Unit 14 - Ethical Practices and Oblligations
A fiduciary, acting in accordance with the UPIA, would choose investments on the basis of all of the following except A) transaction costs. B) needs for liquidity, regularity of income, and preservation or appreciation of capital. C) general economic conditions. D) other resources of the beneficiaries.
a
An agent registered with a broker-dealer personally owns 100 shares of ABCD common stock, thinly traded on the OTC Bulletin Board. This agent is in the process of writing an order ticket to liquidate his position in ABCD when he receives a telephone call from a customer wishing to sell 200 shares of ABCD currently held in her account. The appropriate action for this agent is to A) place the sell order for the customer first and then place his order. B) enter an order for 300 shares and then allocate 2/3 of the proceeds to the client and 1/3 to his account. C) discuss the suitability of the client owning such a large position in a thinly traded stock. D) complete the sell order for his stock because he was in the process of doing so before the customer's call.
a
An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when A) receiving a check made payable to that broker-dealer. B) receiving performance-based compensation. C) charging fees on an hourly basis. D) having the power to make buy-and-sell decisions in an account.
a
FinCEN Form 112, the Currency Transaction Report, is filed with A) the Treasury Department. B) the National Security Agency. C) the SEC. D) the Federal Bureau of Investigation (FBI).
a
Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not A) have physical custody over its clients' monies and certificates. B) refer clients to an affiliated broker-dealer. C) examine customers' stock certificates. D) manage client accounts on a discretionary basis.
a
Fraud would include the willful omission of A) any material fact. B) the public offering price in a preliminary prospectus. C) any fact. D) a material fact, but only one that might be pertinent to making an investment decision.
a
Lamar is an investment adviser representative for Southeast Retirement Advisers (SRA), a wholly owned subsidiary of Southeast Retirement Solutions (SRS), a broker-dealer registered in a number of southeastern states. Lamar is also a registered agent with SRS. If one of Lamar's advisory clients sends a check made payable to SRS for a stock purchase, under NASAA's Model Rule on Custody, A) SRA is considered to be maintaining custody of client funds and securities. B) Lamar is considered to be maintaining custody of client funds and securities. C) SRA would be in violation of the NASAA requirement to use a qualified custodian. D) Lamar would have to post a surety bond in the amount of $35,000.
a
On occasion, two registered agents cooperate on a sale. In that case, the commissions earned may be split in all of the following cases except a) when the agents are not registered with the same or an affiliated broker-dealer b) when one of the individuals is the other's supervisor c) when consent to the split was not obtained from the customer d) when only one of the individuals has made an investment into the account
a
One of the most significant features of the UPIA is the ability of a trustee to delegate investment decisions to a qualified third party. Delegation is permitted as long as the fiduciary to whom the powers are delegated a) acts with skill and caution b) avoids high-risk investments c) considers the risk/reward trade-off of each individual security in the portfolio d) avoids diversification
a
The currency reporting threshold for cash and equivalent instruments is over A) $10,000. B) $25,000. C) $3,000. D) $5,000.
a
Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? Commissions on recommended securities transactions Commissions on insurance sales Incentives from the issuer of a recommended security A) I, II, and III B) I and II C) I and III D) II and III
a
Under the Securities Exchange Act of 1934, which of the following statements regarding reports required to be filed with the SEC is true? A) Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly. B) Institutional investment managers who manage accounts valued at $100 million or more of 13(f) securities must file reports quarterly. C) An investment adviser's access persons must each submit a holdings report no later than 30 days after the person becomes an access person. D) An investment adviser's access persons must submit to the chief compliance officer or other persons designated in the firm's code of ethics annual securities transactions reports within 30 days of the end of the year.
a A key requirement is that the money manager must exercise discretion, not simply manage that large amount of securities. Those associated with investment advisers who meet the definition of access person file the holdings report no later than 10 days after becoming an access person. Access persons must submit their transaction reports within 30 days of the end of each quarter.
Broker-dealers and their agents can have their licenses suspended or revoked for engaging in business practices in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. Which of the following activities would NASAA consider an unethical or prohibited practice? I. Hypothecating a customer's securities in a margin account without written consent from the customer II. Executing a margin transaction in new customer accounts before receiving written margin agreements from the customers III. Charging unreasonable fees for custody and securities transfer services A) I and III B) I, II, and III C) II and III D) I and II
a Charging unreasonable fees for services is also a prohibited practice, but the signed margin agreements only need to be obtained promptly after the first trade in the account, not prior.
Under both federal and state law, the concept of a discretionary account is defined. It would be considered discretion when an agent A) picks the specific security that is the subject of a transaction. B) can decide the specific time at which the transaction will be made. C) makes the decisions in the account once the client assures the agent that the proper authorizations are in the mail. D) can decide the specific price.
a Discretion is the ability to pick the asset (the specific security), the action (buy or sell), or the amount (the number of shares or bonds). Time and price are not discretionary and nothing can take place until the proper papers have been received and documented.
An IAR concludes a successful meeting with a client by receiving oral authority to begin exercising discretion in the client's account. The IAR leaves the appropriate paperwork with the client and urges him to return it in the postage paid envelope as soon as possible. After returning to the office, the IAR enters the first discretionary order for this account, a purchase of $10,000 of CANCO common stock. Six days later, CANCO reports that it is going to miss its earnings estimates and the stock begins to fall. The IAR realizes that the best thing to do for the client is take the loss and get out before it gets worse, but the client has not yet returned the signed paperwork. In this case, A) the IAR may exercise his discretion as authorized and sell the CANCO. B) the investment adviser firm should apply to the Administrator for an extension of time. C) the IAR must wait for the signed paperwork to be received. D) the IAR has acted improperly from the outset by making the purchase prior to receiving the signed paperwork.
a Oral discretionary authority is permitted to be used in a customer's account for the first 10 business days after the date of the first transaction. Following that 10 days, the rule requires written authorization to be on hand for any future discretionary trading.
Which of the following actions is a form of market manipulation? A) Matched orders B) Front running C) Arbitrage D) Wash sales
a Wash trades, not wash sales, are also a form of market manipulation.
Which of the following advisers would be deemed to have custody of customer funds or securities as defined in the Investment Advisers Act of 1940? a) the adviser receives the proceeds of sales in the customer's account b) the adviser receives a fee of $1,,500 as a prepayment for the next contract year c) the adviser has investment discretion over the account d) all of the above
a discretion and substantial prepayments are not considered custody
An investment adviser representative of a federal covered investment adviser that provides advisory services to State A would not trigger the pay-to-play prohibition against the firm receiving compensation from that state for advice as long as the IAR contributed no more than A) $350 per election cycle for a candidate that IAR was eligible to vote for. B) $350 per election cycle for a candidate that IAR was ineligible to vote for. C) $500 per election cycle for a candidate that IAR was eligible to vote for. D) $250 per election cycle for a candidate that IAR was ineligible to vote for.
a if the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle
A broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to immediately A) notify NASAA. B) reply to the client in writing. C) notify the Administrator. D) freeze the client's account.
b
A unique requirement for those investment advisers who maintain custody of customer assets is the filing of A) Form ADV-H. B) Form ADV-E. C) Form ADV, Appendix 1. D) Form ADV, Part 1.
b
An investment adviser who falls under the requirements of Section 13(f) of the Securities Exchange Act of 1934 must file Form 13F a) monthly b) quarterly c) semiannually d) annually
b
In which of the following situations has the investment adviser not violated the antifraud provisions of the Investment Advisers Act of 1940? A) Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known. B) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. C) George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client. D) Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer.
b
Jonathon is employed by Frederick's Investment Advisory Service strictly to telemarket for prospective new clients. Which of the following is true under the Uniform Securities Act? A) He is only subject to the antifraud provisions of the act if his compensation continuously increases. B) He is subject to the antifraud provisions of the act. C) He is only subject to the antifraud provisions of the act if the prospects actually utilize the firm's services. D) He is not subject to the antifraud provisions of the act.
b
State and federal regulations would permit performance-based compensation to be charged to advisory clients with a) a minimum net worth in excess of $1 million, exclusive of primary residence b) a minimum net worth in excess of $2.2 million, exclusive of primary residence c) net income of more than $200,000 for the past two years with a reasonable expectation of it continuing d) at least $5 million in investments
b
The procedures to be followed by an investment adviser whose power was lost due to an earthquake would be found in A) the advice given by the local FEMA (Federal Emergency Management Agency) representative B) the firm's business continuity plan C) the firm's emergency planning manual D) the firm's succession plan
b
Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file A) Form 13D. B) Form 13F. C) Form 112. D) Form ADV-E.
b
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered a prohibited practice for a broker-dealer to A) fail to maintain the required net capital. B) have a history of repeatedly delaying the delivery of securities to its customers. C) maintain an office in the state but fail to register with the Administrator. D) inform customers that past performance is no guarantee of future results.
b
Which of the following would be prohibited practices under state securities law? I. Soliciting orders for exempt securities II. Making recommendations on the basis of nonpublished analysts' reports III. Failing to inform a client of unusually high commissions because the client does not complain IV. Failing to obtain prior written authorization for orders from a third party A) I, II, and III B) III and IV C) I and II D) I and III
b
Which of the following does NOT constitute market manipulation under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Entering numerous buy orders at the close of the trading day to prevent a stock from closing lower. B) Excessive trading in a client's account for the sole benefit of increasing commission income. C) Engaging in transactions that would cause an appearance of increased market activity when no beneficial change of ownership actually occurs. D) Deliberately responding to a request for a quote with inaccurate information.
b Excessive trading for the purpose of increasing commissions is the prohibited practice known as churning, but it is not a form of market manipulation.
An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that the firm has outperformed the overall market by 800% over the past 10 years, and, therefore, they guarantee that their clients will be more than keep pace with inflation. At the bottom of the ad, in smaller print is the following statement "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot expect to be repeated." This is an example of a) a property-worded disclaimer b) an improper hedge clause c) a violation of an investment adviser's fiduciary responsibility d) a wrap fee account
b Hedge clauses may not be used to disclaim statements that are inherently misleading
Which of the following are required to execute orders in a customer's discretionary account? I. The customer must authorize each transaction in writing. II. Trades must be in accordance with the account holder's investment objectives. III. The rules relating to best execution are the same as for a nondiscretionary account. IV. Discretionary orders must take place before nondiscretionary orders. A) I and II B) II and III C) III and IV D) I and IV
b If a customer provides discretionary authority in writing to an agent, written consent is not required for each transaction. Execution of discretionary orders, like all orders, is expected to be done at the best price available and to be in accordance with the customer's means and objectives.
An investment adviser representative with a registered investment adviser would like to structure an arrangement for a new advisory account in which profits and losses in the account will be shared with the client. Under the USA, which of the following statements is TRUE? A) Sharing may only occur if the client has a net worth of at least $2 million or at least $1 million in assets under management with the firm. B) An investment adviser representative may not share in the profits and losses in an advisory client's account. C) This arrangement must be agreed upon before the opening of the account. D) In order for an investment adviser representative to share in the profits and losses in an advisory account, written authorization must be given by both the client and the employing investment adviser.
b Sharing in accounts is permissible under certain conditions for agents of broker-dealers, but the USA specifically prohibits investment advisers and their representatives from sharing in an account with any advisory clients under any circumstances. Performance-based compensation is not considered "sharing"
The institutional trading desk of a major broker-dealer receives a substantial purchase order for XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decides to purchase shares of XYZ for its proprietary account. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) the purchase could only be made with prior disclosure to the client. B) this would be the prohibited practice of front running. C) this would be considered market manipulation. D) the broker-dealer has the right to purchase shares of XYZ whenever it wishes.
b The practice of entering an order for the firm in front of a previously received customer order, known as frontrunning, is prohibited.
Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is not considered when determining excessive trading in a client's account? A) Client's financial status B) Length of association with the agent C) Character of the account D) Investment objectives of the client
b The suitability provisions of NASAA's policy require that, before making recommendations, agents make reasonable inquiry as to the client's financial situation, investment objectives, and needs.
An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with clients who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A) is required to register as a broker-dealer. B) is guilty of selling away. C) performed a matched trade as permitted under the rules. D) engaged in an agency cross transaction.
b When selling securities, agent's are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization
A client with a net worth of $5 million is compensating an investment adviser with a performance-based fee. According to the Investment Advisers Act of 1940, this arrangement A) must be based on a period of no less than six months. B) is not permitted because the client has not met the minimum invested assets requirement. C) must be based on capital gains minus capital losses, including both realized and unrealized gains and losses. D) must be based on the S&P 500 Index performance.
c
A customer of an investment adviser (IA) inadvertently mails some stock certificates to the IA. The IA does not maintain custody of customer assets. If the certificates were received on a Monday, NASAA rules would require that the certificates be A) returned the same day. B) returned no later than Tuesday. C) returned no later than Thursday. D) forwarded to the broker-dealer promptly.
c
A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions except A) compensation is based on gains, less losses, for a period of no less than one year. B) the client must meet certain minimum financial standards. C) disclosure that the performance compensation may create an incentive for the adviser to take greater risks. D) the formula used to calculate compensation includes realized capital losses and unrealized depreciation.
c
Alberto is an IAR with Exceptional Analysis and Results (EAR), an investment adviser registered in three Southwestern states. Although Alberto relies heavily on the recommendations furnished by EAR's research department, he occasionally does his own research for his personal account. As an access person, Alberto a) would be prohibited from trading in his personal account b) would be prohibited from trading these securities in his personal account until his research was made publicly available c) must report any personal transactions on a quarterly basis d) can only use personal research to benefit clients
c
An agent for a broker-dealer receives a buy order from an investment advisory firm on behalf of its clients. The order is to purchase 5,000 shares of XYZ common stock at the market. The adviser informs the agent that once the purchase is completed, the account numbers and quantities for each individual client will be supplied. The buy is completed, but at various prices. How is the order allocated to the adviser's accounts? A) The most favorable prices are allocated to the adviser's clients purchasing the largest quantities. B) The trade cannot be accepted and must be moved to the broker-dealer's errors account. C) The order is reallocated to the investment adviser's clients by using the average cost basis. D) A first-in, first-out (FIFO) method is used.
c
Rachel is an agent registered with a broker-dealer in this state. It would be prohibited for her to A) execute a transaction in a discretionary account after having received the necessary documentation. B) disclose to a client that a transaction in a thinly traded stock will result in a higher-than-normal commission. C) solicit sales of a security whose registration is not yet effective. D) share in the profits and losses in a client account without a financial contribution to the account.
c
The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices. However, it would not be considered a violation A) to borrow money from a client who is not in the lending business. B) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account. C) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client. D) when a broker-dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity.
c
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, when is it unethical for an investment adviser to borrow money from a client? A) When the client is an affiliate of the investment adviser B) When the client is a bank or financial institution in the business of loaning money C) When the client is an immediate family member D) When the client is a broker-dealer
c
What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) Instruct the client to send the certificate to the transfer agent because you cannot accept it. B) Accept the certificate and send the customer a receipt within 24 hours of the delivery. C) Accept the certificate and give the customer a receipt. D) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000.
c
When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is A) that the account is in the name of an institutional customer. B) if the customer owns the underlying security on which the call option is sold. C) the ability of the customer to move funds out of the account on multiple occasions. D) the ability of the customer to make a one-time wire to a foreign bank account owned by a family member.
c
Which of the following employees of a publicly traded company would most likely have access to MNPI? a) VP of HR b) Receptionist c) Chief Financial Officer (CFO) d) VP of Marketing
c
Which of the following statements regarding an investment adviser's use of a full-service broker for an account over which the adviser has investment discretion is true? A) Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full-service broker. B) A full-service broker may not be used for any transaction that could be done by a discount broker. C) A full-service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided. D) A full-service broker may be used only if the broker is not affiliated with the adviser
c
Which of the following would not be included in the safe harbor provisions of Section 28(e) of the Securities Exchange Act of 1934? a) proprietary research b) third-party research c) rent d) seminar registration fees
c
Why do matched orders result in painting the tape? A) Matched orders generally result in meaningful profits for such traders. B) Matched orders will appear on the OTC Link. C) The phony trades make the stock appear more frequently on stock tickers. D) Matched orders are generally executed outside of normal trading hours.
c
NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents states that it is unethical for an agent registered with a broker-dealer to I. personally lend money to the broker-dealer firm with which the agent is registered. II. personally lend money to a bank that is a client of the broker-dealer firm with which the agent is registered. III. split commissions with an agent registered with a broker-dealer that is under common control. IV. borrow money from a mortgage broker who is a client of the agent. A) I and IV B) I and III C) II and IV D) II and III
c An agent would not be permitted to lend money to a client that is a bank because loans may only be made by entities in the lending business, (agents are not). Agents may only borrow from clients who are lending entries and a mortgage broker does not lend money; the broker arranges the loan but does not act as a principal. However, there is no problem with an agent lending money to the broker-dealer with which one is affiliated and splitting commissions with property registered personnel of the same or affiliated broker-dealers is permitted.
It would be considered a prohibited activity for an agent to engage in any of the following activities except A) failing to record exempt transactions on the broker-dealer's books and records. B) sharing in profits of an account as a reward for the agent's recommendations exceeding the S&P 500. C) executing a transaction in a nonexempt security in a discretionary account. D) trading in the account of a conservative client exclusively in initial public offerings with proper trading authorization from the client.
c Once a discretionary account has been property documented, the agent handling the account can trade exempt and nonexempt securities, nothing implies that the security is unregistered.
The duties and responsibilities of a fiduciary are spelled out in A) the Investment Advisers Act of 1940. B) the Uniform Gift to Minors Act. C) the Uniform Prudent Investors Act of 1994. D) the Summary Plan Document of the DOL.
c The UPIA is the legal guide for fiduciaries
All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents except A) recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy. B) conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer. C) hypothecating customer securities held in margin accounts. D) effecting a transaction with no change in beneficial ownership.
c The normal method of financing customer margin accounts is by hypothecating their securities so there is nothing dishonest or unethical happening
An investment adviser is not deemed to be maintaining custody of customer assets when A) keeping stock certificates representing shares owned by customers. B) automatically withdrawing quarterly advisory fees. C) receiving a check made out to the adviser to cover quarterly advisory fees. D) maintaining a list of client usernames and passwords
c When a customer pays the adviser's fee, it is no longer the customer's money, it is the IA's. The SEC states that an investment adviser has custody if password access provides the adviser with the ability to withdraw funds or securities or transfer them to an account not in the client's name at a qualified custodian. Keeping customer's stock certificates is obvious custody of customer assets.
An agent who carefully evaluates a client's risk tolerance, financial situation, and investment objectives engages in an unethical practice when he A) fails to discuss a company's working capital position (because the client does not want to be bothered by details) if the securities are fundamentally suitable for his portfolio. B) underestimates a company's interest rate risk as a result of cautious accounting practices recently adopted by the company. C) buys or sells securities with exceptionally high commissions or transaction costs. D) automatically recommends securities that are highly regarded by other agents in the office.
d
An agent would be engaged in a prohibited practice if he did which of these? I. Split commissions with other agents of his broker-dealer II. Sold a nonexempt, unregistered security to a CPA who specialized in auditing financial institutions III. Shared both the gains and losses in a client's account with written approval of both the client and the employing broker-dealer IV. Aggressively traded a discretionary account on a daily basis with long-term growth as an objective A) I and II B) I and IV C) I, II, III, and IV D) II and IV
d
An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if A) the customer has not received a wrap fee brochure. B) the adviser is not a registered broker-dealer. C) the customer fails to tell the adviser that he has custody. D) there is a rule in the state barring such custody.
d
Dither, Wigman, and Jones, LLC, is an investment adviser with $2 billion in AUM. In appreciation for the large volume of brokerage transactions directed their way, Alexander Wimpton and Sons, members of the NYSE, offer to send Mr. Dither on an all-expense trip to Zurich to attend a seminar covering the latest developments in global investing. Under Section 28(e) of the Securities Exchange Act of 1934, A) Mr. Dither could attend because attendance at a business-related seminar such as this falls under the safe harbor provisions of Section 28(e). B) Mr. Dither could not attend because the safe harbor under Section 28(e) only applies to domestic events. C) Mr. Dither could attend, but only if he paid the direct costs of the seminar and let Wimpton and Sons take care of the transportation costs. D) Mr. Dither could attend, but only if he paid all of the expenses except for those direct costs of the seminar.
d
Lending arrangements between registered agents and their customers are permitted if the customer a) is a member of the representative's immediate family b) is the mortgage broker who arranged for the mortgage on your home c) was your roommate in college and remains your best friend d0 works at the desk next to yours
d
Which of the following are discretionary orders? I. A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. II. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. III. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. IV. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate. A) II and III B) I and IV C) II and IV D) I and III
d
There are certain circumstances under which clients might wish to give their agents discretionary power over their account. An agent empowered to do which of the following would be considered to be using discretion? A) Determining the specific price to be paid B) Determining the specific time to execute the order C) Making the decisions in the account while awaiting delivery of the proper paperwork D) Picking the specific security
d An agent exercising discretion is picking the specific security, the specific amount, and/or the specific action.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may not borrow money from which of the following clients? A) A bank not affiliated with the adviser B) A finance company not affiliated with the adviser C) A broker-dealer not affiliated with the adviser D) A federal covered investment adviser not affiliated with this adviser
d An investment adviser may only borrow money from a client that is in the business of loaning money, such as a bank or a broker-dealer, or a client that is affiliated with the investment adviser Investment advisers are not in the business of loaning money, and the only way this could be done is if the two firms were affiliated.
When would it not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits, or other compensation from the purchase or sale of securities? I. As long as the other person is also registered as an agent for the same broker-dealer II. As long as the other person is also registered as an agent for a broker-dealer under direct or indirect common control III. As long as the arrangement is in writing IV. As long as the client has approved of the sharing arrangement A) I, II, III, and IV B) I, II, and III C) III and IV D) I and II
d NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter.
Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? I. Attorney who writes an offering circular for a company II. An investor holding 4% of the company's stock III. The next-door neighbor of a board member of a company IV. Brother of a company's president A) I and III B) II and III C) II and IV D) I and IV
d The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. Any professional who takes part in preparing the registration is automatically considered to have insider information.
In which of the following cases is a third-party trading authorization acceptable? A) The trades will be made through a broker-dealer under common control with the investment adviser. B) The spouse of a client sends an email to the investment adviser saying that the client has given authorization to the spouse to trade in the account. C) An investment adviser makes a hospital visit to a client who was critically injured. While there, the client gives oral instructions to permit her daughter to trade in the account. D) A client's secretary presents a card signed by the client, stating that the secretary can trade in the account while the client is on a business trip.
d Third-party trading authorization must be in writing; oral authority is never acceptable. If the email came from the client directly instead of the spouse, it would be acceptable.
An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of KAPCO common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the KAPCO stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted A) properly because the agent used discretion as to price and time. B) properly because the agent saved the client money. C) improperly; the order cannot be placed without prior written authorization allowing discretion. D) improperly; the order should have been placed on Thursday.
d Time and/or price discretion are only good for that day - those are considered day orders, so the agent is able to use judgement, but the order must be placed during the day it was received.
