SERIES 65 CHAPTER 13 PART 2
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
If an investment adviser has engaged a website designer, what may the designer include on the website?
A general description of the types of investment advisory programs offered by the firm
When it comes to advertising by investment advisers and their representatives, which of the following would most likely be acceptable to the SEC?
A like from a client on an investment adviser representative's Facebook post that announced the birth of her most recent child
Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include which of these? 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
nder NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? I. They must be renewed on an annual basis. II. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. III. They must prohibit assignment of the contract without the client's consent.
II and III
Which of the following situations would present a conflict of interest that an adviser must disclose to clients to avoid unlawful and deceitful behavior under the Investment Advisers Act of 1940?
The adviser receives compensation from the issuer of securities that he recommends to his clients.
An investment adviser representative tells an advisory client that by investing in U.S. Treasury bonds, you are guaranteed to make money. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements is true?
This is unethical because it constitutes a guarantee against market risk.
Each of the following would represent a potential conflict of interest except
a broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by another firm.
According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following except
any record of securities industry violations by the investment adviser.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the contract between an investment adviser and its clients shall
be in writing.
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.
Content published on social media that allows for others to comment on, reuse, or "like" it is considered to be
interactive content.
While making a sales presentation of a mutual fund, the registered agent states to a customer that reinvesting the dividends will ensure selling shares at a profit. Making such a statement is
misleading and may result in proceedings against the representative.
Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions except
on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account.
An investment adviser who is affiliated with a broker-dealer recommends only products that are provided through that broker-dealer. This is
permitted following disclosure of the potential conflict of interest.
A federal covered investment adviser (IA) has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be disclosed
promptly only to those customers who will be affected by the change through an amended brochure.
Jackie is an agent with Hamilton Securities Co., an SEC-registered broker-dealer. Jackie's father, Andy, founded a start-up venture several years ago, and the company, with Andy as its CEO, had its initial public offering four months ago. For Jackie to recommend shares of this company to clients, Jackie
would have to disclose the potential conflict of interest.
An agent opening a wrap account for a wealthy client is required to disclose that
wrap fees may result in higher costs than separate charges for advice, management, and transactions.
There are occasions when an investment adviser plays a role in a securities transaction with or for an advisory customer. In which of these situations is prior written consent of the customer required?
Agency cross transactions
Beth is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN, and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers,
Beth would be required to obtain consent for this principal transaction if it was the subject of a recommendation.
A broker-dealer informs a client that it does not intend to abide by all the provisions of the Uniform Securities Act. It has the client sign a waiver that specifically prohibits the client from entering a suit against the firm. The client's signature is properly witnessed and notarized. Which of these is true?
Clients cannot waive their legal rights.
Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in five states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its
Form ADV, Part 2A and Part 2B.
If John Good, a properly registered investment adviser, opens his own office and hires several representatives to work for him, his business card may not read
Good Performance Advisers, Inc.
A registered investment adviser runs a promotion offering free information to all who request it. Which of the following statements to people who respond do not comply with the advertising interpretation of the Uniform Securities Act? I. "The offer is yours, free of charge; all I need are the names of five friends who might be able to use our service." II. "Such a deal; our information about the market is free to anyone who makes only one trade with our broker-dealer affiliate." III. "Thank you for responding; if we can help you after you read our information, please let us know."
I and II
Which of the following are prohibited practices? I. An investment advisory firm organized as a partnership fails to inform its clients of the departure of a partner with a very small interest in the partnership. II. An investment advisory firm charges an annual fee equal to 2% of the first $250,000 in assets under management; 1% of the next $500,000; and 0.5% for everything in excess of $750,000. III. The majority stockholder of a registered investment adviser pledges his stock as collateral for a loan taken out by the firm to expand its services without obtaining client consent for assignment of their contracts. IV. An investment advisory firm engages in agency cross transactions.
I and III
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? I. An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. II. In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. III. The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. IV. The fee is projected to consistently be more than the expected return in the portfolio.
I and IV
NASAA holds that the most important duty of an investment adviser (IA) is the disclosure of all information relating to the relationship between an adviser and a client. Because of this, when performing an examination of the IA, the Administrator not only will look for disclosure-related items in the disclosure document but may also check which of these? I. The adviser's advertising II. The adviser's contracts III. The adviser's seminar materials IV. The adviser's websites
I, II, III, and IV
Securities industry rules require that securities professionals disclose all potential conflicts of interest to their clients. Examples of potential conflicts of interest include which of these? 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
The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if which of these are true? Results do not reflect the deduction of fees. Actual market conditions during the referenced period are not disclosed. The advertisement does not reflect performance for a minimum period of three years. The advertisement does not disclose that it applies to only a specific group of clients.
I, II, and IV
An investment adviser is preparing an advertisement. Which of the following would be acceptable? I. A testimonial on radio or TV from a celebrity who is a client of the firm II. Identifying his best investment recommendations for the past 6 months III. Offering to provide the firm's investment recommendations for the past 12 months IV. Promoting his system of charts and formulas while mentioning their limitations and difficulties
I, III, and IV
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
An investment advisory firm advertises a stock-picking system that helps investors choose the timing and selection of securities for purchase. Under the Investment Advisers Act of 1940, which of the following must be disclosed in the advertisement? The number of years the system has been used successfully The difficulty of using the system The limitations of the system
II and III
One of your customers sends you an email with an attachment describing a "can't miss" investment opportunity. Which of the following would be a red flag you should share with the client? I. The security being offered is registered with the SEC and a number of states, including the state of residence of your client. II. The offer shows an anticipated return of 5% per month with little or no risk. III. Payment must be made by Western Union wire to an offshore account. IV. Payment may be made by a check payable to an escrow account at the largest bank in your state.
II and III
Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? I. An adviser that requires prepayment of $1,000 in fees, nine months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. II. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. III. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients.
II and III
Under the USA, when one is referring to a security that is guaranteed, the guarantee applies to which of these? 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
When a broker-dealer engages in a customer transaction from its own account, which of the following statements are true? I. Partners of the broker-dealer are trading in their personal accounts. II. The broker-dealer is trading from its inventory with customers. III. The broker-dealer must disclose its capacity as a principal in the transaction. IV. The broker-dealer must disclose its capacity as an agent in the transaction.
II and III
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
If an investment adviser places an advertisement in a newspaper offering a free brochure to those who call, under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, what may the adviser require from callers as a condition of receiving the brochure?
Nothing, because no obligation may be placed on the callers
An investment adviser holds a small position in the common stock of ABC Corporation, with a current market value of approximately $5,000. ABC Corporation will offer additional stock in a subsequent primary offering, and the adviser recommends the stock to several clients. Which of the following reflects the most appropriate behavior on the part of the adviser?
The adviser may recommend the stock, provided she discloses to clients receiving the recommendation that she holds a small position in the stock.
An investment adviser may state which of the following in the advisory contract?
The advisory contract may be assigned to another party only with the consent of the client.
An investment adviser representative recommends that a client purchase $50,000 of U.S. Treasury bonds maturing in 20 years. According to the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements may the representative legally make?
The bonds are guaranteed as to principal and interest payments by the U.S. government.
As the use of social media has mushroomed, most firms in the securities business have created and maintain websites. In addition to password-protected areas for existing clients, these websites generally have pages accessible to anyone. Which of the following statements could be on an investment adviser's website that would not be on that of a broker-dealer?
The firm is registered with the SEC under the Investment Advisers Act of 1940.
A broker-dealer provides HotScores, a portfolio analysis tool that 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.
Damon is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity?
When the trade that is made is unrelated to the advisory relationship
When an agent recommends a proprietary mutual fund to a client, it is considered
a potential conflict of interest.
An investment adviser would be most likely to be the contra-party to a trade when acting as
a principal.
Under securities industry regulations, all of the following are prohibited when attempting to make a sale except
a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so.
As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm endorses or approves of the material but has no part in its creation, it is known as
adoption.
A type of fraud using social media where the fraudster pretends to be a member of a group, sometimes using respected leaders of the group to spread the word about the scheme, is known as
affinity fraud.
All of the following activities comply with the requirements for agency cross transactions except
after proper written disclosure, an adviser recommends the transaction to both the seller and the buyer.
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must send a copy of its brochure, or a summary of the changes, to
all clients within 120 days of the end of its fiscal year.
A transaction in which an investment adviser acts on behalf of both the advisory client and another person on the other side of the transaction is known as
an agency cross transaction.
Consent of the client before completion of a trade made between the firm and a client must be made when
an investment adviser will be acting in the capacity of a principal.
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.
An investment adviser representative (IAR) has uncovered an unusual investment opportunity that she believes is perfect for one of her clients. When presenting the recommendation to the client, it becomes clear that the client is concerned about the potential of loss. To alleviate that concern, the IAR tells the client that she agrees to repurchase the security from the client anytime within the next 60 days at the original purchase price. In so doing, the IAR has
committed the unethical business practice of guaranteeing against loss.
In general, the Administrator would require that a broker-dealer's social media policies be
committed to writing and communicated firmwide.
Strategic Capital Asset Managers (SCAM) is preparing its Form ADV, Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information except
compensation earned on dealings with clients.
Under the brochure rule of the Investment Advisers Act of 1940, each client must be
delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services.
A client calls to discuss purchasing a specific security that he has been following. The agent handling the account recognizes that a potential conflict of interest exists. The best course of action would be to
disclose the conflict of interest and proceed if the client wishes.
When the compensation arrangements or incentives for the broker-dealer or its agents could affect whether employees recommend or offer a particular security or transaction to a client, it is required that the firm
disclose the potential conflict of interest.
All of the following activities of an investment adviser are prohibited under the Uniform Securities Act except
disclosing potential conflicts of interest.
ABC Securities, a registered broker-dealer, has a wholly owned subsidiary, ABC Real Estate Ventures. ABC Real Estate Ventures is in the business of structuring limited partnership offerings designed to afford qualified investors an opportunity to earn income from commercial property. If an agent representing ABC Securities were to recommend one of these programs to a qualified client,
disclosure of the potential conflict of interest must be made.
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.
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 the Investment Advisers Act of 1940 this activity requires written:
disclosure to the client and consent prior to completion of the transaction.
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 the Investment Advisers Act of 1940, this activity requires written
disclosure to the client and consent prior to completion of the transaction.
Automated Performance Advisers (APA), a registered investment adviser in three states, has spent several years and in excess of $1 million developing the software for a computerized program that APA believes will allow the model portfolios it designs for its clients to consistently outperform the market. In the first year of beta testing the program, returns have ranged from 40% to 60% above the relevant benchmarks. Because of this success, and in an effort to recoup some of the development costs, APA is now charging—in addition to their standard 25 basis points per quarter—a performance-based fee of 10% of the increase of value in a client's portfolio. In so doing, APA would be
in violation of the Uniform Securities Act.
Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP), a state-registered investment adviser, and receives a referral fee for each person who becomes a client of RIP. The practice
is acceptable under the investment adviser marketing rule, as long as the proper disclosures are made.
An agent with a nationally known broker-dealer has been opening new accounts with middle-income clients. When asked for the reason for the success, the agent replies that prospects are offered a money-back guarantee. That is, if any security the agent recommends fails to increase in value by at least 25% in six months, the agent will make up the difference. This type of guarantee
is an unethical and prohibited practice.
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.
Active Technicians (AT) is a state-registered investment adviser. In its brochure supplement, it would include information relating to each of the following individuals except
members of AT's board of directors who are active in the firm's business.
Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners
must notify its clients of Clark's departure within a reasonable period.
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. First Securities Advisers, Inc., has
not violated the prohibition against performance fees.
In their advertising campaigns, state-registered investment advisers are prohibited from doing all of the following except
offering free services.
Matt, a registered investment adviser, operates an office down the hall from Jane, a CPA. Because Jane has no interest in portfolio management, she frequently refers her clients to Matt for investment advice. When one of Jane's clients signs a letter of engagement with Matt, Matt sends Jane a $200 referral fee. This occurred five times in the previous year. This situation is
permitted if the referral fee is disclosed to the appropriate clients.
Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when
purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation.
MaryBeth Williamson is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of
registration.
Social networking sites typically contain both static and interactive content. The difference between these two is that static content
remains posted until it is changed by the poster, while interactive content contains real-time communication.
Perpetual Pecuniary Rewards (PPR) is an investment adviser registered in several states. PPR is affiliated with Perpetual Rewarding Investments (PRI), a broker-dealer registered with the SEC and the same states as PPR. Through that affiliation, clients of PPR can enter into a wrap program with an annual fee between 1% and 1.75%, depending on the account's assets. When opening a new wrap account, PPR must provide the client with a written disclosure statement containing at least the information
required by Appendix 1 of Form ADV, Part 2A.
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.
Wealth Funders and Associates (WFA) is a state-registered investment adviser organized as a partnership. The firm has had five equal partners since its inception. However, with the retirement of one of the partners and the need for additional capital, WFA has added three new partners. As a result of this activity, WFA
shall notify clients of the change to the partnership within a reasonable time.
A banner on a broker-dealer's website is considered
static content.
Under the USA, every investment adviser organized as a partnership must include in its contracts an agreement to notify clients within a reasonable period of time of
the addition or removal of any of the partners.
A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true except
the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment.
A state-registered investment adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be complied with except
the client must sign the advisory contract at the same time that the investment adviser's brochure is delivered.
With regard to an SEC-registered investment adviser employing the services of a promoter to solicit business, it would be correct to state that
the investment adviser may not compensate a solicitor who is subject to a statutory disqualification.
As a securities professional, one of your obligations to your clients is protecting their best interests. One of the ways to do that is to make them aware of the red flags of investment fraud. Those red flags would include all of the following except
the risk of losing money.
When a security is registered with the Administrator, it means that
the security may be legally sold in the state.
Which of the following statements may not be made by an agent in regard to a security registered with the SEC under the Act of 1933?
"The SEC has approved of this issue, and that's why I'm so glad to be able to offer it to you."
An investment adviser (IA) is servicing a group of physicians and will offer a discounted fee to the doctors in that particular partnership. In what way would this be considered ethical?
An investment adviser (IA) is servicing a group of physicians and will offer a discounted fee to the doctors in that particular partnership. In what way would this be considered ethical?
An investment adviser (IA) is a member of a country club and provides substantial fee reductions to those members who become clients. The adviser justifies this because these club members are known for great referrals. The IA charges regular clients a fee that is larger for the same services because they are not members of the country club. Is this permissible?
It is permissible as long as proper disclosure is made in the adviser's brochure.
Of the popular social media sites, the one most thought of as a business networking site is
LinkedIn.
Which of the following circumstances would require an investment adviser structured as a partnership to notify all clients of the firm?
The investment adviser hires another partner for the firm.
There are a number of requirements placed upon investment advisers found in NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which of the following is not included in those requirements?
Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract.
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.
In addition to transaction costs (e.g., commissions or markups), most broker-dealers have a schedule of miscellaneous fees. The purpose of these fees is to
help reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client.
If persons other than the original person entering the post can comment on social media, the content is considered
interactive.
With regard to a state-registered investment adviser using Form ADV, Part 2 as its brochure, it would be correct to state that
it is filed through the IARD system.
Under the Uniform Securities Act, a guaranteed security is protected by someone other than the issuer against loss of all of these except
principal on equity issues.
An SEC-registered investor adviser would like to advertise its performance. The SEC marketing rule requires that any advertisement showing gross performance must also show net performance and reflect all of the following except
the same results.
A securities salesperson may indicate to a prospective customer that the SEC has approved a securities issue
under no circumstances
