An adviser waives a client's fee if the client experiences a loss for the year. C)An adviser charges clients a percentage of assets under management. D)An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results.

Which of the following statements regarding an investment adviser's use of a full-service broker for an account over which the adviser has investment discretion is TRUE? A)A full-service broker may be used only if the broker is not affiliated with the adviser. B)A full-service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided. C)Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full-service broker. D)A full-service broker may not be used for any transaction that could be done by a discount broker.

Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested but will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if A)the contract is signed by one of the investors who is an accredited investor B)the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA C)the individual in charge of the investment company is a qualified investor D)a majority of the shareholders in the investment company are qualified investors

B An investment adviser may enter into, extend, or renew an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the client entering into the contract is: a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $2,100,000. Do not be confused by thinking this is an institutional client (a registered investment company)—they need at least 100 investors and registration with the SEC.

A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A)Because we can allow all of the jointly held property, this client has the necessary net worth to qualify for a performance-based compensation program. B)Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. C)Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program. D)Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program.

B If using joint assets, only those with a spouse are allowed. Please note: This differs from meeting the net worth standard as an accredited investor. Under Rule 501 of Regulation D of the Securities Act of 1933, one can use assets owned jointly with persons other than a spouse to qualify as an accredited investor, but only to the extent of the percentage ownership of the account or property.

An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage its account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable, A)a majority of the shareholders in the investment company must be qualified investors B)the investment company must have net worth in excess of $2.2 million or at least $1.1 million in assets under management with the IA C)all the shareholders in the investment company must be qualified investors D)the individual in charge of the investment company must be a qualified investor

B In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth in excess of $1 million. Over the years, the numbers have increased and currently are net worth in excess of $2.2 million or assets managed by the IA of at least $1.1 million. By the way, this is not a registered investment company under the Investment Company Act of 1940; those need at least 100 investors.

An adviser buys a substantial block of stock for its clients. The order was filled at several prices. Which of the following would dictate how stock is to be allocated among the clients? A)The clients holding the largest accounts would be entitled to the highest-priced executions. B)The allocation among clients would be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. C)The firm may allocate best executions in any manner it chooses, as long as best executions are not routinely allocated to proprietary (house) accounts. D)The clients holding the largest accounts would be entitled to the lowest executions.

B The allocation of order executions among clients should be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. The most common method is the average cost basis.

An IA hires a third-party promoter to solicit for new clients. Which of the following records is the IA required to keep? A)Copies of all investment recommendations made by the solicitor B)A copy of the written agreement between the parties if the compensation exceeded $1,000 over a 12-month period C)A receipt for any fee charged by the solicitor, signed by the client D)A copy of the written agreement between the IA and the solicitor, signed by the client

B When a third-party promoter engaged by an investment adviser to solicit for new business is going to be compensated above the de minimis limit, there must be a written agreement between the parties. As with most agreements, a copy must be kept in the IA's files. That written agreement between the adviser and the solicitor does not require a signature from any client or prospect. Solicitors don't recommend investments.

Regarding performance-based fees charged by covered investment advisers, all of the following statements are correct EXCEPT A)performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE B)it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods C)to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark D)performance-based fees are generally prohibited

B Covered advisers are those under federal jurisdiction rather than state. The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure.

An IAR has received several referrals from a prominent estate-planning attorney. Under the USA, the IAR would be permitted to A)open a managed account for the attorney and offer a discounted fee structure based on the frequency of referrals B)compensate the attorney with a fee based on the assets placed under management as a result of these referrals C)refer advisory clients who need estate planning to this attorney D)send a thank you note and nothing else

An agent receives a phone call from a customer's husband who does not have trading authorization over his wife's account. His wife is stranded while traveling and has asked him to instruct the agent to buy 1,000 shares of XYZ stock in her individual account to take advantage of a price drop. In the above situation, the agent should A)refuse the order because the customer should buy the security for the long term rather than purchase the stock because of a temporary price drop B)accept the order only if the husband faxes or emails an immediate release to the broker-dealer C)refuse the order because the husband is not authorized to enter orders for his wife's individual account D)accept the order and carry out his client's wishes

An investment adviser owes an undivided loyalty to its clients and therefore is considered to be A)an agent B)a principal C)a fiduciary D)a custodian

Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is NOT allowable under the safe harbor provisions of Section 28(e)? A)Registration fees to attend an investment seminar B)Research reports C)Reimbursement for travel expenses to attend an investment seminar D)Financial planning software

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan, and after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A)she would have to obtain Mary's permission first B)both Susan and Mary would have to disclose the cash payment to Amanda C)she would be engaging in an prohibited practice D)only Susan would have to make disclosure to Amanda

C Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward.

Under the Investment Advisers Act of 1940, an investment adviser who has custody of clients' funds and securities must A)annually provide each client with an itemized list of the securities and funds and their location B)annually perform a physical inventory of all clients' funds and securities and file an affidavit with the SEC C)keep the clients' securities and funds segregated and identified D)maintain a surety bond in an amount determined by the SEC

C An adviser who has custody must (1) segregate client securities by client and keep them in a safe place (all clients must be notified in writing of the location of their securities and of any location changes); (2) deposit client funds in bank accounts that contain only the client's funds, naming the adviser as agent or trustee for the client (the funds of all clients may be combined in one account, but complete records must be kept by the adviser; all clients must be notified in writing of the location of their funds and of any location changes); (3) report to clients at least every 3 months with a written, itemized statement indicating the funds and/or securities in the possession of the adviser and all transaction for the period; and (4) arrange for an unannounced examination (audit) by an independent public accountant at least annually, who will report the audit results to the SEC. The Investment Advisers Act of 1940 does not require surety bonds. The Uniform Securities Act requires surety bonds.

Which of the following fee arrangements is legal under the Investment Advisers Act of 1940? A)Adviser B charges an annual fee of 0.075%, guaranteed to be waived if the value of the account does not increase during the year. B)Adviser C charges an annual fee of 0.05% to be waived if the account does not grow by at least 5% during the year. C)Adviser A charges an annual fee of 0.05% of the value of the client's account, due on the first day of the client's fiscal year. D)Adviser D guarantees the annual fee will be waived if the account decreases in value while under his management.

C An adviser's fee may not be based on portfolio appreciation or capital gains, except under certain circumstances that are not detailed in the question. Advisory fees may be based on a percentage of assets under management.

According to the Investment Advisers Act of 1940, under which of the following circumstances is an exculpatory provision acceptable in a contract between an investment adviser and its clients? A)The client is purchasing government securities only. B)The client is a broker-dealer. C)This provision is prohibited under all circumstances. D)The client has received written disclosure of this provision and has signed a written acceptance prior to any transaction.

C An exculpatory (culpa meaning fault) provision is never acceptable in an investment advisory contract. Its purpose is to exclude officers and directors from liability for disregard of their duties. This might also be phrased as the client waiving his rights, and is also not permitted.

If an unaffiliated person acts on behalf of an investment adviser in an attempt to solicit or refer new investment advisory clients, which of the following conditions is not required by the Investment Advisers Act of 1940 for the investment adviser to pay the solicitor a fee of $100 per month for this service? A)The solicitor must be registered as an investment adviser. B)The investment adviser must be registered as an investment adviser. C)There must be a written agreement between the solicitor and the investment adviser. D)There can be no outstanding SEC order barring the solicitor's activities.

C An unaffiliated (nonemployee or third party) solicitor is usually not required to register as an investment adviser or investment adviser representative under the Investment Advisers Act of 1940 as long as certain stipulations are met. The solicitor is not under the control of the SEC. There must be a written agreement between the solicitor and the investment adviser for whom she solicits clients when the compensation agreement calls for payment in excess of $1,000 over a 12-month period. The solicitor cannot have a disciplinary item in her background that would prohibit that solicitor from registering as an adviser or adviser representative.

Greater Wealth Managers, (GWM) is an investment adviser registered in States A, B, C, and D. They have recently hired an individual to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A) no registration is required, because this individual is not rendering investment advice and is being closely supervised B) registration as an investment adviser representative and as an agent is required for this individual C) registration as an investment adviser representative is required for this individual D) no registration is required, because this individual is not rendering investment advice

C Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT A)the client must meet certain minimum financial standards B)compensation is based on gains, less losses, for a period of no less than 1 year C)disclosure that the performance compensation may create an incentive for the adviser to take greater risks D)the formula used to calculate compensation includes realized capital losses and unrealized depreciation

C Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.2 million, or a client is qualified if he has at least $1.1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than 1 year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception.

A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if A)the friend is an employee of the advisory firm B)There are no exceptions C)the solicitations are for impersonal advisory services D)the friend is a client of the adviser's firm

C Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.

An agent may determine which securities to purchase or sell for a client when A)written or oral discretion authority has been received by the broker-dealer within 10 days of the initial discretionary transaction B)written discretion authority has been received by the broker-dealer within 10 days of the initial discretionary transaction C)written discretion authority has been received by the broker-dealer before executing the first discretionary transaction D)written or oral discretion authority has been received by the broker-dealer before executing the first discretionary transaction

C No broker-dealer or any of its employees shall exercise any discretionary power in any customer's account or accept orders for an account from a person other than the customer without first obtaining written authorization from the customer. It is an investment adviser who may act with oral consent for a period of 10 days from the initial discretionary trade.

Which of the following statements regarding an agent's authority to place orders for a client's account under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents is TRUE? A)The agent is not required to obtain authorization to place orders for a client's account unless a conflict of interest is involved. B)The agent may, without the client's approval, place a sell order for the purpose of avoiding losses but may not place a buy order without the client's authorization. C)The client's oral approval is sufficient for a specific order. D)Written approval from the client authorizing a stated amount of a specified security is required before placing an order.

C Oral approval from the client authorizing a stated amount of a specified security is sufficient to place an order. An agent must receive authority to place orders for a client whether or not there is a conflict of interest. Written approval from the client authorizing a stated amount of a specified security is not required before placing the order. However, written authority is necessary for the agent to exercise discretion in the account.

Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses? A)None; because ESA directs commission business to FSC, it would be an unethical business practice for FSC to pay any portion of the expenses B)Travel and transportation fees, but not the seminar fee C)Registration fees for the seminar D)Registration fees for the seminar plus travel expenses

C Payment for seminar fees is permitted under the safe harbor provisions in Section 28(e) of the Securities Exchange Act of 1934.

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A)Charging a performance-based fee to an individual who meets the definition of an accredited investor B)Charging a performance-based fee to an individual with a net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks C)Charging a performance-based fee to an elderly client whose net worth is $2.3 million, with only $150,000 under the adviser's management D)Charging a performance-based fee to an aggressive entrepreneur whose net worth is $1.8 million who has $500,000 under the adviser's management

C Performance fees may be charged, regardless of the client's age, to anyone with a net worth in excess of $2.2 million or with at least $1.1 million under management with the firm. This client with $2.3 million in net worth meets the qualification. An individual reaches accredited investor status with a net worth of at least $1 million, not enough to qualify. Additionally, one way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks.

Lamar is an investment adviser representative for Southeast Retirement Advisers (SRA), a wholly owned subsidiary of Southeast Retirement Solutions (SRS), a broker-dealer registered in a number of southeastern states. Lamar is also a registered agent with SRS. If one of Lamar's advisory clients sends a check made payable to SRS for a stock purchase, under NASAA's Model Rule on Custody A)Lamar is considered to be maintaining custody of client funds and securities B)Lamar would have to post a surety bond in the amount of $35,000 C)SRA is considered to be maintaining custody of client funds and securities D)SRA would be in violation of the NASAA requirement to use a qualified custodian

C Under the NASAA Model Rule, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded). IARs would never take custody, and there is no bonding requirement for IARs.

A "fiduciary" is A)a person who sells securities to the public on a nondiscretionary basis B)a broker who solely conducts agency trades C)a principal in a broker-dealer who specializes in proprietary trading D)a person entrusted with the duty of acting for the benefit of another party

According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, in which of the following situations has an agent acted improperly in placing a client's order? A)After a client's death, an agent receives instruction from a court-appointed administrator to liquidate the account; the agent sells all securities in the account at a loss. B)A client sends a letter about an extended business trip stating that in her absence, she wants the agent to accept orders from her husband, which the agent does. C)An elderly client with an individual account is in the hospital, and her daughter calls the agent to request a liquidation of assets to provide $10,000 for the payment of medical expenses. The agent refuses to place the order. D)A client asks the agent to buy 1,000 shares of a specific high-quality technology stock this week for her nondiscretionary account. The agent places an order promptly for 1,500 shares because the market has begun to take off. By the end of the day, the stock is 5 points higher than the purchase price.

According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is NOT unethical? A)An agent sold shares at a price less than authorized by a client. B)Within the first 10 days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client. C)To protect the client in a declining market, an agent sold all shares in the client's account when the client had only authorized the sale of 30% of the shares. D)An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority.

Al is an investment adviser representative for a federal covered investment adviser. Al has discretionary authority over most of his accounts and determines that shares of the RAN Corporation are a suitable investment for 7 of them. He enters a buy order for 1,000 shares of the RAN and receives 3 trade confirmations, all at slightly different prices. When allocating these shares to his clients, how should Al determine the price per share? A) Allocate the lowest-priced shares to the customers with the largest accounts B) Allocate the highest-priced shares to the customers with the highest net worth C) Allocate the lowest-priced shares to the customers who have had accounts with the firm the longest period of time D) Allocate the shares using the average price of all the shares combined

Alice is a financial planner who is properly registered as an investment adviser and occasionally meets with clients with negative cash flow and substantial indebtedness. Alice refers such clients to Norman, a bankruptcy attorney. Likewise, when Norman encounters clients who need help managing their assets, he refers them to Alice. This activity is A)prohibited B)permissible without disclosure if it occurs on an incidental basis C)permissible without restriction D)permissible if the referral arrangement is disclosed to clients

An agent for a broker-dealer receives a buy order from an investment advisory firm on behalf of its clients. The order is to purchase 5,000 shares of XYZ common stock at the market. The adviser informs the agent that once the purchase is completed, the account numbers and quantities for each individual client will be supplied. The buy is completed, but at various prices. How is the order allocated to the adviser's accounts? A) The trade cannot be accepted and must be moved to the broker-dealer's errors account. B) A first-in, first-out (FIFO) method is used. C) The most favorable prices are allocated to the adviser's clients purchasing the largest quantities. D) The order is reallocated to the investment adviser's clients by using the average cost basis.

An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that it has outperformed the overall market by 800% over the past 10 years, and the firm therefore guarantees that clients will more than keep pace with inflation. At the bottom of the ad, in smaller print, is the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of A)a wrap fee account B)a violation of an investment adviser's fiduciary responsibility C)a properly worded disclaimer D)an improper hedge clause

In an effort to further protect the interests of clients, the Investment Advisers Act of 1940, as amended, contains recommendations for implementing a Code of Ethics. This code A)is not subject to minimum standards set forth by the SEC B)is only required by firms performing comprehensive financial planning C)is not required unless the firm has been found to have committed violations of federal securities law D)must reflect the nature and scope of the business done by the firm

Plenitude Premier Solutions (PPS) is registered in State C. If PPS wished to maintain custody of client funds or securities, A) notice is given to the State C Administrator as part of the annual updating amendment. B)prompt notice would have to be given to the State C Administrator in a private letter. C)permission would have to be obtained from the State C Administrator . D)prompt notice would have to be given to the State C Administrator on Form ADV.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A)Meal expenses to attend an investment seminar sponsored by the broker-dealer B)Desks remaining after the broker-dealer re-designed its office C)Use of vacant office space in the broker-dealer's facilities D)Bespoke software designed to give clients access to asset allocation programs

Under provisions of the Investment Advisers Act of 1940, investment advisers that maintain custody of client securities are required to do all of the following EXCEPT A)arrange for a surprise audit by an independent public accounting firm at least annually and subsequently file a report of the examination with the SEC B)keep copies of all confirmations sent to clients C)maintain a separate ledger for each client showing all purchases and sales D)send an itemized statement to clients at least monthly

Which of the following statements regarding the use of a hedge clause by an investment adviser is CORRECT? A)A properly worded hedge clause may be used to minimize the investment adviser's fiduciary responsibility. B)A hedge clause that limits liability to acts done in bad faith or pursuant to willful misconduct but also explicitly provides that rights under state or federal law cannot be relinquished would generally be acceptable to the Administrator. C)The adviser's brochure always must contain at least 1 hedge clause. D)A hedge clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, and natural disasters generally would be acceptable to the Administrator.

An investment adviser (IA) has a number of clients who need high-quality estate planning. These clients are referred to the Rox Law Firm, and in exchange, Mr. Rox sends those of his clients needing investment advice to the IA. The IA pays a referral fee to Mr. Rox of $300 for each referral who becomes a client. Under the NASAA Model Rule on Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) this is permissible, but only if disclosed to the Administrator B) this type of arrangement is never permitted C) this is permissible, but does not need to be disclosed to clients because Mr. Rox is an attorney and this would be a violation of attorney/client privilege D) this is permissible, but only if disclosed to clients

D Actually, NASAA doesn't say anything at all about referral fees, but you have to pick an answer. It is the Investment Advisers Act of 1940 that deals with the topic and permits them as long as proper disclosures are made and the fee is not related to the size of the account. Because it is a flat $300, it would be the same for a $100,000 account as a $10 million account.

When referring to a federal covered investment adviser, all of the following are supervised persons EXCEPT A)an investment adviser representative B)the receptionist who works for the investment adviser and analyzes client financial profiles C)the chief securities analyst D)an individual contracted to solicit for new advisory clients

D All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA. That act considers solicitors to be supervised persons, whether employed by the adviser or not, and requires IAR registration.

A client opens a discretionary account with an IAR over the phone and tells her to buy 3,000 shares of any technology stock that she thinks is suitable. One month later, the stock has dropped and the IAR determines that it is time to cut the losses and get out of the stock. In checking the records, the IAR discovers that the written discretionary authorization form has not yet been received. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, the IAR should A)sell the shares immediately because that is in the client's best interest B)attempt to get permission to sell from her supervisor C)sell the shares relying on the clients' oral authorization to use discretion D)contact the client and indicate that the firm cannot act with discretion until the authorization form is received

D NASAA policy permits oral discretionary powers to IAs and their representatives as long as the written authorization form is received within 10 business days of the first trade made using that discretion. One month is more than 10 business days so nothing can be done without the written authorization. Remember, when the client leaves the specific security to be purchased up to the discretion of the IAR, discretion has been exercised.

Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to A)have discretion over a client's assets B)charge commissions C)charge fees in advance of services performed D)charge fees based on performance

D Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.

Holly Cavendish is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing the Form ADV-E. This tells Holly that her firm A)is reporting certain errors discovered by management. B)will be changing to state registration. C)is undergoing a special evaluation by its clients. D)maintains custody of customer funds and or securities.

D The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser.

Which of the following statements is true about the compensation of a registered investment adviser? A)The investment adviser may be compensated on the basis of a share in the capital appreciation of the funds of the client as long as the client meets the accredited investor standard. B)It is not necessary to disclose compensation received from the sale of nonsecurities products to advisory clients. C)With written consent of the client, the investment adviser is permitted to share in the gains or losses in the client's account. D)The investment adviser may be compensated on the basis of the average total assets of the portfolio over a period of time.

D The Investment Advisers Act of 1940 (as well as the Uniform Securities Act) permits an investment adviser to be compensated on the basis of the average total value of the client's funds between specified dates. It may not be based on a share of portfolio appreciation or capital gains. The most common way to compensate the adviser is based on a percentage of average assets under management each month or quarter. As with any rule, there are exceptions. Because this question does not address the exceptions, it should be answered from the basic premise that performance-based fees are prohibited. Furthermore, performance-based fees are applicable to qualified clients, a standard more rigorous than that of an accredited investor. The ability to share in profits and losses in an account is unique to agents of broker-dealers and no other securities professional.

Included in the fiduciary relationship between an investment adviser and client is the responsibility to A) recommend only nonaffiliated broker-dealers for execution of portfolio transactions B) provide tax advice as an integral part of the client relationship C) recommend only nonaffiliated attorneys to clients seeking legal advice D) disclose the tax consequences of a recommended investment

D Whenever a recommendation is made to an advisory client, it is incumbent on the IA or IAR to make disclosure of the tax effects of that investment to the client. IAs are not to provide tax advice unless specifically qualified to do so and may recommend legal advisers who are or are not affiliated with the firm. There is no reason why an IA cannot recommend an affiliated broker-dealer, as long as disclosure of the relationship is made.

Witherspoon, Eustis, and Brahmin (WEB), an investment banking firm and SEC-registered investment adviser, is the principal underwriter for MTEX's upcoming stock issue. Lynn Black is an analyst and IAR with WEB, and she learned from an employee in MTEX's programming department that a serious problem was recently discovered in the software program of its major new product line. In fact, the problem is so bad that many customers have canceled their orders with MTEX. Black checked the stock's prospectus and found no mention of this development. The red herring prospectus has already been distributed. According to WEB's required code of ethics, Black's best course of action is to A)report her discovery to the Administrator of the state where MTEX's principal office is located. B)keep quiet because this is material nonpublic inside information. C)notify potential investors of the omission on a fair and equitable basis. D)inform her immediate supervisor at WEB of her discovery.

D Whether the adviser's code of ethics or rules of FINRA and NASAA, whether acting as an investment adviser or broker-dealer, the answer to a question like this is always to notify your immediate supervisor. From there, it will probably be taken to the chief compliance officer (CCO). Depending on the nature of the problem and the firm's policies, it might be necessary for this to be escalated to the proper regulatory authorities, but we can't tell that from the information given. You can never go wrong with going to your supervisor.

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