Mastery Exam II
An agent receives physical certificates from a customer that the customer wishes to deposit to his brokerage account. Which statement is TRUE? A. The agent must forward the certificates to the broker-dealer immediately B. The agent must enter the certificates into street name and destroy the old certificates immediately C. The agent can accept the securities for safekeeping for no longer than 3 months D. Under no circumstances can a broker-dealer take physical custody of securities unless approval of the Administrator is obtained
A. Broker-dealers take custody of clients funds and securities as part of the business and must maintain minimum net capital in order to do so. (In contrast, investment advisers do not "routinely" take custody and must notify the Administrator if they intend to do so and must follow NASAA's custody rules for IAs.) If an agent receives securities from a client to be placed in custody of the broker-dealer, the certificates must be forwarded to the broker-dealer immediately.
Which of the following can be purchased on margin? A. Mutual fund shares B. Options C. Futures D. OTCBB issues
C. NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures markets are not subject to Regulation T and have their own margin requirements, which are quite low. Futures contracts can be purchased on margin. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.
A federal covered registered investment adviser completes a notice filing with the State on October 1st. This will: A. expire on October 1st of the following year B. not expire because it is not a registration filing C. expire on December 31st of the current year D. expire on January 1st of the following year
C. All registration and notice filings made in a State, whether by a broker-dealer, agent, investment adviser or investment adviser representative, expire on December 31st unless renewed (which requires the payment of an annual renewal fee, which is what the States are really looking for!).
A broker-dealer is a syndicate member in a negotiated underwriting of revenue bonds issued by the City of Jacksonville, Florida Industrial Development Authority. If the issue is oversubscribed, under NASAA rules, it would be unethical for the bonds to be sold to: A. residents of Florida B. employees of the broker-dealer that are Florida residents C. institutional investors in Florida D. investors that are non-residents of Florida
B. When a broker-dealer does a new issue offering, it must make a "bona-fide" sale to the investing public and cannot retain part of the issue for itself or for its employees. If this were permitted, the broker-dealer would have the incentive to "underprice" the issue and then buy it for itself; intending to turn around and resell it for a profit. This would be in addition to any underwriting fees earned by the broker-dealer. The issue can be sold to both Florida and non-Florida residents, as long as it is suitable. While it is typically the case that only State-residents will get the highest tax benefit if they buy an issue of that State, it is not always true. There are situations where out-of-state residents can benefit by buying bonds (for example, by buying taxable bonds of a State, and these are taxable bonds).
An application to register securities may be filed by all of the following EXCEPT a(n): A. Broker-Dealer B. Investment Adviser C. Issuer D. Person on whose behalf the offering is to be made
B. Applications to register a security in a State cannot be filed by agents; nor can they be filed by investment advisers. They may only be filed by the issuer; or a broker-dealer acting for an issuer; or the person on whose behalf the offering is being made (for example, an officer of a company effecting a secondary distribution of a large block of shares that he or she holds can file a registration application).
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. Investment adviser representatives cannot borrow funds from customers (unless the customer happens to be a bank, broker-dealer, or lending institution). NASAA prohibits agents from borrowing from family members that are customers; but there is no prohibition on borrowing from family members that are not customers of the adviser.
All of the following are examples of market manipulation EXCEPT: A. disseminating rumors B. churning C. painting the tape D. wash trades
B. Market manipulation means that the price of a security is being manipulated in the market away from the true market value. Disseminating rumors to get people to buy or sell that stock, especially if it is thinly traded, will certainly get the price moving! "Painting the tape" is a term for doing rapid-fire buy/sell trades in that security to show action on the tape, without an actual ownership change. This activity will attract other market participants to trade, again moving the stock's price. Wash trading is another term for "painting the tape." Churning a customer's account is illegal, but it is not market manipulation. Churning is executing trades in a customer account that are excessive in frequency or size, just to generate commission income for that agent.
An investment adviser representative's friend provides him with a list of 10 prospective clients. The representative agrees to pay his friend a referral fee for each person on the list that opens an account with the adviser. Which statement is TRUE? A. The arrangement is permitted without restriction B. The arrangement is permitted only if it is in writing between the investment adviser and the friend C. The arrangement is permitted only if it is in writing between the investment adviser and the friend and the arrangement is disclosed in writing to any customer opening an account D. The arrangement is prohibited
C. An investment adviser that pays a referral fee to another individual for finding new clients comes under SEC Rule 206(4)-3 covering solicitors. An investment adviser can only pay a solicitor if there is a written agreement between the adviser and the solicitor. The investment adviser must give the customer its brochure and the solicitor's brochure, in which the referral fee arrangement must be disclosed.
Which of the following is NOT EXCLUDED from the definition of an "investment adviser"? A. Broker-dealer B. Trust company C. Insurance company D. Savings and loan
C. Excluded from the definition of an investment adviser are: investment adviser representatives, broker-dealers, depository institutions (banks, trusts, savings and loans), professionals (lawyers, accountants, teachers, engineers) and newsletters that do not render advice based upon a specific client situation. Insurance companies and investment companies are not excluded from the definition (though they may be exempt from registration under certain circumstances).
An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is: A. permitted if the IAR opens a joint account with the customer; contributes capital; and shares in proportion to the capital contributed B. permitted if the Administrator is notified that the Investment Adviser is taking custody C. permitted only if the Investment Adviser does not charge an advisory fee D. prohibited
D. Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.
At the initial registration of a broker-dealer, which of the following individuals would automatically be registered as an agent of that broker-dealer? I Officer of the broker-dealer II Director of the broker-dealer III Partner of the broker-dealer
D. ALL The registration of a broker-dealer automatically constitutes the registration of that firm's officers, partners, and directors as agents since all of these individuals are named in the registration document
ADAP Advisors is a State-registered adviser with 7 IARs. One of the IARs, Mark, leaves the employ of ADAP to join another advisory firm. His accounts are assigned by ADAP to the remaining 6 IARs at ADAP. By taking this action, ADAP: A. is required to notify each of Mark's customers of the change of IAR and get the customer's approval B. is required to send a negative consent letter to each of Mark's clients and if no response is received, the assignment is permitted C. has violated the Investment Advisers Act of 1940 because advisory contracts cannot be assigned D. is not required to take any further action
D. The transfer of an investment adviser account to another investment adviser must be approved by the customer. However, this situation is different. The advisory client's account is being transferred to another IAR at the same firm. This is not an assignment of the account to another adviser. The customer's contract is with the advisory firm; not the IAR. The firm can reassign customer accounts to any IAR at the same firm without notifying the customer.
The filing of an updated Form ADV with the SEC by a Federal Covered Adviser at fiscal year end is: A. only required if there are material changes in the content compared to the information included in the previous year's filing B. only required the adviser will, for the first time, take custody of client funds C. only required if the adviser was registered with a state in the preceding year D. required for each Federal Covered Adviser without exception
D. The updated Form ADV must be filed each year with the SEC by Federal Covered Advisers - there are no exceptions. The filing is due within 90 days of fiscal year end. Note that the updating ADV amendment must be filed with NASAA under the same time frame for State-registered advisers.
