Series 63: Business Practices

A market maker in ABCD stock is currently quoting the stock at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to but 800 shares of ABCD at $42.50, the market maker must update its quote to: _____ Bid (_____ shares); _______ Ask (______ shares)

$42.50; 800; $43.00; 1,000

If a state-registered IA accepts $_____ of prepaid advisory fees (or more), ___ months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds.

$500; 6

A block trade is a trade of at least:

10,000 shares

An adviser that takes custody must file a copy of its surprise audit results with the State Admin within:

120 days of completion of the examination

If a client inadvertently gives securities or funds to an IA, as long as they returned within ___ business days, then the adviser has NOT taken custody.

3

Changes to the terms of advisory contracts must be filed with the Admin on Form ADV within _____ days and approved by the _________

30; customer

A written complaint is received by mail that the firm resolves to the customer's satisfaction. Which statement is TRUE regarding keeping this record? A. A copy of the original complaint along with its resolution must be retained in the file of the agent by the BD B. A copy of the original complaint along with its resolution must be retained at the firm's supervisory office C. A copy of the original complaint along with its resolution must be retained by the State Admin D. There is no requirement to retain a copy of the complaint because it was resolved to the customer's satisfaction

A

An RIA is formed as a partnership. The RIA intends to charge an incentive fee that is based on investment performance. Under NASAA rules, the RIA: A. Must be able to show that the fee is fair and reasonable to the state Admin B. Is not permitted to have an incentive fee under any circumstances C. Can charge an incentive fee as long as it is included in the partnership agreement D. Must offer the customer a fee refund if the performance does not meet the benchmark

A

Under the NASAA Statement of Policy on unethical practices, written discretionary authority need not be obtained by an IA if the customer: A. Gives verbal discretionary authority and a written power of attorney from the customer is obtained within 10 days B. Selects the security to be traded and the price of execution C. Is an insurance company D. Effects 5 or fewer trades within a 12 month period

A

Under the Uniform Securities Act, copies of order memoranda maintained by IAs must contain all of the following information EXCEPT: A. Time of execution of the order B. Person who placed the order C. Name of account for which order was entered D. Name of BD to which the order was sent

A

Under the NASAA Statement of Policy on unethical practices, third party research reports may: A. Not be given to customers B. Only be used internally by the IA C. Be given to customers if the adviser discloses that the report was not prepared by the advisory firm D. Only be given to institutional customers

C

Under the Prudent Investor Rule, investment decisions must be made based primarily on:

An overall investment strategy that balances risk and return objectives

Under NASAA rules, within 120 days of fiscal year end, each customer must be sent a(n):

An updated brochure and brochure supplement

The purchase of a security on one exchange and the simultaneous sale of the same security on another exchange is:

Arbitrage

To protect against identity theft and theft of funds, client instructions received electronically must be:

Authenticated

______ are permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed, but ____ are not permitted to do so

Agents; IAs

A RIA that is formed as a partnership has been in business for 15 years. They decide to merge with another IA, in which they will have a 50% ownership interest. The RIA must: A. Pay a new filing fee to the state B. Have its existing clients sign an acknowledgment of the change of ownership C. Liquidate its customer accounts and complete a new account application for each customer D. Notify its customers of the change

B

A customer may be charged a higher than normal commission in a transaction that is difficult for the broker to execute: A. Under no circumstances B. If the additional charge is disclosed to the customer prior to the placement of the order C. If the additional charge is disclosed to the customer no later than on the trade confirmation D. At the discretion of the BD

B

An IAR has opened an account for a new customer. The customer is "on the road" for 3-4 weeks per month and has given the IAR verbal authorization to trade her account on a discretionary basis. The IAR sends the customer a written power of attorney for signature and return. 1 week after opening the account, the IAR hears of a good investment opportunity and buys 500 shares of the XYZ stock at $50 for the customer's account. 3 weeks later, the stock declines and the IAR sells the stock at $30 per share. The customer never returned the signed power of attorney. Liability for the loss rests with the: A. Customer B. Investment advisory firm C. Investment adviser representative D. All of the above

B

The portfolio construction most suitable for a pension fund seeking current income and safety of principal is: A. Treasury bonds, GO bonds and covered call writing B. Treasury bonds, Corporate bonds and covered call writing C. Corporate bonds, Time deposits and naked call writing D. Treasury STRIPS, Corporate bonds and naked call writing

B

Under NASAA rules, an IAR could NOT personally borrow money from a: A. Family member that does not have an account with the adviser B. Family member that has an account with the adviser C. Affiliated BD that is a customer of the adviser D. Bank that is a customer of the IA

B

Prospectus delivery is only required for new issues:

Being sold in the primary market

An IA purchases a research report from a bank's research department. This report may be distributed to the RIA's clients: A. Under no circumstances B. Verbally only; printed copies may not be distributed C. If the adviser discloses to his clients that the report was prepared by a third party D. If the adviser pays the bank for each person to whom the research report is distributed

C

An IAR writes a blog published on the Internet about how to achieve the best returns for clients, while minimizing risk. Which statement is TRUE about this? A. This can only be done if the IA firm that employs the IAR approves of the content B. This can only be done if the IA firm that employs the IAR authorizes the distribution of the communication C. This can only be done if the IA firm that employs the IAR both approves the content and authorizes the distribution of the communication D. This action is prohibited

C

An investment adviser that claims that it is a "fee only" adviser could NOT be compensated based on: A. A percentage of assets under management B. A flat annual or hourly fee for all work performed C. 12b-1 fees paid by mutual funds D. A performance based fee for wealthy investors

C

The Prudent Investor Act requires that fiduciaries manage the assets of their beneficiaries based upon: A. Legal list requirements B. Efficient market theory C. Modern portfolio theory D. Value investing theory

C

Under the Uniform Securities Act, an IA is permitted to take physical custody of a customer's monies or securities: A. Under no circumstances B. Only if the Admin does not prohibit this by rule and the adviser has notified the customer that he has, or will take, custody C. Only if the Admin does not prohibit this by rule and the adviser notifies the Admin that he has, or will take, custody D. If the adviser is properly registered with the State Admin

C

Which of the following is the MOST appropriate investment for an estate account? A. Investment grade long term bonds B. Long Treasury Bonds C. Treasury Bills D. Insured Municipal Bonds

C The objective of an estate account is to preserve principal and to effect a timely distribution of estate assets. T-bills are liquid and have little market risk

Executing trades in a customer account that are excessive in frequency or size, just to generate commission income for that agent is:

Churning

A registered IA that trades securities on the behalf of customers is required to keep a record of the transaction that includes all of the following information EXCEPT the name of the: A. IAR who placed the order B. BD to which the order was sent for execution C. Person at the IA who recommended the transaction D. Agent at the BD who executed the transaction

D

A retired 81 year old customer has $36,000 of annual income from a pension and social security. She has no investments other than a fully-paid home worth $120,000. She has just inherited $75,000 that she would like to invest for supplemental monthly income with minimum default risk. The BEST recommendation is for the customer to purchase: A. AAA rate municipal bonds B. A variable annuity C. Whole life insurance D. US Government bonds

D

An IA can borrow money from which of the following customers? A. Unaffiliated IA B. Investment company C. Accredited investor D. BD

D

An IA is considered to "take custody" of funds or securities from a customer if it: A. Exercises discretionary authority by placing trades of securities for that customer B. Accepts a check from the customer made payable to the fund custodian to buy a mutual fund C. Accepts commissions for effecting trades for that customer's account through an affiliated BD D. Is appointed as trustee for a customer's trust account under a legally binding trust document

D

Under NASAA rules, a customer MUST sign and return the margin agreement: A. Prior to placing the first trade in the account B. Prior to confirmation of the first trade in the account C. Prior to settlement of the first trade in the account D. Promptly after the initial transaction in the account

D

Under the Uniform Securities Act, copies of order memoranda maintained by IAs must contain all of the following EXCEPT: A. Person connected with the IA who recommended the transaction to the client B. Person who placed the order C. Date of order entry D. Time of order execution

D

When can an agent represent that a mutual fund is "no load"? A. When the fund does not impose an up-front sales load B. When the fund does not impose a contingent deferred sales charge C. When the fund does not impose annual 12b-1 fees in excess of 0.25% D. When the fund does not impose an up-front sales load, a contingent deferred sales charge or annual 12b-1 fees in excess of 0.25%

D

If a customer wishes to purchase an IPO of a non-exempt security, then the customer must receive a ____ prospectus at, or prior to, ________ ___ _____

Final; confirmation of sale

A ______ ______ must be signed by the customer in order to open a margin account.

Hypothecation Agreement

Delivery of a prospectus is required if a: I. New issue of corporate bonds s being offered to the public II. Trade in a corporate bond takes place in the secondary market III. New issue of government bonds is being offered to the public IV. Trade of a government bond takes place in the secondary market

I

A customer enters a bank branch where he has a savings account and is approached by the branch manager who asks: "Are you interested in earning a higher rate of return than we offer on our savings accounts? Let me introduce you to our securities representative." If the customer opens a securities account, which disclosures are required to be made? I. Securities products are not insured by the FDIC II. Securities products are not deposits or other obligations of financial institution III. Securities products are subject to investment risks, including possible loss of principal IV. Securities products are subject to taxation of income and capital gains

I, II, III

Which of the following conditions must be met in order for an agent to share in the gains and losses of a customer's account? I. The agent and customer must enter into a written agreement to share in the account II. The agent can only share to the extent of capital contributed by the agent, and must share in both gain and loss III. The agreement must be approved by the BD before it takes effect

I, II, III

Which of the following must be included in an investment advisory contract under NASAA rules? I. The fact that prepaid fees will not be returned if the contract is terminated early II. The fact that assignment of the contract is only permitted with customer consent III. Whether the contract grants discretionary authority to the adviser IV. Disclosure that the fee for managing fixed income securities may be higher than for managing equity securities

I, II, III

Which of the following orders MUST be retained as a record by BDs? I. Executed orders II. Unexecuted orders III. Canceled orders IV. Subscription orders

I, II, III

An IA is permitted to borrow money from which of the following clients? I. An affiliated bank II. An unaffiliated bank III. An affiliated broker-dealer IV. An unaffiliated broker-dealer

I, II, III, IV

Which of the following information MUST be recorded on an executed order ticket? I. Time of execution II. Time of receipt III. Account number IV. Solicited or unsolicited

I, II, III, IV

Regulation SP applies to customer information that is: I. Obtained from non-public sources II. Obtained directly from the customer III. Obtained through examination of the customer IV. Obtained through observation of the customer

I, II, III, IV Regulation SP requires that non-public customer information cannot be divulged to third parties unless the customer approves

An IA may be compensated with which of the following? I. Wrap fees charged to customers for all services rendered by the adviser II. Soft dollars paid by an executing broker to the adviser in return for trades sent to the broker by the adviser III. Bid-Ask spreads earned when position trades are executed IV. Commissions paid to an affiliated BD on trades recommended by the adviser

I, II, IV

Under the provisions of the Prudent Investor Act, a RIA should consider which of the following when investing and managing trust assets? I. General economic conditions II. Possible effects of inflation or deflation III. Trading patterns of plan beneficiaries IV. Investment tax consequences

I, II, IV

A BD is a syndicate member in a best efforts underwriting of ABC Common stock. The issue is oversubscribed. The BD may allocate sales of the issue to: I. Employees of the issuer II. Employees of the BD III. Officers of the issuer IV. Officers of the BD

I, III

A Chinese Wall must be maintained by a BD between investment banking and which of the following departments? I. Research II. Trading III. Retail Sales IV. Mergers and Acquisitions

I, III, III

NASAA Model Rule 502(c) applies to: I. State registered advisers in its entirety II. State covered advisers only to the extent that the conduct is fraudulent or deceptive III. Federal Covered Advisers in its entirety IV. Federal covered advisers only to the extent that the conduct is fraudulent or decpetive

I, IV

Which statements are TRUE about the filing of the annual surprise audit results with the Admin by IAs? I. Only advisers that take custody must be audited II. All advisers must be audited III. Audit results must be filed with the Admin within 60 days of completion of the audit IV. Audit results must be filed with the Admin within 120 days of completion of the audit

I, IV

Which statements are TRUE about the use of testimonials in advertising? I. Testimonials are permitted in BD advertising II. Testimonials are prohibited in BD advertising III. Testimonials are permitted in IA advertising IV. Testimonials are prohibited in IA advertising

I, IV

Under NASAA rules, each RIA must establish, implement and maintain a Business Continuity and Succession Plan that is based on the:

IA's business model including the size of the firm, types of services provided, and number of business locations

Under the Prudent Investor Act, a trustee's investment and management decisions should be evaluated: I. Based on each individual transaction II. Based on the context of the portfolio as a whole III. As part of the investment strategy of each single trust beneficiary IV. As part of the overall investment strategy for all beneficiaries of the trust

II, IV

Which of the following information MUST be included on a customer confirmation? I. Solicited or unsolicited II. Exchange where the transaction was effected III. The customer name and account number IV. The price of execution

III, IV

An investment adviser will always be considered to have taken custody if the adviser:

Is the trustee for the client in a trust account

A customer opens an account at a brokerage firm to purchase securities in an offering. The customer must receive the disclosure document/prospectus:

No later than the confirmation of the sale

A trade is NOT considered to be discretionary if the representative selects:

Price and time

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is:

Prohibited

A compliance officer is informed by a representative that he has found a forged customer signature in the account papers that were returned by mail by a new customer who is opening an account. How quickly must the compliance officer report the incident?

Promptly

Under NASAA rules, the "Brochure" must be:

Provided to clients at least 48 hours prior to entering into a written or oral advisory contract

Under the __________ _________ _______, investment authority over the trust account may be delegated to an IA by the fiduciary

Prudent Investor Act

If an adviser is suspicious about a customer's account activity and believes that there may be illegal activity, then the adviser must file a ___ report with _________ in _____ days

SAR; FinCEN, 30