CHAPTER 6 SERIES 63
One of the elements in the SEC's definition of advertisement is the presence of compensation. The compensation can be
direct (such as cash payments) or indirect (such as directing brokerage business to the promoter)
Delivery of the brochure and related brochure supplements required by subsections of the NASAA Model Rule on investment adviser brochures need not be made to clients who receive only impersonal advice and who pay less than
$500 per year in fees.
A brochure supplement, Form ADV Part 2B, must be prepared listing
(1) any supervised person who formulates investment advice for a client and has direct client contact and (2) any supervised person who has discretionary authority over a client's assets, even if the supervised person has no direct client contact. The supplement discloses the supervised person's name, age (or year of birth), formal education after high school, and business background (including an identification of the specific positions held) for the preceding five years. If the supervised person has no high school education, no formal education after high school, or no business background, disclose this fact.
When attempting to secure a new customer, it would be unethical for the agent to
imply that the Administrator has approved of the agent's qualifications. The Administrator never approves of an agent's registration. As long as the BDs are under common control, there is no problem with multiple registration.
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
prohibited and may result in proceedings against the agent. Guaranteeing a profit (or ensuring there will be no loss) is always a prohibited action.
An agent is so confident that the shares of KAPCO Industries are underpriced that he tells his clients that he will repurchase any shares at their original cost plus 5% if the stock hasn't outperformed the market over the next six months. This is considered
a performance guarantee and is a prohibited action.
When an agent has a personal relationship with the issuer of a security and has a bias toward recommending that issuer's stock, it would be considered
a potential conflict of interest that must be disclosed.
When an agent has competing interests or loyalties between his customers and an issuer of securities, it is considered
a potential conflict of interest.
As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that any time within six months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be
a prohibited guarantee against loss.
Under the Uniform Securities Act, it is legal for an agent to tell a customer that
a registered security may lawfully be sold in the state.
A customer calls his agent to inquire about something he read on a recent trade confirmation. It said, "The firm acted as a contra party to the trade," and the customer does not know what that means. The agent would explain that the broker-dealer
acted as a principal in the trade.
Disclosure to customers of a control relationship between a broker-dealer and the issuer of the security recommended is required in
agency transactions. principal transactions. exempt transactions.
A performance guarantee, such as
agreeing to buy a stock back at a profit (or even at cost), is a prohibited action, regardless of the financial standing of the client.
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.
the following clients of a registered investment adviser is exempt from the requirement to receive annual delivery of the adviser's brochure
The NewBean Municipal Bond Fund, a unit investment trust registered with the SEC
NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. the following statements correctly identify the delivery requirements
The brochure may be delivered to prospective and new advisory clients at the time of entering into any such contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
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,
the agent is describing a guaranteed security.
Trade confirmations sent by broker-dealers to their customers must always include
the amount of commission charged.
A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means
the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning.
Authorized Retirement Investments (ARI) is a registered broker-dealer. ARI publishes a list of securities it approves for inclusion in IRAs. This means
the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning.
A prospective customer enters a branch office of Extraordinary Profits, Inc. (EPI), a broker-dealer registered with the Administrator. If the prospect wants to know the cost of obtaining certificates for securities she plans to purchase, the firm would most likely hand her a copy of
the broker-dealer's fee disclosure document.
the following statements appearing on the website of a broker-dealer is most likely to be viewed as a recommendation
"Each month, our analysts prepare a list of their top five stock picks for our customers to consider. Click here to access that list."
James Douglas, an agent with Government Securities Specialists (GSS), a broker-dealer registered in this state, sells his client 10 U.S. government bonds due to mature in 30 years. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following statements may Douglas legally mak
"The bonds are guaranteed as to principal and interest payments by the U.S. government." .
The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is
120 days after the end of the adviser's fiscal year
Helen, a registered agent with a broker-dealer, 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 statement best reflects her situation
Although this stock has enjoyed an excellent performance, past performance cannot predict future results.
When does a customer have to receive the options disclosure document
Before the first order
he following are required to be maintained by financial institutions, such as banks and broker-dealers (BDs), by the USA PATRIOT Act to prevent the financing of terrorist operations and money laundering?
Customer identification programs (CIPs)
Opening a margin account involves significant documentation. Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change
The credit agreement
the following prospective clients of a registered investment adviser is exempt from the requirement to receive delivery of the adviser's brochure
Fortune Income Fund, a closed-end investment company traded on the NYSE
Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it
did not send an annual brochure to its clients because there was no material change from the previous year.
the following clients of a registered investment adviser is exempt from the requirement to receive annual delivery of the adviser's brochure
Doris Diamond, a client with a net worth of $5 million, who receives impersonal advisory services billed at a quarterly rate of $120
Unless qualifying for an exemption, which of the following advisory fee structures is not allowed under the Uniform Securities Act? A) Fees based on a percentage of the change in value of funds from quarter to quarter B) Fees based on a percentage of the aggregate value of funds under management C) Fees based on a fixed dollar schedule tied to the value of funds under management D) Fees based on an hourly rate
Fees based on a percentage of the change in value of funds from quarter to quarter
Margin is borrowing money from a broker-dealer to buy a stock, using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock
The hypothecation agreement
Of the popular social media sites, the one most thought of as a business networking site is
LinkedIn.
An investment adviser is preparing an advertisement , the following is acceptable
Offering to provide the firm's investment recommendations for the past 12 months Promoting the firm's system of charts and formulas while mentioning their limitations and difficulties
A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?
Options
the following types of compensation is an investment adviser prohibited from accepting
Quarterly fee based on account performance
Testimonials promoting investment advisers' services are permitted under the
SEC rule
Which of the following is the best example of an exaggerated claim that may not be used in investment adviser advertising?
Saying that the firm has $300 million under management when it manages only $50 million. Overstating the amount of client funds under management is an exaggeration
f the following conditions would most likely meet compliance standards of state regulators
Training both supervisory personnel and agents on the difference between interactive and static content
Which of the following statements regarding Form ADV Part 2 is true
Unless there are no material changes, it must be delivered to clients annually.
the following items is required under the customer identification program (CIP)
Visa details for noncitizens Physical address Date of birth
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
Whether the contract grants discretionary power to the adviser The term of the contract The amount of prepaid fees to be returned in the event of contract termination The formula used for computing the fee
Different types of accounts have different times for receipt of customer information. the following does correctly state the required time for the specified account?
Written discretionary account authorization must be received by a broker-dealer before exercising discretion. Written discretionary account authorization must be received by an investment adviser within 10 days after the initial discretionary trade. The options account agreement must be received within 15 days after the customer's account has been approved. Margin account agreements must be received after the first margin trade in the account.
The NASAA Model Rule dealing with investment adviser brochures states that if there are no material changes to the previous year's brochure (remember, Form ADV Part 2 is the basis of the brochure),
`the annual delivery requirement to existing clients is waived
An example of what the regulators have determined to be a recommendation would be if
a broker-dealer (BD) provides a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The BD then sends the customer a list of specific securities they could buy or sell to meet the investment goal they indicated.
Adoption is defined as
a firm's endorsement of the content of a third-party site
A benefit to to a broker-dealer using social media to provide securities recommendations is that
a large number of investors can be reached quickly and inexpensively.
One way to make money is to buy low and sell high. If an investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms, any advertisement about the system must
indicate that there are limitations and difficulties to using the system.
An investment adviser's contract contains the following statement: "While GEMCO Advisers agrees to use its best efforts in the management of the portfolio, GEMCO shall not be responsible for errors in judgment or losses incurred on investments made in violation of applicable law." Under the Uniform Securities Act, this statement
is an improper waiver and makes the contract null and void.
A margin account is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities. The purpose of doing this is
margin increases investors' purchasing power, but it also exposes investors to the potential for larger losses.
MaryJo Barkley is the CEO of MJB Securities. MJB is distributing an offering of ABC common stock to investors. Barkley has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of
registration.
One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that the CIP
requires date of birth while the regulators only require proof of legal age.
Unless exempt, all state-registered investment advisers must provide prospective and existing customers with a disclosure document. This document is most commonly called
the investment adviser's brochure.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the contract between an investment adviser and its clients shall include all of the following
whether the contract grants discretionary power to the adviser. the services to be provided. the formula for computing the fee.
As a state-registered investment adviser (IA), all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV Part 2A. Every IA, state-registered or federal covered, must update the information on file within
90 days of the end of the adviser's fiscal year.
Under industry rules, customers who wish to trade options must receive a copy of the OCC's options disclosure document (ODD)
at or before account approval.
Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD)
at or before account approval.
It would be considered an unethical business practice under NASAA's policies for an investment adviser to charge fees
based on a percentage of the change in value of funds from quarter to quarter.
The Uniform Securities Act mandates that contracts between investment advisers and their clients
be in writing. disclose the method of compensation.
Shandra Jackson is an agent with a registered broker-dealer. Jackson's uncle is the CEO of a publicly traded company. If Jackson were to recommend the purchase of that company's stock, she would
be obligated to disclose the potential conflict of interest.
A state-registered investment adviser 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. It would be correct to state
clients cannot waive their legal rights.
One of the concerns about social media is the opportunity for affinity fraud. This occurs when
fraudulent offers are aimed at groups of people who share a similar interest.
The hypothecation agreement gives permission to the broker-dealer (BD) to
pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the BD on the basis of the loan value of these securities.
When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document entitled "Understanding the Risks and Uses of Options," the broker-dealer satisfies the risk disclosure requirements. Please note, the rules call for two delivery choices—either
before the first options trade or at (or before) the time the options account is approved.
Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are
prohibited
Different types of accounts have different times for receipt of customer information. the required time for the specified account
Margin account agreements must be received promptly after the first margin trade in the account. Options account approval must be received in writing at or before the initial options trade.
the following is required to be disclosed in an investment advisory contract under the Uniform Securities Act?
The amount or manner of calculation of the amount of the prepaid fee to be returned in the event of contract termination The termination date of the contract If applicable, a statement that the investment adviser will be exercising discretion in the account
Which of the account documents authorizes the use of those securities as collateral for that loan
The credit agreement
the following investment adviser compensation arrangements are permitted under the Uniform Securities Act
The investment adviser charges a fee of 1% of the average value of the account portfolio during the year. The investment adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. Unless the question states that it relates to the exception for wealthy investors ($1.1 million under management of the investment adviser or $2.2 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.
One of your customers sends you an email with an attachment describing a "can't miss" investment opportunity. Which of the following would be red flags you should share with the client
The offer shows an anticipated return of 5% per month with little or no risk. Payment must be made by Western Union wire to an offshore account.
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?
The purchase money must be wired to an offshore account. One of the members of the group is a principal in the company being offered. Bonus shares are offered for recruiting friends into the deal.
Under the Uniform Securities Act, which of the following is required to be in writing in an advisory contract
The terms of the advisory contract The method used for computing the adviser's compensation The amount of prepaid fees to be returned in the event of contract termination
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include
They must describe the amount of any prepaid fees that will be returned to the client in the event the contract is terminated. They must prohibit the use of discretion without the client's authorization.
A broker-dealer provides HotScores, a portfolio analysis tool that allows clients to indicate their retirement goal. After disclosing age, current financial condition, and risk tolerance, those participating will receive a list of specific securities the customer could buy or sell to meet the investment goal.
This would be regarded as making a recommendation.
In general, it could be said that an investor is exposed to the greatest potential risk of loss when maintaining
a margin account
An agent is making a presentation of a mutual fund to a client. So that the client better understands the risks and expenses involved, the agent takes a yellow highlighter and uses it to mark the most important information in the prospectus. Under state and federal regulations, this is
a prohibited practice because no markings may ever be made on a prospectus.
. Entanglement and adoption are terms applying to
a securities professional making use of third-party information on social media.
An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the Uniform Securities Act would require
a statement as to the limitations of and difficulties involved in using this system
Testimonials promoting investment advisers' services are permitted under the SEC rule. The rule distinguishes between
a testimonial and an endorsement
Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions from trades effected for clients are
acceptable forms of compensation
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.
Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on 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.
The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents requires that margin account agreements must be received promptly
after the initial margin trade in the account
Regarding the use of testimonials in advertising, all of the following are true
an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial
Although all new accounts must be approved by a designated supervisory person before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be
an options account.
A broker-dealer feels that some recent industry regulations will limit its ability to provide the returns to clients that both it and they desire. The broker-dealer communicates this to its clients and urges them to sign an agreement waiving their rights to take any legal action in the event of loss due to the firm's refusal to follow those rules. This means that
clients would still be permitted to sue because there is no way that legal rights can be waived.
In general, the Administrator would require that a broker-dealer's social media policies be
committed to writing and communicated firmwide.
All of the following actions must be completed prior to customers entering their first option trade
completion of the new account form. delivery of the options disclosure document (ODD). approval by a designated options supervisor.
Compliance with the customer identification program (CIP) requires that all the following information must be obtained from new individual customers
date of birth. physical address. Social Security number.
Social media is a form of
electronic communication. As communication with the public, it is subject to firm supervision, including training of agents. Depending on the nature of the communication, it may have to be filed with the Administrator.
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.
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 has involved itself in the preparation of the content, it is known as
entanglement.
An increasing percentage of agents of registered broker-dealer firms are using social media to increase their business. When using social media to reach out to clients and prospects, compliance with the Uniform Securities Act and NASAA Model Rules requires
firm supervision over social media communication with clients and prospects.
An agent is using social media to try to build her business. If her Facebook page allows for followers to "like" her, that would be considered
interactive content. One of the things that differentiates interactive content from static content is the ability for persons other than the originator of the content to have access
One question asked on a new options account form that is not required on a normal brokerage account opening is about
investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments
Investors open margin accounts to
leverage their investment dollars. Margin accounts employ the use of leverage—borrowed money
Anytime you see a question dealing with advertising a charting system (or investment formula, etc.), always look for
limitations and difficulties in the answer
One of the risks of investing on margin is that a severe decline in the market price of one of the securities in the account can trigger a call for additional funds. If this happens and the investor does not supply the money when demanded, the broker-dealer can
liquidate its choice of securities in the account to bring the account back to the needed level.
Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is
margin interest on the debit balance.
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 the term used to describe
material posted to a securities professional's social media site by a third party, where the securities professional has taken part in the preparation of the material.
Affinity fraud targets
members of identifiable groups, such as the elderly, or religious or ethnic communities.
Avuncular Securities, Inc. (ASI) is a broker-dealer registered in seven states. ASI is leading a registered offering of a nonexempt security in an initial public offering in State D. As such, any advertising and sales literature
must be filed with the Administrator of State D. Unless the security is exempt (and this one is not), any advertising or sales literature must be filed with the Administrator(s) where the security is offered for sale.
Under the Uniform Securities Act, investment advisory contracts
must contain a description of fees.
A high return with little or no risk is one of the most obvious red flags; so is payment with a
nontraditional and generally nontraceable method, especially offshore
First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts at First Securities Broker-Dealers, Inc. First Securities Advisers, Inc., has
not violated the prohibition against performance fees. First Securities Advisers, Inc., has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable.
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 Uniform Securities Act, the agreement is
null and void.
A high return with little or no risk is one of the most
obvious red flags;
Differences between static and interactive content on social media include the fact that
only interactive content can be modified by persons other than the originator.
In most cases, a broker-dealer's website is static. That is,
only the firm can make changes, and those changes are infrequent.
A client of a broker-dealer is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?
options
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advertisements must comply with rules set out under the Investment Advisers Act of 1940. Those rules include
requiring a written agreement betwee an investment adviser and a promoter who receives more than $1,000 over a 12-month period for endorsing the services of the adviser.
The marketing rule's definition of compensation specifically excludes
salary or bonuses paid to the adviser's personnel.
When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document entitled "Understanding the Risks and Uses of Options," the broker-dealer
satisfies the risk disclosure requirements.
LinkedIn is a popular social media tool for business people. The nature of the information posted poses risks for investment advisers because of the specific requirements for testimonials. A step that advisers should consider taking to minimize the risk of an improper endorsement appearing on their page is to
select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile.
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 (the brochure), but may also check for proper disclosure in the adviser's
seminar materials.
Customers do not have to complete (sign) the options agreement prior to entering an order. Under current rules, the agreement must be
signed and returned by the customer within 15 days of account approval.
the options account agreement that must be
signed and returned to the broker-dealer within 15 days of account approval.
Under the Investment Advisers Act of 1940, an investment adviser that becomes registered may
state on its stationery that it is registered with the SEC.
A banner on a broker-dealer's website is considered
static content.
The federal legislation that requires broker-dealers to verify the identity of any person opening an account is
the USA PATRIOT Act.
Leverage works two ways. It is great when the stock's price is rising but can be painful when going the other way. When it drops below a certain point, the firm will need more money. In the risk disclosure document, it is made clear that
the client is not entitled to choose which securities can be sold if a call for additional funds is not met.
Under the Investment Advisers Act of 1940, if an investment adviser's sales literature describes an investment system, such as one using charts, the description must include
the difficulties and limitations of using the system.
Entanglement is the term used to describe material posted to a securities professional's social media site by a third party, where the securities professional has taken part in the preparation of the material. This differs from adoption, where
the firm has endorsed or approved of the post but played no part in its preparation.
Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract
the manner in which the advisory fee will be computed. a provision prohibiting the investment adviser from being compensated based on a share of capital gains. whether or not discretion will be exercised.
An agent is discussing a guaranteed security with a customer. That means
the security has a guarantee from a third party other than the issuer covering the payment of principal and interest or dividends.
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 the fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; and provisions as to whether the adviser has discretionary authority and to what extent.
Under the Uniform Securities Act, all of the following statements are true regarding investment advisory contracts
they must be in writing. disclosure of the method used for computing the adviser's fee must be included. they can only allow fees to be performance related under certain limited circumstances.
A new client is opening a margin account and notices the following wording in the documentation: "You are authorized to lend to yourself or others any securities held by you in my margin account and to carry all securities lent as general loans, and you shall have no obligation to retain under your possession and control a like amount of such securities." When the client asks you what this is about, you would respond that
this is the loan consent agreement.
A client, who is a famous tennis player, offers to record a testimonial for a covered investment adviser. The recording will be used in a television commercial. Under the SEC's Marketing Rule for Investment Advisers, the firm may
use the testimonial provided disclosure is made that the athlete is a client and the extent of any compensation paid.
A new investor is confused over the expression that a broker-dealer must disclose its capacity on a trade confirmation. You could explain that capacity refers to
whether the firm acted as an agent or a principal in the transaction.
A client of an investment adviser representative of a federal covered investment adviser wishes to place a favorable comment on the investment adviser's website. This action
would be considered a testimonial and require that disclosure be made of any compensation received by the client.
When an investment adviser's (IA's) only activity is sponsoring or participating in wrap fee accounts, its brochure is Form
ADV Part 2A, Appendix 1.
In the securities industry, the term contra party refers to
`the person on the other side of the trade.
Active Technicians (AT) is a state-registered investment adviser. In its brochure supplement, it would include information relating to each of the following individuals
those exercising discretion over assets of clients in this state, even if no direct contact is involved. those providing investment advice and having direct contact with institutional clients in the state. those providing investment advice and having direct contact with retail clients in the state.
For larger accounts, a broker-dealer is least likely to waive its normal fee for
transferring the account to another broker-dealer.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may guarantee investment results
under no circumstances.
When attempting to secure a new customer, it would be ethical for the agent to
sell securities in any other state in which the agent and the agent's broker-dealer are registered. mention that the agent is registered in the state. register with two different broker-dealers who are under common control.
The Uniform Securities Act defines a guaranteed security as one with a third party guarantee. That guarantee extends to all of these except A) the principal repayment at maturity on debt securities. B) the invested capital on equity issues. C) the interest on debt securities. D) the dividends on equity securities.
B) the invested capital on equity issues. As stated in the Uniform Securities Act, guaranteed means guaranteed as to payment of principal, interest, or dividends. There are no guarantees on the growth or avoidance of loss on an equity security.
Promising Future Retirement Success (PFRS) is a state-registered investment adviser whose only activity is sponsoring wrap fee accounts. In line with the NASAA Model Rule on investment adviser brochures, PFRS shall deliver a copy of its
Form ADV Part 2A Appendix 1 wrap fee brochure prior to or concurrently with the initial entry into an advisory agreement.
Strategic Capital Asset Managers (SCAM) is an investment adviser registered in five 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.
A prospective client would like information on the post-secondary schools attended by those employees of an investment adviser who will be making advisory decisions. That information can be found by requesting
Form ADV Part 2B.
the following pairs are correctly matched
Broker = agency Dealer = principal
The template allows for three acceptable methods of disclosure of the fee information.
Charts, tables, or lists are fine as long as they are presented in the proper format.
Heritage Planning Services (HPS) is registered as an investment adviser in three states. The firm's business model is preparing custom financial plans for its clients. HPS charges an up-front fee for the initial plan and an ongoing annual management fee of ¾% of assets under management. After a detailed asset-gathering session, a new client is sent a 40-page comprehensive financial plan and told that this plan requires a fee of $2,500 at signing. One week later, after reviewing the plan, the client comes to the HPS office, signs the contract, delivers a $2,500 check and receives the most recent copy of HPS's brochure. Three days later, the client has second thoughts and contacts HPS with instructions to cancel the contract. According to the Uniform Securities Act, which of the following statements is correct
HPS must cancel the contract and must refund the $2,500 fee.
the following clients of a registered investment adviser is exempt from the requirement to receive annual delivery of the adviser's brochure
KAPCO Growth Fund, a mutual fund registered with the SEC The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. The other is when the advisory contract is with a registered investment company such as a mutual fund.
A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is true
Material changes to wrap fee programs must be filed promptly with the Administrator. Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end.
a prohibited guarantee against loss
Offering to buy back a stock at its original cost, even without paying interest, it a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud and, in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price.
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 (IAs) who offer wrap fee programs
The business backgrounds of these key individuals must be included in
Part 2 of Form ADV and in the disclosure brochure
NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Which of the following statements correctly identify those delivery requirements
The brochure must be delivered to prospective and new advisory clients no later than entering into the advisory contract. Annual delivery of the brochure to existing clients must be made within 120 days of the end of the adviser's fiscal year.
Where would a prospective customer find disclosure of a broker-dealer's account maintenance fees
The broker-dealer's fee disclosure document
The brochure rule creates exemptions from the delivery requirement in two cases.
The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. The other is when the advisory contract is with a registered investment company such as a mutual fund.
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, the following statements is true
This is unethical because it constitutes a guarantee against market risk.
Under the Uniform Securities Act, the investment adviser brochure rule requires
a brochure, or summary of material changes, if any, to be delivered to all clients within 120 days of the end of the adviser's fiscal year.
Under securities industry regulations, all of the following are prohibited when attempting to make a sale
an agreement by the agent to repurchase the security from the customer for the same price at a future date. telling a client that he is trading commission free when, in actuality, the firm is acting as a principal and placing a markup on his trades. telling a client that her stock is a sure candidate for a takeover bid.
Under the Uniform Securities Act, an investment adviser's current clients must be delivered a brochure
annually, whether or not the adviser has custody or discretion.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, a broker-dealer may charge a reasonable fee for
appraisals. transfers. collection of dividends. safekeeping.
When a broker-dealer acts in the capacity of a principal in a trade, the firm is acting
as a contra party to the trade. In every trade, there are two principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.
In general, a broker-dealer will disclose its fee schedule
at the time of the account opening.
As an agent of a registered broker-dealer, one of the benefits of selling a security registered with the Administrator is
being able to deliver a prospectus containing the information an investor needs to make the investment decision.
In general, a broker-dealer will disclose any changes to its fee schedule
by notifying clients of the change in advance.
The SEC's Marketing Rule for Investment Advisers requires that any advertisement containing an endorsement of the adviser's services must include disclosure of any compensation in the form of
cash. retainer fees.
Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document
changes to the fee schedule may be shown on the firm's website. changes to the fee schedule must be announced in advance. it must be up to date.
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
charges for late payments. fees for issuance of a stock certificate. account inactivity fees.
In the securities industry, when a person is acting in an agency capacity, the form of compensation received is
comissions
There are three 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.
Operating as a broker-dealer requires making a number of disclosures for the protection of their customers. such as
conflicts of interest faced by the broker-dealer. the fees and charge schedule used by the broker-dealer. the capacity in which the broker-dealer acts in a securities transaction.
When the compensation arrangements or incentives for the broker-dealer or its agents could affect whether employees recommend or offer a particular security or transaction to a client, it is required that the firm
disclose the potential conflict of interest.
Under the Uniform Securities Act, a guaranteed security is protected by someone other than the issuer against loss of all of these
dividends on equity securities. principal repayment at maturity on debt securities. interest on debt securities.
Under the Uniform Securities Act, when one is referring to a security that is guaranteed, the guarantee applies to
dividends to be paid on the specified stock. interest and principal payments on the specified bond.
According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of
each member of the investment committee or group that determines general investment advice to be given to clients.
NASAA has prepared a standard template to be used to disclose the broker-dealer's fees and charges to a prospective or existing customer. It is not part of the new account form, although if the prospect does open an account, it may be delivered at or about the same time. NASAA designed the template, but each firm discloses its
fees on its disclosure document.
The agent has committed an unethical business practice because the NASAA Model Rule dealing with advisers' brochures requires a
five-day penalty-free period when the brochure is not delivered at least 48 hours prior to entering into the contract
Stephanie Whitworth, an agent with a nationally known broker-dealer, has uncovered an unusual investment opportunity that she believes is perfect for one of her 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, Whitworth tells the client that she agrees to repurchase the security from the client anytime within the next 60 days at the original purchase price. In so doing, Whitworth
has committed the unethical business practice of guaranteeing against loss.
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
help reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client.
The Cambridge dictionary defines a conflict of interest as "a situation
in which someone cannot make a fair decision because they will be affected by the result."
The NASAA Model Brochure Rule for investment advisers states that delivery of the brochure and related brochure supplements need be made to
individual clients meeting the definition of accredited investor. an employee benefit plan with assets in excess of $1 million.
Under the Uniform Securities Act, the Administrator has the authority to
issue stop orders. review standard registration forms.
Securities regulators know that one of the most important ways to protect investors is requiring securities professionals to disclose information pertinent to the relationship with customers. When opening a new account, it is expected that a broker-dealer will disclose
its fees and charges.
When BDs acting in the capacity of a dealer (principal), the compensation comes from
markups or markdowns.
The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if
no material changes have taken place since the last summary and brochure delivery
When opening an account at a broker-dealer, if the most recent copy of the firm's fee schedule is not available, NASAA recommends that the client
not place any assets in the account until it is provided.
It is proper for fees to be disclosed at the time a customer account is opened. If not presented, clients should ask for the fee schedule and make sure it's up to date. If it is not readily available, clients should
not place any assets into the account until it is provided. NASAA believes that clients have the right to know the fees in advance.
Perpetual Investment Returns (PIR), a registered investment adviser in four states, has had no material changes to the information in its Form ADV Part 2 from the previous year. That means PIR is
not required to deliver a copy of its brochure to existing clients.
The NASAA Model Rule on investment adviser brochures contains one condition where verification of receipt of a readable copy of the brochure and supplements by the customer is required. That is the case
of an initial delivery to a potential client in electronic form.
Broker-dealers are required to disclose the capacity in which they acted on any transaction with a retail customer. That disclosure is always made
on the trade confirmation
Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Among the most common ways for making this disclosure are
presenting a chart with all of the fees. preparing a list of all of the fees. displaying the fees in tabular form.
All of the following statements regarding the disclosure investment adviser brochure rule of the Uniform Securities Act are true
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 five-day refund right. the disclosure brochure must contain essentially the same information as is contained in Form ADV Part 2A and, if applicable, Part 2B. the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within five business days.
Pedantic Professional Analytics (PPA) is an investment adviser registered in States B, C, and D. Part of PPA's service is offering a comprehensive financial plan, for which there is an initial fee of $2,500. During a discussion with a prospect, one of its investment adviser representatives seeks to allay the individual's concerns by informing her that once the firm delivers its brochure and receives the client's payment, there is a three-day period during which the client may cancel the contact and receive a refund of that fee. In this case,
the investment adviser representative is in violation because the time period is five days.
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.
A state-registered investment adviser would be permitted to
use Part 2 of the Form ADV to satisfy the brochure requirement.
Delivery of the brochure and related supplements may be made electronically if the investment adviser, in the case of an initial delivery to a potential client, obtains a
verification that a readable copy of the brochure and supplements was received by the client.
Gray is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrator. Gray has a 55-year-old customer who has just inherited $100,000 and plans to retire once attaining age 70. Gray has recommended investing the money into several mutual funds offered by the KAPCO Fund Group, pointing out that over a 15-year period, mutual funds will outperform the market. Gray has
violated the prohibition of guaranteeing results.
The NASAA Model Brochure Rule for investment advisers requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations
when the service provided is an individual supervisory service. when the client is an individual with a net worth of more than $1 million.
The Uniform Securities Act defines a guaranteed security as one
where the payment of interest and principal (bond) or dividends (stock) is guaranteed by a party other than the issuer.
NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Unless qualifying for an exception, a registered investment adviser shall deliver,
within 120 days of the end of its fiscal year, a free updated brochure and related brochure supplements, which include or are accompanied by a summary of material changes. within 120 days of the end of its fiscal year, a summary of material changes that includes an offer to provide a copy of the updated brochure and supplements and information on how the client may obtain a copy of the brochures and supplements. The rule calls for delivery of the current brochure and current summary of material changes at or before entering into the advisory contract On an annual basis, the brochure or supplement describing material changes is delivered within 120 days of the end of the investment adviser's fiscal year.
A new client of your broker-dealer makes her first purchase. After receiving the confirmation of the trade, she calls to inquire why she was not charged any commission. The most likely reason is
your firm acted as a principal in the trade and charged a markup.
