Series 63 Chapter 4
According to the Uniform Securities Act, an agent may share in the profits and losses in a customer account if:
1.) The sharing arrangement is approved, in writing, by the customer 2.) The sharing arrangement isnapproved, in writing, by the employing broker dealer of the agent
An investment adviser decides to recommend that one of its accredited investors invest some of their funds in an outside Hedge Fund. The IA is a partner in the Hedge Fund. Which of the following is true according to NASA regulations? I. This recommendation would be considered to be unethical unless the IA discloses in writing to the client that the lA is a partner in the Hedge Fund. I. The lA would have to disclose to the client why they have determined that this recommendation is suitable for the client Ill. The recommendation may not be made to the IA's clients as it would be considered to be a conflict of interest. IV. The recommendation may be made to the client only because the client is an accredited investor.
A.) 1 and 2
When is it acceptable under NASA rules for an IAR to exercise discretionary authority over the account of an investor? ls [A] Only when the AR gives written notification to the investor with the confirmation of the trade. [B] If the lAR receives authority via telephone and this is followed by written authority within 10 days, the IA may exercise discretion over the account. [c] Only when the lAR is increasing or decreasing an existing position that is held by the investor. [D] If the lAR has suggested allowing discretionary authority, then the lAR may use discretionary authority.
B
Which of the following statements by an agent would be grounds for denial, suspension, or revocation of registration of a broker-dealer or agent in connection with solicitation of investment company shares? I. Stating to a customer the fund's current yield without disclosing the fund's most recent average annual return. I. Stating to his client that the investment performance of an investment company portfolio is comparable to that of a certificate of deposit, without disclosing the shares are not guaranteed by the FDIC. Ill. Stating to his client that the investment performance of an investment company portfolio is comparable to that of a savings account, without disclosing the shares are not guaranteed by the FDIC. IV. Stating to a customer the fund's income and disclosing the fund's most recent average annual return calculated using the SEC's calculation methods, and explaining differences.
C.) 1,2,3 only
An Investment Adviser Representative buys shares of ABC in his own personal account and then contacts his clients and advises them to buy ABC. This practice is known as
[A] Funding [B] Front running**** [c] Churning [D] Backwardation
Governed by the NASA Model Rule on Unethical Business Practices of Investment Advisers and Federal Covered Advisers, investment advisers, when writing memorandums pertaining to buy and sell orders of securities must include all of the following EXCEPT:
IA. [B] Any person making a recommendation regarding the trade to the client must be identified. [c] The IA's officers and directors must be identified.**** [D] The person placing the order must be identified.
Under NASAA Unethical Business Practices of Investment Advisors, an incestment adviser places an order for securities for a client based on oral discretionary authority. It must be followed within 10 business days ny wrotten discretionary authority from the client unless the discretionary power relates only to which two of the following?
The time and price
You are an AR who specializes in small capital securities. After several solicitations, a friend of yours is interested in your services and has a high-risk tolerance. Your friend opens a managed account with over $250,000 to be managed on a fee basis. You suggest small-cap securities and over the next couple of years, the account loses over 10% of its kalue due to small cap volatility. Your friend sees the losses and wants some sort of remedy for the losses. What is the client entitled to?
[A Full restitution because the investments were in the high-risk sector. [B] Partial restitution because although the client is in the high-risk category the AR should have changed the investment strategy before getting to a 10% loss. [c] A waiver of future advisory fees to compensate for the loss [D] No remedy since the IAR acted properly and in good faith****
According to NASA's Statement of Policy on Unethical Business Practices of Investment Advisers, which of the following statements is true about investment advisers?
[A] A state securities administrator may look into an investment adviser's fee to determine whether they are competitive or unreasonable.**** [B] The free market and the forces of competition will regulate the fees investment advisers can charge. [C] Investment advisory fees must be tied to the performance of the clients account. [D] Any advisory fee that amounts to more than 2% of the value of the client's accounts would be considered excessive and unreasonable.
Under NASA Statement of Policy on Dishonest or Unethical Business Practices, an agent of a broker-dealer is contacted by one of his clients who is the owner of a medium size business. The client tells the agent that he will be doing a lot more investing since he just landed a large new account but will only give the business to the agent if the agent agrees to share his commissions with the client. If not, the client plans to move the account to another agent at a different firm who will share commissions. In this situation the agent should
[A] Advise the client that he is not allowed to share commissions through the firm but will share with the client after the agent is paid by the broker-dealer. [B] Advise the client that he is not allowed to share commissions with the client under any circumstances, and the agent at the other firm will be violating securities law by doing so.**** [c] Advise the client that he cannot share commissions but will invest in other investments that generate more profits to the client [D] Advise the client that he cannot share commissions but will provide the client with gifts such as trips in lieu of sharing
According to NASA's Statement of Policy on Unethical Business Practices of Investment Advisors, which of the following describes a breach of ethical conduct:
[A] An advisor fails to inquire into a client's investment objectives, financial situation, and needs before making a recommendation.**** [B] An advisor discloses a material conflict of interest which might impair its rendering of objective investment advice. [C] An advisor fails to guarantee a client's account against loss. [D] An advisor loans money to a client which is a financial institution.
A potential customer asks an investment adviser (IA) for a list of references, including the names and addresses of current clients of the IA. The IA may provide the list to the potential customer without breaching his fiduciary duty, as long as the list identifies whict,of the following?
[A] Any affiliation with the client, whether as a personal friend or family member. [B] Any and all services provided to each client. [c] Every person that the IA currently has under contract. [D] The list must only provide the information of clients who have agreed to be a reference. ****
Arthur has been Henry's investment adviser representative for the last 20 years. Recently Henry's health has been failing and he was moved into a nursing home. Henry has good days and bad days and Arthur has been able to stay in touch with him. One day Henry's son Edward calls Arthur to ask about his dad's account he is wondering if they should make any changes to the account since it looks like Henry will remain in the nursing home. Arthur already knows that Edward will be the executor of Henry's estate when Henry passes. Which of the following is true with regard to this situation?
[A] Arthur may meet with Edward to discuss Henry's account since Arthur has been informed that Edward will become the executor of Henry's estate. [B] Arthur may meet with Edward to discuss Henry's account if and when Arthur is provided with such consent from Henry.**** [c] Arthur would not be allowed to provide information about the account to Edward under any circumstances, until Henry dies and Edward is appointed executor of the estate. [D] Arthur would not be allowed to provide information about the account to Edward unless Henry went into a coma.
Bill is an investment adviser for Dave. Dave and Bill are also personal friends. Dave has been going through a tough divorce and Bill has been Dave's confidant. Dave and his son have their own business and Dave's son handles most of the bookkeeping duties of the company. Based on this information which of the following is true?
[A] Bill would be allowed to give information about Dave's investment account to Dave's attorney without consent from Dave, since Bill is familiar with the details of the divorce. [B] Bill would be allowed to give information to Dave's son about Dave's account, since Dave's son handles to books of their business. [c] Bill would be allowed to give information only to those persons that Dave has consented to.**** [D] Bill would be allowed to provide information about Dave's account to Dave's wife's attorney since the couple are going through a divorce.
Which of the following statements is FALSE regarding broker-dealers and agents in connection with investment company shares?
[A] Broker-dealers engaging in the solicitation of investment company shares and failing to disclose relevant sales charge discounts when customers purchase specific dollar amounts of shares is considered dishonest or unethical. ****[B] Agents recommending their customers purchase investment company shares while considering their clients' investment objectives would be an unethical business practice. **** [c] Dishonest and unethical business practices in the securities business may constitute grounds for suspension or revocation of registration. [D] The delivery of the prospectus shall not, by itself, determine that the agent provided the customer with full and fair disclosure.
Under NASA Statements of Policy on Dishonest and Unethical Business Practices by broker-dealers and agents, which of the following statements are true? I. Commissions, profits, or other compensation derived from the purchase or sale of securities may only be shared between registered agents of the same or an affiliated broker-dealer. I. Commissions, profits, or other compensation derived from the purchase or sale of securities may only be shared between registered agents, regardless of the employing broker-dealer. Ill. Agents may not share in the profits and losses in the account of any customer. IV. Agents may not share in the profits and losses in the account of any customer without the written authorization of the customer and the broker- dealer which the agent represents.
[A] I & Ill only [BI 1& IV only**** [c] Il & Ill only [D] Il & IV only
Which of the following considerations must an Investment Adviser make in relation to the NASA InvestmentAdviser Information Security and Privacy Rules? I. Use one form of ID for access to systems I. Train staff to recognize suspicious emails Ill. Install anti-virus software IV. Use cloud-based servers
[A] I and Il only [B] II, Ill and IV only**** [c] I, Il, and Ill only [D] I, I, Ill, and IV
Which of the following would be grounds for denial, suspension, or revocation of registration of a broker-dealer or agent in connection with solicitation of investment company shares? I. Stating to a customer that investment company shares are sold without a commission if the customer purchases a front-end load mutual fund. I. Failing to properly disclose sales charges associated with redemption of mutual fund shares. Ill. Stating to a customer that investment company shares have no sales charge if purchased with closed-end investment company shares. IV. Stating that investment company shares have a sales charge discount for purchasing specific amounts.
[A] I only [B] I and Il only [c] I, ll, and Ill only**** [D] 1, I, Ill, and IV
Under NASA Model Rules for Investment Advisers, which of the following statements would be true in a situation in which the client of an investment advise representative became incapacitated?
[A] If the client became incapacitated, the IAR would be allowed to accept sell orders onlyfrom the client's spouse. [B] The lAR would not be allowed to handle orders unless the AR received a written durable power of attorney from the person acting on behalf of the client.**** [c] If the client became incapacitated, the IAR would be allowed to handle orders on behalf the client from the client's personal attorney. [D] Although the lAR generally would not be able to place orders on the client's behalf, the AR would be satisfying his or her fiduciary responsibility by placing sell orders during extreme market volatility only.
An investment adviser has received a phone call from a stock analyst. During the conversation the analyst tells the lA that he plans to downgrade a particular stock that the lA has recently purchased in several client accounts. The analyst will announce the downgrade after the market closes today. Based on this situation the IA should:
[A] Immediately report the Analyst to the proper regulatory association. [B] Immediately sell the clients out of the stock that will be downgraded. [c] Re-evaluate the stock and make no trades based on new information until after the public announcement is made by the analyst to avoid "trading ahead" rule violations.*** [D] Do nothing and pretend that the conversation with the analyst never happened.
Mrs. Smith's granddaughter is concerned about her grandmother's financial condition and pays a visit to her grandmother's investment adviser. She has a copy of her grandmother's statements and a copy of the advisory agreement. Which of the following would be an unethical practice for the IA:
[A] Offer Mrs. Smith's granddaughter a free financial evaluation. [B] Discuss the details of the grandmother's account with the granddaughter since she already has possession of account statements and the advisory agreement.**** [c] Inform the granddaughter that discussions about any client or any account requires the written consent of that client. D Get Mrs. Smith on the telephone.
Under the NASA Model Rules on Agents, an agent of a broker-dealer would be allowed to execute an order using discretion with regard to time and price for a client:
[A] Only with prior written authorization from the client ***[B] Without prior written authorization from the client*** [c] Only with written authorization obtained upon completion of the transaction [D] Without written authorization until completion of the transaction
All of the following would be considered acceptable practices according to the NASA Statement of Policy on Dishonest or Unethical Business Practices by a broker-dealer except
[A] Refusing to guarantee a customer against loss [B] Failing to disclose an affiliated relationship with an issuer prior to entering into a contract with the customer to purchase securities of the affiliated enterprise. **** [c] Giving a client a bid and ask quote for a security when the broker-dealer is certain that such a quote is accurate. [D] Splitting the commission from the sale of securities between two agents, both of whom are agents of the broker-dealer.
Under NASA Statements of policy and Model Rules for Investment Advisers, an Investment Adviser is not allowed to lend money to a client unless the Investment Adviser is "in the business of loaning funds" or
[A] The Client is arraffiliate of the Investment Adviser.**** [B] The Investment Adviser Representative receives permission from a supervisor. [C] The Investment Adviser Representative receives permission from the Administrator. [D] The Client receives permission from the investment adviser.
An IA is registered in several states, including the state in which it has its principal place of business. Which of the following statements is true concerning the IA's obligation to maintain a minimum net capital?
[A] The IA must satisfy the requirements of the SEC. [B] The IA must satisfy the requirements of the state. [c] The IA must satisfy the requirements of the state where it has its principal place of business only.**** [D] The lA must satisfy the requirements of the state in which it has the highest number of clients.
Mr. Penske is discussing the investment advisory contract with Natu, a prospective client. Natu reviews the contract and expresses a concern regarding the mediation clause. He reassures Natu that the clause is a customary component of advisory contracts, and also points out that with the market about to open soon, he is unable to disclose his stock recommendations unless Natu signs the contract, including the mediation clause. According to NASAA Model Rules, which of the following is correct regarding this situation?
[A] The IAR should not coerce Natu into signing the mediation clause.**** [B] The prospective client must sign the mediation clause as it is part of the contract. [c] The AR made factual statements so Natu should sign the clause. [D] There are no concerns in this situation as Natu hasn't signed the clause and contract.
Gladys is a registered agent at a broker-dealer. She receives an email from a customer expressing his dissatisfaction with an unauthorized trade in his account. Gladys sees the email come in on her mobile phone but does not respond as she is on a business trip. She plans to call the customer upon her return in two weeks. According to the NASA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is correct regarding the agent's behavior?
[A] The agent hehaved unethically because she failed to respond to a customer complaint.**** [B] The agent behaved appropriately because the customer sent an email rather than a written complaint. [C] The agent exhibited unethical behavior by not canceling the trade in question immediately. [D] The agent handled the situation properly as she plans to respond when she returns in two weeks.
An agent is working with an issuer during an IPO. This IPO was considered a "hot issue" because of a well-known executive who agreed to be on the company's board of directors. Several large investors wanted to buy the company solely because of this well-known executive. During the IPO, the agent learns that the well-known executive has chosen to leave the boardfor unspecified reasons and will not be participating in any way with the company. According to the regulations of the Uniform Securities Act, which of the following is true?
[A] The agent is in no way obligated to disclose the departure of the well-known executive since this is not a material fact and does not affect the new issue. [B] The agent is obligated to disclose the departure of the well-known executive, since this is a material fact, and failure to disclose would make the sale to investors misleading. *** [c] The agent is not permitted to discuss the board of directors of the IPO, and thus is forced to continue to sell the security as if the well-known executive were still on the board. [D] The agent is not obligated to disclose the departure of the well-known executive, but would be permitted to do so to clients that the agent personally knows.
Under the Statement of Policy on Investment Advisers an investment adviser may only place orders for the account of client upon the instruction of a third party if
[A] The lA received written authorization from the third party [B] The IA received written authorization from the client immediately following the execution of the transaction [c] The lA received written authorization from the client prior to execution of the transaction**** [D] Third party instructions are strictly prohibited under all circumstances.
According to NASA Policy Statement on Unethical Business Practices of Investment Advisers, in which of the following circumstances would the Investment Adviser be allowed to make a recommendation to a client?
[A] The recommendation is consistent with trades the firm has made for its own account. [B] The adviser has no financial interest in the security recommended for purchase. [c] The recommendation to purchase a security is made only after their own research in the securities prospect for growth. [D] The recommendation is based on the client's investment objectives, financial situation, and needs.****
Which of the following must a registered Investment Adviser file with the state securities Administrator if it has custody of client funds or securities?
[A] Unaudited income statement [B] Audited income statement [c] Audited balance sheet**** [D] Unaudited balance sheet
A registered investment adviser's fiscal year has ended. When must it file a copy its balance sheet with the state securities Administrator?
[A] Within 30 days [B Within 45 days [c] Within 60 days [D] Within 90 days****
Pertaining to NASA Unethical Business Practices of Investment advisers, an investment adviser may not borrow money from which of the following clients:
[A] broker-dealer [B] bank [c] affiliates of the adviser [D] blue chip issuers***
All of the following chices adhere to the NASA Model Rule on Unethical Business Practices of Investment Advisers EXCEPT when an investment adviser:
[A] decides to borrow funds with a promissory note in writing from a client, who is also a controlling shareholder. [B] decides to borrow funds with a promissory note in writing from an institutional lending facility, who also happens to be a client. ***[c] decides to borrow funds with a promissory note in writing from an individual client. **** [D] decides to borrow funds through a margin account from a broker-dealer who also just happens to be a client.
A client sends an agent a check to buy 1,000 XYZ shares for her account. The agent is also interested in purchasing 1,000 shares in his personal account and discloses this to the client. The agent deposits the client's check in his account and places an order to buy 2,000 XYZ shares. The deposit of client funds in the agent's account is considered
[A] layering. [B] commingling.**** [c] placing. [D] integration.
According to the Secures Exchange Act of 1934 and NASA Regulations, a person exercises discretion with respect to an account if: I. the person is authorized to determine which securities will be purchased for the account. I. the person purchases securities for the account at direction of the client. Ill. the person is authorized by the client to purchase a security for the account if the price reaches a certain level.
[A] lonly**** [B] 1, Ill [c] I1, Ill [D] 1, I, Ill
Janet calls on a client who has very limited assets and little experience with the securities industry. The client is near retirement and will be relying on his retiren portfolio to supplement social security income. Janet's employing broker-deale acting as an investment banker on the issue of a "hot" growth stock. Janet calls, recommends, and sells the stock to her client in his retirement portfolio. In this cr Janet has
[A] sold the client into a stable security that is very likely to grow the client's resources, making retirement more financially comfortable for him. [B] failed to adequately determine suitability in relation to the trade for this particular client.**** [c] placed the client into a scenario where funds may not be available upon retirement, because new issues of "hot" stocks are often restricted for years following the initial offering. [D] engaged in a combination of illegal cold calling and unauthorized trading in the client's account, since he has limited experience in the securities industry.
According to NASA Regulations, an lA that has and maintains custody of a client's funds must:
[A] submit to an independent audit by the Administrator at least annually [B] notify the client of the location of the funds within 3 months of taking custody [c] hold bank accounts in the name of the lA as agent or trustee for the benefit of the client**** [D] give prior verbal notice to the Administrator of the IA's intention to take custody
The investment adviser's fiduciary duty to clients is BEST described as the duty of the IA to
put clients interests ahead of those of the IA, IA employees and other affiliates and related parties