Series 63 - Unit 5

A client with a margin account notifies an agent of his vacation next week. The day after the client departs, there is a substantial market sell off, and the drop in the value of the client's portfolio requires addition margin in the client's account immediately. Which of the following actions of the agent would NOT be prohibited?

Doing his best to reach the client, and, if successful, notifying his supervisor, who will direct that sufficient securities in the account be liquidated to meet the margin call (if client cannot be reached, the only way to satisfy the margin call if through the liquidation of shares in the account.)

Which of the following practices violates the USA?

Failing to follow a customer's instructions (deliberate disregard for a customer's instructions is a violation under the USA)

Under the USA, which of the following activities is an example of churning?

Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter (because Class A mutual funds carry a front-end load and are considered long-term investment vehicles, frequent trades constitutes churning.)

Examples of identity theft would include I. taking over an individual's credit card account II. applying for new credit cards in the compromised individual's name III. lending money in the name of the compromised individual IV. purchasing lottery tickets in the name of another individual

I and II (when an individual's identity is stolen, it is common to find the thief takes over the current credit card accounts and also applies for new ones. thieves borrow money in name of compromised individual, not lend it.)

An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be I. unsuitable and unethical II. a securities felony III. grounds, in extreme cases, for suspension or revocation of the agent's license IV. outside regulatory jurisdiction

I and III (municipal bonds provide a fixed income, but they are generally suitable only for high tax-bracket individuals.)

Which of the following is(are) unethical business practice of investment advisers? I. Charging a client an unreasonable advisory fee II. Guaranteeing a client that a specific result will be achieved as a result of advice that will be rendered III. Recommending an investment to a client without reasonable grounds to believe the investment is suitable for that client IV. Continuing to exercise discretionary investment authority under and oral agreement with the client

I, II, III, and IV

If a broker-dealer wishes to conduct operations on the premise of a financial institution, it is required to I. disclose both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution II. make a reasonable attempt to be in a location physically distant from that where retail deposits are taken III. attempt to obtain written acknowledgement from customers that they have received and read the disclaimers IV. be under common control with the institution

I, II, and III

An elderly widow with no independent income wishes to invest the proceeds from her recently deceased husband's life insurance. Which of the following would be the most suitable recommendation?

Large-cap income stocks (the customer needs income. the large-cap stocks would be most suitable because they would provide income while maintaining relative safety. while the municipal bonds are probably safer, the benefits of their tax-free income would probably be lost on a client with no independent income.)

Following the advice of its portfolio managers, The Rising Tide Hedge Fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tides to use furniture and facility at a discount rate. Under the soft-dollar provisions of Section 28(e)

This would not fall under the safe harbor (the use of furniture or office facilities is not included in the list of safe harbor items, regardless of what role the employees of the fund play)

When an agent is discussing possible discounts related to the purchase of mutual funds shares, she would be referring to

breakpoints (one of the requirements under the NASAA policy is to inform clients of reduced sales charges available when reaching a breakpoint.)

An agent has a highly successful neurosurgeon as a client. The doctor has indicated that speculative growth, including aggressive positions, is the account objective. If the agent's manager noticed a pattern of excessive transactions in the account, this would be a case of

churning

An agent opens an account for a new customer and executes trades in the account. Three weeks later the account has a significant profit. The customer's husband calls and directs the agent to liquidate the account because his wife has lost her job. Under the USA, the agent can

do nothing without instructions from the client herself (the agent cannot accept the husband's order without the wife's prior written trading authorization)

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers or Agents, it would be improper to

fail to deal with written customer complaints.

If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the USA, this omission constitutes

no violation (no violation occurs because the USA requires the disclosure of only material facts; material facts are those that could influence the price of a security.)

Bryan, an agent registered with a broker-dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is

not an unethical sales practice (this practice is ethical providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock.)

It would be correct to state the SIPC

offers protection for the net account value, up to the SIPC limits, in the even of a broker-dealer's insolvency (SIPC is the member owned insurance company that provides protection to clients in the event of a broker-dealer bankruptcy. The clients are entitled to receive market value of their securities, less any indebtedness, plus any cash in their accounts up to a specified limit, currently $500,000. SIPC does not protect against losses in the market. )

Your friend is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent, and your friend wants you to dell the policy and split commissions with him. Splitting commissions

on variable annuity sales is allowable only if the agents involved are both licensed in life insurance and maintain their securities license at the same or affiliated broker-dealers.

An agent engages in a practice prohibited under the NASAA Statement of Policy on Dishonest or Unethical Business Practices fo Broker-Dealers and Agents by doing any of the following EXCEPT

recording small transactions with clients on the books of the employing broker-dealer (all transactions, regardless of size, must be recorded on the broker-dealer's books unless consent has been received from the bd to do otherwise)

An agent at a broker-dealer firm is excited about new earnings projections he received from TechEd, which sells at a market value of $10, has paid $1 dividend this past year, and its earnings projections for the next year amount to an increase of 30%. The agent calls his clients to solicit purchases of TechEd stock and says if they buy now at $10 per share they will realize a profit of 30%. The agent should

refrain from making this statement because it is a misrepresentation (clear case of misrepresenting earnings projections and the agent must immediately stop this activity)

An investment adviser may not have custody of a customer's funds and securities under the USA if

there is a rule in the state barring such custody (if there is a rule barring custody, under no circumstances may the investment adviser have custody of customer funds or securities. it is the IA who must notify the customer that custody is being maintained)

A millionaire grants discretionary authority to his agent to invest in income securities. The agent invests the customer's money in high growth securities that pay little or no dividends. Under the USA, this activity is

unethical because the investments are not consistent with the investor's objectives.

Pat Conway, a risk-averse investor, has never invested money outside of bank instruments. Recognizing Pat's conservative nature, his agent recommends Treasury notes, pointing out that federal government-backed securities are risk-less securities. In the above situation, the agent has acted

unlawfully, because the agent failed to disclose that the customer retains interest rate risk (although t-notes issued by the federal government do not carry default risk, the customer who buys them retains interest rate risk because the value of the notes will fall if interest rates rise.)

This morning's financial section of your newspaper has an article discussing several significant material facts relating to a stock held in the portfolio of several of your clients. You would be able to share these facts with your clients

with or without the issuer's permission (public information may be disseminated with or without the permission of the issuer, even if it is material information that casts the issuer in an unfavorable light.)