Unit 6 Quizzes
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? 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 his employment with the broker-dealer. A) I and III B) I, II, III, and IV C) II and IV D) III and IV
****B All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required.
**Which two of the following statements accurately describes the time limits for investment adviser documents? I. Filing of the annual updating amendment to the Form ADV with the appropriate regulatory body is within 90 days of the end of the adviser's fiscal year II. Filing of the annual updating amendment to the Form ADV with the appropriate regulatory body is within 120 days of the end of the adviser's fiscal year III. Delivery of the investment adviser's brochure to the customer is due within 90 days of the end of the adviser's fiscal year IV. Delivery of the investment adviser's brochure to the customer is due within 120 days of the end of the adviser's fiscal year A. I and III B. I and IV C. II and III D II and III
***Answer: B. The investment adviser must get its paperwork into the state (or SEC) prior to the end of the 90 day period. (must file annual updating amendment to SEC within 90 days of the end of the advisers fiscal year) The Investment Adviser has another 30 days to get the information into the brochure to be sent to the clients. (must deliver the brochure to customer within 120 days of the end of the advisers fiscal year)
**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) interest on debit balances in margin accounts B) markups and markdowns on trades done as a principal C) the cost of overnight delivery services D) safekeeping of customer funds and securities
***B There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: - commissions; - markups and markdowns; and - advisory fees for those firms that are also registered as investment advisers.
*** According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT A) whether or not the contract grants discretionary authority B) the amount of prepaid fee to be returned if the contract is terminated C) that assignment of the contract cannot occur without client consent D) any record of securities industry violations by the investment adviser
***D An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. **The investment advisory contract must include the amount of prepaid fee to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.
**A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) it would be permissible only if consent was obtained, and written disclosure of the firm's capacity was disclosed prior to execution B) WSWM would be engaging in a prohibited practice C) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction D) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation
**C *In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.
**In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) disclosure to the client B) consent of the client C) consent of and the disclosure to the client prior to execution of the transaction D) disclosure to the client and consent prior to completion of the transaction
**D Consent, which can be oral or written, may be obtained before or after the execution of the trade, but both of these must be done prior to completion of the transaction. (Completion of the transaction is considered to be the day the trade settles. Under current industry practice, that is the second business day after the trade is made.) (unlike a broker-dealer who, when acting as a principal in a trade with a customer or as the customer's agent, need only indicate that capacity on the trade confirmation; consent is not required.)
A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly only to those customers who will be affected by the change through an amended brochure B) disclosed promptly to all customers by amending the brochure C) disclosed promptly to the Administrator of the state where the IA maintains its principal office D) disclosed in the summary of material changes in the annual updating amendment to the SEC
A Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.
Social media can be static or interactive. Examples of static content typically available through social networking sites include all of the following EXCEPT A) blogs B) wall information C) profiles D) backgrounds
A Blogs are interactive, while the others are static
***Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A) compensation earned on dealings with clients B) disciplinary information about material events within the past 10 years C) the name, title, and telephone number of the individual supervising any listed person D) the fact that any listed person has no formal education after high school
A It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.
In their advertising campaigns, state-registered investment advisers are prohibited from doing all of the following except A) offering free services B) exaggerating the capabilities of the firm and its personnel C) guaranteeing future performance D) showing past performance of the best performing recommendations
A It is not unethical to advertise free services as a benefit of using a firm, but failing to supply services offered as free is unethical. Guaranteeing future performance, and exaggerating the capabilities of the firm and its personnel are unethical. When showing past performance of recommendations, investment advisers are not permitted to "cherry-pick" the best perrformers; all recommendations must be shown.
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 committed the unethical business practice of guaranteeing against loss. B) has acted fraudulently because his actions would be considered market manipulation. C) has committed the unethical business practice of recommending an unsuitable investment. D) has acted ethically because he has not guaranteed a profit to the client.
A Performance-based compensation is prohibited. On the exam, unless the question refers to one of the exceptions we're going to learn about in the next unit, you should always take the attitude that performance-based compensation is prohibited.
In general, the Administrator would require that a broker-dealer's social media policies A) be committed to writing and communicated firmwide B) be updated at least once every 3 years C) be left up to the manager of each branch office D) be limited to defining the responsibilities of supervisory personnel
A Updating every 3 years is not nearly frequent enough in this dynamically changing industry.
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) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement C) avoid the control or custody of client funds and securities D) have a net worth of $100,000
B
Paradime Investment Group (PIG), an SEC-registered broker-dealer with offices in 22 states, has recently begun offering a wrap fee program. When promoting this new program to existing brokerage clients, it would be appropriate to point out that the wrap fee charges cover which of the following services? A) Financial planning and securities recommendations B) Investment advice and execution of brokerage transactions C) Free ATM usage for PIG's debit card and wiring funds to the client's bank D) Research reports and seminar fees
B Although firms can bundle a number of items into their wrap fee accounts, the two primary services that are always present are advisory service and execution of trades. Research reports and seminar fees are items that are usually provided by broker-dealers to investment advisers as soft-dollar compensation.
One of your clients has called you to discuss an interesting investment opportunity discovered on one of the LinkedIn groups she participates in. Which of the following factors might increase the likelihood that this is a scam? I. A registration statement with the SEC is available on the website of the proposed investment II. The purchase money must be wired to an offshore account III. One of the members of the group is a principal in the company being offered IV. Bonus shares are offered for recruiting friends into the deal A) I and III B) II, III, and IV C) I, II, III, and IV D) II and IV
B the existence of an available SEC registration statement greatly reduces the likelihood that a deal like this is a scam. The other choices are certain red flags.
While making a sales presentation of a mutual fund, the registered agent states to a customer that reinvesting the dividends will ensure selling shares at a profit. Making such a statement is: A)allowed if the representative does not use the word "guarantee" in the presentation B)allowed if the representative explains to the customer that reinvested dividends are still subject to federal income tax C)misleading and may result in proceedings against the representative D)allowed if the representative does not put the statement in writing
C
Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? I. An adviser that requires prepayment of $1,000 in fees, 9 months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. II. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. III. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) I, II, and III B) I and II C) II and III D) I and III
C An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, 6 or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure.
**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, A) it would be necessary to obtain consent of the agent's supervisor B) the agent would be engaging in an unethical business practice C) disclosure of the potential conflict of interest must be made D) a sale could not take place without a review by the firm's compliance officer
C 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.
Which of the following is a fraudulent or prohibited activity for an agent under the Uniform Securities Act? A) Using the dividends paid in the last 12 months to determine the current yield of a common stock B) Selling common stock to a customer with income objectives C) Implying that registration of a security means approval of the security D) Stating that zero-coupon bonds pay no current interest
C 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.
**Which of the following statements regarding the Investment Advisers Act of 1940 and the adviser's brochure is CORRECT? A) Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500. B) Each client must receive the brochure no later than 48 hours after entering into the advisory contract. C) Each client must receive the brochure no later than the entry into the advisory contract. D) Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure.
C 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. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure.
Under the USA, the term guaranteed refers to all of these EXCEPT A) interest B) principal C) capital gains D) dividends
C When a security is guaranteed, that means that someone other than the issuer has guaranteed timely payment of interest and principal on a debt security, or the payment of dividends on an equity security. No one ever guarantees that the investor will have a capital gain.
***Under the brochure rule of the Investment Advisers Act of 1940 A) each client must be delivered a written disclosure statement no later than 48 hours after signing the contract B) each client must be offered a written disclosure statement at the time of signing the contract C) each client must be offered a written disclosure statement at least 48 hours before signing a contract D) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services
D No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. ADV Delivery Rules: Federal covered investment Adviser - must deliver to each client, a copy of the most recent ADV Part 2A no later than at the time of entering into the advisory agreement. state-registered adviser - requirement to deliver the brochure at least 48 hours in advance, unless the contract calls for a penalty-free termination.
Acting in a principal capacity: They are on the other side of the trade of the client - client is buying a security, the broker-dealer is selling it out of inventory - the firm's profit comes from a markup. If the client is selling a security and the broker-dealer purchases it for its inventory, once again, the firm is acting as a principal - the profit comes from a markdown.
When acting in an agency capacity, the firm is acting like any other broker or agent - they are simply putting the buyer and seller together. And, like all agents or brokers, they earn a commission.
Performance-based compensation is prohibited. On the exam, unless the question refers to one of the exceptions we're going to learn about in the next unit, you should always take the attitude that performance-based compensation is prohibited.
Which of the following fee arrangements is legal under the Investment Advisers Act of 1940? A. Adviser A charges an annual fee of 0.5% of the value of the client's account, due on the first day of the client's fiscal year. B. Adviser B charges an annual fee of 0.75%, guaranteed to be waived if the value of the account does not increase during the year. Adviser C charges an annual fee of 0.5% to be waived if the account does not grow by at least 5% during the year. C. Adviser D guarantees the annual fee will be waived if the account decreases in value while under her management. Answer: A. An adviser's fee may not be based on portfolio appreciation or capital gains, except under certain circumstances that are not detailed inthe question. Advisory fees may be based on a percentage of AUM There should be no question on the exam where "waiving" something will bepermitted.
