S63 - Chapter 5
A) immediately reply to the client in writing 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 broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to A) immediately reply to the client in writing B) immediately notify NASAA C) immediately suspend the agent involved until the complaint is resolved D) immediately notify the Administrator
A) may open the account, but may not make any recommendations. If a customer fails to provide suitability information, the account may be opened but the member may not make any recommendations; the only trades permitted are those that are unsolicited.
A customer wishes to open a new account, but refuses to provide suitability information. Under NASAA rules, the agent A) may open the account, but may not make any recommendations. B) may open the account, but must limit recommendations to investment-grade securities. C) shall not open the account. D) may open the account, but must limit recommendations to U.S. government securities.
B) high-risk penny stocks are not suitable recommendations for this low-net-worth customer Regardless of diversification, low-priced stocks are not suitable for a low net worth customer. Risk is not necessarily diversified away by simply increasing the number of risky securities. Risk is only reduced by diversifying many securities whose patterns of returns are not correlated.
A customer with liquid net worth of $25,000 tells an agent that she has $1,000 to invest. Explaining how diversification can reduce risk, the agent recommends that the customer purchase 8 different over-the-counter stocks, each trading at approximately $1 per share. With regard to the above situation, A) the agent may be exhibiting a pattern of excessive commissions (churning) in his customer's account B) high-risk penny stocks are not suitable recommendations for this low-net-worth customer C) the recommendation is suitable for the customer because the agent recommends a diversified stock portfolio D) once the customer agrees to the agent's recommendation, it is no longer considered an unsolicited transaction
C) unethical An investment adviser cannot lend money to a customer unless the loan is made through a regulated lender such as an affiliated broker-dealer or an affiliated bank.
An investment adviser structured as a partnership lends money to a customer to buy recommended securities. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this activity is A) acceptable, provided the loan is made under the provisions of Regulation T of the Federal Reserve B) acceptable, provided the securities are used as collateral for the loan C) unethical D) acceptable, provided the securities are used as collateral for the loan and the loan conforms to the provisions of Regulation T
D) selling away. As limited as Alice's activity appears to be, this would be considered arranging for a securities transaction "away" from her broker-dealer. This would be permitted if Alice had received written authorization in advance from her employing broker-dealer.
Alice Allison, an agent with Winmore Securities, a registered broker-dealer, introduced some of her clients to an old college friend who was raising funds for a new start-up venture. Those who invested in the deal did so by having Alice transfer funds from their account at Winmore to the start-up. Alice did not charge or receive any compensation for doing this. Because of this limited role, Alice did not notify her supervisor at Winmore. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, Alice has engaged in the unethical business practice of A) sharing in accounts. B) churning. C) front running. D) selling away.
A) 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.
All of the following activities comply with the requirements for agency cross transactions EXCEPT A) after proper written disclosure, an adviser recommends the transaction to both the seller and buyer B) before obtaining a client's written consent in an agency cross transaction, the adviser must disclose that it will receive commissions from both parties and that the transactions involve a conflict of interest C) an adviser sends an annual statement to clients that reveals the total number of agency cross transactions for the client and the total amount of commissions the adviser received from those transactions D) a client consents (in writing) to the adviser's dual role in the transaction as both adviser to the client and broker to the other party
D) the price of the security at the time of the order The price at the time of the order is of no significance. The execution price, of course, is.
All of the following information would be found on a trade ticket EXCEPT A) the time of order entry B) was the order solicited or unsolicited C) the customer account number D) the price of the security at the time of the order
C) churning The key word is excessive. That word always means "too much." With a speculator who is aggressive, there will be frequent trading in the account, but once you see that it is excessive, churning is taking place.
An agent has a highly successful neurosurgeon as a client. The doctor has indicated that speculative growth, including aggressive positions, is the account objective. If the agent's manager noticed a pattern of excessive transactions in the account, this would be a case of A) meeting the client's objectives B) arbitrage C) churning D) sharing in the client's account
B) Recommending that the attendees purchase shares of the KAPCO 2020 Target Date Mutual Fund How could the same security be suitable for everyone in attendance? NASAA would call this a blanket recommendation, an unethical business practice. However, it would not be prohibited to speak about a specific fund and how it attempts to reach its goals. In that case, the prospectus would have to be made available to all attendees.
An agent is conducting a seminar open to the public. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following would be prohibited? A) Distributing the prospectus for the KAPCO 2020 Target Date Mutual Fund during the seminar B) Recommending that the attendees purchase shares of the KAPCO 2020 Target Date Mutual Fund C) Having the business editor of the local newspaper speak about current economic trends D) Handing out his business card and a new account application
D) Large-cap income stocks This customer needs income. Of the answers provided, the large-cap stocks would be the most suitable because they would provide income while maintaining relative safety. While the municipal bonds are probably safer, the benefits of their tax-free income would probably be lost on a client with no independent income.
An elderly widow with no independent income wishes to invest the proceeds from her recently deceased husband's life insurance. Which of the following would be the most suitable recommendation? A) Call options B) Oil and gas exploration program that you know is going to strike C) Municipal bonds D) Large-cap income stocks
C) II and IV *The IAR can use any source of information to create his own analysis, and disclosure of that source is required only if the IAR uses the product of a third party as the presentation to the client.
Disclosure to the client of a potential conflict of interest is required when I. an investment adviser representative, in preparing a recommendation, uses research provided by the broker-dealer with whom the IAR is affiliated II. an investment adviser representative intends to sell the client the insurance policy he recommended for his financial plan and receive a commission for doing so III. transactions recommended to the client are not the same as those for other clients with similar objectives IV. recommending a new issue where the major stockholder is the investment adviser's brother A) I, II, and III B) I and III C) II and IV D) I, II, III, and IV
A) I and II 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.
Examples of identity theft would include I. taking over an individual's credit card account II. applying for new credit cards in the compromised individual's name III. lending money in the name of the compromised individual IV. purchasing lottery tickets in the name of another individual A) I and II B) II and III C) I and IV D) III and IV
B) I, II, and III It is not necessary that there be any relationship between the BD and the institution other than a business one.
If a broker-dealer wishes to conduct operations on the premises of a financial institution, it is required to I. disclose both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution II. make a reasonable attempt to be in a location physically distinct from that where retail deposits are taken III. attempt to obtain written acknowledgement from customers that they have received and read the disclaimers IV. be under common control with the institution A) I, II, III, and IV B) I, II, and III C) I and IV D) II and III
C) no violation 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.
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 criminal violation punishable by up to 3 years in prison B) a misdemeanor C) no violation D) a civil violation punishable by a fine up to $5,000
D) that exceeds $10,000
In an effort to combat money-laundering, financial institutions are required to file reports with FinCEN for each cash transaction A) of $10,000 or more B) that exceeds $5,000 C) made by a new customer D) that exceeds $10,000
B) I, II, III, and IV An agent may not take personal possession of clients' cash and securities. The broker-dealer, however, can provide safekeeping and custodial services.
Under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, which of the following activities (if performed by an agent) are considered fraudulent, dishonest, or unethical? I. Executing a transaction in a margin account without securing an executed written margin agreement from the customer, promptly after the initial transaction in the account II. Executing a transaction either with or for a customer at a price not reasonably related to the current market price III. Guaranteeing a customer against loss on securities purchased IV. Personally providing safekeeping and custodial services for clients' cash and securities A) I, II, and III B) I, II, III, and IV C) II and IV D) I and IV
B) The transactions are authorized in writing by the broker-dealer before execution of the transactions.
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 agent will receive no compensation. B) The transactions are authorized in writing by the broker-dealer before execution of the transactions. C) The customer is a member of the agent's immediate family. D) The securities are exempt under the Uniform Securities Act.
C) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar disclosed the $100 commission prior to the transaction and Watson chose to proceed with the trade. 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.
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? A) Gibraltar Securities is not required to disclose the amount of commission in advance to Watson. However, it must receive clearance from the Administrator before charging commission in amounts exceeding 10% of the value of the securities traded under the transaction. B) A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive. C) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar disclosed the $100 commission prior to the transaction and Watson chose to proceed with the trade. D) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction.
B) I, II, and III The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation as the loan is from the bank, not the manager.
When it comes to borrowing and lending money, the NASAA Model Rules prohibit activity that would compromise the objectivity of securities professionals. Which of the following are NOT prohibited practices? I. A broker-dealer lending money to a client to purchase additional securities II. An agent taking out a car loan from a bank whose branch manager is a client of that agent III. An investment adviser borrowing money from an affiliated broker-dealer IV. An investment adviser lending money to a client to enable that client to maintain the minimum required asset level in the account A) I and III B) I, II, and III C) I, II, III, and IV D) II and IV
A) A business account held by a company listed on the NYSE In general, business accounts are not included in the term covered account. There could be an exception for a sole proprietorship or other small business where there is a reasonably foreseeable risk to customers due to the inability of the customer to provide adequate internal safeguards. That is unlikely to be the case with a listed company.
Which of the following would be least likely to meet the cyber security definition of a covered account? A) A business account held by a company listed on the NYSE B) A customer with an automobile loan at a bank C) A customer with a margin account at a broker-dealer D) An account with a registered investment company that permits the owner to wire funds to a third party
