Series 63 Chapter 4

Which of the following pieces of customer information must an agent attempt to obtain when opening a new account? I.Emergency contact person II.Financial condition III.Investment objective IV.Education

II and III When opening a new account, the agent normally would request information about the customer's financial condition, investment objectives, and other relevant personal information.

In general, the Administrator would require that a broker-dealer's social media policies

be committed to writing and communicated firmwide

In general, a broker-dealer will disclose any changes to its fee schedule

by notifying clients of the change in advance NOT to the Administrator and then to the clients Most broker-dealers disclose fee changes at least 30 days in advance and there is no requirement whatsoever to notify the Administrator. SO DONT need to notify the Administrator. MOST broker dealers disclose fee changes AT LEAST 30 days in the advance

A person who is vested with legal rights and powers to be exercised for the benefit of another is known as

a fiduciary A fiduciary places the interest of the beneficial owner first, and is morally and legally responsible for acting in that capacity.

According to the U.S.A PATRIOT Act, account identification and verification procedures should be applied to which of the following? I.New individual accounts. II.New business accounts. III.Existing individual accounts. IV.Existing business accounts.

I and II The procedures required by the U.S.A PATRIOT Act for the verification and identification of customer accounts should be applied to all new customers-whether individuals or businesses.

A registered investment adviser has a fiduciary duty to disclose all real and potential conflicts of interests to clients. Which of the following would NOT be considered a conflict of interest?

An investment adviser representative spends about 25% of her time supervising the activities of other investment adviser representatives. The term investment adviser representative includes those who supervise other IARs (there is no principal level registration such as is found with FINRA). Recommending products based on an incentive is fine as well, as long as disclosure is made. IARs can be agents of affiliated or non-affiliated broker-dealers, but the existence of that relationship must be disclosed. Finally, there is nothing wrong with an IAR recommending a security where a family member is a high-level officer, as long as disclosure of that fact is made.

Which of the following actions by an investment adviser representative would be an unethical practice under the Uniform Securities Act?

Failing to tell a customer that the recommended investment will be sold from the inventory of the investment adviser representative's firm Failing to disclose that recommended investments are being sold as principal by the representative's own firm would be an unethical business practice. Whenever the adviser is acting as principal or agent in any transaction recommended to a client, written approval of the client is necessary prior to completion of the transaction. Investment adviser representatives' securities recommendations that result in losses are not unethical nor are commissions with a fellow licensed employee. An investment adviser representative with discretionary authority is not under an obligation to sell a security simply because it is declining in price.

Different types of accounts have different times for receipt of customer information. Which of the following does NOT correctly state the required time for the specified account?

Margin account agreements must be received before the first margin trade in the account. The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents requires that margin account agreements must be received promptly after the initial margin trade in the account. All of the other choices are correct regarding the relevant time of receipt.

Under the Uniform Securities Act, which of the following is NOT required to be in writing in an advisory contract?

The names and titles of all principals in the advisory firm The other choices are specifically required to be in writing in the advisory contract. The method used for computing the adviser's compensation IS REQUIRED IN THE ADVISORY CONTRACT

A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers?

Your free subscription will start once we have received your name and mailing or email address. A free offer must not only be free of financial cost, it must be free of any other burden or commitment.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT

advisory fees There are 3 primary expenses involved with brokerage accounts that are not included in the FEE DISCLOSURE TEMPLATE Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

NOT included in the fee disclosure documents are:

Commissions Markups or Markdowns Advisory Fees

Typical Fees for an Standard Account Include

issuance of stock certificate account transfer wiring funds margin interest annual account fee sakekeeping of certificates

Trade confirmations sent by broker-dealers to their customers must always include

the amount of commission charged Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.

Although all new accounts must be approved by a designated supervisory before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be

an options account NOT a discretionary account Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening. SO supervisor who approves an option account MUST have special knowledge of options accounts, rather than simply being a principal

Investment Advisers and their IARs

have a fiduciary responsibility to identify and address ALL conflicts of interest by either ELIMINATING or DISCLOSING them

An individual walks into the office of a broker-dealer wishing to open a new account. Which of the following information would NOT be required on the new account form?

Marital status Although most new account forms do ask for marital status, it is not a required item as are the other choices given here.

All of the following actions must be completed by the time customers enter their first option trade EXCEPT:

receipt of a completed options agreement. NOT delivery of the options disclosure document (ODD). While other option account requirements must be met no later than the time customers enter their initial options trade, under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

When it comes to advertising by investment advisers and their representatives, which of the following would be most likely to be acceptable to the Administrator?

A "like" from a client on an investment adviser representative's Facebook page post that announced the birth of her most recent child. Although investment advisers and their representatives are prohibited from using testimonials from clients, it has been determined that a Facebook "like" commenting on something of a non-business related manner, such as the birth of a child, a wedding anniversary, admiring photos posted of a vacation, and so forth, is not considered a testimonial. Commenting on the IAR's service would be a testimonial. When showing past performance, an investment adviser cannot "cherry-pick" the ones it wishes to show—all recommendations of similar types of securities (all common stock, or all bonds) must be shown. No securities professional can ever assure investment success—that would be considered a performance guarantee.

When it comes to social media, agents need to understand the difference between interactive and static content. Which of the following would be considered static content?

A broker-dealer's profile posted on Facebook NOT Emails sent to clients Static content is content that remains posted until it is changed by the firm or individual who established the account. Interactive content is generally real-time communications, such as the other three choices shown here.

When an agent recommends a proprietary mutual fund to a client, it is considered

A potential conflict of interest There is nothing improper about recommending a proprietary mutual fund as long as the potential conflict of interest is disclosed. Investment advisers and their representatives have fiduciary responsibility; such only applies to agents in certain limited circumstances. Proprietary mutual funds are offered for sale by the financial institution -- such as a bank, investment company, or brokerage firm -- that sponsors the funds

If AAA Investment Advisers has entered into a written advisory contract with a client that contains a discretionary power, all of the following information must be stated in the contract EXCEPT

AAA Investment Advisers shall be the only party eligible to make investment decisions in the account The discretionary power authorizes the investment adviser to make the investment decisions without prior approval of the client. However, nothing in that power prohibits the client from personally making the decision to buy or sell any assets in the account.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees?

Account closing fees NOT commissions It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are 1.commissions; 2.markups and markdowns; and 3.advisory fees for those firms that are also registered as investment advisers. SO commissions are NOT typically disclosed

Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on asset allocation that harmonizes with WSI's investment philosophy. If WSI should post a link to this article on its website, it would probably be considered

Adoption A firm will be responsible for the content of a linked third-party site if the firm "adopts" its content on any of the firm's sites. Adoption is defined as a firm's endorsement of the content of a third-party site. In this question, by posting a link, WSI is endorsing the content. This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm's policies. Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it.

When does a customer have to receive the options disclosure document?

Before or at the time the firm approves that customer's account or accepts the customer's order to trade options covered by the ODD When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document entitled Understanding the Risks and Uses of Options before or at the time it approves that customer's account or accepts the customer's order to trade options covered by the ODD, the broker-dealer satisfies the risk disclosure requirements.

Which of the following actions should be taken by an agent when a client decides to open an options account?

Before the first options trade, review with the client the risks involved when trading options It is imperative that suitability and risk be addressed with the client before allowing options trading to take place. The ODD must be delivered no later than with account opening, and the signed options account agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading taking place in the account.

When does a customer have to receive the Options Disclosure Document?

Before the first order. When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an Options Disclosure Document entitled "Understanding the Risks and Uses of Options", the broker-dealer satisfies the risk disclosure requirements. Please NOTE: the rules call for two delivery choices; either before the first options trade or at (or before) the time the options account is approved.

Which of the following conditions would most likely meet compliance standards of state regulators?

Both supervisory personnel and agents need to understand the difference between interactive and static content NOT Maintaining an under-the-radar system of monitoring social media use by its agents is permissible when determining compliance with NASAA's rules. Before allowing associated persons to use social media for business purposes, a firm's policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content, between business and non-business communications. A firm should consider requiring training in the use of social media before permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations.

New Account Agreement

Does the client have the legal capacity to enter into an agreement employment information the Customer Identification Program Notice (CIP) concerning helping the government fight terrorism and money laundering, broker dealers are REQUIRED by federal law to obtain, verify and record info that identifies each person who opens an account and asks for FOUR (but really SIX) items: name date of birth residential or business address (SSN) tax identification number Citizenship or visa details Financial info about the client

Unless qualifying for an exemption, which of the following advisory fee structures is NOT allowed under the USA?

Fees based on a percentage of the change in value of funds from quarter to quarter NOT Fees based on an hourly rate Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures.

With regard to a broker-dealer's use of social media, static content would be considered as I.a planned communication to a target audience that is generally not altered II.communication that does not provide for interaction with the author once published III.content used to engage in real-time interactive communications with a target audience IV.a blog that gives readers the opportunity to post comments

I and II NOT II and III A key to recognizing static social media content is that it is usually not changed once published and does not provide a method for interaction (commenting) once published.

The Uniform Securities Act mandates that contracts between investment advisers and their clients I.be in writing II.provide that no discretion may take place without prompt notification to the client III.disclose the method of compensation IV.include steps the adviser plans to take to reach the client's objectives

I and III Any contract must disclose the method of compensation. The USA requires that initial and renewal contracts be in writing. If discretion is to be exercised, it requires consent of the client, not notification. The contract does not necessarily describe any of the investment adviser's plans for reaching the client's goals.

Question ID: 685100 Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I.a charge when a client requests that a stock certificate be issued in his name II.a commission charge when a client buys a security on a listed exchange III.the interest charged by the firm on money owed by customers in their margin accounts IV.fees for providing advisory services to high net worth individuals

I and III If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are 1.commissions; 2.markups and markdowns; and 3.advisory fees for those first that are also registered as investment advisers.

Under the Uniform Securities Act, which of the following is (are) prohibited practices? I.Failing to disclose that one is acting as a principal for one's own account in a securities transaction for which one has received a fee for investment advice II.Selling unregistered, nonexempt securities that are not federal covered securities in transactions that are not exempt III.Engaging in a practice not expressly forbidden by the act, but defined as unethical by the Administrator in a rule

I, II and III A person must disclose the fact that he will act as a broker or dealer in a transaction if a fee was charged for the advice. An unregistered security that is not a federal covered security may not be sold unless it or the transaction is exempt. The act gives the Administrator the power to define certain practices as unethical and prohibits those practices with the same force as the ones spelled out in the act.

Disclosure to customers of a broker-dealer's control relationships is required in I.agency transactions II.principal transactions III.exempt transactions

I, II and III The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.

Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Among the most common ways for making this disclosure are I.presenting a chart with all of the fees II.preparing a list of all of the fees III.displaying the fees in tabular form

I, II and III Whether using a table, a chart, or a list, broker-dealers must make sure that it is easy for customers to determine what the fees and charges are and how they are computed.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an advisory contract? I.Whether the contract grants discretionary power to the adviser II.The term of the contract III.The amount of prepaid fee to be returned in the event of contract termination IV.The formula used for computing the fee

I, II, III and IV Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; and provisions as to whether the adviser has discretionary authority and to what extent.

Securities industry rules require that securities professionals disclose all potential conflicts of interest to their clients. Examples of potential conflicts of interest include I.offering a proprietary product II.an agent having a financial interest in a recommended security III.a broker-dealer publishing a favorable research report after underwriting the issuer's stock offering IV.the sponsor of a mutual fund offering a trip to Key West for all agents reaching a minimum sales level of any of the sponsor's funds.

I, II, III, and IV All of these represent the potential for a conflict of interest that must be disclosed to clients.

An investment adviser plans to sell securities out of its own investment account to an advisory client. In order to do so, which of the following is required? I.A reduction in the fee equivalent to the profit made on the trade II.Consent of the client before completion of the trade III.Written disclosure of the adviser's capacity before completion of the trade IV.Notification to the Administrator of the adviser's plan to act as a principal

II and III In order to act as a principal (or agent) in a trade with an advisory client, there are 2 requirements: •The client receives full written disclosure as to the capacity in which the adviser proposes to act •Consent of the client

Under the USA, when one is referring to a security that is guaranteed, the guarantee applies to I.capital gains to be expected by holding the specified security II.dividends to be paid on the specified stock III.interest and principal payment on the specified bond IV.reimbursement by the firm for any losses suffered while holding that security

II and III The USA defines the term guaranteed as meaning guaranteed as to payment of principal, interest, or dividends.

Differences between static and interactive content on social media include I.Only static content can be reused by others II.Only static content needs pre-approval III.Only static content can be changed by the person who originated it IV.Only interactive content can be commented on by others

II and IV Static content requires pre-approval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static can only be changed by its originator and interactive by the originator or others.

One of your clients has called you to discuss an interesting investment opportunity discovered on one of the LinkedIn groups she participates in. Which of the following factors might increase the likelihood that this is a scam? I.A registration statement with the SEC is available on the website of the proposed investment II.The purchase money must be wired to an offshore account III.One of the members of the group is a principal in the company being offered IV.Bonus shares are offered for recruiting friends into the deal

II, III and IV NOT II and IV Although not foolproof, the existence of an available SEC registration statement greatly reduces the likelihood that a deal like this is a scam. The other choices are certain red flags.

An investment adviser is preparing an advertisement. Which of the following would be acceptable? I.An endorsement on radio or TV from a celebrity who is a client of the firm II.Identifying its best investment recommendations for the past 6 months III.Offering to provide its investment recommendations for the past 12 months IV.Promoting its system of charts and formulas while mentioning its limitations and difficulties

III and IV Any mention of investment recommendations in any investment adviser's advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the investment adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. No outside endorsements are ever allowable on the exam.

Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act? I.The value of a client's account at the start of the year is subtracted from the value at the end of the year. The investment adviser's compensation is 5% of the difference. II.The investment adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. III.The investment adviser charges a fee of 1% of the average value of the account portfolio during the year. IV.The investment adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more.

III and IV Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the investment adviser or $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.

Typical Broker-Dealer Fees

Issuance of a physical stock certificate transferring an account Wiring funds (though this charge is frequently waived for those with larger account balances) Margin Account Interest Account Maintenance Fees Safekeeping of funds/securities (typically waived for larger accounts)

Margin Account Risk Disclosure Form

NASAA does not have one, but FINRA does (and many states use that as a template) As part of opening a margin account, the BD must provide customers with a risk disclosure form. this info must also be provided to the margin customers on an ANNUAL BASIS States the following: you can LOSE more than you deposit in a margin account the firm can force the sale of securities or other assets in your account and do so without contacting you you are NOT entitled to choose which securities can be sold if a call for additional funds is not met you are NOT entitled to an extension of time to meet a margin call the firm can INCREASE its house maintenance margin requirements at any time and its not required to provide you advance written notice

Which of the following is among the items of information that must be entered on a new account form?

Names of all persons who will have access to the account The facts that are required on a new account form are aimed at facilitating the operation of the account, properly identifying the customer, and guarding against money laundering and other illegal activities. Of the choices offered, only the names of those with access to the account would help with these goals, so this item of information is the only one on the list that is required.

Which of the following documents must an existing customer sign to establish a discretionary account?

Trading authorization To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements.

A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities using marginable securities in the account as collateral. Which of the account documents authorizes the use of those securities as collateral for that loan?

The credit agreement It is the credit agreement, sometimes referred to as the margin agreement, which contains all of the terms of the loan. In addition to explaining how the interest is charged and the right of the firm to liquidate collateral if a call for additional funds is not made, the credit agreement contains the terminology which authorizes the broker-dealer to use the value of the account as collateral for the margin loan made by the BD to the client. The hypothecation agreement permits the broker-dealer to pledge the client's margin securities as collateral for a loan that the BD takes out. In simple terms, there are two loans taking place: 1.The loan from the BD to the client with the client's securities used as collateral. That is covered in the credit agreement 2.The loan from a bank to the BD with the client's securities used as collateral for the BD's loan. The authorization for the BD to use those securities is found in the hypothecation agreement.

Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock?

The hypothecation agreement The hypothecation agreement gives permission to the broker-dealer to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities.

A broker-dealer provides HotScores, a portfolio analysis tool which allows clients to indicate their retirement goal. After disclosing age, current financial condition, and risk tolerance, those participating will receive a list of specific securities the customer could buy or sell to meet the investment goal. Which of the following is TRUE?

This would be regarded as making a recommendation. An example of what the regulators have determined to be a recommendation would be if a broker-dealer provides a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The broker-dealer then sends the customer a list of specific securities the customer could buy or sell to meet the investment goal the customer has indicated.

Nifty Advisers Group made an announcement on its website that the firm was going to create a Facebook account to keep all its clients and prospective clients updated on the market. To get the word out, Nifty sent an email notice to its current clients and asked them to please refrain from airing complaints through that account; any negative comments would be addressed through the normal channels. Also, contained in the email was an announcement that all "likes" would receive a one-time 5% decrease in the client's quarterly fees. For this campaign, which of the following are NOT true?

This would not be considered a testimonial and therefore permitted under the regulations. Please note that this question is looking for the statement that is NOT true - in other words, find the false statement. In March 2014, the SEC, but not NASAA, published an interpretive release dealing with testimonials for investment advisers using social media. Included in that release is the statement that third-party use of the "like" feature on an investment adviser's social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's experience with the adviser.

Margin Accounts Require

Two Agreements: the Credit Agreement: which discloses the terms of the credit extended by the broker dealer, including the method of computation and situations under which interest rates may change as well as the stipulation that BROKER DEALER MAY USE THE CLIENT'S MARGIN SECURITIES AS COLLATERAL FOR THE LOAN TO THE CLIENT the Hypothecation Agreement: which gives permission to the broker dealer to pledge customer margin securities as collateral (to the bank, and the bank loans money to the broker dealer on the basis of the loan value of these securities **optional loan consent form: gives permission to the firm to loan customer margin securities to other customers or broker dealers, usually for short sales loan from bd to customer COVERED BY CREDIT AGREEMENT loan from the bank to the BD is COVERED BY THE HYPOTHECATION AGREEMENT

Disclosure of Fees

Typically disclosed when a customer account is opened (Must be up to date) Fee Changes (typically must notify customers at least 30 days in advance) methods used include email, postal mail or website Disclosure Method Used: chart list table narrative NASAA Model Fee Disclosure Schedule is a template to be used

Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery which was covered in the new offering prospectus when explaining why he felt the issuer found the next "aspirin." He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following?

Unethical business practice NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. Such practices would be: •a distribution of any nonfactual data; •any material or presentation based on conjecture; •unfounded or unrealistic claims in any brochure, flyer, or display by words, pictures, or graphs; or •anything otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure.

All of the following activities and communications would fall outside the definition of a recommendation EXCEPT

a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks, and includes a list of those paying the highest dividends Specificity, such as a list of securities, invariably results in a communication being deemed a recommendation. All of the other choices given would generally be viewed as falling outside the definition of recommendation.

The Seeking Alpha Growth Fund directs a sizeable portion of its portfolio executions to your broker-dealer. If the firm has this fund on its highly recommended list, this would be

a conflict of interest that would have to be disclosed Recommending shares of a fund when the broker-dealer is aware that a policy exists to direct brokerage to them is an obvious conflict of interest, and would have to be disclosed.

One way to reduce the potential for conflicts of interest arising from offering agents the incentive of different compensation for different products is to create product agnostic compensation grids. These grids provide

a flat percentage of the revenue an agent generates, regardless of product recommended An agnostic compensation grid is sometimes referred to as a neutral grid. That is, regardless of the product being sold, the compensation level is the same.

An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require

a statement as to the limitations of and difficulties involved in using this system NOT disclosure of the length of time the charting system has been employed Anytime an investment adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.

A type of fraud using social media where the fraudsters pretend to be member of a group, sometimes using respected leaders of the group to spread the word about the scheme is known as

affinity fraud This is a classic definition of how affinity fraud operates. Although it is frequently aimed at ethnic groups, there is no such term as ethnic fraud.

When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted

as a contra-party to the trade NOT for the benefit of the client In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra-party to the other side of the trade. SO contra party means that the broker dealer is a principal in a trade (EITHER a buyer or a seller)

Under industry rules, customers who wish to trade options must receive a copy of the Options Disclosure Document (ODD):

at or before account approval. All prospective options customers must receive a copy of the ODD at or before the time the account is approved to trade options. It is the options account agreement that must be signed and returned to the broker-dealer within 15 days of account approval. SO OPTIONS AGREEMENT CAN BE RETURNED WITHIN 15 DAYS OF ACCOUNT APPROVAL ODD AT OR BEFORE THE TIME THE ACCOUNT IS APPROVED TO TRADE OPTIONS

In general, a broker-dealer will disclose its fee schedule

at the time of the account opening NOT within 30 days following any changes in fees or charges Although there are no specific industry requirements, typically, a broker-dealer's fee schedule is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT that they

cannot allow for prepaid advisory fees Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and must disclose the method used for computing the adviser's fee. There are certain circumstances, such as an investor with a net worth of at least $2.1 million, where performance-based fees are permitted. NEED TO KNOW THESE EXCEPTIONS

An investment adviser representative is prohibited from

charging a fee for investment advice and then earning commissions on recommended trades without disclosing the nature of the dual relationship When acting as a representative of an investment adviser as well as a broker-dealer, the relationship must be disclosed. IARs are permitted to recommend proprietary products only but must make disclosure of that fact. There is nothing to prohibit an investment adviser representative from telling clients what securities the IAR is or is not buying, as long as the IAR is not divulging material non-public (inside) information. The only time IARs are required to disclose their personal trading activity is when it is inconsistent with that recommended to clients. This could occur, for example, when the IAR is recommending clients buy a particular stock at the same time he has just sold his personal holdings in it.

Question ID: 685490 A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT

commissions on unsolicited trades There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1.commissions; 2.markups and markdowns; and 3.advisory fees for those firms that are also registered as investment advisers.

The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following EXCEPT

current employment status The 4 primary requirements of the CIP are the individual client's name, physical address, DOB, and SSN. Although current employment status would be asked as part of opening a new account, that is not a CIP requirement.

Discretionary Accounts

customer grants the power to a broker dealer or investment adviser to make buy and sell decisions in the account without the need to have prior contact with the customer MUST be approved by the designated supervisor For Advisory clients oral (as opposed to written) authorization may be relied upon for the first 10 business days after the initial discretionary trade in the account

Options Accounts

designated supervisory person must approve the account customer must complete the Options Disclosure Document (ODD) the account approval will indicate the following: date the ODD is furnished to the customer nature and types of transactions for which the account is approved name of the agent assigned to the account date of approval of the account dates of verification of currency of account information

If a broker-dealer provides investment advice or discretionary portfolio management services to its clients and the firm also recommends or sells products that it or affiliated companies issue,

disclosure of the potential conflict of interest must be made A classic example of a potential conflict of interest is when a broker-dealer has discretion over a client's account and purchases securities for that account that are issued by the firm or an affiliated company. There is nothing wrong with this as long as disclosure is made and, in some cases (not tested), the client must give consent. What about disclosing capacity in the trade? Isn't that always required? Yes it is, but this is an example of a question where there could be 2 correct answers and you must choose the one that is closest to dealing with the point being made in the question.

For larger accounts, a broker-dealer is least likely to waive its normal fee for

transferring the account to another broker-dealer NOT safekeeping of funds or securities in the account Although there is no official standard, larger accounts tend to have many of the smaller fees waived. However, if the client is moving the account to another firm, it is likely that the transfer fee will be charged.

In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under current regulations, this activity requires written

disclosure to the client and consent prior to completion of the transaction NOT disclosure to the client Unlike broker-dealers, investment advisers MUST obtain the CONSENT of and make written disclosure to the client of the intent TO ACT AS AGENT OR PRINCIPAL in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.

When opening an account at a broker-dealer, if the most recent copy of the firm's fee schedule is not available, NASAA recommends that the client

does not place any assets in the account until it is provided NOT promptly notifies the Administrator of the firm's failure to comply It is proper for fees to be disclosed at the time a customer account is opened. If not presented, clients should ask for the fee schedule and make sure it's up to date. If it is not readily available, clients should not place any assets into the account until it is provided. NASAA believes that clients have the right to know the fees in advance.

According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of

each member of the investment committee or group that determines general investment advice to be given to clients The business background of these key individuals must be included in Part 2 of Form ADV and in the disclosure brochure. The business background of other employees, affiliated broker-dealers, and institutional clients need not be included in the brochure.

A third-party post has been made on a broker-dealer's Facebook page. If the firm has involved itself in the preparation of the content, this would be known as

entanglement NOT misrepresentation The entanglement theory means the firm or its personnel is entangled with the preparation of the third-party post. A similar concept is that of ADOPTION. This is when the broker-dealer explicitly or implicitly endorsed or approved the content posted by the third party.

If persons other than the original person entering the post can comment on social media, the content is considered

interactive One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments.

Investors open margin accounts to

leverage their investment dollars Margin accounts employ the use of leverage—borrowed money. If the investment is successful, the leverage magnifies returns. However, if unsuccessful, the losses are magnified and can even be greater than the amount invested.

One of the risks of investing on margin is that a severe decline in the market price of one of the securities in the account can trigger a call for additional funds. If this happens and the investor does not supply the money when demanded, the broker-dealer can

liquidate its choice of securities in the account to bring the account back to the needed level Leverage works two ways. It is great when the stock's price is rising, but can be painful when going the other way. When it drops below a certain point, the firm will need more money. In the risk disclosure document, it is made clear that the client is not entitled to choose which securities can be sold if a call for additional funds is not met.

One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser

shall obtain client consent before completion of the transaction NOT may not charge a commission on the transaction In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: •The client receives full written disclosure as to the capacity in which the adviser proposes to act •Consent of the client Both of these are required before the completion of the transaction.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to

loan out the customer's margin securities A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional. The credit agreement describes the creditor/debtor relationship established and gives the BD the ability to lend money to the client using the client's securities as collateral. The hypothecation agreement allows the BD the right to take the client's securities that have been pledged (hypothecated) as collateral for her loan and pledge (re-hypothecate) a portion of those to a lending institution for a loan to the broker-dealer.

Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is

margin interest on the debit balance In a cash account, you can't have margin activity, so there can't be a margin interest charge.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT

markups and markdowns on trades done as a principal There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are 1.commissions; 2.markups and markdowns; and 3.advisory fees for those firms that are also registered as investment advisers.

Under the Uniform Securities Act, investment advisory contracts

must contain a description of fees Under the USA, all advisory contracts must be in writing and contain descriptions of how fees are determined. Contracts are valid upon signing, need not list all states in which an adviser is registered, and cannot be assigned without the client's approval. Administrator approval is not required.

A famous tennis player offers to record a testimonial for an investment adviser for use in a television commercial. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the investment adviser may

not use the testimonial Testimonials promoting investment advisers' services are prohibited under both state and federal law, regardless of whether a spokesperson receives compensation. This is in contrast to FINRA (NASD) rules, which do permit testimonials as part of advertising as long as proper disclaimers are made.

In their advertising campaigns, investment advisers are prohibited from doing all of the following EXCEPT

offering free services It is not unethical to advertise free services as a benefit of using a firm, but failing to supply services offered as free is unethical. Using testimonials, guaranteeing future performance, and exaggerating the capabilities of the firm and its personnel are unethical.

A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?

options NOT margin One question asked on a new options account form that is not required on a normal brokerage account opening is investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments.

Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract EXCEPT

other states in which the investment adviser is registered There is no requirement to advise clients of any other states in which the investment adviser is represented. The presence (or absence) of discretion must always be disclosed. Unless the question specifically refers to the rare cases when performance fees are permitted, always read the question as if they are prohibited.

Disclosure of Conflict of Interest

proprietary products (such as a house fund) incentives from program sponsors (trips, etc...) financial interest in recommended security (sister is CEO) Broker dealer publishing a favorable research report after bringing company public limited partnership offering (DPP) where the sponsor is an affiliate of the broker dealer a securities professional having a financial interest in any security being recommended

It would likely be considered a conflict of interest when an agent

recommends a stock to many of his clients immediately after purchasing some of those shares himself An agent purchasing a stock and then recommending it to clients, has a conflict of interest. Strong buying of that stock should cause the price to go up so, to avoid conflicts, the agent should purchase after the clients do.

KAPCO Advisers, a registered investment adviser, recommends the purchase of 100 shares of GEMCO common stock to one of its advisory clients. The client accepts the recommendation and the sale is made from KAPCO's inventory. This transaction

requires both written disclosure to and the consent of the client prior to the completion of the transaction NOT may be made without restriction as long as the markup on the GEMCO stock was fair and reasonable Industry rules require that investment advisers made disclosure when acting as principals (from inventory) or agents in a transaction with an advisory client. This disclosure must be made in writing - furthermore, client consent to acting in this capacity must be obtained before the completion of the transaction.

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several which she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent

should pack her bags for the trip; she earned it NOT will probably be disciplined for failure to disclose the potential conflict of interest The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable.

A banner on a broker-dealer's website is considered

static content In most cases, a broker-dealer's website is static. That is, only the firm can make changes and those changes are infrequent. Certainly a banner ad on the website fits that description. Entanglement and adoption are terms applying to a securities professional making use of third-party information on social media.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that

the CIP requires date of birth while the regulators only require proof of legal age NOT the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

In a margin account, broker-dealers lend money to clients to enable them to leverage their investments. The account document that is evidence of the debtor-creditor relationship is

the credit agreement The credit agreement, sometimes simply referred to as the margin agreement, is the written agreement between the client and the broker-dealer evidencing the loan. The loan consent agreement is the optional portion of the account documentation which allows the broker-dealer to lend out the client's margin securities

Opening a margin account involves significant documentation. Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change?

the credit agreement It is the credit agreement that discloses the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change.

In the securities industry, the term contra-party refers to

the person on the other side of the trade Contra-party is defined as the broker-dealer or customer to whom a person has sold securities or from whom a person has purchased securities - they are on the other side of the trade.

One of the surest ways to explain to a client that an investment opportunity presented via social media is likely to be a scam is

the promise of high returns with low risk A high return with low risk is almost always an indication that something is not right about an investment. Even though SEC registration is no guarantee of success, at least we know the issuer has gone through the rigor of filing the registration statement and making full disclosure. An escrow account offers investors protection and audited financial statements allow for a true look at the issuer's financial condition.

When a security is registered with the Administrator, it means that

the security may be legally sold in the state We can never misrepresent a security's registration. The Administrator, in registering a security, declares that the security is legal for sale in the state. Never use the word approved when referring to registration of a security or a securities professional. Only exempt securities and exempt transactions are exempt from the advertising filing requirements and federal covered securities don't register with the Administrator; they notice file.

A new client is opening a margin account and notices the following wording in the documentation: "You are authorized to lend to yourself or others any securities held by you in my margin account and to carry all securities lent as general loans, and you shall have no obligation to retain under your possession and control a like amount of such securities". When the client asks you what this is about, you would respond that

this is the loan consent agreement No broker-dealer shall lend securities that are held on margin for a customer and that are eligible to be pledged or loaned, unless the broker-dealer shall first have obtained a written authorization from such customer permitting the lending of such securities. That written authorization is known as the loan consent agreement and is the only one of the margin documents that is optional.

A client of an investment adviser is thrilled with her portfolio's results and posts a note on her bridge club's cork board suggesting that some of the other members would probably benefit from the adviser's skills. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers,

this would be permissible because it was done without the knowledge of the adviser NOT this would not be permissible because it is clearly a testimonial There is a limit as to how far an investment adviser or IAR can go to prevent clients from giving testimonials. After all, as in so many businesses, referrals are a key to growth. As long as this note was posted without any knowledge of the IA (or IAR), there is NO problem. However, once the IA (or IAR) finds out about it, a request MUST be made to remove it. The prohibition on testimonials is not limited to social media.

LinkedIn is a popular social media tool for business people. The nature of the information posted poses risks for investment advisers because of the prohibition against testimonials. A step that advisers should consider taking to minimize the risk of an improper endorsement appearing on their page is

to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile

A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. This individual calls the client and suggests the purchase of 500 shares of RMBM common stock as an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted:

unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity. The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.

As fiduciaries, investment adviser representatives owe their clients an affirmative duty of utmost good faith and full disclosure of all material facts. This affirmative duty of disclosure is required by the investment adviser representative in all of the following situations EXCEPT

when donating funds to a nonprofit medical research institute that owns securities the IAR has recommended