63 Unit 4
Which of the following would NASAA consider to be a substantial prepayment of fees?
$600 covering the entire contract year. NASAA defines a substantial prepayment of fees to be more than $500, 6 or more months in advance.
Which of the following activities are prohibited under the Uniform Securities Act?
A practice that is not expressly forbidden by the act but defined as unethical by the Administrator, the deliberate omission of a material fact when soliciting a client, and selling recommended securities to a client from one's own account without disclosing this fact to the client are all prohibited.
In which of the following situations did an agent commit fraud?
An agent knowingly sold a nonexempt, nonregistered security to a retail client who could well afford the risk involved. Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or non-institutional clients.
Which of the following transactions are prohibited?
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 (think of margin accounts) 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.
An investment adviser must disclose which of the following legal or disciplinary actions to clients and prospective clients if they occurred within the last ten years?
An investment adviser must disclose adverse regulatory events to clients and prospective clients if they occurred within the last ten years, such as a conviction relating to a misdemeanor involving an investment related business; SEC or other federal regulatory agency proceedings in which the person was found to have violated an investment-related statute; or proceedings before FINRA in which the adviser was barred or suspended from membership. Misdemeanors regarding noninvestment-related actions are not considered material and need not be disclosed (e.g., a motor vehicle violation).
An investment advisory firm is organized as a partnership and there are five equal partners. During the year, one of the partners passes away and two others leave to start their own firm. Which of the following is required by the Uniform Securities Act?
Because three of the five partners are no longer with the firm, that represents a majority interest and the partnership must be re-formed as a new entity. The state does not require fees from successor firms, as they will be paid the fee at annual renewal time. Since this represents a new firm, the USA considers this as if the contracts are assigned so permission is required; not merely notification (as would be the case if only two of the partners had left or died)
The Uniform Securities Act permits excessive trading activity that generates high commissions and low returns in a customer's account
Excessive trading activity in an account is called churning and is a prohibited practice.
Which of the following methods of compensation to an investment adviser may be in violation of the USA?
Guaranteeing a level of performance is a prohibited business practice whether the client agrees or not. An adviser may charge clients a flat fee provided it is fair and reasonable for the services offered. Charging accounts a percentage of assets under management is also an acceptable business practice under the Uniform Securities Act.
Mildred Peabody, a retired schoolteacher, has heard about enormous profits made recently in Internet stocks. She calls her agent at her broker-dealer and instructs the agent to liquidate her AAA-rated municipal bond position and use the proceeds to buy two Internet stocks that have recently experienced significant price volatility. In this situation, the agent should
It appears that pursuing this strategy would be a mistake for this client. However, if after being informed of the unsuitability of a particular trade a customer still insists that an order be entered, the agent must follow the customer's instructions as directed. However, because the question asks for what the agent should do, best practices in the industry suggest that the trade be executed only after obtaining written acknowledgment that the trade was not solicited by the agent.
Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action?
It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson proceeded with the trade. However, charging larger than normal commissions without informing the customer of such intent in advance is a prohibited practice under the Uniform Securities Act. There is no requirement for administrative clearance prior to charging larger than normal commissions.
Which of the following practices is fraudulent?
Marking up a security by 5%, but indicating to the client that the markup is only 2% Fraud is the willful deception of a client. Stating that the markup will be 2% and then effecting a 5% markup is a fraudulent act. Marking up a security by more than industry practices is a prohibited practice but is not necessarily fraudulent. It is not necessary to state all of the facts; only those that are material are required.
An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be
Municipal bonds provide a fixed income, but they are generally suitable only for high tax-bracket individuals. In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent's license.
An agent submits a list of recommendations to a customer that includes 5 different securities. The customer chooses to buy a round lot of 1 of the 5 securities recommended (a stock in which the agent's broker-dealer makes a market). The firm, in completing the trade, charges a markup that is larger than normal for a stock transaction. Is this allowable under the Uniform Securities Act?
No, under the circumstances given, it is a prohibited practice to charge a higher than normal markup. Higher than average markups or commissions are not prohibited if they are justifiable and disclosed. However, in this case, there would appear to be no justification because the customer bought a round lot, the normal trading unit of stock. The firm is a market maker, so the security is being sold from their inventory and the stock is on the company's recommended list.
Which of the following activities are allowable activities of an agent?
Splitting commissions with another agent at the same broker-dealer is an allowable activity, as is borrowing money from colleagues and lending institutions. It is a prohibited practice to borrow money from a client not in the lending business or establish a joint account with a client without written permission from the broker-dealer and the client.
Which of the following activities are considered market manipulation?
Stating falsehoods, misrepresenting prices, and matching and placing orders to influence prices are examples of market manipulation.
Under the Uniform Securities Act, which of the following are prohibited actions of an investment adviser?
The USA prohibits an investment adviser from acting as principal or agent in a transaction with an advisory client without approval prior to completion (settlement) of the trade. Assignment of a majority interest in the company's stock is considered to be the same as assignment of client contracts; an action that may not be done without client acceptance. There is nothing wrong with agency cross transactions as long as disclosure is made and the trade is recommended to only one of the parties by the adviser. Performance fees may be charged, regardless of the client's age, to anyone with a net worth of at least $2 million or with at least $1 million under management with the firm.
With regard to the Uniform Securities Act, which of the following statements regarding the omission of a material fact by an agent is NOT true?
The correct answer was: It is not a violation if the security is exempt from registration under the Uniform Securities Act. Deliberate omission of material facts is a fraudulent practice under the Uniform Securities Act, whether securities are exempt or nonexempt or even if the transaction was exempt. If done unknowingly, then it is a unethical business practice (fraud requires deliberate action) and is still a violation.
Which of the following is a method of compensation available to investment advisers under contract to registered investment companies that is not normally available to those who advise individual investors?
The correct answer was: Performance fees Advisers under contract to registered investment companies may be compensated on a performance-fee basis. This form of compensation is only permissible when managing the accounts of certain qualified individual investors.
An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require
The correct answer was: a statement as to the limitations of and difficulties involved in using this system Anytime an adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.
All of the following activities comply with the requirements for agency cross transactions EXCEPT
The correct answer was: after proper written disclosure, an adviser recommends the transaction to both the seller and buyer An adviser cannot recommend a trade to both buyer and seller in an agency cross transaction, a transaction in which the adviser acts on behalf of both buyer and seller. The adviser can act as broker to both parties upon proper written disclosure and consent, provided the adviser did not recommend the transaction to both sides.
The president of a manufacturing company sells his or her company's common stock to the public and receives a commission substantially lower than others selling that stock. Under the USA, the president is acting
The correct answer was: as an agent of the issuer Unless the security is in one of the five listed categories of exempt securities, or the transaction is exempt (neither of which apply here), the exclusion from the definition of an agent only applies when the employee of an issuer sells the issuer's securities to employees and does not receive sales related compensation.
All of the following activities could result in being charged with a fraudulent or prohibited practice EXCEPT
The correct answer was: failing to state all known facts about an investment when presenting it to a client 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.
Following the advice of its portfolio managers, The Rising Tide Hedge Fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tide to use furniture and facility at a discounted rate. Under the soft-dollar provisions of Section 28(e)
The correct answer was: this would not fall under the safe harbor The use of furniture or office facilities is not included in the list of safe harbor items, regardless of what role the employees of the fund play.
Which of the following statements regarding Form ADV Part 2 is TRUE?
Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients within 120 days of the end of the adviser's fiscal year. If it is not delivered 48 hours in advance of the initial contract, the client has a 5-day penalty-free termination clause. It does not accompany the brochure-it is the brochure.
An investment adviser representative may share in the profits and losses of a customer's account
Unlike agents, investment adviser representatives are not allowed to share in the capital appreciation or depreciation of their customers' accounts.
A broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to
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.
A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers?
Your free subscription will start once we have received your name and mailing or email address. A free offer must not only be free of financial cost, it must be free of any other burden or commitment
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
not an unethical sales practice 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.
An agent sells her customer $10,000 of 15-year U.S. Treasury bonds. If the agent tells the customer this is the best investment due to the absolute safety of Treasury securities, the agent has acted
unlawfully, because the term "absolute safety" implies that the customer cannot lose money Implying or stating to customers that they cannot lose money when investing in a marketable security is prohibited. Although Treasury securities carry no default risk, the customer faces potential interest rate risk, particularly in light of the bonds' 15- year maturity.
A customer placed an order with an agent to sell 100 shares of ABC and he instructed the agent to limit any losses. The agent did not have discretionary authority over the account and waited to sell the shares, hoping to get a better price for the customer. The price of the shares went down, so the agent sold 50 ABC shares to limit the customer's losses. According to the Uniform Securities Act, this is a
violation because the agent acted without discretionary authority An agent may determine the price and timing of a transaction without discretionary authority. As a result, the agent is not necessarily required to execute a transaction immediately after an order is placed. In this situation, the agent acted without authority when he changed the amount of the security sold.
In a discussion with one of his clients, an agent describes a stock offering that occurs in a neighboring state. The client is excited about the company's prospects and tells the agent he would like to buy 500 shares. The agent replies that the security is unregistered and nonexempt, and the only way he would be permitted to sell it is if the client agrees to sign a waiver releasing the agent from responsibility. This signed waiver
will neither make the trade legal nor relieve the agent of liability, was correct!. If an issue is nonexempt and not registered in this state, no agent is permitted to make a sale. There are never any situations on the exam where a waiver is the correct course of action.
