63 Exam 7
Under the USA, which of the following persons is considered an agent of a broker-dealer and required to be registered as such?
A person who accepts orders for limited partnership units as a sales assistant: The term agent includes any person who represents a broker-dealer in executing or attempting to execute purchases or sales of securities. In this question, notice that the secretary is not soliciting orders to buy or sell and is not executing or attempting to execute transactions. According to the USA, commodity futures contracts are not considered securities.(15595)
All of the following must be obtained by an agent opening a new account for a customer, EXCEPT:
An e-mail address: There is no requirement to obtain a customer's e-mail address. All the other information must be obtained to open the account. (88901)
Which of the following statements is TRUE regarding an options account?
Before entering an options order, the broker-dealer must deliver the Options Disclosure Document to the customer: When opening an options account, the customer must receive the Options Disclosure Document. This document must be sent to the customer no later than the time the Registered Options Principal approves the account for trading. The firm may not enter an order for the customer until the account is approved for trading. Thus, the firm must send the document to the customer before the customer's first options order is entered. The customer has 15 days to return the options account agreement. (88932)
According to the USA, which of the following statements is NOT TRUE regarding investment advisory contracts?
Compensation of the investment adviser can be based on a share of capital appreciation of the client's funds as long as the period occurs between defined dates: As a general rule, the USA prohibits an IA from being compensated based on a performance basis. In other words, the IA's compensation cannot be based on capital appreciation. Instead, IAs may be compensated on the value of the assets in the client's portfolio. Provisions regarding the assignment of contracts or notification regarding change of ownership are required to be included in investment advisory contracts.(15599)
An agent's customer sends her an order indicating that he wants to purchase 100 shares of BCD stock, which has been listed on a national exchange for the last 10 years. According to NASAA regulations, what's the prospectus delivery requirement for this purchase?
Delivery of the prospectus is not required in this situation since BCD's shares are not a new issue: A prospectus must be delivered by no later than the confirmation of the purchase of a "new" issue. However, since the transaction in this question is a secondary market transaction, there is no prospectus delivery requirement.(15592)
Under the Uniform Securities Act, which of the following statements is TRUE regarding the registration of investment advisers (IAs) and investment adviser representatives (IARs)?
IARs are required to be registered in a state even if the IA is registered there: Under the USA, it's unlawful for any registered investment adviser to employ an investment advisor representative unless the IAR is also registered.(15593)
Which of the following actions will require an adviser to register under the USA?
Selling investment management services: Under the Uniform Securities Act (USA), firms that sell securities are typically required to register as broker-dealers, not investment advisers. On the other hand, firms that sell management services are required to register as investment advisers under the USA. (15406)
Which of the following is grounds for denial, revocation, or suspension of a broker-dealer's registration?
The discovery that the broker-dealer failed to supervise its agents: A failure to supervise charge is considered grounds for denial, suspension, or revocation. However, minor rule infractions or pending legal issues against an individual director are not reasons to take action.(15598)
Which of the following is NOT defined as an IAR?
A person that manages portfolios and assets for its clients: This is a challenging question, but three of the choices listed are clearly considered investment adviser representatives (IARs). A person who provides advice as an employee of an investment adviser, a person who solicits business for an investment adviser, and a person who manages other IARs for an investment adviser each meet the definition of an investment adviser representative. On the other hand, a person managing portfolios could be either an individual or a business. Keep in mind, if the person is a business (firm), it's considered an investment adviser (IA) and not an investment adviser representative (IAR). (18776)
State Administrators have certain authority regarding the establishment of requirements related to net capital and registration of broker-dealers. Which of the following BEST describes this authority?
Administrators can act in the public's best interest and establish appropriate minimum net capital requirements for broker-dealers: The Administrator may set minimum net capital requirements which are deemed to be in the public's best interest and appropriate. Remember, as it relates to minimum net capital requirements, a state Administrator cannot impose a requirement that exceeds the SEC (federal) requirement.(15591)
An agent's customer places an order and tells the agent to buy XYZ stock "when the price is right." The customer goes out of town on business and cannot be reached when the agent learns of news about XYZ which the agent believes will drive the price of the stock up. Which of the following actions should the agent take?
Do nothing until the customer can be reached: NASAA's Model Rules prohibit an agent from executing a trade without written authorization or exercising discretionary trading authority without the prior written authorization of the client. Discretion that's limited to the time and/or price of execution can be given to an agent, but only until the end of a trading day. For any time exceeding one day, the authorization must be in writing in the form of a discretionary account.(15601)
When developing trust with a client, which of the following actions by an investment adviser representative is detrimental to this process?
During the first meeting with the client, informing her that it's wise to increase her risk tolerance: If an IAR believes that a client's risk tolerance is too low for her stated financial goals, then such issues should be discussed. However, immediately informing the client that her risk tolerance is too low and recommending that she increase it without fully understanding her situation will not assist in building trust with her. All of the choices are either requirements (providing financial information or other disclosures) or are honest statements of the IAR.(15602)
An individual is an investment adviser representative of a state-registered investment adviser. Under the Uniform Securities Act, even if the IAR has no place of business in the state, registration is required if her clients include which of the following?
Eight accredited investors: If an investment adviser's clients are limited to investment companies (mutual funds), employee benefit plans, and other investment advisers, the adviser (and its IARs) is exempt from registration under the USA. However, accredited investors can include wealthy individual investors. To do business with more than five of these clients, registration is required. (15600)
An investment adviser must maintain a record of any communication including that which appears on its social media site for what period of time?
Five years from the date of the last entry: Investment advisers are required to maintain books and records for at least five years from the date of the last entry. The first two years, records must be maintained in the principle office of the adviser, after which they may be stored in an easily accessible location for three years. (88930)
An agent is registered in State A. Her broker-dealer is registered in State A and State B. The agent's client has moved to State B. In order to continue to service the client, which of the following is TRUE? 1. The agent must register in State B 2. The agent may continue to service the client for up to 60 days while their registration is pending 3. The agent must be a member of an SRO (i.e., FINRA) 4. The agent must be registered in at least one state
I, II, III, and IV: All the conditions must be met in order to service the client in State B. (88926)
The Administrator may take administrative action against an agent who willfully violates any provision of which of the following acts? 1. The Securities Act of 1933 2. The Securities Exchange Act of 1934 3. The Investment Advisers Act of 1940 4. The Investment Company Act of 1940
I, II, III, and IV: The Uniform Securities Act established a cause for administrative action against an applicant or registrant (i.e., agent) who willfully violates any provision of federal security acts. (88924)
Which following statements about new customer accounts are TRUE? 1. A customer may use a P.O. Box as the address of record when opening a new account 2. The broker-dealer must obtain the customer's suitability information before the first transaction in the account is executed 3. All accounts must be approved by a registered principal 4. The customer's new account information must be kept for at least 6 years
III and IV: A customer may not use a P.O. Box to open an account. (The customer may have his mail be sent to a P.O. Box if he wants.) Broker-dealers and their agents must make a reasonable attempt to obtain suitability information about a customer, but they are not required to do so. The regulators recognize that some customers may refuse to provide this information. However, without suitability information, it will be very difficult for the agent to make any recommendations to the customer. A qualified principal of the firm must approve all new accounts, and the customer's new account information must be kept for at least 6 years after it is last updated, or the account is closed. (88902)
When can an agent of a broker-dealer and a client share in an account?
If the agent is exposed to risk that's proportionate to his investment in the account: In order to share in a client's account, an agent needs to obtain approval from the client and a supervisor of the broker-dealer. In addition, the agent can only take profits in proportion to his investment in the account. (15411)
The sole proprietor of a state-registered investment advisory firm creates a Facebook page and LinkedIn profile in his own name, not that of the firm. All of the following statements regarding these social media sites are TRUE, EXCEPT:
Neither are considered advertising according to the NASAA Model Rules for Investment Advisers: Both the Facebook page and the LinkedIn page would be considered investment advisory firm advertising. All the other statements are true. Remember copies of investment adviser advertising must be kept for five years after they are last used. Broker-dealers must keep advertising for three years after the materials are last used. (88912)
When opening a brokerage account, a customer need not disclose which of the following?
P.O. Box: When opening a brokerage account, an agent should attempt to obtain all the affirmation information except a P.O. Box. Rather, the actual residence of the customer is required. (88931)
An agent of Broker-Dealer A intends to open an account with Broker-Dealer B in order to purchase securities that the agent cannot purchase through her employer. In order to open the outside account, the agent must:
Receive written permission from her employer: Before opening an account at another broker-dealer, an agent must obtain the written permission from her employer. An agent who's opening an account at another firm is NOT required to obtain her employer's permission if the transactions are limited to mutual funds, variable products, or unit investment trusts. An agent is NOT required to arrange for a supervisor to review her confirmations and statements. However, a broker-dealer that opens an account for an agent who's affiliated with another firm must send these documents to the agent's employer upon request. (18774)
An Administrator can take which of the following actions if an agent violates the USA?
Revoke the agent's registration: An Administrator can revoke the registration of an individual who has violated the Uniform Securities Act. However, only a state criminal court may enjoin, fine, or imprison an individual who violates the USA. (15410)
A client asks her IAR to develop an updated comprehensive financial plan for her. After creating the plan, the IAR realizes that the client is likely to encounter serious tax consequences over the next several years as a result of changes in the plan. Despite this, the IAR is confident that the financial plan he developed is the best plan for the client. What should the IAR do?
The IAR should suggest that the client seek the assistance of a tax accountant or refer her to one: If the IAR is convinced that the updated financial plan is optimal for the client, he should refer the client to a tax accountant in order to determine whether the tax consequences can be minimized. Part of providing clients with overall service is recommending or bringing in other professionals. Transferring the account is not a viable option since the results will remain the same. If an IAR believes that a plan is the best (optimal) plan for a client, there's no reason to change it. Also, the IAR shouldn't present the plan without mentioning the future tax implications since that goes against the IAR's fiduciary duty. (15582)
Which of the following actions by an investment adviser could violate the Testimonial Rule?
The adviser invites clients to "like" its Facebook page: According to SEC guidance, asking customers to "like" an adviser's Facebook page could violate the Testimonial Rule. Advisers may refer to the ratings they receive from third-party social media sites as long as the site has no material connection with the adviser. IARs can have their own profiles and pages on sites such as LinkedIn and Facebook as long as the adviser can supervise these sites and maintain the required records. (Remember these sites are advertising and must comply with same recordkeeping and supervisory rules as more traditional advertising.) (88904)
An agent of a broker-dealer routinely conducts investment seminars in order to attract new clients. Which of the following statements is TRUE?
The broker-dealer must approve all written materials that are used at the seminar: A principal must approve all written seminar materials and guest speakers beforehand (including advertising or notices for the seminar itself). If an agent regularly conducts sales seminars, then a supervisor should attend random seminars to fulfill the broker-dealer's obligation to supervise the agent. However, there is no need for a supervisor to attend every seminar. (32356)
When opening a margin account, the customer must sign a margin agreement which consists of all the following, EXCEPT:
The deposit agreement: When purchasing securities on margin, a customer must sign a margin agreement. The three sections that comprise a margin agreement are the credit agreement and hypothecation (pledge) agreement, and the loan consent agreement. Both the credit agreement and hypothecation agreement are mandatory, but the loan consent agreement is optional. The credit agreement explains the terms and conditions of the loan and establishes the customer's responsibility to pay interest on the debit balance. The hypothecation agreement stipulates that the customer's securities will be pledged as collateral to support the margin loan. The loan consent agreement allows the firm to loan a customer's fully paid securities to another customer (e.g., to short sellers). There is no deposit agreement associated with a margin agreement. (32355)
Under the Uniform Securities Act, a state Administrator may require the application for registration as an investment adviser to include which of the following?
The financial condition and history of the IA: When filing the initial application for registration, an investment adviser must include its financial condition and history. Once the IA is registered, it must comply with the other requirements listed. (15586)
According to the SEC, an investment adviser may publish the comments it receives on a third-party review site on its own Internet site if:
The site is independent of the adviser and the adviser does not cherry-pick the reviews it receives: According to SEC guidance, an investment adviser (or an IAR) may publish the comments it receives from an independent social media site on its own Internet site or social media page as long as it has no control over the comments. In other words, the site must be neutral. It must permit both positive and negative comments and the adviser must not be able to tailor or sort them so that the favorable ones are highlighted. (88905)
How does an Administrator determine whether excessive trading has occurred in a customer's account?
The suitability of solicited trades in the account: Churning or excessive trading is a prohibited activity. To determine whether churning has occurred, regulators typically examine the suitability of solicited trades (i.e., those which were recommended by agents of a broker-dealer). Unsolicited trades are executed at the client's own volition, without advice from an agent of a broker-dealer, and are irrelevant for churning determination. (15451)
An agent has been given the login and password for a client's account. The client has provided written authorization for the agent to login and place trades in the client's account. This activity is considered:
Unacceptable, since it likely violates the terms of service of the broker-dealer's online account access system: Since the agent is logging into the website using the client's credentials, it's impossible to determine which transactions were entered by the agent and which were entered by the customer. Since broker-dealers cannot identify whether trades were fraudulent, they prohibit the sharing of usernames and passwords in their terms of service. (15447)
An agent is leaving Broker-Dealer A for a better position with Broker-Dealer B. The agent agrees to transfer his clients to another agent who's employed by Broker-Dealer A in return for a share of the commissions earned from these clients for the next year. Under the USA, this arrangement is:
Unethical since the agent will not be employed by the same broker-dealer: This practice is unethical since the agent will not be employed by the same broker-dealer. An agent is only permitted to split commissions with another agent who's registered with the same broker-dealer. (15589)
An IAR receives an unsolicited tweet from a satisfied customer that says "My portfolio just hit a new high. Up 200% in less than 2 years. U r the greatest!!!" The IAR retweets this statement to all of her twitter followers. The IAR has:
Violated both the testimonial rule and the rules about performance advertising: By retweeting the customer's comment, the IAR has potentially violated both the rule against the use of testimonials in adviser advertising and the rules about performance advertising. Advertisements of past performance must conform to a number of specific rules. By retweeting the customer's statement about his portfolio increasing 200% in less than two years, the IAR has advertised his past performance without following these rules. Note that the regulators have expressed concerns about the use of Twitter for communicating performance information since its short format makes it difficult to include the required disclosures. (32325)
An apparent violation of the Uniform Securities Act has occurred. Which of the following is NOT included in the list of possible actions that may be taken by the Administrator?
Without providing for a hearing, the Administrator can immediately revoke the suspected violator's registration: An Administrator is not permitted to revoke a registration without providing appropriate prior notice, the opportunity for a hearing, and written findings, facts, and conclusions related to the alleged violation. The Administrator can initiate an investigation, issue a cease and desist order, or initiate civil proceeds without prior notice. However, firms and individuals who are subject to these actions have an opportunity to appeal. (15588)
A investment adviser representative states that he has a Ph.D. in finance from a prestigious institution on his Facebook page. Is this permitted under the advertising rules?
Yes, as long as the adviser has actually received the degree from that institution: The statement is not misleading as long as the adviser actually received the degree. Remember that advisers may not inflate their credentials or those of their personnel in their advertising or other communications with the public. (88906)
An IAR receives a tweet with a link to an article about a promising new tech company. The IAR retweets the link with the following message "Interesting article about a new tech startup." It is discovered later that the article was published by a stock promoter who falsified several key pieces of information. Neither the IAR nor the adviser had any knowledge that the content was falsified. One of the IAR's twitter followers invested in the company's stock based on the article and sustained a large loss. Can the adviser or the IAR be held responsible for the misleading statements in the article?
Yes, they have adopted the content: By retweeting the link to the article, the IAR has adopted the content. There is a possibility that the IAR and the advisory firm could be held liable for the purchaser's losses. (88908)
