Unit 5
Which of the following would be prohibited practices under state securities law? A)Failing to obtain prior written authority for orders from a third party B)Making recommendations on the basis of in-house analysts' reports C)Soliciting orders from retail customers for exempt securities D)Failure to include the broker-dealer's commission schedule on the fee disclosure document
A)Failing to obtain prior written authority for orders from a third party Orders from a third party (someone other than the client) can only be accepted when the broker-dealer has received a written trading authorization form from the client. Soliciting orders for a security that is exempt from registration is a normal business practice. An agent may use the in-house reports of his firm's securities analysts as a basis for recommendations, provided the reports do not contain inside information. The NASAA fee schedule template specifically excludes commissions, markups and markdowns, and advisory fees.
Which of the following statements are TRUE of a discretionary account at a broker-dealer? I. It must be approved by a designated supervisory individual of the firm. II. It must be reviewed frequently to minimize the chances that the account has been churned. III. A discretionary order may be placed once the customer has placed a power of attorney in the mail. IV. It must be approved by the Administrator of the state of residence of the client. A)I and II B)I and III C)II and IV D)III and IV
A)I and II A new discretionary account must first be approved by a designated supervisory person, and the account must be reviewed frequently for suitability and avoidance of churning. The written discretionary power must be "in hand", not in the mail, before discretion may commence.
Under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, which of the following activities (if performed by an agent) are considered fraudulent, dishonest, or unethical? I. Executing a transaction in a margin account without securing an executed written margin agreement from the customer, promptly after the initial transaction in the account II. Executing a transaction either with or for a customer at a price not reasonably related to the current market price III. Guaranteeing a customer against loss on securities purchased IV. Personally providing safekeeping and custodial services for clients' cash and securities A)I, II, III, and IV B)I and IV C)I, II, and III D)II and IV
A)I, II, III, and IV An agent may not take personal possession of clients' cash and securities. The broker-dealer, however, can provide safekeeping and custodial services. Agents must execute trades at prices related to current market prices and may not guarantee the performance of a security. An agent may execute a trade in a margin account providing the agent receives a written margin agreement promptly after the initial trade.
Which of the following statements regarding brokerage and advisory activities under the USA are TRUE? I. It is not unlawful for an investment adviser or broker-dealer to employ any device, scheme, or artifice to defraud in the sales of securities to institutional investors because the USA is designed to protect individual investors. II. Under the USA, it is unlawful for an investment adviser to deceive a person when an advisory relationship does not exist. III. Sanctions for both investment advisers and broker-dealers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions. IV. It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities. A)III and IV B)I and III C)I and II D)II and IV
A)III and IV Sanctions for violations are administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is also true that any individual, whether technically defined as an adviser or not, may not deceive another person when providing investment advice if he is compensated for providing the advice. However, the Uniform Securities Act has no jurisdiction over an investment adviser when the deceitful action occurs in a non-advisory situation, such as social interaction.
An agent has a part time job as an usher at an NFL football team's stadium. His primary function is to provide assistance to those who are seated in the luxury boxes. While serving drinks, he overhears a discussion about a planned hostile takeover bid that will be made during the coming week. What should an agent do when he comes across material, non-public information like this? A)Keep it confidential B)Only use the information for trades in his personal account C)Report it to the firm's trading desk D)Only use the information for his discretionary account clients
A)Keep it confidential When a securities professional is made aware of material non-public information, there are only two choices on the exam that can be correct: (1) keep it confidential or (2) report it to the appropriate supervisor (not the trading desk—can you imagine what traders would do with this information?).
All of the following are unethical or prohibited practices EXCEPT A)divulging names and financial data on advisory clients in response to a subpoena B)misrepresenting the status of an advisory client's account C)an investment adviser disclosing details of advisory client's accounts without the consent of the client or a court order D)failing to disclose commissions in addition to advisory fees
A)divulging names and financial data on advisory clients in response to a subpoena Investment professionals must divulge confidential client information under subpoena. All the other practices are unethical.
Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of the following EXCEPT A)omitting non-material information from a sales presentation B)engaging in any fraudulent or deceitful practice in the normal course of business C)engaging in any practice that the Administrator defines by rule as unethical D)employing any device, scheme, or artifice to defraud
A)omitting non-material information from a sales presentation It is only the omission of material information that is fraudulent. If information is immaterial, it may be left out.
Alice Allison, an agent with Winmore Securities, a registered broker-dealer, introduced some of her clients to an old college friend who was raising funds for a new start-up venture. Those who invested in the deal did so by having Alice transfer funds from their account at Winmore to the start-up. Alice did not charge or receive any compensation for doing this. Because of this limited role, Alice did not notify her supervisor at Winmore. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, Alice has engaged in the unethical business practice of A)selling away. B)churning. C)front running. D)sharing in accounts.
A)selling away. As limited as Alice's activity appears to be, this would be considered arranging for a securities transaction "away" from her broker-dealer. This would be permitted if Alice had received written authorization in advance from her employing broker-dealer.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following are required for an agent to lawfully share in the profits of a customer's account? I. The customer's written approval II. The broker-dealer's written approval III. The agent may share only in proportion to his or her own financial contribution to the account A)I, II, and III B)I and II C)I and III D)II and III
B)I and II To share in a customer's account, written consent of both the client and the broker-dealer need to be obtained. Unlike FINRA rules, there are no requirements for proportionate sharing.
Written discretionary authorization is not required for an agent to choose which of the following order instructions? I. Security to be bought or sold II. Number of shares to be bought or sold III. Time of execution IV. Price of execution. A)I and III B)III and IV C)II and IV D)I and II
B)III and IV If an agent chooses price or timing of an order only, that order is not a discretionary order and a written discretionary authorization is not required. To be discretionary, the agent must choose one or more of the following: the action (buy or sell), the asset (the specific security), or the amount (number of shares).
Agents A and B work for the same firm and wish to share commissions. Agent A is licensed in states X, Y, and Z. Agent B is licensed in states X, Y, and C. Which of the following statements is TRUE in regard to their sharing commissions? A)All commissions from agents A and B can be shared. B)Only the commissions from states X and Y could be shared. C)Only the commissions from states Z and C could be shared. D)Commissions cannot be shared.
B)Only the commissions from states X and Y could be shared. In order to share commissions, agents must be registered as an agent for the same broker-dealer or for an affiliated broker-dealer. Additionally, in order to receive a commission, an agent must be registered in the state where the transaction is made.
At a charity ball, you are introduced to someone who, upon hearing your name, exclaims that he has heard that you are doing a magnificent job managing his best friend's investment portfolio. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, it would NOT be a violation for you to A)indicate that most of the performance was due to the large number of IPOs you were able to place into the account B)acknowledge the fact that the friend is a client C)accept the compliment and comment on the portfolio's year-to-date return D)deny that the friend is your client
B)acknowledge the fact that the friend is a client It is normally prohibited to tell others who your advisory clients are without their consent. However, under these circumstances, you would be permitted to affirm that this is your client but say nothing more about the account. Denying that the friend is your client would be lying—you can't do that and it would get back to the client.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is unlawful for an agent to A)solicit orders for unregistered securities in exempt transactions B)make trades in a customer's discretionary account in excess of what would be considered suitable for that client C)trade frequently in a customer's account D)acknowledge third-party trading authority
B)make trades in a customer's discretionary account in excess of what would be considered suitable for that client Securities need not be registered if the transaction is exempt. Agents may act on properly acknowledged third-party trading authority. But agents may not make trades in a customer's discretionary account in excess of the customer's suitability limitations. Trading frequently is not the same as trading excessively. If within the client's objectives and risk tolerance, frequent trading might be fine - excessive trading never is.
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 A)an illegitimate sales tactic B)not an unethical sales practice C)only problematic if investors lose money in the investment D)only problematic if Bryan sells his shares after informing the other investors
B)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. Otherwise, this would be an ethical problem.
Maplewood Money Managers (MMM), an investment adviser with over $250 million in assets under management, directs a substantial portion of their client's securities transactions to Columbia Securities Incorporated (CSI), a registered broker-dealer. If, in response to the business generated by those transactions, CSI provided software that enabled MMM's investment adviser representatives to generate comprehensive portfolio reports for their client accounts, this would be A)permitted as compensation to MMM, but only if they were also registered as a broker-dealer B)permitted as soft-dollar compensation under Section 28(e) of the Securities Exchange Act of 1934 C)permitted, but the value of the software would have to be used as an offset to the fees charged to MMM's clients D)prohibited as it would be a violation of MMM's fiduciary duty to their clients
B)permitted as soft-dollar compensation under Section 28(e) of the Securities Exchange Act of 1934 Soft-dollar compensation is the provision of services (soft) rather than money (hard) to investment advisers by broker-dealers to thank them for directing advisory client's securities transactions to them. Section 28(e) of the Securities Exchange Act of 1934 permits this activity and has, in fact, created a safe harbor for those services that benefit the client. Included in that safe harbor is software that benefits the client.
An agent omits certain details about an issue during a sales presentation. This omission would be fraudulent if A)made to an individual client, but not to an institution B)the information was material and was necessary to make other statements not misleading C)the information was not available in the prospectus D)this were a solicited transaction
B)the information was material and was necessary to make other statements not misleading All material information must be disclosed. Omission or misstatement of material information would be prohibited.
The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket? A)Customer name, customer address, execution price, time of execution or cancellation B)Customer name, execution price, time of order entry, and time of execution or cancellation C)Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order D)Account number, customer address, time of order entry, and terms and conditions of the order
C)Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order This is one of those questions where the best way to find the answer is by determining what is NOT correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed) and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.
NASAA has a Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents in Connection with Investment Company Shares. One of the things the Policy does is restrict statements that may be made when referring to a mutual fund as "no-load". I. Under the Policy, one could claim or imply that a mutual fund is no-load as long as the fund did not have a contingent deferred sales load II. 12b-1 fee in excess of .25% of average net fund assets per year III. service fee in excess of .25% of average net fund assets per year IV. front-end load in excess of .25% of the purchase price A)I and IV B)I, II, and III C)II and III D)I, II, III, and IV
C)II and III There are four things that will prohibit a fund from being referred to as no-load: 1. ANY front-end load 2. Any CDSC 3. A 12b-1 charge in excess of .25% of average net fund assets per year 4. A service fee in excess of .25% of average net fund assets per year So, what is wrong with choice IV? Any front-end load, even one LESS than .25%, will lead to a prohibition against using the term no-load.
A friend of an agent wants to sell a security and asks if the agent can guarantee a certain price. The friend offers to share his profits with the agent in return for a guaranteed price. Is this practice permissible under the Uniform Securities Act? A)No, this is an example of commingling. B)No, this is unethical because an agent cannot share profits with a customer. C)No, this is unethical because the agent cannot guarantee trade prices. D)Yes, it is permissible if it is disclosed as a joint proceeds transaction and has been approved in advance by his principal.
C)No, this is unethical because the agent cannot guarantee trade prices. This practice is not permissible under the USA because guaranteeing profits is unethical. Agents are allowed to share profits in a customer account under certain circumstances with the client and firm permission. Commingling is the act of combining customer assets with those of an agent.
A client sends a check to her agent every month to fund the purchase of a mutual fund for her IRA. The agent places the checks in a safe in the office and then, once each quarter, forwards the checks to the mutual fund. This would be A)acceptable as long as the agent is forwarding the checks on a quarterly basis B)acceptable because by placing her checks in the office safe, the agent is supplying the proper protection for her checks C)a prohibited practice because all checks must be forwarded promptly D)permitted, but only if the agent contributed an amount equal to the interest earnings lost due to holding the checks
C)a prohibited practice because all checks must be forwarded promptly Keeping customer checks is never allowed. All funds must be promptly transmitted. This is a form of commingling.
All of the following are general principles of the prudent investor standard EXCEPT: A)reasonable expected returns. B)liquidity of investment. C)profit guarantees. D)diversification.
C)profit guarantees. The prudent investor standard does not require a guarantee of profit, but it does include using skill and caution to achieve diversification, liquidity, and the goal of obtaining a reasonable return based on a reasonable amount of risk.
An agent sells her customer $10,000 of 15-year U.S. Treasury bonds. If the agent tells the customer this is the best investment due to the absolute safety of Treasury securities, the agent has acted A)lawfully, because Treasury securities are the safest among all domestically available debt instruments B)lawfully, because Treasury securities carry no default risk C)unlawfully, because the term "absolute safety" implies that the customer cannot lose money D)unlawfully, because allocating the customer's entire $10,000 into bonds ignores the customer's need for diversification
C)unlawfully, because the term "absolute safety" implies that the customer cannot lose money Implying or stating to customers that they cannot lose money when investing in a marketable security is prohibited. Although Treasury securities carry no default risk, the customer faces potential interest rate risk, particularly in light of the bonds' 15- year maturity.
For purposes of safeguarding customer information, which of the following would be considered a covered account? A)An account in the name of the Wells Morgan Bank B)An account in the name of the State of X employee pension fund C)A margin account in the name of the Interglobal Hedge Fund D)A margin account in the name of MaryBeth Simmons
D)A margin account in the name of MaryBeth Simmons The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.
An agent's customer says that ABC Corporation is about to be bought out. The customer wishes to place an order to buy ABC common stock based upon this yet unreleased information, which he claims he learned from an officer in the company. How should the agent respond in this situation? A)Accept the customer's order and mark it solicited B)Bring the information to the attention of the State Securities Administrator C)Discuss the matter with other, more experienced agents of the firm to evaluate the validity of the information D)Bring the information to the attention of the firm's supervisory individual named to handle such matters in the Supervisory Procedures Manual
D)Bring the information to the attention of the firm's supervisory individual named to handle such matters in the Supervisory Procedures Manual The customer seeks to place an order based on inside information or rumor. The agent should not accept the order before discussing it with her supervisor/principal. Under no circumstances should the agent repeat the information to fellow agents. There is no requirement that such information be reported to the state securities Administrator.
An agent learns of material, inside information regarding a company that is publicly held. Which of the following with respect to the information would NOT violate the Uniform Securities Act? A)Discussing the information at a seminar but not making an investment recommendation B)Soliciting orders based on this information C)Trading for the agent's personal account based on this information D)Discussing the situation with a superior or compliance officer in the agent's firm
D)Discussing the situation with a superior or compliance officer in the agent's firm Discussing the situation with a superior or compliance officer is the appropriate action. An agent may not solicit or trade on the basis of material inside information. Discussing material inside information in a public forum is prohibited, regardless of investment recommendations.
Which of the following is a prohibited business practice? I. Executing a trade for a client on the orders of a client's attorney without third-party trading authority II. Executing a purchase order at market when the price of the security was falling III. Accepting a loan of money from a customer who is an immediate family member and is the chief loan officer at a bank A)I, II, and III B)II and III C)I and II D)I and III
D)I and III An agent can always execute an unsolicited market order but may never accept unwritten third-party orders or a money of securities from a customer, regardless of the family relationship. Loans from clients who are lending institutions are permitted, but not from the individuals who work for them..
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? A)Oil and gas exploration program that you know is going to strike B)Municipal bonds C)Call options D)Large-cap income stocks
D)Large-cap income stocks This customer needs income. Of the answers provided, the large-cap stocks would be the 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.
Under the Uniform Securities Act, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT A)Have client funds and securities examined at least once a year by an independent public accountant on a surprise basis B)Maintain one or more separate bank accounts where client funds are deposited and keep customers' securities clearly marked and segregated C)Notify the Administrator in writing that the adviser is maintaining custody D)Send clients itemized statements no less frequently than every 6 months detailing the funds and securities in the adviser's custody at the end of the period
D)Send clients itemized statements no less frequently than every 6 months detailing the funds and securities in the adviser's custody at the end of the period The adviser must send clients quarterly (not semi-annual) itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. The adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.
James Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is TRUE? A)The antifraud provisions of the USA do not apply to Jones because he is not suitably trained nor does he have a securities license. B)Jones's failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration. C)As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act. D)The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
D)The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security. The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent could not A)open a joint account with a family member B)select the specific security to be purchased in a discretionary account C)sell shares of a new issue to a client D)borrow money from a client pursuant to a written agreement with the client and with the permission of the broker-dealer
D)borrow money from a client pursuant to a written agreement with the client and with the permission of the broker-dealer The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents is quite clear that you can only borrow money from a client who is in the money-lending business, such as a bank or credit union.
Under the Uniform Prudent Investor Act of 1994, trustees are required to A)consider the risk of each investment on its individual merits B)delegate investment functions to qualified persons C)limit the diversification of the portfolio so as not to subject it to undue risk D)exercise reasonable care, skill, and caution over the assets they manage
D)exercise reasonable care, skill, and caution over the assets they manage The UPIA knows that trustees can't be perfect, but they must use care, skill, and caution to conserve the value over the assets they manage. Delegation of investment functions is permitted, but not required. The risk of each investment must be viewed in the totality of the overall portfolio, not as an individual unit, and limiting the diversification generally increases the risk.
All of the following activities would be considered a form of market manipulation EXCEPT A)disseminating false information about a trade B)giving market quotes that can be easily misinterpreted C)entering matched buy and sell orders to attract attention to the security D)improper hypothecation
D)improper hypothecation Improper hypothecation (pledging a client's securities as collateral for a loan without the proper documents) is a prohibited business practice, but it has nothing to do with manipulating prices in the market. Stating falsehoods about trading activity, misrepresenting prices, and matched orders are examples of market manipulation.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may not use the term "no-load" to describe a mutual fund if A)it does not offer breakpoints B)the minimum initial investment is $10,000 C)it has service fees in excess of .10% D)it has a 12b-1 charge in excess of .25%
D)it has a 12b-1 charge in excess of .25% Any mutual fund with a 12b-1 charge or service fee in excess of .25% cannot use the term, "no-load".
An agent offers to sell a new issue of an unregistered, exempt security to a wealthy individual investor's account through a private placement. The offer is accepted and the transaction is executed. If the agent has not obtained satisfactory suitability information for this transaction, this is A)permitted because suitability is not required for exempt securities B)permitted because wealthy investors are not required to provide suitability information C)permitted because suitability is not required for exempt transactions D)not permitted because an agent is required to make reasonable and suitable recommendations
D)not permitted because an agent is required to make reasonable and suitable recommendations Agents are required to suggest investments that are suitable to an investor's objectives and financial resources. Investment recommendations must be suitable to the client whether the client is a wealthy investor or not and whether the securities or transactions are exempt from registration or not.
If an investor bought stock on one exchange and sold it at a higher price on another exchange, this practice constitutes a(n) A)violation under both the USA and federal law B)offense punishable by 3 years in the county jail C)violation of the Uniform Securities Act D)perfectly acceptable market arbitrage
D)perfectly acceptable market arbitrage This common practice is perfectly acceptable. Arbitrage is the practice of buying on one exchange and selling on another to take advantage of market disparities.
If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A)a violation in certain states B)a violation under all circumstances C)permitted if the secretary is also registered as an agent D)permitted if the secretary is also registered as an agent with the broker-dealer
D)permitted if the secretary is also registered as an agent with the broker-dealer If the secretary is a registered agent with the same, (or affiliated) broker-dealer, then the agent may split commissions. However, in contrast to almost everything else in this business, this practice does not have to be disclosed to clients.
In order to function as a broker-dealer on the premises of a financial institution A)all agents must be employees of the bank B)any networking arrangements between the bank and the broker-dealer must be clearly disclosed C)the bank must own the broker-dealer D)the broker-dealer must clearly distinguish between the operations of the broker-dealer and the retail banking operation
D)the broker-dealer must clearly distinguish between the operations of the broker-dealer and the retail banking operation
