Unit 6

Written Trade Confirmation Must Include:

-A statement of the nature of the transaction -The date, and if requested, the time of the transaction -The source and amount of any renumeration to be received by the IA (or IAR) in connection with the transaction

What is excluded in the fee disclosure documents?

-Commissions -Markups and Markdowns -Advisory Fees

Disclosure and Client consent requirements

1. The client receives full written disclosure as to the capacity in which the adviser proposes to act. 2. Client consent is obtained.

Guaranteed Security

A guaranteed security is where a party other than the issuer guarantees the payment of principal and interest (on a debt security) or dividend (on an equity security.) The important thing about that guarantee is that there is no guarantee on the performance of the investment. That is, gains cannot be part of the guarantee.

If a broker dealer forms a subsidiary to start an investment adviser, existing clients of the BD wishing to become clients of the IA must enter into what?

A new contract for advisory services

Hugh Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners. A) must notify its clients of Clark's departure within a reasonable period B) need not notify its clients of Clark's departure because Clark was only a minority partner C) must change its name because the partnership has a new mix of partners as a result of Clark's departure D) must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period

A. ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period. ABC has no obligation to notify Clark Advisers of Clark's new employment.

Wiring Funds

Although frequently waived for those with large account balances, if the client needs money wired out of the account, a charge, similar to that made by most banks, is levied against the account.

Postage and handling

Although many firms absorb the cost of normal mailings, express or overnight delivery at the request of the client is usually subject to a charge.

Issuance of a stock certificate

Although most securities are kept in street name, there could be instances where the customer wants delivery of the physical certificate. There is usually a charge for this service.

Material Disciplinary ACtion

Any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years.

According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? A) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. B) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. C) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. D) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received.

B. An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on asset allocation that harmonizes with WSI's investment philosophy. If WSI should post a link to this article on its website, it would probably be considered A) estrangement B) entanglement C) adoption D) fulfillment

C) Adoption A firm will be responsible for the content of a linked third-party site if the firm "adopts" its content on any of the firm's sites. Adoption is defined as a firm's endorsement of the content of a third-party site. This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm's policies. Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it.

Fiduciary Investment Group (FIG), an investment adviser registered in 6 states, from time to time acts as a principal in trades recommended to advisory clients. Under the provisions of the Uniform Securities Act, A. FIG is engaging in an unlawful practice B. FIG must receive consent of the clients and disclose its capacity no later than completion of the trade. C. FIG must receive consent of the clients and disclose its capacity no later than completion of the trade. D. FIG does not need consent because the trade was recommended to existing advisory clients.

C. This practice is not unlawful as long as the investment adviser obtains the required consent and makes the appropriate disclosures on a timely basis. That time limit is no later than the completion of the trade (the settlement date). If FIG is also a broker-dealer and a client makes a trade that is not initiated through an advisory recommendation, then acting as a principal only requires disclosure of capacity, not consent.

An investment adviser is a member of a country club and provides substantial fee reductions to those members who become clients. The adviser justifies this because these club members are known for great referrals. The IA charges regular clients a fee that was larger for the same services because they were not members of the country club. Is this permissible? A) It is permissible as long as the offer is not published as an inducement to join the country club. B) It is not permissible because all clients must be charged at the same rate. C) It is not permissible because the firm is charging other clients fees that are excessive in nature compared with the fees charged to country club members. D) This is permissible as long as proper disclosure is made in the adviser's brochure.

D. Item #5 on the Form ADV Part 2A asks about the adviser's fee schedule. The adviser is asked if fees are negotiable. If so, the adviser must describe the nature of the fee structure and what type of variations there might be. As long as the adviser discloses that there are some affinity groups that will qualify for a lower fee, there should be no problem. This is not considered to be a referral fee

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) directing securities transactions to an affiliated broker-dealer B) the trade is being executed by an officer or partner of the firm C) engaging in an agency cross transaction D) purchasing shares directly from advisory clients

D. There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.

Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract providing the client is allowed to cancel the contract without penalty within 5 business days B) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B. C) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right D) the disclosure brochure must be signed by an officer or a general partner of the firm

D. When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

Which of the following would NASAA consider to be a substantial prepayment of fees? A) $500 covering the next six months B) $1,000 covering the next month C) $600 covering the next calendar quarter D) $600 covering the entire contract year

D. NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points; it is more than $500 and for more than six months. A payment of $500 covering the next six months meets the time requirement, but it is not more than $500. Payments of $600 for the next quarter or $1,000 for the next month meet the dollar amount but not the time requirement.

Which of the following actions are prohibited under the Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Depositing securities in lieu of a required surety bond B) Notifying the Administrator that the adviser intends to maintain custody of customer securities C) Determining the price and time of execution of customer orders without written discretionary authority D) Claiming that advisory fees are negotiable, but maintaining a fixed fee schedule

D. If an adviser states that fees are negotiable but charges fixed rates, that would be an unfair business practice. Time and price are not considered discretion. Cash or securities may be deposited with the Administrator instead of posting a surety bond.

In an agency cross transaction, the adviser may recommend the transaction to both parties of the trade. True or False

False

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I. a charge when a client requests that a stock certificate be issued in his name II. a commission charge when a client buys a security on a listed exchange III. the interest charged by the firm on money owed by customers in their margin accounts IV. fees for providing advisory services to high net worth individuals

I and III There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if I. results do not reflect the deduction of fees II. actual market conditions during the referenced period are not disclosed III. the advertisement did not reflect performance for a minimum period of 3 years IV. the advertisement did not disclose that it applied to only a specific group of clients

I, II, and IV Advertising that reflects past performance must show a minimum period of 1 year, not 3. All investment advisers' advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period.

A corporation offering securities registered under the Act of 1933 may make which of the following statements? I. "The SEC has passed on the merits of these securities as an investment." II. "The SEC has released our securities for sale to the public." III. "The SEC has passed on the accuracy of the information in our prospectus." IV. "The SEC has declared this prospectus effective."

II and IV When a security registers with the SEC, the date that sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.

The USA would permit an agent to use the term "guaranteed" to refer to I. a security that is backed by the U.S. government II. a bond that is backed by the taxing power of a governmental body III. a bond whose interest and principal payments are guaranteed by someone other than the issuer IV. a stock whose dividend payments are guaranteed by someone other than the issuer

III and IV Under the USA, the term "guaranteed" refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

Regulation Best Interest (SEC)

If enacted, this rule will require a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.

Does a Broker-Dealer, acting as a principal in a trade, need customers' consent?

No

If acting as a principal or agent, is blanket authorization required and client consent needed prior to the completion of the transaction?

No

Are Waivers ever permitted?

No If you are given a question where clients agree to waive their rights to sue, the agreement is null and void.

Part 2 of Form ADV: Full and Truthful Disclosure

Obviously, all information in the brochure and brochure supplements must be true and may not omit any material facts.

Account Maintenance Fees

Similar to the monthly charge on your bank statement, many firms charge an annual account fee, particularly if a small account.

Part 2 of Form ADV: Filing

The investment adviser must file the brochure(s) (and amendments) through the IARD system. If the IA is federal covered or in the process of registering with the SEC, it is not required to file the brochure supplements through the IARD or otherwise. However, a copy of the supplements must be preserved and made available to SEC staff upon request. If the IA is registered with or is in the process of registering with one or more state securities authorities, a copy of the brochure supplement (Part 2B) must be filed for each supervised person doing business in that state.

Late Settlement Fee

This is similar to the late fee on a credit card. When a client's payment arrives after settlement date (or is returned due to insufficient funds), the broker-dealer may assess a fee.

Safekeeping of funds/securities

This is the charge made for maintaining custody of client assets, which is usually waived for larger accounts.

An adviser may obtain client consent to a principal or agency transaction after execution, but must prior to settlement of the transaction True or False

True

Brokers must always indicate their capacity on the trade confirmation, sent no later than completion of the trade (settlement date) True or False?

True

Only State Registered IAs are required to file brochure supplements True or False

True This is because virtually all of the supervised persons described in the supplements are investment adviser representatives and they are always registered on a state level only, not with the SEC.

Performance-based compensation is prohibited True or False

True, it is only allowed under certain conditions.

Part 2 of Form ADV: Disclosure Obligations as a Fiduciary

Under federal and state law, IAs act in a fiduciary capacity and must make full disclosure to their clients of all material facts relating to the advisory relationship. As a fiduciary, they also must seek to avoid conflicts of interest with their clients, and, at a minimum, make full disclosure of all material conflicts of interest between them and their clients that could affect the advisory relationship.

Transferring an Account

When a client decides to move the account from one broker-dealer to another, there is usually a charge to cover the administrative expenses of the transfer.

Margin Account Interest

When purchasing on margin, money is borrowed, and the rate of interest charged on the borrowed funds must be disclosed.

Contra Party

When the broker dealer is acting in a principal capacity

Can a broker dealer correct a bona fide error?

Yes but not an associated person of a broker-dealer because the concern that any such payment may conceal individual misconduct.

Should broker-dealers provide retail customers at account opening written notification of all service charges and fees?

Yes, in accordance to NASAA

Wrap Fee Program

client is charged a specified fee, or fees, not based directly on transactions in a client's account, for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and for execution of client transactions.

Completion of the Transaction

considered to be the day the trade settles. Under current industry practice, that is the second business day after the trade is made

Part 2 of Form ADV: Narrative Format

consists of a series of items that contain disclosure requirements for the firm's brochure and any required supplements. The items require narrative responses. If an item does not apply to their business, they must indicatethat item is not applicable. There are 18 items on the ADV Part 2 (with a 19th one for state-registered advisers only). Remember, this is for clients to use to understand what the IA does so the information disclosed relates to the way the IA operates the business.

Part 2 of Form ADV: Plain English

designed to promote effective communication between the firm and their clients. The brochure and supplementsmust be written in plain English, taking into consideration the clients' level of financial sophistication. Specifically, the SEC states that the brochure should be concise and direct. Unit 6 Communication With Clients and Prospects 123 The brochure should discuss any conflicts the adviser has or is reasonably likely to have and practices in which it engages or is reasonably likely to engage.

Entangled

social media term meaning that a securities firm has participated in the development of content on a third-party site to which it publishes links.

Adoption

social media term meaning that a securities firm links to a third-party site and indicates that it endorses the content on that site.

The Model Rule

states that "Indicating, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of the Uniform Securities Act or of the Investment Advisers Act of 1940" is an unethical business practice

Agency Cross Transaction

the adviser (or IAR acting on behalf of the firm) acts as agent for both its advisory client and the party on the other side of the trade.

Do Brokers always disclose the amount of commission?

yes

In the case of agency cross transactions, is permission to engage in them required to be obtained in writing before the first transaction?

yes