Unit 6 "Communication with Clients and Prospects"
Mary Baker is a sole proprietor investment adviser registered with the SEC. Eight years ago, she was the subject of an SEC investigation involving improper actions between her customers and herself which resulted in a $5,000 fine. Under the Investment Advisers Act of 1940, Mary's obligation to her clients is to 1. disclose to prospective clients in her Form ADV Part 2 that she was the subject of a proceeding and the proceeding's outcome 2. make disclosures in her Form ADV Part 2 regarding the case only if the prospect becomes a client 3. make disclosures in her Form ADV Part 2 only if the event was resolved her favor, or was reversed, suspended, or vacated A) II only B) I only C) I, II, and III D) I and III
B) 1 Only. *If an investment adviser has been the subject of a material criminal, civil, or regulatory action within the past 10 years, that fact must be disclosed to all clients and prospective clients in the Form ADV Part 2A. The only time disclosure of an investigation need not be made is when the event was resolved in her favor, or was reversed, suspended, or vacated. In other words, no guilty verdict, no fine. Unlike broker-dealers, where only a handful are structured as sole proprietorships, that structure is not unusual for investment advisers, especially those registered on the state level.
Manhattan Brokerage Associates (MBA) specializes in bringing midwestern companies public. Shortly after underwriting the IPO of a farm equipment manufacturer, MBA publishes a research report that is highly favorable regarding that company's growth potential. Doing so would require MBA to A) agree to repurchase any shares tendered at the original offering price B) disclose the potential conflict of interest C) refrain from underwriting any further issues of that company for a period of 2 years D) obtain permission from the Administrator to issue a report on a new company
B) disclose the potential conflict of interest *A common industry conflict of interest is underwriting a new issue and then preparing a favorable research report about that company. There is nothing improper about doing so, as long as the potential conflict of interest is disclosed.
An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act, A) the agent is possibly committing fraud B) the agent is describing a guaranteed security C) a guaranteed security only guarantees payment of interest or dividends D) agents should always recommend securities that are familiar to the investor
B) the agent is describing a guaranteed security *A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that your client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if suitable.
A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. The terms of the account call for discretionary power to be given for the account and all required forms have been received. In the opinion of the IAR, the purchase of 500 shares of RMBM common stock is an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted A) lawfully in that disclosure of capacity is not necessary when executing trades in managed accounts B) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity C) lawfully in that the disclosure of capacity was made on the confirmation D) unlawfully in that any stock the broker-dealer is a market maker in is probably not suitable for a managed money client
B) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity *The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Even though the firm has discretionary power, any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.
Which of the following statements may be made by an agent of a broker-dealer? 1. I am a registered agent for the XYZ broker-dealer. 2. I am a registered agent for the XYZ broker-dealer, meaning my qualifications have been approved by the appropriate regulatory agencies. 3. This security I am recommending to you is registered on both the state and federal level. 4. This security I am recommending to you is registered on both the state and federal level, meaning that both the SEC and the appropriate states have given their approval of this issue. A) I and IV B) I and III C) II and III D) II and IV
C) 1 & 3 *Securities professionals are not permitted to misrepresent their qualifications by stating or insinuating that their registration implies any kind of approval of their qualifications by any regulatory body. The same holds true when it comes to the registration status of any security.
An investment adviser must disclose which of the following legal or disciplinary actions to clients and prospective clients if they occurred within the last 10 years? 1. Conviction of a misdemeanor involving an investment-related business 2. SEC or other federal regulatory agency proceedings in which the person was found in violation of an investment-related statute 3. A proceeding before FINRA in which the adviser was barred or suspended from membership 4. Conviction of a misdemeanor in a civil action regarding payment of motor vehicle violations A) II and III B) I and II C) I, II, and III D) I, II, and IV
C) 1, 2 & 3 *An investment adviser must disclose adverse regulatory events to clients and prospective clients if they occurred within the last 10 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 non-investment-related actions are not considered material and need not be disclosed (e.g., a motor vehicle violation).
According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? 1. The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. 2. The transactions recommended to the client are inconsistent with those for the adviser's own account. 3. The investment adviser intends to sell the client the insurance policy recommended for his financial plan. 4. The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer. A) I and III B) II and IV C) I, II, III, and IV D) III and IV
C) 1, 2, 3, & 4 *All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required.
An investment adviser is preparing an advertisement. Which of the following would be acceptable? 1. An endorsement on radio or TV from a celebrity who is a client of the firm 2. Identifying his best investment recommendations for the past 6 months 3. Offering to provide his investment recommendations for the past 12 months 4. Promoting his system of charts and formulas while mentioning their limitations and difficulties A) II and III B) I and IV C) III and IV D) I and II
C) 3 & 4 *Any mention of investment recommendations in any adviser advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. No outside endorsements are ever allowable on the exam.
Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT A) dividends on equity securities B) interest on debt securities C) principal repayment at maturity on debt securities D) principal on equity issues
D) Principal on equity issues *Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee.
Under the Investment Advisers Act of 1940, a registered investment adviser who provides investment advisory services to individuals must A) sell only listed securities B) have a net worth of $100,000 C) avoid the control or custody of client funds and securities D) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement.
D) Provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement. *The brochure rule requires that each client be given a written disclosure statement by the adviser no later than the time of entering into the advisory agreement. It may consist of a copy of Part 2A and 2B of Form ADV or another document providing similar information. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.
A client of an investment adviser representative of a state-registered investment wishes to place an encomium on the IAR's LinkedIn page. This action A) should be happily accepted by the IAR B) would need to be reviewed by the Administrator C) should be turned over to the IAR's supervisor, as should any complaint D) would be considered a testimonial and, therefore, be prohibited
D) would be considered a testimonial and, therefore, be prohibited. *Testimonials for investment advisers and their representatives are a prohibited practice under both state and federal regulations.
Wealth Funders and Associates (WFA) is a state-registered investment adviser organized as a partnership. The firm has had 5 equal partners since its inception. However, with the retirement of 1 of the partners and the need for additional capital, WFA has added 3 new partners. As a result of this activity, WFA A) shall notify clients of the change to the partnership within a reasonable time B) shall renew its registration promptly C) is considered to have assigned client contracts and must obtain their consent D) will now be required to register with the SEC
A) Shal notify clients of the change to the partnership within a reasonable time *It is unlawful for an investment adviser to enter into, extend, or renew any investment advisory contract unless it provides that the investment adviser, if a partnership, shall notify its clients of any change in the membership of the partnership within a reasonable time after the change. If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the members of the investment adviser who have only a minority interest in the business of the investment adviser, or from the admission to the investment adviser of one or more members who, after admission, will be only a minority of the members and will have only a minority interest in the business. In this example, the new members will represent 3/7 of the partnership—a minority interest.
One of the surest ways to explain to a client that an investment opportunity presented via social media is likely to be a scam is A) the promise of high returns with low risk B) the ready availability of audited financial reports C) if an SEC-registered prospectus is available D) that an escrow account has been established at a recognized bank
A) the promise of high returns with low risk. *A high return with low risk is almost always an indication that something is not right about an investment. Even though SEC registration is no guarantee of success, at least we know the issuer has gone through the rigor of filing the registration statement and making full disclosure. An escrow account offers investors protection, and audited financial statements allow for a true look at the issuer's financial condition.
Capital Asset Planning & Management (CAPM), a registered investment adviser, has decided to employ the services of Optimized Lead Generators (OLG), a third-party solicitor. In order to be in compliance, OLG's disclosure document must include 1. the name of the solicitor (OLG) 2. the name of the investment adviser (CAPM) 3. the nature of the relationship between OLG and CAPM 4. the fact that OLG will receive compensation, the terms of the compensation arrangement, and indicate whether the client will pay a specific charge or a higher advisory fee because OLG recommended CAPM to the client. A) II, III, and IV only B) I, II, III, and IV C) I and II only D) I, III, and IV only
B) 1, 2, 3, & 4 *SEC Release IA-688 contains the specifications for required inclusions in a third-party solicitor's disclosure document (brochures). This document, which includes all the information in these choices, must be delivered along with the IA's brochure. Although not in this question, you should know that the investment adviser must receive from the client, prior to or at the time of entering into any written or oral investment advisory contract with such client, a signed and dated acknowledgment of receipt of the investment adviser's brochure and the solicitor's written disclosure document.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? 1. They must be renewed on an annual basis. 2. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. 3. They must prohibit assignment of the contract without the client's consent. A) I, II and III B) II and III C) I and III D) I and II
B) 2 & 3 *There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent.
Which of the following would be considered a prohibited practice if performed by an investment adviser representative without appropriate disclosure? A) Inheriting 200 shares of a New York Stock Exchange-listed company he recommends B) Acting as an agent of the brokerage firm that executes the trades he recommends and receiving commissions on them as a result C) Owning shares of a mutual fund that is not on his firm's recommended list D) Offering his client tickets to a game of a professional football team in which his son is the star quarterback and a principal stockholder
B) Acting as an agent of the brokerage firm that executes the trades he recommends and receiving commissions on them as a result. *An investment adviser representative must disclose to the client the capacity in which he is acting so the client can make an informed decision as to the objectivity of the advice and whether to sustain the relationship. The fact that an IAR inherited a small amount of stock in a publicly traded company does not, of itself, present a conflict of interest that must be disclosed. No conflict of interest exists unless the IAR recommended companies in which he also has a significant beneficial ownership. It would not be required to disclose personal ownership of a mutual fund not on the firm's recommended list. Unless there is some kind of conflict of interest, an IAR's personal holdings do not have to be disclosed to clients.
Antonia, a customer of Leroy (an agent of Gibraltar Securities), is considering the purchase of 2,000 shares of Kansas Plains Gas and Electric Company common stock. Antonia has stock in 10 other utilities companies in her portfolio, and this stock trades on the Chicago Stock Exchange (CHX). Leroy tells Antonia that the company has been increasing its dividend for the past 19 years and will surely continue to do so. Which of the following statements best reflects this situation? A) Leroy has acted ethically in recommending the purchase of a stock with a long history of dividends. B) Leroy has acted unethically, misleading Antonia by implying that increased dividend distributions from Kansas Plains Gas and Electric Company are a sure thing. C) Leroy has acted unethically because he made an unsuitable recommendation to Antonia. D) Leroy has acted ethically because he did not guarantee profits or the absence of potential loss to Antonia.
B) Leroy has acted unethically, misleading Antonia by implying that increased dividend distributions from Kansas Plains Gas and Electric Company are a sure thing. *The agent has acted unethically, misleading the customer by implying that increased dividend distributions from the utility corporation are guaranteed. Given the customer's history of purchasing stock in other utilities, nothing in the question indicates that the trade is unsuitable for the customer.
Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients A) that any transactions made on the adviser's own account are consistent with the advice given to clients B) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented C) that the adviser has never been subject to disciplinary action or censure by the SEC D) the number of clients with whom the adviser does business
B) The association between the investment advisor and the broker-dealer with whom the overall investment plan will be implemented. *Advisers must disclose to clients any outside interest or potential conflicts of interest involved in its recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser's recommendation, this must be disclosed in writing and the client must consent. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities, but not the absence of such actions. The adviser is not required to disclose its consistent transactions, but must make disclosure if its transactions are not consistent with the advice given.
Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery that was covered in the new offering prospectus when explaining why he felt the issuer found the next "aspirin." He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following? A) Phishing B) Unethical business practice C) Fraud D) Advertising
B) Unethical business practice. *NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. Examples of such practices would be a distribution of any nonfactual data; any material or presentation based on conjecture; unfounded or unrealistic claims in any brochure, flyer, or display by words, pictures, or graphs; or anything otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure.
Nifty Advisers Group made an announcement on its website that the firm was going to create a Facebook account to keep all its clients and prospective clients updated on the market. To get the word out, Nifty sent an email notice to its current clients and asked them to please refrain from airing complaints through that account; any negative comments would be addressed through the normal channels. Also, contained in the email was an announcement that all "likes" would receive a one-time 5% decrease in the client's quarterly fees. For this campaign, which of the following are NOT true? A) Third-party use of the "like" feature on an investment adviser's social media site could be deemed a testimonial. B) "Likes" posted to the personal accounts of IARs are treated the same as those posted to the firm's account. C) This would not be considered a testimonial and therefore permitted under the regulations. D) Even though the rules do not prohibit testimonials for broker-dealers, they are strictly forbidden for use by investment advisers.
C) This would not be considered a testimonial and therefore permitted under the regulations. *Please note that this question is looking for the statement that is not true—in other words, find the false statement. In March 2014, the SEC published an interpretive release dealing with testimonials for investment advisers using social media. Included in that release is the statement that third-party use of the "like" feature on an investment adviser's social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's experience with the adviser. Posting "likes" to the personal accounts of the firm's IARs does not change the situation.
Which of the following would NASAA consider to be a substantial prepayment of fees? A) $600 covering the entire contract year B) $500 covering the next 6 months C) $600 covering the next calendar quarter D) $1,000 covering the next month
A) $600 covering the entire contract year *NASAA defines a substantial prepayment of fees to be more than $500, 6 or more months in advance.
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) account inactivity fee B) issuance of a stock certificate C) charges for late payments D) advisory fees
A) Advisory fees *There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers.
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A) send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year B) send a copy of its brochure, or a summary of the changes, within 7 days of receiving a request from a client C) send a copy of its brochure, or a summary of the changes, to all clients within 90 days of the end of its fiscal year D) send a copy of its brochure, or a summary of the changes, to all clients within 60 days of the end of its fiscal year
A) Send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of the fiscal year. *Whether the firm is a state or federal covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.
Jackie Jackson is an agent with Hamilton Securities Co., an SEC-registered broker-dealer. Jackie's father, Andy, founded a start-up venture several years ago and the company, with Andy as its CEO, had its initial public offering 4 months ago. For Jackie to recommend shares of this company to clients, Jackie A) would have to disclose the potential conflict of interest B) must receive approval from a supervisory person of Hamilton Securities Co. before making this recommendation C) would have to obtain written consent of the client before completing the sale D) must apply a stricter suitability standard to this company because it is so new
A) Would have to disclose the potential conflict of interest. *When an immediate family member is in a control position with a recommended security, the agent must make disclosure of the potential conflict of interest. Consent of the client is not required, and we don't have enough information to know anything about the risk profile of this company that would require greater a suitability standard. Trades are approved by principals, not recommendations.
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 A) a statement as to the limitations of and difficulties involved in using this system B) a display of past performance for at least the most recent 12-month period C) a graph showing the results of back-testing the system D) disclosure of the length of time the charting system has been used
A) 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.
An agent receives a notice of execution for 500 shares on a customer's order for only 400 shares. Which of the following actions should he take? A) Report the problem immediately to his supervisor B) Break the trade within five minutes, enter a corrected order, and place the transaction on the error log C) Promptly sell the 100 share overage at the best available price D) Promptly report the execution of 500 shares to the customer and waive commissions on the overage
A) report the problem immediately to his supervisor. *Agents are not empowered to fix errors. Agents should report errant trades to a supervisory individual immediately.
Under the Uniform Securities Act, an agent may NOT make which of the following statements to a customer? A) This security is approved by the Administrator. B) This security is exempt from registration. C) This security is not registered with the Administrator. D) This security is registered with the state.
A)This security is approved by the Administrator. *The state Administrator does not approve any security.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an investment advisory contract? 1. The formula used to determine the investment adviser's compensation 2. A statement of the discretionary authority, if any, given to the investment adviser 3. A statement that the investment adviser may assign the contract without the consent of the client A) I, II, and III B) II and III C) I and II D) I and III
B) 1 & 2 *Advisory contracts must contain the services to be provided; the term of the contract; the amount of the advisory fee or the formula used to compute it; the amount of fee to be refunded if the advisory fee is prepaid; whether the adviser has discretionary authority and to what extent; and a provision explaining that the consent of the client is required to assign the contract.
An investment adviser representative has uncovered an unusual investment opportunity that he believes is perfect for one of his clients. When presenting the recommendation to the client, it becomes clear that the client is concerned about the potential of loss. To alleviate that concern, the IAR tells the client that he agrees to repurchase the security from the client anytime within the next 6 months at the original purchase price. In so doing, the IAR A) has acted fraudulently because his actions would be considered market manipulation. B) has committed the unethical business practice of guaranteeing against loss. C) has acted ethically because he has not guaranteed a profit to the client. D) has committed the unethical business practice of recommending an unsuitable investment.
B) Has committed the unethical business practice of guaranteeing against loss *The unethical business practice of guaranteeing against loss can take several forms. This is one of them - offering to buy back a security at the purchase price. There is nothing in this question to indicate that the recommendation is unsuitable; we're only told the client is concerned about losing money. The prohibition against guarantees does not require that the client be assured a profit, only that there is no loss. Although market manipulation is a fraudulent activity, there is nothing here that would manipulate the market.
In addition to transaction costs (e.g., commissions or markups), most broker-dealers have a schedule of miscellaneous fees. The purpose of these fees is to A) keep commissions low while making up the difference with fees B) help to reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client C) build in a hidden markup D) increase the broker-dealer's net income
B) Help to reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client. *Executing a transaction for clients frequently incurs expenses that commissions don't cover, such as clearing fees and execution facility fees. There are services performed for clients, such as postage and handling, for which expenses are incurred. Although charging these fees does have a positive effect on the firm's bottom line, they are designed for reimbursement purposes, not as an additional source of income.
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 be signed by an officer or a general partner of the firm C) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B. D) 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
B) The disclosure brochure must be signed by an officer or a general partner of the firm *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.
When recommending a corporate security, an IAR indicates that the top officers of the company were responsible for the rapid growth of LJB Corporation, a well-known, successful firm in the same industry. Under the Uniform Securities Act, all of the following statements by the agent are permitted EXCEPT A) the president of this company used to run LJB Corporation B) there is no doubt that the officers will repeat the success they enjoyed with LJB Corporation C) the president of this company was responsible for LJB Corporation's success D) time will tell whether the officers can repeat the success they enjoyed with LJB Corporation
B) There is no doubt that the officers will repeat the success they enjoyed with LJB corporation. *This statement implies guaranteed performance and is not permitted.
A contract between an investment adviser and a customer may be assigned to another investment adviser, provided A) the broker-dealer handling the account's transaction is notified in writing B) the assignment is done 1 year after the initial contract C) the client consents to the assignment D) the client is notified in writing within a reasonable period of time
C) Client consents to the assignment *Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that no assignment of the contract may be made by the investment adviser without the consent of the other party to the contract.
Damon Raymond is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) Never B) Only if the client terminates the advisory relationship C) When the trade that is made is unrelated to the advisory relationship D) When the client has given ABC blanket permission to engage in this type of transaction
C) When the trade that is made is unrelated to the advisory relationship *Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary.
The agreement between an investment adviser and client is the advisory contract. To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they A) must disclose the amount or method of calculation of the adviser's fee B) generally do not provide for discretion C) must be in writing D) typically are renewed on an annual basis
C) must be in writing *Although it is not the general practice, the federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing.
Under the Investment Advisers Act of 1940, an investment adviser that becomes registered may A) tell a client its qualifications have been approved by the SEC B) state in a brochure that its registration is approved by the SEC C) state on its stationery that it is registered with the SEC D) place the abbreviation RIA after its name on their business card
C) state on its stationery that it is registered with the SEC *It is illegal to imply in any way that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. However, a statement that the adviser is registered with the SEC is appropriate. An abbreviated title after a person's name must be used to recognize educational or professional (e.g.,CFP® or ChFC®) designations only.
Which of the following statements is NOT true concerning the wrap fee programs brochure under the Uniform Securities Act? A) Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. B) The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A. C) It contains a statement that the program will generally cost the client less than purchasing these services separately. D) It lists the services provided under the program, including the types of portfolio management services.
C)It contains a statement that the program will generally cost the client less than purchasing these services separately. *The wrap fee brochure must contain a statement that the program may cost the client more or less than purchasing these services separately. The brochure must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end.
A broker-dealer informs a client that it does not intend to abide by all the provisions of the Uniform Securities Act. It has the client sign a waiver that specifically prohibits the client from entering a suit against the firm. The client's signature is properly witnessed and notarized. A) This waiver is only effective if a copy is filed and registered with the Administrator. B) The client will only be able to sue in the case of fraud. C) Because the client signed the agreement, a suit against the firm will have no legal standing. D) Clients cannot waive their legal rights.
D) Clients cannot waive their legal rights. *Never is a waiver acceptable.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee A) must reflect the amount of time the adviser spends managing the client's account B) may not be based on a percentage of the client's assets under management C) is not subject to regulatory oversight by the Administrator if the client is considered financially sophisticated D) may be considered unreasonable if it is not in line with fees charged by other advisers for similar services
D) May be considered unreasonable if it is not in line with fees charges by other advisers for similar services. * An investment adviser may not charge any client an unreasonable fee. A fee may be considered excessive if it is substantially higher than that charged by other advisers for performing similar services. The Administrator may research the fees charged by various investment advisers for the purposes of comparison. Whether clients have agreed to the fee or have done their own price shopping is irrelevant in determining if a particular adviser's fee is unreasonable. The exam sometimes phrases this as stating that fees must be competitive.
Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions EXCEPT A) the investment adviser's compensation shall not be based on capital gains in client accounts B) the adviser, if a partnership, must notify the client of any change in the partnership's membership C) no assignment of the investment advisory contract may be made without the client's consent D) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account
D) On the departure or death of majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an an unlawful assignment of the account. *Investment advisers organized as corporations are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account, although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent.
An investment advisory contract is considered assigned if an adviser formed as A) a corporation with 5 officers and adds 2 officers B) a corporation with 2 officers and adds 5 officers C) a partnership with 5 partners and adds 2 partners D) a partnership with 2 partners and adds five partners
D) a partnership with 2 partners and adds five partners *If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required.
Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) engaging in an agency cross transaction B) the trade was being executed by an officer or partner of the firm C) directing a securities transaction to an affiliated broker-dealer D) shares held in the account of an advisory client are purchased by the investment adviser
D) shares held in the account of an advisory client are purchased by the investment adviser *There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from the client who owns them places the IA in the position of being 1 of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent—that's the reason for the term.
LinkedIn is a popular social media tool for business people. The nature of the information posted poses risks for investment advisers because of the prohibition against testimonials. A step that advisers should consider taking to minimize the risk of an improper endorsement appearing on their page is A) only allow unsolicited recommendations from clients to be shown on the page B) only allow clients to endorse an adviser for a skill that is already listed on his profile C) only allow clients to endorse an adviser for a new skill that does not already appear on the adviser's profile D) to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile
D) to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile *If you do a good job, it is only natural that your clients want to say good things about you. Unfortunately, that can lead to a violation of the rule against testimonials for IAs and IARs. The LinkedIn service allows people to either endorse a listed individual's skills (or add new ones) or post recommendations. Either of these would not be acceptable. The safest thing to do is turn off the ability to endorse skills.
