Series 63 Unit 4

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.

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

A) 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.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name verbal assurance that the customer is of legal age a street address, unless the primary mailing address is a PO Box located in the state of residence a Taxpayer Identification Number (TIN)

A) I and IV Name and Taxpayer Identification Number Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

If persons other than the original person entering the post can comment on social media, the content is considered A) interactive B) static C) mobile D) flexible

A) interactive One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments. Reference: 4.5.3.1 in the License Exam Manual

First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts at First Securities Broker-Dealers, Inc. First Securities Advisers, Inc., has A) not violated the prohibition against performance fees B) violated the prohibition against charging performance fees C) violated the Uniform Securities Act by charging commissions in addition to advisory fees D) violated the Uniform Securities Act by charging excessive advisory fees

A) not violated the prohibition against performance fees First Securities Advisers Inc. has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable. The commissions charged by the affiliated broker-dealer have nothing to do with the question. The client would have to pay commissions wherever the transactions were executed.

A banner on a broker-dealer's website is considered A) static content B) adoption C) entanglement D) interactive content

A) 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.

After a string of losing recommendations, an agent's client is threatening to close the account and move it to a competing broker-dealer. In an effort to save the account, the agent promises a return of no less than 10% over the next 12 months and offers to make up any deficit personally. In so doing,

B) the agent has violated the prohibition against performance guarantees There is just no way a securities professional can offer a guarantee like this. It is true that any statement about past performance must have the disclaimer that the past is no guarantee of the future, but that is not relevant here because the agent has promised a minimum future return;, no reference has been made to past performance. Although a violation, it is a civil one, not criminal and, therefore, the agent is not eligible for a prison sentence. Reference: 4.3.2 in the License Exam Manual

Disclosure to customers of a broker-dealer's control relationships is required in A) II only B) I and III C) I, II, and III D) I and II

C) 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.

Which of the following documents must an existing customer sign to establish a discretionary account? A) Options agreement B) New account application C) Trading authorization D) Customer's agreement

C) 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.

In general, the Administrator would require that a broker-dealer's social media policies A) be limited to defining the responsibilities of supervisory personnel B) be left up to the manager of each branch office C) be committed to writing and communicated firmwide D) be updated at least once every 3 years

C) be committed to writing and communicated firmwide Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that a firm's social media policies be in writing and made known to all in the company. It is not just supervisory personnel who must know the policy; any employee is subject to it. Updating every 3 years is not nearly frequent enough in this dynamically changing industry.

One of the concerns about social media is the opportunity for affinity fraud. This occurs when

C) fraudulent offers are aimed at groups of people who share a similar interest Affinity fraud targets members of identifiable groups, such as the elderly, or religious or ethnic communities.

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

D) 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.

All of the following activities and communications would fall outside the definition of a recommendation EXCEPT A) a broker-dealer's website was created to be available to customers that contains a link to an electronic library of research reports that contains buy-sell recommendations from the author of the research reports B) a broker-dealer's website places a search engine in a prominent spot on its landing page that can be used to access charts of multiple stocks in the large-cap sector C) a broker-dealer provides research tools on its website that allow customers to screen through all Nasdaq securities D) 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

D) 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.

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 A) would be considered unethical B) can only be done through a registered broker-dealer C) may be made without restriction as long as the markup on the GEMCO stock was fair and reasonable D) requires both written disclosure to and the consent of the client prior to the completion of the transaction

D) requires both written disclosure to and the consent of the client prior to the completion of the transaction 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.

The Uniform Securities Act defines a guaranteed security as one A) where a party other than the issuer offers a guarantee that investors are assured of never receiving less than their original investment B) that may only be sold to institutional investors C) involving a guarantee of a minimum profit by a party other than the issuer D) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer

D) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer The one thing not guaranteed is a profit (capital gain).

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Assure that the options agreement has been signed prior to the first trade takes place B) Provide an options disclosure document no later than 15 days after the first trade C) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade D) Before the first options trade, review with the client the risks involved when trading options

D)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. Reference: 4.4.2.2 in the License Exam Manual

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?

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 Both of these are required prior to the completion of the transaction.

Discretionary power Investment Advisor

Permission can be oral, if oral it is valid for ten days. 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.

Red Flags

Promises of High returns and low risk offshore operations funds must be wired- not traceable phony testimonials lack of details

A person who is vested with legal rights and powers to be exercised for the benefit of another is known as A) a fiduciary B) a broker C) a sponsor D) a beneficiary

a fiduciary

An investment adviser representative is prohibited from A) recommending proprietary products only B) disclosing to clients that he is not buying the security being recommended to them for his personal account C) as part of a comprehensive financial plan, selling a life insurance policy to an advisory client issued by a company he represents, even with disclosure to the client D) charging a fee for investment advice and then earning commissions on recommended trades without disclosing the nature of the dual relationship

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.

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

commissions; markups and markdowns; and advisory fees for those first that are also registered as investment advisers.

4 primary requirements of a CIP

he 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 account BD

must be written and provided prior to the trade

An agent is licensed to sell variable annuities. An insurance company, whose products are available through the agent's broker-dealer, is offering an all-expense paid trip to Panama City Beach to any individual who places at least $1 million of clients' money into one of the company's deferred variable annuities. In order to recommend this company's products to clients,

the agent shall disclose the potential conflict of interest Anytime there is an incentive involved in a security offering, the potential conflict of interest shall be disclosed to the potential investor.

Under the NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may guarantee investment results

under no circumstances Under no circumstances may an adviser guarantee that a client will achieve an investment result-either that a gain will be realized or that no loss will occur. Reference: 4.3.2 in the License Exam Manual