Unit 6 Communication with Clients and Prospects
Which of the following circumstances would require an investment adviser to notify all clients of the firm? (B) A) The investment adviser opens a branch office in another state. B) The investment adviser hires another partner for the firm. C) The investment adviser acquires the accounts of another firm. D) A partner of the firm was disciplined by the firm.
*The investment adviser must disclose to the client any change in the members of a partnership.* The adviser must notify only those clients whose accounts were obtained. The adviser does not need to notify existing clients of the new accounts. *Internal disciplinary actions generally do not have to be reported to clients.* U6LO4
If a broker-dealer provides investment advice or discretionary portfolio management services to its clients and the firm also recommends or sells products that it or affiliated companies issue, disclosure of the potential conflict of interest must be made
A classic example of a potential conflict of interest is when a broker-dealer has discretion over a client's account and purchases securities for that account that are issued by the firm or an affiliated company. There is nothing wrong with this, as long as disclosure is made, and in some cases (not tested), the client must give consent. What about disclosing capacity in the trade? Isn't that always required? Yes, it is, but this is an example of a question where there could be 2 correct answers, and you must choose the one that is closest to dealing with the point being made in the question. U6LO1
With regard to a broker-dealer's use of social media, static content would be considered as (1 and 2) 1. *a planned communication to a target audience that is generally not altered* 2. *communication that does not provide for interaction with the author once published* 3. content used to engage in real-time interactive communications with a target audience 4. a blog that gives readers the opportunity to post comments
A key to recognizing static social media content is that it is usually not changed once published and does not provide a method for interaction (commenting) once published. U6LO5
In general, a broker-dealer will disclose its fee schedule at the time of the account opening
Although there are no specific industry requirements, a broker-dealer's fee schedule typically is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made. U6LO1
An investment advisory contract is considered assigned if an adviser formed as (C) A) a corporation with 5 officers and adds 2 officers B) a corporation with 2 officers and adds 5 officers C) a partnership with 2 partners and adds five partners D) a partnership with 5 partners and adds 2 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. U6LO4
NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. Because of this, when performing an examination of the IA, the Administrator not only will look for disclosure-related items in the disclosure document but may also check the adviser's (all of the following) advertising contracts seminar materials websites
Improper disclosures in any form of communication with the client is a prohibited business practice. U6LO5
In general, a broker-dealer will disclose any changes to its fee schedule by notifying clients of the change in advance
Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator. U6LO1
Which of the following is a fraudulent or prohibited activity for an agent under the Uniform Securities Act? A) Implying that registration of a security means approval of the security B) Selling common stock to a customer with income objectives C) Stating that zero-coupon bonds pay no current interest D) Using the dividends paid in the last 12 months to determine the current yield of a common stock
Registration of a security with the SEC or the state implies neither approval nor disapproval. To state otherwise is fraudulent. Dividends paid in the last 12 months determine the current yield of a common stock. Selling common stock to a customer with income objectives is not a fraudulent activity if suitable to the client's objectives. Zero-coupon bonds pay no current interest and to state so is not a fraudulent activity. U6LO2
In reviewing prospectuses and registration statements, the SEC (A) A) certifies the accuracy of the disclosures made in a prospectus B) does not approve or disapprove of the issue C) guarantees the adequacy of the disclosures made in a prospectus D) passes on the merits of a particular security covered by a registration statement
The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. *The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.* U6LO2
If an agent has secured a signed statement from a customer that waives the customer's right to sue for a transaction in violation of the USA, the agreement is null and void 無法律效力的
The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not. U6LO4
An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent (B) A) should pack her bags and leave the firm before the compliance department learns of her actions B) should pack her bags for the trip; she earned it C) should only sell what is suitable for the client based on all available information D) will probably be disciplined for failure to disclose the potential conflict of interest
The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable. U6LO1
As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm endorses or approves of the material, but has no part in its creation, it is known as adoption.
Adoption is the term used to describe material posted to a securities professional's social media site by a third party where the securities professional explicitly or implicitly endorses or approves of the content, but plays no role in its development. Where the firm is involved in the preparation of the content, it is known as entanglement. U6LO5
An investment adviser representative is assuring clients of steady returns on an investment. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, this activity is (B) A) acceptable if the client has been made aware of the risks B) prohibited because the IAR is guaranteeing a profit C) acceptable if the security being recommended is an investment-grade bond D) prohibited because the customer may still experience loss
Assuring a steady rate of return is considered to be guaranteeing performance, a practice prohibited under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers. Even in the case of investment-grade bonds, *returns can never be "assured."* U6LO3
Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is D A) the fee for transferring certificates B) an account maintenance charge C) a charge if the client asks to have funds wired D) margin interest on the debit balance
In a cash account, you can't have margin activity, so there can't be a margin interest charge. U6LO1
Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include (I & III) I) *a charge when a client requests that a stock certificate be issued in his name* II) a commission charge when a client buys a security on a listed exchange III) *the interest charged by the firm on money owed by customers in their margin accounts* IV) fees for providing advisory services to high net worth individuals
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. U6LO1
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 disclosing which of the following fees? Account closing fees
It is very common for a broker-dealer to charge a fee for processing the closing of an account. 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.
If persons other than the original person entering the post can comment on social media, the content is considered interactive
One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments. U6LO5 On social networking sites: Wall information, backgrounds, and profiles are static blogs are Interactive
When it comes to social media, agents need to understand the difference between interactive and static content. Which of the following would be considered static content? (D) A) Tweets B) Comments on a Facebook posting C) Emails sent to clients D) *A broker-dealer's profile posted on Facebook*
Static content is content that remains posted until it is changed by the firm or an individual who established the account. Interactive content is generally real-time communications, such as the other three choices shown here. U6LO5
The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if (1, 2, and 4) 1. results do not reflect the deduction of fees 2. actual market conditions during the referenced period are not disclosed 3. the advertisement did not reflect performance for a minimum period of 3 years 4. the advertisement did not disclose that it applied to only a specific group of clients
*All investment adviser advertising must reflect fees, state actual market conditions during the referenced period, and disclose the specific group of clients to which it applies.* However, advertising that reflects past performance must show a minimum period of 1 year, not 3 years. U6LO5
Which of the following activities of an investment advisory firm would *NOT* require notification to and consent of the clients of the advisory firm? (C) A) An investment adviser wishing to merge with a larger national advisory firm B) The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm C) *A minority partner resigning from the firm to start his own advisory firm* D) The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser
*Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the investment adviser.* The change in a minority interest is not considered an assignment, so only notification, but not consent, is required. U6LO4
A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means (A) A) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning B) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met C) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited D) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs
*Approved* is an odd word in this industry. It *can never be used with reference to any regulator commenting on the status of a security or an individual.* However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended. U6LO2 >The state Administrator does not approve any security.
A famous tennis player offers to record a testimonial for an investment adviser for use in a television commercial. Under the Uniform Securities Act, the investment adviser may not use the testimonial
*Testimonials promoting investment advisers' services are prohibited under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, regardless of whether a spokesperson receives compensation.* This is in contrast to the rules regarding broker-dealer advertising, which do permit testimonials as part of advertising, as long as proper disclaimers are made. Please note: In 2021, a new SEC marketing rule went into effect that permits the use of testmonials by investment advisers under certain conditions. Because this is a federal law and this exam is owned by NASAA (state regulators) we do not expect the federal rule to be tested. U6LO5
The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT (2 and 3) 1. when the service provided is an individual supervisory service 2. when the client is an investment company 3. when the contract is for an impersonal advisory service requiring payment of less than $500 4. when the client is an individual with a net worth of more than $1 million
A disclosure brochure is not required to be delivered if the client is a registered investment company, or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements. U6LO4
Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on an asset allocation that harmonizes with WSI's investment philosophy. If WSI should post a link to this article on its website, it would probably be considered adoption
A firm will be responsible for the content of a linked third-party site if the firm "adopts" its content on any of the firm's sites. *Adoption* is defined as a firm's *endorsement of the content of a third-party site* (share a link). This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm's policies.* *Adoption* is the term *used to describe material posted to a securities professional's social media site by a third party where the securities professional explicitly or implicitly endorses or approves of the content, but plays no role in its development.* *Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it.* U6LO5
Hugh Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners A) must notify its clients of Clark's departure within a reasonable period B) need not notify its clients of Clark's departure because Clark was only a minority partner C) must change its name because the partnership has a new mix of partners as a result of Clark's departure D) must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period
ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period. ABC has no obligation to notify Clark Advisers of Clark's new employment.
Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients (C) A) that any transactions made on the adviser's own account are consistent with the advice given to clients B) that the adviser has never been subject to disciplinary action or censure by the SEC C) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented D) the number of clients with whom the adviser does business
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 discloses 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 a disclosure if its transactions are not consistent with the advice given. U6LO1
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding investment advisory fees is (are) TRUE? (IV) I) Advisory fees may be any amount, provided the client has agreed in writing to the fees, and disclosure has been made that the fees may be much higher than those charged by other advisers for the same service. II) Advisory fees are not regulated for sophisticated clients. III) Advisory fees must bear a relationship to the amount of time the adviser devotes to the client's account. IV) Advisory fees may be considered unreasonable if they are not comparable to fees charged by other advisers for the same advisory services.
Advisory fees may be considered unreasonable if they are not comparable to fees charged by other advisers for the same advisory services. NASAA's Model Rule states it is unethical to charge excessive fees, even if the client has agreed to the fees or is sophisticated. However, advisory fees need to bear no relationship to the amount of time the adviser spends on the client's account. U6LO4
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) A) Report the problem immediately to his supervisor B) Promptly sell the 100 share overage at the best available price C) Break the trade within five minutes, enter a corrected order, and place the transaction on the error log D) Promptly report the execution of 500 shares to the customer and waive commissions on the overage
Agents are not empowered to fix errors. Agents should report errant trades to a supervisory individual immediately. U6LO3
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? (All of the below) I) The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. II) The transactions recommended to the client are inconsistent with those for the adviser's own account. III) The investment adviser intends to sell the client the insurance policy recommended for his financial plan. IV) The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of
All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required. U6LO1 The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.
Helen, a registered investment adviser, recommended a stock to many of her clients when that stock was trading at $35 per share. The stock is currently trading at $70 per share. From the choices below, which statement best reflects her situation? (D) A) She is prohibited from commenting about the performance of a stock that she recommended in the past. B) Her stock recommendations often result in 100% returns. C) This stock has even more upside potential than previously thought. D) Although this stock has enjoyed an excellent performance, future performance cannot be predicted.
Although an adviser is not prohibited from discussing a profitable past recommendation with clients and prospects, the adviser must point out that past performance is not an indication of future return. U6LO5
An investment adviser wishes to advertise a proprietary charting system used to time the market. To be in compliance with the Investment Advisers Act of 1940, a statement reflecting the limitations and difficulties of using the system must be included in the ad
An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using said system. *Anytime you see a question dealing with advertising a charting system (or investment formula, etc.), always look for limitations and difficulties in the answer.* U6LO5
All of the following activities comply with the requirements for agency cross transactions EXCEPT A) 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 B) 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 C) *after proper written disclosure, an adviser recommends the transaction to both the seller and the buyer* D) 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
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. U6LO1
All of the following activities comply with the requirements for agency cross transactions EXCEPT (C) A) 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 B) 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 C) after proper written disclosure, an adviser recommends the transaction to both the seller and the buyer D) 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
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. U6LO1
According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? *Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent.* B) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. C) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. D) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received.
An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
Which of the following are prohibited practices? (1 and 3) 1. An investment advisory firm organized as a partnership failing to inform its clients of the departure of a partner with a very small interest in the partnership 2. An investment advisory firm charging an annual fee equal to 2% of the first $250,000 in assets under management, 1% of the next $500,000, and 0.5% for everything in excess of $750,000 3. Without client consent, the majority stockholder of a registered investment adviser pledging his stock as collateral for a loan taken out by the firm to expand its services) 4. Engaging in agency cross transactions
Any change in the ownership of an investment advisory firm organized as a partnership, no matter how small, requires notification to all clients within a reasonable amount of time. If the firm is structured as a corporation, the pledging of a controlling interest in the company's stock is viewed as an assignment of the contracts. This may not occur without the approval of the clients. *Agency cross transactions, where the adviser represents both sides of the trade, are permitted as long as the adviser makes the proper written disclosures and only makes the recommendation to buy or sell to one of the parties, not both.* U6LO4
An investment adviser is preparing an advertisement. Which of the following would be acceptable? C and D A) An endorsement on radio or TV from a celebrity who is a client of the firm B) Identifying his best investment recommendations for the past 6 months C) *Offering to provide his investment recommendations for the past 12 months* D) *Promoting his system of charts and formulas while mentioning their limitations and difficulties*
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.* U6LO5
A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is NOT true? (A) A) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. B) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. C) Material changes to wrap fee programs must be filed promptly with the Administrator. D) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year end.
As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of ADV Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even non-material information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes. U6LO4
Creative Wealth Management (CWM), an investment adviser registered in five states, has a preferred brokerage arrangement with Bullish Bobbie Brown Securities (BBBS), a FINRA member broker-dealer. If one of CWM's clients chooses to use a broker-dealer other than BBBS, CWM must disclose that (I and III) I) in a client-directed brokerage account, the client may pay higher brokerage commissions because the IA may not be able to aggregate orders to reduce transaction costs II) the advisory contract is in danger of not being renewed if the client insists on using anyone other than BBBS for trade execution III) the client may receive less favorable prices because the IA has arranged a preferred commission rate with a preferred broker-dealer IV) using BBBS assures the client of receiving research ahead of those clients who trade elsewhere
Because of preferred arrangements between the IA and the BD, it is likely that larger orders will be combined (with a concurrent cost saving) and there may be a better commission schedule available for the adviser's clients. This would not be a cause for the adviser to refuse to renew the contract, and it would be an unfair business practice to make research available to certain clients ahead of others.
Which of the following statements regarding provisions of the Investment Advisers Act of 1940 is TRUE? (C) A) An investment adviser must obtain client permission to accept a buyout offer for all of the adviser's stock. B) Pledging a client's contract as collateral for a loan to the adviser would not be considered an assignment of the contract. C) Five Partners Advisers, Ltd., must inform all clients that one of the 5 partners has retired and been replaced by a new partner. D) Big Gains Registered Investment Advisers must disclose its sources of information for specific recommendations they make to their clients.
Both state and federal law require advisers operating as partnerships to notify their clients of changes in partners where it represents a minority interest in the firm. No adviser is required to disclose the sources for a particular recommendation; that is not the same thing as the requirement to disclose the use of material prepared by a third party. An advisory firm can be sold without client permission. However, if the transaction results in a change that would be deemed to be an assignment, the adviser must obtain the consent of the clients to maintain their contracts. The regulatory bodies consider a pledge of clients' contracts to be an assignment. U6LO4
If an investment adviser wishes to engage in an agency cross transaction involving advisory clients, it would be prohibited from (D) A) obtaining written consent from the parties prior to engaging in agency cross transactions B) earning a commission on both the purchase and the sale C) representing both the buyer and the seller D) recommending the trade to both sides
In an agency cross transaction, the IA represents advisory clients on both sides of the trade and may earn a buying and selling commission. To engage in these types of transactions, written notice must be furnished to advisory clients before the trade. These transactions can never be recommended to both sides of the trade. U6LO1
Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions EXCEPT (B) A) the investment adviser's compensation shall not be based on capital gains in client accounts B) 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 C) the adviser, if a partnership, must notify the client of any change in the partnership's membership D) no assignment of the investment advisory contract may be made without the client's consent
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. U6LO4
Under the USA, every investment adviser organized as a partnership, must include in its contracts an agreement to notify clients within a reasonable period of time of (C) A) a change in the location of securities held in custody B) a change in the method of computing fees C) he addition or removal of any of the partners D) the decision to charge fees in advance rather than arrears
Investment advisers organized as partnerships must include in their advisory contracts a statement that they will notify all clients of a change to the composition of the partnership within a reasonable period of time. All of the other choices mentioned here would require prompt notification, which although not quantified in the USA, is much sooner than a reasonable period of time. U6LO4
All of the following practices are unethical under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT (A) A) charging higher commissions than normal for executing thinly traded foreign securities B) effecting any transaction in a security that involves no change in beneficial ownership C) using deceptive or misleading advertising or sales presentations D) backdating a customer's records to save the client a substantial amount of income ta
It is not an unethical practice to charge higher commissions for trades that are difficult to execute, such as trading a thinly traded foreign security. The other activities are unethical business practices prohibited by the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. U6LO1
Jake Aaron is registered as an agent with ABC Securities, a broker-dealer registered with the SEC doing business in 34 states. In addition, Aaron has his own investment advisory business, Jake's Money Advisers, and is registered with the SEC. To comply with all appropriate regulations, which of the following would have to be stated on the business card for Jake's Money Advisers? (3 and 4) 1. Jake Aaron, RIA 2. Jake's Money Advisers, RIA 3. *Jake's Money Advisers, registered investment adviser* 4. *Securities offered through ABC Securities*
It is not permissible to use the initials RIA, but one would properly describe the fact that the firm is a registered investment adviser. If one is registered as an agent with a broker-dealer, that fact always must be stated on that person's business card. U6LO5
If an investment adviser places an advertisement in a newspaper offering a free brochure to those who call, under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, what may the adviser require from callers as a condition of receiving the brochure? (1) 1. *None, because no obligation may be placed on the callers* 2. financial profile 3. The names of three friends who might be interested 4. A purchase
It is unethical to offer free services unless the offer is free of any obligation, monetary or otherwise. U6LO5
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 disclosing which of the following fees? (C) A) Commissions B) Markups and markdowns C) Account closing fees D) Advisory fees
It is very common for a broker-dealer to charge a fee for processing the closing of an account. 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. U6LO1
All of the following must be disclosed by an investment adviser EXCEPT (C) A) a senior officer of the firm was convicted of a felony 6 years ago B) a senior officer's suspension from the securities industry C) an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations D) the president of the investment adviser was found liable in a civil action involving unsuitable advice in a state where the adviser does not have an office
Legal and disciplinary action successfully brought against an investment adviser must be disclosed to customers, as well as disciplinary actions that resulted in a fine in excess of $2,500. Convictions for a misdemeanor or felony involving securities or money within the past 10 years must also be disclosed. U6LO1
Under the brochure rule of the Investment Advisers Act of 1940 each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services
No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. 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. U6LO4
ABC Securities, a registered broker-dealer, has a wholly owned subsidiary, ABC Real Estate Ventures. ABC Real Estate Ventures is in the business of structuring limited partnership offerings designed to afford qualified investors an opportunity to earn income from commercial property. If an agent representing ABC Securities were to recommend one of these programs to a qualified client, (D) A) a sale could not take place without a review by the firm's compliance officer B) it would be necessary to obtain consent of the agent's supervisor C) the agent would be engaging in an unethical business practice D) disclosure of the potential conflict of interest must be made
One of the more common cases of a conflict of interest is when a broker-dealer (or one of its agents) recommends a security issued by an entity affiliated with the firm. As long as disclosure of the relationship is made, there are no problems. Compliance officers do not review every—they look for the red flags. U6LO1
Alexander Wimpton is registered as an agent with WorthMore Securities, a broker-dealer registered with the SEC and 10 states. Wimpton is also an investment adviser representative (IAR) with their wholly owned subsidiary, WorthMore Investments, a federal covered investment adviser. Many of Wimpton's advisory clients also maintain brokerage accounts at WorthMore Securities. If one of those clients were to call Wimpton and enter an order to purchase shares of a stock the broker-dealer is selling out of inventory, consent of the client would not be necessary as long as the only capacity in which Wimpton was acting was that of an agent
Only when acting in an advisory capacity is there a requirement to obtain client consent when selling out of inventory. In this case, unless there was a statement to the effect that the security had been recommended by Wimpton, this is just a brokerage transaction and consent is not necessary (although the principal capacity would have to be stated on the trade confirmation). Because this is a principal transaction, there is no commission, only a markup. U6LO1
If an investment adviser tells a client that a stock has doubled in the past year and, even though past performance is no assurance of future results, he is sure it will double, this statement is (A) A) prohibited as a likely exaggeration B) prohibited because the investment is not suitable for the client C) permissible due to the disclaimer of future performance D) permissible if the adviser has performed due diligence on the stock
Regardless of disclosure of the uncertainty of future performance of an investment, an investment adviser may not make potentially exaggerated claims. U6LO3
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 (All of the following) - the name of the solicitor (OLG) - the name of the investment adviser (CAPM) - the nature of the relationship between OLG and CAPM - 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.
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. U6LO4
Which of the following statements regarding the Investment Adviser Act of 1940 and the adviser's brochure are CORRECT? Each client must receive the brochure no later than entering into the advisory contract.
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. The summary includes an offer to provide a copy of the updated brochure and information on how the client may obtain it. There is no 48-hour rule under federal law as there is for state law, and in any event, that law has a 48-hour in advance requirement. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure. U6LO4
Which of the following statements may be made by an agent of a broker-dealer? 1 and 3 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 levels, meaning that both the SEC and the appropriate states have given their approval of this issue.
Securities professionals are not permitted to misrepresent their qualifications by stating or insinuating 含沙射影的 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. U6LO2 > Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. As an intrastate offering, the registration format would be qualification, but that is not the misrepresentation here.
The most common way in which *to distinguish whether social media content is static or interactive is* *the ability for others to change it*
Static content can only be changed by the originator (or someone under that person's control). One of the things that differentiate interactive content from static content is the ability for persons other than the originator of the content to have access or may make comments. Posting a "like" to a Facebook page is an example of static content. *Interactive content is generally real-time communications.* U6LO5
An agent sells his client 10 U.S. government bonds due to mature in 30 years. According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, which of the following statements may the agent legally make? (A) A) The bonds are guaranteed as to principal and interest payments by the U.S. government. B) There is no way to lose money on the safest security on earth. C) The U.S. government guarantees that principal and interest payments will keep pace with inflation. D) The full faith and credit backing of the U.S. government means virtually no chance of loss.
Stating that the bonds are guaranteed as to principal and interest payments by the U.S. government is an accurate statement of fact. A client can lose money on government bonds should interest rates rise after he purchases the bonds. The government does not guarantee that the principal and interest will keep up with inflation. U6LO3
Regarding the use of testimonials in advertising, all of the following are true EXCEPT (A) A) *an investment adviser representative may only use a testimonial from an existing client* B) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial C) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial D) an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm
Testimonials are prohibited under any circumstances for investment advisers and their representatives. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards. U6LO5
Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in 5 states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its Form ADV Part 2A and Part 2B
The Form ADV Part 2 (both parts) is acceptable for use as the firm's brochure. Part 1 is for registration purposes, and Part 1B is only used by state-registered advisers (as this firm is). *Part 2, Appendix 1 is used for investment advisers who offer wrap fee programs.* As a state-registered investment adviser, SCAM does not file any forms with the SEC. U6LO4
Under the Investment Adviser's Act of 1940, which of the following is NOT true with regard to advertising? 1. *The advertisement may not make offers of free service.* 2. The advertisement may not refer to any formula, charting device, or graphing method without disclosing the difficulties or limitations in their use. 3. The advertisement may not use testimonials from clients. 4. The advertisement may not refer to specific past recommendations.
There is no prohibition against offers of free service, except that such offers must have absolutely no strings attached. Advertisements used by investment advisers may not use testimonials, specific past recommendations (though it may refer to all recommendations within a given period of time, provided a disclaimer is included stating there is no assurance that the same results will be obtained), or any formula, charting, or graphing device without disclosing the difficulties or limitations in their use; make offers of free service unless there is no obligation imposed on those who request it; or make false or misleading statements. U6LO5
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? (2 and 3) 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.
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. U6LO4
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, the schedule should be made available on the broker-dealer's public website without requiring any login or password
Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included. U6LO1
An agent tells a customer that by investing in U.S. Treasury bonds, he is guaranteed to make money. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following statements is TRUE? This is unethical because it constitutes a guarantee against market risk.
U.S. Treasury bonds are guaranteed to pay interest and principal, but they do carry market risk. *It is unethical to indicate to a client that he is guaranteed against loss.* U6LO3
The USA would permit an agent to use the term "guaranteed" to refer to (3 and 4) 1. a security that is backed by the U.S. government 2. a bond that is backed by the taxing power of a governmental body 3. a bond whose interest and principal payments are guaranteed by someone other than the issuer 4. a stock whose dividend payments are guaranteed by someone other than the issuer
Under the USA, the term "guaranteed" refers to *a guarantee of interest, principal, or dividends by a party other than the issuer.* U6LO3
Under the USA, an investment adviser's current clients must be delivered a brochure annually whether or not the adviser has custody or discretion
Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing. U6LO4
When a security is registered with the Administrator, it means that (A) A) the security may be legally sold in the state B) it is now exempt from the advertising filing requirements of the USA C) it is probably a federal covered security D) the Administrator has approved of the issue
We can never misrepresent a security's registration. The Administrator, in registering a security, declares that the security is legal for sale in the state. Never use the word approved when referring to registration of a security or a securities professional. Only exempt securities and exempt transactions are exempt from the advertising filing requirements, and federal covered securities don't register with the Administrator; they notice file. U6LO2
Which of the following would be considered an unethical business practice? (D) A) Agents exercising discretion in discretionary accounts B) Broker-dealers sending retail clients an email 30 days in advance of a change to fees C) Broker-dealers charging larger than ordinary commissions on certain transactions D) Agents correcting execution orders in their customer's accounts
When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website). U6LO3
A corporation offering securities registered under the Act of 1933 may make which of the following statements? 2 and 4 1. "The SEC has passed on the merits of these securities as an investment." 2. "The SEC has released our securities for sale to the public." 3. "The SEC has passed on the accuracy of the information in our prospectus." 4. "The SEC has declared this prospectus effective."
When a security registers with the SEC, the date that sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus. U6LO2
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) A) *the disclosure brochure must be signed by an officer or a general partner of the firm* B) 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 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 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.
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. U6LO4
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) A) the disclosure brochure must be signed by an officer or a general partner of the firm B) 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 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 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
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. U6LO4
An agent opening a wrap account for a wealthy client may tell the customer that (A) A) wrap fees may result in higher costs than separate charges for advice, management, and transactions B) wrap account managers will generally outperform index funds C) wrap fees always result in lower costs than separate charges for advice, management, and transactions. D) wrap fees generally result in higher costs than separate charges for advice, management, and transactions
When prospecting for new wrap accounts, agents are required to disclose to customers that wrap fees may result in higher costs than separate charges for advice, management, and transactions if the client is not able to use all of the services included. For those clients that are able to make use of all of the services provided, the costs will generally be lower than the cost of buying them piecemeal. Future performance of managed accounts may not be stated or implied. U6LO4
According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. U6LO1
You receive a note from your firm congratulating you on passing the exam and indicating that it has received notice from the Administrator that your registration as an agent is effective. At this point, you could NOT (B) A) state that you have passed the required licensing exams B) *indicate to prospects 有前途的候選人 that you are approved by the state* C) begin to accept orders from clients resident in the state D) begin to prospect for new clients in the state
Becoming a registered securities agent with the state does not infer or imply any sort of approval of you or your credentials. Once the firm has told you that you have an effective registration, you can commence doing those things that are permitted to licensed agents. U6LO2
A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT (A) A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment B) this practice is ethical if full disclosure is made to all clients C) the adviser may collect fees for investment advice and commissions for executing trades D) the adviser must state that the client may be subject to certain limitations because of this arrangement
Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed. U6LO1
A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT (D) A) the adviser must state that the client may be subject to certain limitations because of this arrangement B) this practice is ethical if full disclosure is made to all clients C) the adviser may collect fees for investment advice and commissions for executing trades D) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment
Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed. U6LO1
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 only) 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
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. U6LO1
In general, a broker-dealer will disclose any changes to its fee schedule (D) A) when requested by the client B) to the Administrator and then to the clients C) within 30 days following the change D) by notifying clients of the change in advance
Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator. U6LO1
A third-party post has been made on a broker-dealer's Facebook page. If the firm has involved itself in the preparation of the content, this would be known as entanglement
The entanglement theory means the firm or its personnel is entangled with the preparation of the third-party post. A similar concept is that of adoption. This is when the broker-dealer explicitly or implicitly endorsed or approved the content posted by the third party. U6LO5
A securities salesperson may indicate to a prospective customer that the SEC has approved a securities issue (A) A) under no circumstances B) if the SEC has not initiated action against either the company or the underwriters of the issue C) if a registration statement is in effect with the SEC D) if the SEC has not opened an investigation of the company or the underwriter of the security
The first sentence of the SEC's disclaimer, found on every prospectus, states that the SEC does not approve or disapprove of the offering. U6LO3
As a fiduciary, the investment adviser representative owes his clients an affirmative duty of utmost good faith, and full and fair disclosure of all material facts. This affirmative duty of disclosure is required by the IAR in all of the following situations EXCEPT he has donated funds to a nonprofit medical research institute that owns securities that the investment adviser representative has recommended
The investment adviser representative need not disclose that he donated funds to a nonprofit research institute. No conflict of interest is present that requires an affirmative duty to disclose. The fact that the institute owns securities consistent with the IAR's recommendations is not relevant to his relationship with his client. The IAR has an affirmative duty to disclose all material facts in all the other choices. U6LO1
When an agent recommends a proprietary mutual fund to a client, it is considered (B) A) an unethical business practice B) a potential conflict of interest C) an obvious attempt to maximize personal compensation D) a violation of the agent's fiduciary responsibility
There is nothing improper about recommending a proprietary mutual fund, as long as the potential conflict of interest is disclosed. It is investment advisers and their representatives who have a fiduciary responsibility to their clients; agents operate under a best interest standard, which is not quite the same.
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 advisory contract? (All of the below) 1. Whether the contract grants discretionary power to the adviser 2. The term of the contract 3. A clause preventing assignment without consent 4. The formula used for computing the fee
Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether the adviser has discretionary authority and to what extent; and provisions requiring consent of the client to assign the contract. U6LO4
