Business Practices Quiz #5

An Investment Adviser has adopted an internal Business Succession Plan. Who is responsible for servicing the IA's client accounts if the managing director of the Investment Adviser suddenly dies? A. Another Investment Adviser Representative currently in the firm B. Another Investment Advisory Firm to which investment management has been transferred C. The custodian bank that holds client funds and securities positions D. An immediate family member of the deceased managing director

A

The State Administrator is conducting an audit of a Registered Investment Adviser. The RIA is given a court order to disclose a client's records. The client tells the investment adviser that he refuses to give any information to the court. What should the investment adviser do? A. Disclose the records to the relevant authorities B. Not disclose the records to the relevant authorities C. Document the customer's instructions in writing and follow those instructions D. Require the customer to deliver the records to the relevant authorities

A Legally, advisers are compelled to comply with a court order, so regardless of the customer's instructions to the contrary, the adviser must produce the customer records.

NASAA Model Rule 502 (c) applies to: A. State registered advisers only to the extent that the conduct is fraudulent or deceptive B. Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive C. State registered advisers and Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive D. Federal covered advisers and State registered advisers only to the extent that the conduct is fraudulent or deceptive

C

Under the NASAA Statement of Policy on unethical practices, all of the following investment advisers would be able to loan monies where securities are collateral for the loan EXCEPT an investment adviser that: A. has a registered broker-dealer that lends money to a customer through the broker-dealer affiliate B. is a subsidiary of a parent bank that lends money to a customer through the bank affiliate C. is a partnership that lends money to a customer under the provisions of Regulation T of the Federal Reserve Board D. is a corporation that lends money to its officers

C An investment adviser is not permitted to lend money to a customer, unless the investment adviser does so through an affiliated "regulated lender." An affiliated broker-dealer is regulated under Regulation T and can lend money to a customer; as can an affiliated bank. An adviser can lend monies to its officers or employees because they are not customers.

What constitutes "taking custody" under the NASAA rule for investment advisers? A. An employee of an advisory firm who is given discretionary authority to trade the account by a client B. A client who signs a power of attorney, giving the adviser the right to trade on the client's behalf C. An employee of an advisory firm acting as a trustee for a firm D. An introducing broker-dealer receiving checks made out to the carrying broker-dealer that are to be deposited at a broker-dealer

C Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers.

What is a good definition of "suitability"? A. When, in a securities transaction for a customer, a representative chooses the security to be traded, the amount to be traded, and the price and time of execution B. When, prior to recommending a securities transaction to a customer, information is obtained concerning the customer's financial status, tax status, investment objectives and investment needs C. When a representative has reasonable grounds for believing that his or her recommendation is appropriate for the client, based on the client's financial situation and needs, investment objectives, risk tolerance and other security holdings D. When the representative considers the client's risk tolerance, financial situation, financial needs, investment objectives and other security holdings in relation to the firm's list of recommended securities

C Suitability means that a recommendation is "suitable" for the client. In Choice C, the representative is using the client information to make a suitable recommendation - this is the best answer.

Which of the following statements may be made by an agent about a new securities issue that is being registered by coordination? A. "Because these securities are being registered with the Securities and Exchange Commission, you are guaranteed that the issue is safe" B. "Once registration is effective, this means that both the Administrator and the Securities and Exchange Commission have approved of the offering" C. "The issue is selling out fast to institutional investors" D. "The security is being registered in the State and with the Securities and Exchange Commission"

Stating that the security is registered with the State and the Securities and Exchange Commission is true if the issue is being registered by coordination. If the security is being registered by qualification, it will be registered with the state