Progress Exam 2

Under SEC Release 1092, who would NOT be exempt from the definition of investment adviser? A. marketing firm whose investment advice is solely incidental to its profession B. An accounting firm whose investment advice is solely incidental to its profession C. A law firm whose investment advice is solely incidental to its profession D. A professor whose investment advice is solely incidental to his profession

"According to SEC Release 1092, the professional exclusion provided by the Advisers Act is only available to lawyers, accountants, engineers, and teachers. A person engaged in any other profession who performs investment advisory services would be considered an investment adviser, whether or not the performance of investment services is incidental to the practice of her profession. However, other exemptions under the Act may be available to professionals, e.g., accountants and lawyers. The Act does not provide a specific exemption to a marketing firm. For example, a firm that markets financial planning services does not have an exemption from the definition of investment adviser and may be required to register."

Which of the following choices would not be permitted under a soft-dollar arrangement between an investment adviser and a broker-dealer? A. Accounting fees B. Portfolio analysis software C. Discussions with research analysts D. A seminar where corporate executives are in attendance

A. Accounting fees "Concerning soft-dollar arrangements, the SEC interprets research and brokerage services to include research as well as anything that helps the investment adviser to effect securities transactions or to perform related functions such as clearance, settlement, and custody. The key is that the service that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services include traditional research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars do not include accounting fees, advertising and marketing expenses, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors."

Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, all of the following activities are considered violations, EXCEPT: A. Exercising discretion for 10 business days based on oral instructions B. Charging a client an excessively high advisory fee C. Following a conservative, risk-free approach in all client accounts D. Indicating that the Administrator approves of a firm s activities

A. Exercising discretion for 10 business days based on oral instructions "The only acceptable practice is exercising discretionary control for up to 10 business days based on oral discretion from a client. NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers prohibits charging unreasonable fees. In determining the reasonableness of fees, Administrators can research the competitiveness of fees and advisory services provided. Since not all clients have the same objectives, a conservative approach is not appropriate for all clients. Remember that an Administrator does not approve of a firm's practices."

Money managers are prohibited from directing commission dollars to obtain which of the following items from registered broker-dealers? A. Office space B. Computer software C. In-house research reports D. Third-party research reports

A. Office space "Advisers may not direct commissions to a registered broker-dealer in order to obtain office space or furniture. These are unacceptable examples of soft-dollar rebates."

All of the following are acceptable reasons for disclosing confidential information regarding a client's account, EXCEPT: A. The account is discretionary B. A demand is made by the SEC C. A demand is made by an Administrator D. The client grants permission

A. The account is discretionary "The NASAA Statement of Policy on Unethical Business Practices of Investment Advisers considers the release of confidential information about advisory clients unethical and unlawful unless the disclosure is authorized by the client or required by law (SEC or state Administrator). Discretionary authority permits the adviser to buy and sell securities for the account, but it is not an authorization to release confidential information."

An adviser charges its clients a fee that's based on the dollar value of assets under management. The firm has seen the value of assets under management increase over the last 12 months due to its successful asset allocation model. One of its clients, whose account increased in value during this period, contacts the firm to complain that the fee he is being charged increased and that he never signed a contract which allows for a performance-based fee. Which of the following statements is TRUE? A. The adviser's fee percentage that is based on assets under management did not change; therefore, no violation has occurred. B. The adviser has committed a violation by charging the client a higher fee. C. Although no violation has occurred, the adviser engaged in an unethical business practice. D. The client would be permitted to cancel the contract since the adviser did not disclose the correct method it used to calculate its fees.

A. The adviser's fee percentage that is based on assets under management did not change; therefore, no violation has occurred. "The adviser is not charging a performance-based fee in this question. Under the Investment Advisers Act of 1940, an advisory contract may provide for compensation based on the total value of a fund or account over a definite period. The dollar amount received by the adviser increased, not because the fee percentage increased, but due to the assets or total value of the account increasing. For this reason, no violation has occurred. If the fee percentage increased due to the performance of the account (a performance-based fee), it would be allowed only if this information was properly disclosed and the account was held by a qualified client"

An investment advisory firm has created a brochure which contains the same information that's found in its Form ADV Part 2. One of the firm's IARs has given this brochure to one of his new clients at the time that she verbally agreed to a contract. He had not previously provided her with any other documents. Which of the following statements is TRUE regarding the IAR's actions? A. The advisory firm is in compliance with the Brochure Rule of the Investment Advisers Act. B. The advisory firm has not fully complied with the disclosure requirements of the Investment Advisers Act. C. The IAR must send his client a copy of the firm's Form ADV Part 2 within 48 hours of her signing the contract. D. If the IAR's client was a registered investment company, he would be required to provide a brochure after the contract was signed.

A. The advisory firm is in compliance with the Brochure Rule of the Investment Advisers Act. "The Brochure Rule permits advisers to provide a disclosure brochure to clients at the time they enter into contracts. For federal covered advisers, the brochure must be given to clients even if the advisory contract with the client is entered into orally. IAs and/or IARs are not required to provide a brochure to registered investment companies or clients whose contracts are for limited impersonal advisory services for which the client pays less than $500 per year."

When sharing in the profits of a customer's account, whose approval is required? A. The client's B. The SEC's C. The Administrator's D. This practice is prohibited and unethical

A. The client's "The client and the broker-dealer carrying the account are required to approve any account in which both the agent and the customer share in the profits and losses. The sharing must be proportionate to the capital at risk. Of the choices given, the client is the only correct answer."

An attorney wishes to place orders for a client's account with an investment adviser. Under the NASAA Statement of Policy on Unethical Business Practices of Investment Advisers, which of the following statements is NOT TRUE? A. The investment adviser should accept the order as is because, as an officer of the court, an attorney by definition has a limited power of attorney for her clients. B. The order may be accepted provided written trading authorization was granted from the client to the attorney. C. If written trading authorization was not granted, the investment adviser would commit an unethical business practice by accepting the order. D. The investment adviser could be liable for civil liabilities if they trade in an account without authorization.

A. The investment adviser should accept the order as is because, as an officer of the court, an attorney by definition has a limited power of attorney for her clients. "The order may only be accepted if the attorney is granted trading authorization from the client. If not, the investment adviser would commit an unethical business practice by accepting the order, which could result in civil liability."

An investment adviser may NOT receive which of the following forms of compensation for directing brokerage commissions? A. The travel cost of flying to London to attend an economics conference B. The cost of conducting research used in the development of investment models C. A fee paid to cover the costs of a seminar on convertible bonds D. The cost of computer software used for evaluating a client's portfolio

A. The travel cost of flying to London to attend an economics conference "An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft-dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft-dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors."

According to the Disclose or Abstain Principle, an IA must disclose all of the following actions, EXCEPT: A. Using contracts that include hedge clauses. B. Providing clients with research prepared by a third-party. C. Acting as a broker-dealer and/or securities agent. D. Effecting agency cross transactions for two clients when only one side is unsolicited.

A. Using contracts that include hedge clauses. "If disclosed, an investment adviser may provide clients with third-party research as a resource, act as a broker-dealer or securities agent, or effect agency cross transactions provided one side of the trade is solicited. However, investment advisers must abstain from using contracts that include exculpatory provisions, and hedge and mandatory arbitration clauses."

Which of the following persons would be considered an investment adviser under the Investment Advisers Act of 1940? A. A brokerage firm that offers advice but is compensated solely through commission income B. A brokerage firm that offers wrap accounts to its customers C. A fee-based financial planning firm that only provides advice on U.S. government securities and fixed annuities D. A lawyer who provides estate planning and tax advice to a group of elderly customers and their children

B. A brokerage firm that offers wrap accounts to its customers "Any firm that offers wrap accounts is considered an investment adviser. The Investment Advisers Act of 1940 specifically excludes a lawyer, accountant, engineer, or teacher whose rendering of investment advice is solely incidental to the practice of her profession. Also excluded are broker-dealers who offer advice but receive no special (additional) compensation for this service. Choice (c) is excluded from the definition of adviser since the firm is giving advice related solely to direct obligations of the United States government (an exclusion) and nonsecurities such as fixed annuities (another exclusion)."

According to the Investment Advisers Act of 1940, which of the following persons does NOT qualify for the professional exclusion from the definition of investment adviser? A. A teacher who works for a private school that offers classes on security analysis and portfolio planning B. An actuary who constructs bond portfolios for clients designed to provide a certain cash flow at a given level of risk C. A chemical engineer who, as a consultant, evaluates the feasibility of commercial development of certain patented chemical processes being investigated by limited partnerships D. A tax accountant who provides advice to clients regarding investment strategies that minimize tax liabilities

B. An actuary who constructs bond portfolios for clients designed to provide a certain cash flow at a given level of risk "According to SEC Release 1092, the professional exclusion provided by the Advisers Act is only available to lawyers, accountants, engineers, and teachers. A person engaged in any other profession who performs investment advisory services would be considered an investment adviser, whether or not the performance of investment services is incidental to the practice of his profession. However, other exemptions under the Act may be available to the professional".

Which of the following statements would be considered FALSE regarding the registration provisions of the Investment Advisers Act of 1940? A. An investment adviser may operate in more than one state. B. An investment adviser may be subject to different state-mandated minimum financial requirements if registered with the SEC. C. An investment adviser would be subject to minimum federal financial requirements if registered with the SEC. D. An investment adviser that is registered in a state where it maintains its principal place of business would be subject to that state's minimum financial and bonding requirements.

B. An investment adviser may be subject to different state-mandated minimum financial requirements if registered with the SEC "The Investment Advisers Act of 1940 regulates federal covered advisers. If registered with the SEC, IAs must comply with federal rules regarding financial requirements and bonding requirements. Investment advisers that are subject to state registration would be subject to the requirements placed upon them by the state in which it maintains its principal place of business."

A broker-dealer receives an order to purchase a block of securities for an institutional client. The broker-dealer feels as though the order will create an upswing in the stock price and therefore buys call options on the subject security. What is the term for this action? A. Churning B. Front-running C. A wash sale D. Selling away

B. Front-running "Placing proprietary orders (orders for the account of the broker-dealer) ahead of customer orders is termed front-running, and is prohibited. The institutional buy order has the possibility of moving the price of a security higher. This would allow the broker-dealer to purchase the security or a derivative on that security prior to executing this order and profit when the market reacts to the institutional order."

According to the Investment Advisers Act of 1940, an advisory fee that increases and decreases based on the performance of a portfolio compared to a benchmarking index is called a(n): A. Participation fee B. Fulcrum fee C. Incentive fee D. Pay for Performance fee

B. Fulcrum fee "A fulcrum fee is averaged over a specific period. It increases and decreases proportionately with the investment performance of a client's account, in relation to the investment record of an appropriate index of securities. If the client's account outperformed the index, the adviser would be entitled to an additional fee. If the client's account underperformed the index, the fee would be reduced."

According to blue-sky laws, which of the following activities is prohibited or fraudulent? A. Using the dividends paid in the last 12 months to determine current yield on a common stock B. Guaranteeing to reimburse a client due to any losses incurred C. Forwarding a written complaint to an immediate supervisor D. None of the above

B. Guaranteeing to reimburse a client due to any losses incurred "If a client loses money on an investment, agents may not reimburse the client."

An investment advisory firm has four partners. One of the partners has earned a Certified Financial Planner (CFP) designation, while the other three partners are attending CFP classes, but have not yet earned the certification. The advisory firm has published an advertisement that states, All of our planners have participated in the CFP certification program. Which of the following statements is TRUE? A. This is unethical since investment advisers may not advertise their qualifications. B. This is unethical since it implies that all of the partners are CFPs, which is misleading. C. This is acceptable since it may become true in the near future. D. This is acceptable since the content of adviser advertisements is not regulated.

B. This is unethical since it implies that all of the partners are CFPs, which is misleading. "Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, it is unethical to misrepresent the qualifications of the adviser or any employee. Advisers must consider how the wording of their ads will be interpreted by the public when considering whether the wording might be misleading."

An investment adviser offers a choice between a wrap-fee program and a traditional asset-based fee (fee plus commission). When working with a client, what must the investment adviser disclose? A. The option that has the lower fee B. The option that the adviser feels is in the customer's best interest C. Both choices (a) and (b) explained orally and in writing D. The compensation the investment adviser will receive from each option

C. Both choices (a) and (b) explained orally and in writing "When offering a choice between a wrap-fee program and a traditional asset-based fee, the investment adviser must disclose both alternatives in writing and explain both to the client."

A firm has been keeping stock owned by customers and stock owned by the broker-dealer together in a way that does not clearly indicate who owns the shares. What is this prohibited practice called? A. Hypothecation B. Rescission C. Commingling D. Conversion

C. Commingling "Commingling refers to the practice of intermixing securities belonging to customers with securities belonging to the broker-dealer. This is prohibited in an attempt to assure that customer securities are not misused."

All of the following are access persons of an investment adviser, EXCEPT: A. Officers B. Directors C. Employees who have access to public information regarding securities' prices D. Employees who are in a position to exploit client information, client transactions, or holdings in reportable securities

C. Employees who have access to public information regarding securities' prices "Under both the USA and Investment Advisers Act of 1940, access persons include officers, directors, partners, and other supervised persons who have access to non-public information. Employees who have access to non-public information, or who are in a position to exploit information that relates to client transactions or holdings in reportable securities are also considered access persons. However, employees of an IA who have access to public information are not in a privileged position and are not considered access persons. To ensure that they're not violating their fiduciary responsibilities, access persons must file holdings reports annually and transaction reports quarterly."

Which of the following investments by a fiduciary MOST likely violates prudent investor standards? A. Spreading assets in a portfolio over 10 uncorrelated asset classes B. Investing 5% of a portfolio in foreign government bonds C. Placing 100% of a portfolio in an IPO for which great demand is expected D. Writing covered calls against 10% of the common stock in a portfolio

C. Placing 100% of a portfolio in an IPO for which great demand is expected "Prudent investor standards explicitly recognize the need for diversification. Investing 100% of a portfolio in anything is rarely wise."

Under the Uniform Securities Act, which of the following statements is NOT TRUE regarding an agent sharing in the profits and losses in the client's account? A. Sharing is permissible if the client has approved of it in writing. B. Sharing is permissible if the broker-dealer employing the agent has approved of it. C. Sharing is permissible if the client and agent have a mutual agreement as to the proportion of profits and losses the agent will share. D. The agent may share only in direct proportion to the amount the agent has contributed to the client's account.

C. Sharing is permissible if the client and agent have a mutual agreement as to the proportion of profits and losses the agent will share. "An agent is permitted to share in the profits and losses of a client's account if the client has approved the arrangement in writing (both signing joint account papers), the broker-dealer employing the agent approved the arrangement in writing, and the gains and losses are shared in direct proportion to the funds contributed."

Sam has custodial power over his nephew's account. He is an astute investor who is looking to maximize the child's returns. Sam is considering using a portion of the account assets to invest in an extremely speculative biotech penny stock that trades in the Pink Sheets. Under the UPIA, which of the following statements is TRUE? A. This action is prohibited since Pink Sheets penny stocks are never suitable for children. B. This action is permissible if Sam obtains the permission of his state's Investment Ethics Committee (IEC). C. This action may be permissible depending on the size of the investment. D. This action is permissible once Sam has received prior written permission from the child's parents.

C. This action may be permissible depending on the size of the investment. "Under the UPIA, a custodian's central consideration is to evaluate the risk/reward trade-off of a given investment prior to inclusion in an account. In this way, the UPIA borrows from modern portfolio theory when assessing the actions of a custodian. Factors such as preserving purchasing power, tax consequences, and liquidity needs are considered, but balancing the risk/reward profile of the account is the custodian's central goal."

An investment advisory firm has three partners and ten associates. While all of the partners have earned a CFP (Certified Financial Planner) designation, the associates are attending CFP classes, but have not yet earned the designation. The advisory firm has published an advertisement that states, All of our partners have completed the CFP certification program. Which of the following statements is TRUE? A. This is unethical since investment advisers may not advertise their qualifications. B. This is unethical since it implies that all of the firm's employees are CFPs, which is misleading. C. This is acceptable since the statement is literally true. D. This is acceptable since the content of adviser advertisements is not regulated.

C. This is acceptable since the statement is literally true. "Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, it is unethical to misrepresent the qualifications of the adviser or any employee. Advisers must consider how the wording of their ads will be interpreted by the public and how it could be misleading. Since the advertisement states that the partners, not all employees, have earned their CFP certification, this is acceptable since the statement is true."

ABC Investment Advisers purchases quarterly research reports from XYZ Brokerage and sends the report to clients. Which of the following statements, if printed on the research reports, would violate NASAA guidelines on Unethical Business Practices of Investment Advisers? A. This report is provided to you courtesy of ABC Investment Advisers. B. ABC Investment Advisers uses this and other information from XYZ Brokerage in determining its investment recommendations. C. This research report was created for your benefit by ABC Investment Advisers. D. ABC Investment Advisers does not necessarily endorse the recommendations of XYZ Brokerage contained in this report.

C. This research report was created for your benefit by ABC Investment Advisers. "Choice (c) gives the impression that the third-party research report was actually created by ABC. This would be a misleading statement."

An investment adviser (IA) only has one client. The IA is NOT provided an exemption from the registration requirements of the Investment Advisers Act of 1940 based on which of the following clients? A. A Section 3(c)(1) private fund that has $110 million of assets under management B. An insurance company C. A venture capital fund D. A Section 3(c)(7) private fund that has $200 million of assets under management

D. A Section 3(c)(7) private fund that has $200 million of assets under management "If an IA is managing a private fund that has less than $150 million of AUM, it's exempt from registration as an IA. Private funds are also referred to as hedge funds and are exempt under Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. Section 3(c)(1) is available to hedge funds that has 100 or fewer owners, while Section 3(c)(7) is available to hedge funds that limit their purchasers to qualified clients (i.e., clients with $5 million of investable assets). If an IA is managing a private fund with $200 million of AUM, it must register with the SEC as a federal covered adviser. If an IA's only client is an insurance company or venture capital fund, the IA is exempt from registration, regardless of the client's AUM."

Which of the following persons would meet the definition of an investment adviser according to SEC Release 1092? A. broker-dealer that provides the public with asset allocation tools B. An accountant who holds herself out to the public as a provider of tax planning advisory services C. A bank that holds itself out to the public as a provider of trust services D. A lawyer who holds himself out to the public as a provider of financial planning advisory services

D. A lawyer who holds himself out to the public as a provider of financial planning advisory services "According to SEC Release 1092, lawyers who hold themselves out to the public as providers of financial planning services would meet the definition of an investment adviser. In these circumstances, the advice provided by the lawyers would no longer be incidental to their law practice."

Under NASAA's Statement of Policy on Unethical Business Practices, an adviser may share confidential client information with all of the following, EXCEPT: A. The SEC B. The IRS C. FINRA D. An affiliated broker-dealer

D. An affiliated broker-dealer "An investment advisory firm must keep all information concerning its clients confidential. It may release the information only if required to do so by law or with the client's approval. The SEC, FINRA, and the IRS are regulatory agencies that could obtain the information without the client's approval."

According to the Investment Advisers Act of 1940, which of the following individuals would need to register as an investment adviser? A. An attorney who determines the fair market value of the assets inside of an estate B. An accountant who recommends a tax-advantaged strategy when reviewing a client's tax return C. A broker-dealer D. An individual who sells a market timing newsletter that advises clients when to buy and sell exchange-traded options

D. An individual who sells a market timing newsletter that advises clients when to buy and sell exchange-traded options "Broker-dealers are excluded from the definition of an investment adviser, as are certain professionals, such as attorneys, and engineers, whose advice is incidental to their profession. An individual who sells a market timing newsletter is selling securities-related advice that is not incidental."

Under the Investment Advisers Act of 1940, which of the following situations would be a violation of soft-dollar practices? A. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with third-party research. B. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with market data services. C. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with trading software used to route orders to a market center. D. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with assistance concerning its compliance responsibilities.

D. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with assistance concerning its compliance responsibilities "An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft-dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft-dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors."

In a holdings report that's filed by an access person of an investment adviser, the information must be: A. Updated within 10 days of every change in the access person's holdings B. Updated within 45 days of adviser's fiscal year-end C. Current as of a date that's no more than 30 days prior to the date on which the report is submitted D. Current as of a date that's no more than 45 days prior to the date on which the report is submitted

D. Current as of a date that's no more than 45 days prior to the date on which the report is submitted "An access person of an investment adviser must report his holdings (i.e., the stocks and/or bonds that he owns personally) by no later than 10 days after becoming an access person and at least every 12 months thereafter. When the holdings report is filed, the information must be current as of a date that's no more than 45 days before the report is filed. Access persons must also file transaction reports to disclose their purchases and/or sales. Transactions reports must be filed within 30 days after the end of each calendar quarter."

Chris is a customer who has very little understanding of financial markets. Chris has custodial power over his children's accounts and is concerned that his lack of investment experience could hurt his children's investment returns. He is considering allowing a third party to assume control of the accounts through a limited power of attorney. Under the UPIA, which of the following statements is TRUE? A. This practice is prohibited in all cases B. This practice is prohibited unless the custodian obtains the written consent of each child C. Custodians may delegate discretion only to licensed advisers and/or attorneys D. Custodians may delegate discretion to any competent person

D. Custodians may delegate discretion to any competent person "Under the UPIA, a custodian is permitted to delegate investment functions to any competent third party. Minors have no say in this decision. Note: In the past, the UPIA specifically prohibited a custodian from delegating discretion to a third party. This is no longer the case."

One of your largest clients has consistently picked profitable stocks for his account. He has just indicated his desire to buy 10,000 shares of a Pink Sheets stock. Considering the client's successful track record, you decide to purchase a significant number of shares ahead of completing your client's buy order. Under which of the following conditions is this action acceptable? A. The client has signed the IAR liability waiver. B. Written disclosure is made to the client regarding your activities. C. The client is given a reduced commission on the transaction in return for his accommodation. D. Generally, this action is prohibited.

D. Generally, this action is prohibited. "Taking this action would constitute an unethical violation. The practice is often referred to as front-running. Some practices, even when disclosed, are still considered unethical and should be avoided."

Which of the following choices is a custodian's primary goal under the Uniform Prudent Investor Act? A. Limiting capital losses B. Maximizing return C. Preserving purchasing power D. Investing with an eye toward the risk/reward profile of the entire account

D. Investing with an eye toward the risk/reward profile of the entire account "No class or type of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and assesses the risk/reward composition of the account when determining if an asset mix is acceptable. The standard of prudence is applied to the entire portfolio as opposed to individual investments."

Which of the following investments are prohibited under the UPIA? A. Speculative option positions B. Penny stock investments C. Junk bonds D. None of the above

D. None of the above "No type or class of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and makes an assessment as to the risk/reward trade-off of the investments selected when determining if an asset mix is acceptable for a given account. The standard of prudence is applied to the whole portfolio as opposed to individual investments."

Betty owns and operates Right Choice Advisers, a small investment advisory firm registered with the states of Oregon, Washington, and California. Betty decides to sell 60% of her shares to another investment adviser and retire. This transaction would require the approval of: A. The SEC B. FINRA C. The state securities Administrator D. Right Choice's clients

D. Right Choice's clients "An investment adviser may not assign a client's contract to another investment adviser without the client's consent. An assignment includes the acquisition of the majority of the adviser's stock by another entity."

Under the Uniform Securities Act, which of the following practices is NOT prohibited? A. Sharing in the profits of a client's account without any contribution to the account B. Executing a solicited order for an unregistered, nonexempt security C. Excessive trading in a client's account D. Sharing of a commission on a trade by two agents of a broker-dealer

D. Sharing of a commission on a trade by two agents of a broker-dealer "Agents of the same firm are permitted to share commissions on a trade."

If a federal covered adviser changes its fee: A. The old fee must be reflected in its brochure B. Only new clients must be advised C. The investment adviser is not required to file an amended Form ADV Part 2 with the SEC D. The investment adviser is required to file an amended Form ADV Part 2 with the SEC

D. The investment adviser is required to file an amended Form ADV Part 2 with the SEC "If a federal covered adviser changes its fee, it must file an amended Form ADV Part 2 with the SEC and it must also notify its clients of the change. Please note that the IA is required to disclose the new fee in its brochure, but not the old fee."

Which TWO of the following transactions would NOT be considered an unethical business practice by a broker-dealer? I. Buying a security on one exchange and selling it on another to take advantage of a price difference II. Effecting a transaction in a security on behalf of clients for the purpose of acting as an agent for both buyer and seller III. Effecting a transaction in a security on behalf of clients for the purpose of increasing the trading volume of that security IV. Effecting a transaction in a security with other broker-dealers for the purpose of increasing or decreasing the price

I and II "It is considered an unethical business practice for a broker-dealer to effect transactions in a security for manipulative or deceptive purposes. Choices (III) and (IV) are examples of these types of transactions. A broker-dealer may effect an agency transaction with two clients where they represent both the buyer and the seller. Also, arbitrage is an acceptable practice (taking advantage of price differences)."

A client of a broker-dealer's agent is interested in adding a pharmaceutical stock to her portfolio, but is unsure of which one of three stocks to choose. The client is leaving for a one-day business trip and fears that the most appropriate time to buy may be while she's unavailable. Which of the following orders may the agent accept from the client without written discretionary authority? I. "Buy 500 shares of SureCure whenever you think the price is right." II. "Enter a market order for 500 shares of TriCare whenever you think it's appropriate." III. "Buy 500 shares of whichever pharmaceutical stock seems to be the best value when the market opens."

I and II only "Broker-dealers and their agents are prohibited from exercising discretionary authority in a customer's account without first obtaining written authority from the customer, UNLESS the customer provides verbal discretion to select the time and/or price of execution. For the exception to apply, the customer must specify all of the other details of the trade, including whether to buy or sell, the specific security, and the amount. In choices (I) and (II), the agent is free to choose the price or time; therefore, written discretionary authority is not necessary. In choice (III), the agent would also need to select the specific security to be purchased which would require written discretionary authority."

Which of the following practices are violations of the Uniform Securities Act? I. Executing trades for the firm's account prior to executing client trades II. Reporting inside information to an immediate supervisor III. Inducing trades for the purpose of increasing commissions

I and III only "Reporting inside information to an immediate supervisor is not a violation of the Uniform Securities Act. Choice (I) is a front-running violation and Choice (III) is a churning violation."

According to the Investment Advisers Act of 1940, the definition of an investment adviser includes which of the following choices? I. Pension consultants II. Broker-dealers III. Bank holding companies IV. U.S. government securities advisers

I only "Pension consultants may provide securities-related advice as an integral part of other financial services and may be considered investment advisers under SEC Release 1092. The other choices are all specifically excluded from the definition of an investment adviser under the 1940 Act."

Which of the following records must be kept by an investment adviser? I. A written agreement between the adviser and client II. A copy of each communication sent to 10 or more individuals III. All documents needed to demonstrate the calculation of return IV. A copy of the investment adviser's code of ethics

I, II, III, and IV "Any investment adviser subject to the registration provisions of the Advisers Act is also required to keep certain records. Some of the records required include a copy of each written account agreement, all documents necessary to demonstrate how the adviser calculates performance or rate of return, blotters, ledgers, and a copy of the investment adviser's code of ethics."

According to the Investment Advisers Act, a financial planner's compensation may consist of which of the following choices? I. An hourly fee II. An overall fee for developing a financial plan III. Commissions on insurance products

I, II, and III "According to SEC Release 1092, the compensation a financial planner receives may consist of fees and/or commissions."

Which of the following statements is TRUE according to the Business Standard Test referred to in SEC Release 1092? I. A person is in the business of providing advice if the person holds him- or herself out to be in the business of providing advice. II. A person is not in the business of providing advice if the advice given occurs rarely or in isolated nonperiodic instances. III. A person is in the business of providing advice if separate or additional compensation is received for providing investment advice.

I, II, and III "SEC Release 1092 refers to the three-pronged test that must be met if a person is going to fall under the definition of an investment adviser. The three prongs are advice, compensation, and the business standard. To meet the business standard, a person must provide advice about securities with some regularity, receive compensation for the advice or analysis provided, or hold oneself out to be in the business of providing advice."

Under the Investment Advisers Act of 1940, which of the following situations would NOT be a violation of soft-dollar practices?' I. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with market data services. II. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with trading software used to route orders to a market center. III. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with assistance concerning its compliance responsibilities. IV. An investment adviser uses a broker-dealer to execute transactions that provide the adviser with third-party research.

I, II, and IV only "An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors."

Under the Investment Advisers Act of 1940, which of the following statements is/are TRUE concerning an investment adviser's use of a solicitor? I. The cash fee paid to a solicitor must be disclosed. II. A partner, officer, director, or employee cannot perform solicitation activities. III. The solicitor must provide the client with a separate written disclosure that sets forth the solicitor's relationship with the adviser and any differential in advisory fees charged over the adviser's usual fees. IV. The adviser must receive from the client a signed acknowledgment of receipt of the solicitor's written disclosure brochure.

I, III, and IV only "Some advisers pay solicitors to obtain clients. If the services of a solicitor are used, various disclosures must be made to the client. In addition to ADV Part 2, there must be a separate solicitor disclosure document that describes the solicitor's relationship to the adviser and the terms of solicitor compensation. Partners, officers, directors, and employees may perform solicitation activities as long as this fact is disclosed."

Without discretionary authority, an agent may execute a client's order if the client specifies which TWO of the following details? I. The price of execution II. The particular security to be bought or sold III. Whether to buy or sell IV. The time the trade should be executed

II and III "As long as the client has specified the action (whether to buy or sell), the amount, and the specific asset to be bought or sold, an agent may determine the time and/or price to execute a client's order, without prior written discretionary authorization."

Selling away is allowed if an agent completes which of the following steps? I. Provides oral or written notification to her supervisor II. Provides written notification to her firm III. Receives her firm's written permission IV. Notifies the state securities Administrator or the SEC

II and III only "A registered representative who wants to sell securities outside of her normal course of employment must first notify her firm in writing about the proposed transactions and must receive her firm's written permission. The notice must describe the proposed private securities transactions in detail. If the firm approves the representative's activities, then it is responsible for supervising the transactions and must record them in its books and records"