Business Practices Quiz #3 Missed Questions

A customer opens an account at a brokerage firm to purchase securities in an offering. The customer must receive the disclosure document/prospectus: A. no later than the confirmation of the sale B. no later than the settlement of the transaction C. within 7 days of the transaction D. within 90 days of the transaction

A

A market maker in ABCD stock is currently quoting the stock at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to buy 800 shares of ABCD at $42.50, the market maker: A. must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B. must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C. must send the order to a stock exchange floor for execution D. is not required to take any action

A

Broker-dealers may charge: A. commissions on recommended transactions B. advisory fees on recommended transactions C. both commissions and advisory fees on recommended transactions D. commissions, advisory fees and performance fees on recommended transactions

A BDs charge commissions IAs charge advisory fees

Which of the following would be an unethical practice under the Uniform Securities Act? A. Telling a customer that the price of a security is $25 per share if the broker-dealer is the sole market maker in the stock B. Telling a customer that the price of a security is $25 per share if the source of the quote is the NASDAQ system C. Telling a customer that the price of a security is $25 per share if this is the P.O.P. of the issue in a syndicate distribution D. Telling a customer that the price of a security is $25 per share if the source of the quote is the NYSE

A If a broker-dealer is the sole market maker in a stock, then there is no true independent market - the price is whatever the broker-dealer says it is!

A client of an investment adviser representative has enjoyed excellent returns on his portfolio over the past 5 years. The client needs $25,000 of cash, but does not want to sell securities from his portfolio since it is performing so well. He asks the investment adviser representative for a loan, which the investment adviser representative gives. The investment adviser representative is guilty of a: A. fiduciary violation B. churning violation C. selling away violation D. failure to supervise violation

A Investment adviser representatives cannot borrow from, or lend money to, a customer.

An agent of a broker-dealer with discretionary authority has a customer that currently is invested in ABC Speculative Fund. The agent enters an order to sell the ABC Speculative Fund holding and, using the proceeds, enters another order for the client to buy XYZ Speculative Fund. The agent: A. must show that there is a marked difference between the two funds and that the trade was justified B. must show that the commissions earned on the transactions were not a factor in the investment decision C. has committed an unethical practice because the account is being churned D. will be ordered by the Administrator to reverse the trades and refund commissions earned to the client

A The issue here is that the agent is selling one "speculative" fund for this customer and is using the money to buy another "speculative" fund for the same customer. On its face, there is no reason to do this, since they have the same investment objective. Choice A is the best one offered - the agent must be prepared to justify the transactions

Annual audited reports are required to be sent by investment advisers to their clients if the adviser: I holds customer funds II has discretionary control under a full power of attorney over customer accounts III has solicited the customer for advisory business IV has a conflict of interest that has been disclosed to the customer

A If an investment adviser takes custody of customer funds or securities, it must be audited annually and provide a copy of the audit opinion to its customers. The definition of "custody" also includes "any arrangement, including a general power of attorney under which the adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian."

All of the following actions would be permitted under the Uniform Securities Act EXCEPT: A. engaging in wash trades for a customer B. engaging in tax swaps for a customer C. omitting facts when making a recommendation to a customer D. recommending unregistered exempt securities to a customer

A Wash trades are quick "in and out" trades in a stock to create the appearance of trading activity, without any actual change of ownership. This is an unethical practice also known as "painting the tape" - since the ticker tape is being "painted" with phony trades.

An investment adviser is "bought out" by another advisory firm. Which statement is TRUE? A. The sale must be approved by the State Administrator prior to the accounts being moved to the acquiring firm B. Each customer of the "bought out" investment adviser must give prior approval for his or her account to be moved to the acquiring firm C. A majority of the customers of the "bought out" investment adviser must give prior approval for all of the accounts to be moved to the acquiring firm D. There is no requirement for approval from either the State Administrator or the customers

B

What is the best way to ensure that customer account information held at a broker-dealer is not stolen due to cyber theft? A. Require that the customer send a text message to the firm from a registered device before allowing access B. Maintain customer information in a secure website in encrypted form C. Purchase an adequate level of insurance to cover the full range of cyber risks D. Retain third party vendor to evaluate the firm's cyber risks

B

Which of the following can an agent choose in a customer transaction without a written power of attorney? I Security II Size III Price IV Time A. I and II B. III and IV C. I, II, III D. I, II, III, IV

B

Which statements are TRUE about sharing commissions? I An agent is permitted to share commissions with an agent at another broker-dealer that is under common control of the agent's broker-dealer II An agent is not permitted to share commissions with an agent at another broker-dealer that is under common control of the agent's broker-dealer III An agent is permitted to share commissions with an investment adviser representative at another investment adviser that is under common control of the agent's broker-dealer IV An agent is not permitted to share commissions with an investment adviser representative at another investment adviser that is under common control of the agent's broker-dealer A. I and III B. I and IV C. II and III D. II and IV

B Agents of broker-dealers may only share commissions with other registered agents who work at the same broker-dealer or who work at a broker-dealer that is owned or controlled by the same parent entity. An agent cannot share commissions with unregistered agents or with registered agents of other independently-owned broker-dealers.

Under NASAA rules, an investment adviser representative could NOT personally borrow money from a: A. family member that does not have an account with the adviser B. family member that has an account with the adviser C. affiliated broker-dealer that is a customer of the adviser D. bank that is a customer of the investment adviser

B IARs cannot borrow funds from customers UNLESS they are banks, bds, or other lending institutions

All of the following are relevant considerations when determining if a customer account has been churned EXCEPT the: A. customer's investment objective B. length of time that the customer had the account with that broker-dealer C. character of the customer's account D. financial condition of the agent responsible for the account

B The length of time that a customer had an account has no relevance when attempting to determine if churning has occurred.

All of the following actions by an investment adviser are violations of the Uniform Securities Act EXCEPT the adviser: A. makes misleading statements to a client, but the client profits from the advice B. makes misleading statements to a client, but no transaction results from the advice C. discloses the risks of the investment, but the client loses as a result of the advice D. makes misleading statements to a client, but the client is an accredited investor

C

An Investment Adviser that does not take custody of customer funds receives a check from a customer to buy $10,000 of a mutual fund made payable to the Adviser instead of the Fund Custodian. The Investment Adviser should: A. deposit the check to its account and write a check from that account in the same amount made payable to the Plan Custodian B. endorse the back of the check with the Investment Adviser name and, below the endorsement, write in the Fund Custodian's name C. return the check to the customer and ask for a new check made payable to the Fund Custodian D. cash the check and use the funds to buy a money order in the same amount made payable to the Fund Custodian

C

Regarding the use of material facts when effecting customer transactions, which statement(s) is(are) TRUE? I Omission of material facts is fraudulent II If all known facts cannot be presented, the agent must decide which facts are "material" and must be presented III Material facts must only be disclosed if they would have a negative impact on the security's value IV Material facts must be disclosed when making either an offer to buy or sell A. I only B. II and III C. I, II, IV D. I, II, III, IV

C

Which of the following orders MUST be retained as a record by broker-dealers? I Executed orders II Unexecuted orders III Canceled orders IV Subscription orders A. I and II only B. III and IV only C. I, II, III only D. I, II, III, IV

C

Under the provisions of the Prudent Investor Act, a Registered Investment Adviser should consider which of the following when investing and managing trust assets? I General economic conditions II Possible effects of inflation or deflation III Trading patterns of plan beneficiaries IV Investment tax consequences A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV

C General economic conditions; Possible effects of inflation or deflation; Expected tax consequences of investment decisions or strategies; The role that each investment plays within the overall trust portfolio; The expected total return; Other resources of the beneficiaries; Needs for liquidity, regularity of income, and preservation or appreciation of capital; and An asset's special value to one or more of the beneficiaries. The trading patterns of the plan beneficiaries have no bearing on this.

ADAP Advisers is offered a large block of ACME stock (a NYSE-listed issue) by an institutional investor at a 20% discount to the current market price, if ADAP Advisers is willing to buy the block that day. Which statement is TRUE if ADAP purchases the block for its own account rather than for its customers? A. This action is prohibited without exception, since ADAP Advisers is benefiting at the expense of its customers B. This action is permitted if ADAP Advisers rebates any profit that it earns to its customers when it sells the block C. This action is permitted if the purchased stock is not a suitable investment for ADAP's customers D. This action is permitted if the block is purchased in the Third Market during the hours that the NYSE is closed

C Investment advisers have a fiduciary responsibility to their customers and must always put their customers' interests first. Since this block of stock is being offered to the adviser at a substantial discount, the adviser must buy the stock for its customers - but only if the stock is a suitable investment for these customers.

An investment adviser has been in business for the past 10 years. During this time period, the adviser has produced average annual returns of 28% while the Standard and Poor's Index has increased by only 15% over this period. The adviser currently charges an annual fee equal to 3% of assets and wishes to raise it to 5% of assets. This action is: A. prohibited because annual advisory fees can only be increased at the same rate as general inflation as measured by the Consumer Price Index B. prohibited because advisory fees cannot be based on account performance C. permitted only if other advisers that provide similar services to customers are charging a 5% annual fee D. permitted without restriction because advisory fees are set by free market forces

C NASAA requires that advisory fees be comparable to those charged by other advisers that provide similar services

Attaching any of the following to a prospectus delivered to a customer in connection with the purchase of a new non-exempt securities offering would be a violation of the Uniform Securities Act EXCEPT a(n): A. summary of the important points in the prospectus prepared by the broker-dealer offering the securities B. copy of the most recent advertisement published by the issuer in the mass media C. supplement that presents the issuer's most recent audited financial statements D. internal report prepared by the issuer that shows the next 12 months' sales projections

C Prospectuses cannot be altered or summarized by anyone - to do so would change the content and disclosures made to investors.

A customer has placed an order to buy 1,000 shares of ABC stock at the closing market price. In order to get the customer a lower execution price, the agent places an order to sell 100,000 shares of ABC at the end of the day. This is known as: A. Front running B. Block trading C. Marking the close D. Unauthorized trading

C Effecting securities transactions at the close of the market with the intent of manipulating the closing price is a prohibited practice known as "marking-the-close."

Under the NASAA Statement of Policy on unethical practices, the release of customer information to which of the following would NOT be "unethical"? I Securities and Exchange Commission II Internal Revenue Service III Self-Regulatory Organizations IV Registered broker-dealers A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

C The only exception is if the information request comes from a governmental authority such as the SEC, IRS or a self-regulatory organization like FINRA.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that covers all of the following items EXCEPT: A. the protection, backup, and recovery of books and records B. alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel C. minimization of service disruptions and client harm that could result from a significant business disruption D. announcement to the public in local newspapers and on the internet the fact that a significant business interruption has occurred

D

Which statements are TRUE? I Referral fees can be paid by an investment adviser to an unlicensed individual II Referral fees cannot be paid by an investment adviser to an unlicensed individual III Commissions can be shared by an agent of a broker-dealer with an unlicensed individual IV Commissions cannot be shared by an agent of a broker-dealer with an unlicensed individual A. I and III B. I and IV C. II and III D. II and IV

D

Which of the following is (are) prohibited in a margin account? I A customer buying a security without the intention to pay on settlement II A customer selling a security without the intention to deliver on settlement III A customer selling short a security that cannot be borrowed and delivered on settlement A. I only B. I and II C. II and III D. I, II, III

D In any account, whether it be a cash or margin account, a customer cannot buy a security without intending to pay on settlement, and cannot sell a security without intending to deliver on settlement. Short sales can only be effected in a margin account. Selling short a security means that the security to be sold is borrowed from another customer of the broker-dealer. A short sale is not permitted unless it is first determined that the security to be sold can be borrowed and delivered by settlement.

Under the Uniform Securities Act, an investment advisory contract could contain all of the following compensation arrangements EXCEPT: A. monthly fees based on a percentage of the total value of all assets being managed B. yearly fees based on a percentage of all assets being managed, inclusive of any capital gains achieved C. fixed fee levels depending on the total value of assets being managed D. fees based solely on capital gains achieved

D It is prohibited for an investment adviser to be compensated on the basis of capital gains achieved.

Under NASAA rules, within 120 days of fiscal year end, each customer must be sent a(n): A. brochure B. updated brochure C. brochure and brochure supplement D. an updated brochure and brochure supplement

D NASAA rules require that within 120 days of fiscal year end, the adviser must send each customer a revised Brochure (Form ADV Part 2A) and Brochure Supplement (Form ADV Part 2B)

All of the following information must be recorded on an order ticket EXCEPT: A. time of order receipt B. customer account name/number C. name of person entering the order D. time and date of execution

D Time and date of execution is only recorded on an order ticket if it is executed - which may never happen!

A customer has previously signed a non-durable power of attorney giving his spouse power of attorney over his individual brokerage account. Which statements are TRUE? I The power of attorney continues upon the customer's death II The power of attorney ceases upon the customer's death III The power of attorney continues upon the customer's incapacitation IV The power of attorney ceases upon the customer's incapacitation A. I and III B. I and IV C. II and III D. II and IV

D A non-durable power of attorney ceases if the grantor becomes incapacitated. Note, however, that any power of attorney ceases if the grantor dies (the power of attorney dies with the customer!)

An investment adviser is permitted to borrow money from which of the following clients? I An affiliated bank II An unaffiliated bank III An affiliated broker-dealer IV An unaffiliated broker-dealer A. I and II only B. II and IV only C. I and III only D. I, II, III, IV

D An IA CANNOT borrow from a client. An IA CAN borrow from a Bank or BD

All of the following are violations under the Uniform Securities Act EXCEPT: A. failure to make reasonable inquiry as to the financial objectives and needs of a customer B. recommending a security without having a reasonable basis for making the recommendation C. failure to sufficiently describe the material facts and risks about a transaction D. failure to sufficiently describe all facts and risks about a transaction

D Since it is impossible to describe all facts and risks, failure to disclose these is not a violation. The violation is the failure to disclose all material facts.

An agent of a broker-dealer is opening a new client account. The agent has completed the new account application and the suitability determination. The customer has an investment objective of safety of principal and income. The agent makes an initial recommendation of a conservative blue chip stock with a track record of paying a consistent cash dividend. The customer accepts the recommendation. When must the commission charged on the transaction be disclosed to the customer? A. At the time that the order is placed B. At the time when the order is filled C. At the time when the account is opening D. On the confirmation of the transaction

D The only requirement is that the commission be disclosed on the trade confirmation. Also remember that any commission charged must be "fair and reasonable."