Quiz Questions - Business Practices

Which State-registered investment adviser MUST report that it takes custody on Form ADV

An adviser that directly deducts management fees each quarter from client accounts

Not disclosing to a customer that dividends can be automatically reinvested without any sales charge imposed

is not unethical

Accepting securities from a client to be placed in an agent's account

is prohibited

The payment of referral fees to unlicensed individuals

is prohibited

Recommending the purchase of shares which results in the customer simultaneously holding shares in different investment company portfolios with similar investment objectives

is unethical

If a State-registered investment adviser accepts $500 or more of advisory fees, 6 months or more in advance of rendering services

it is considered to have taken custody of client funds

Will =

letters testamentary

Partnership is considered to change if

majority of partners are new

Executing the first transaction comes AFTER

manager signature

Broker-dealers take custody of clients funds and securities as part of the business and must maintain

minimum net capital in order to do so

Whether a payment for order flow was made

must be disclosed on confirmation

Under the Uniform Securities Act, investment advisory contracts

must be in writing

Prospectus delivery is only required for

new issues being sold in the primary market

It is also a requirement to inform clients about the addition of

new partners

The trading patterns of the plan beneficiaries have

no need to be considered under Prudent

An agent can

not publish and distribute reports detailing the performance of recommended transactions

So the SEC states that if complaint copies are retained, the firm must retain the

original

Qualified custodians under NASAA's Custody Rule are

1. FDIC insured deposit taking institutions; 2. Registered broker-dealers holding customer assets; 3. Registered futures commission merchants holding customer assets; and 4. Foreign financial institutions holding financial assets for customers.

the customer can be given the brochure at the time the contract is signed; but must have the right to rescind the contract within the next

5 days after examining the brochure

After how many days without payment is the customer's account frozen

5th business day

If a representative were to sell these promissory notes offered by an outside individual, then the rep would be

"selling away" from his firm

Accepting funds or securities from a customer is considered to be

"taking custody"

For federal covered the amount is

$1,200 in 6 months advance

Any fee calculation must cover minimum periods of

1 year

The Prudent Investor Act states that the trustee should consider the following when making investment decisions relevant to the trust or its beneficiaries

1. General economic conditions; 2. Possible effects of inflation or deflation; 3. Expected tax consequences of investment decisions or strategies; 4. The role that each investment plays within the overall trust portfolio; 5. The expected total return; 6. Other resources of the beneficiaries; 7. Needs for liquidity, regularity of income, and preservation or appreciation of capital; and 8. An asset's special value to one or more of the beneficiaries

In order for an "Internet Communication" to NOT be considered an offer of securities brokerage or investment advisory services in a State, 4 conditions must be met

1. The communication must be limited to general information on products and services; 2. The communication must contain a legend that the Broker-Dealer, Investment Adviser, BD Agent or IA Agent may only transact business in the State if first registered in that State; or if that "person" is excluded or exempted from registration; 3. Any follow-up individualized responses to persons that involve effecting securities transactions cannot be made unless that "person" has complied with the State's registration requirements (or is exempted or excluded); 4. The Internet Communication must contain a "firewall"

When is an investment adviser deemed to have custody of client funds

1. When the adviser holds a check payable to the client from the client's broker-dealer 2. When the adviser holds a full power of attorney over the client's account 3. When the adviser acts as a trustee where the client is the beneficiary of the trust

The NASAA rules states that any advertisement from an investment adviser

1. cannot contain a testimonial 2. cannot state that any report or research will be provided for free unless this is offered without condition; 3. cannot contain false, untrue or misleading statements; 4. can include a list of recommendations made with their performance as long as all recommendations over that period (a minimum of 1 year) are included, along with the market price at the time of the recommendation and the current price of the security. This list cannot be deliberately selective.

In an ad you cannot say that you were (2)

1. certified 2. approved

There are 4 critical pieces of information that must be collected to open a new account

1. name 2. address 3. dob 4. ssn

Before entering into an advisory contract that charges a performance fee, the adviser must disclose in writing

1. that the fee arrangement may create an incentive for the adviser to make investments that are riskier; 2. that the investment adviser will get compensation based on both unrealized appreciation and realized capital gains; 3. the basis for valuing any illiquid investments used in computing unrealized appreciation; 4. the periods that will be used to measure performance and their significance to the computation of the fee; and 5. the nature of any index used as a comparison of investment performance, the significance of the index, and the reason why the adviser believes the index is appropriate

Sharing in the gain or loss in a customer account by an agent is prohibited unless

1. the customer agrees in writing 2. the broker-dealer approves of the account in advance; and 3. any sharing is in direct proportion to capital contributed

IA order tickets must contain (4)

1. who advised 2. date of order 3. who executed order 4. who's account order is for

The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to

10 business days; as long as a written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion

A member, who acted as manager or co-manager of an initial public offering for an issuer, may not issue research reports regarding the issuer within

10 calendar days following the effective date of the offering

A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of

10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering

Audit results must be filed with the Administrator within

120 days of completion of the audit

If there are material changes to Form ADV Part 2, within how long must the customer be given a copy

120 days of fiscal year end

CTR =

15 days; over $10,000

Under NASAA rules, customers must receive Part 2 of Form ADV (the "Brochure" and "Brochure Supplement") at least

2 business days prior to the completion of an oral or written contract to provide advisory services

SAR =

20 days

An investment adviser receives a check from a customer made out to the adviser that the customer sent to the adviser inadvertently. This adviser will NOT have taken custody as long as it returns the check to the customer within

3 business days

Even if the customer did not sign the contract, he or she has

5 business days to rescind the contract

A written customer complaint is received by mail that the firm resolves to the customer's satisfaction. Which statement is TRUE regarding keeping this record

A copy of the original complaint along with its resolution must be retained in the file of the agent by the broker-dealer

Under NASAA rules, if a customer wishes to trade a margin account prior to returning the signed margin agreement, such an action is

permitted only if the customer returns the signed margin agreement promptly

A trade is NOT considered to be discretionary if the representative selects:

price and time

Each customer of the "bought out" investment adviser must give

prior approval for his or her account to be moved to the acquiring firm

There is no prohibition on a broker-dealer compensating its agents with

prizes

Backdating of transactions is

prohibited

An investment adviser may be compensated with which of the following? I Wrap fees charged to customers for all services rendered by the adviser II Soft dollars paid by an executing broker to the adviser in return for trades sent to the broker by the adviser III 12b-1 fees paid by a mutual fund to the adviser based on annual net assets IV Commissions paid to an affiliated broker-dealer on trades recommended by the adviser

ALL

If an investment adviser wishes to take custody of client funds, under Uniform State Law the: I funds must be kept segregated from investment adviser monies II clients must receive quarterly account statements III investment adviser may have to maintain a higher net worth amount IV investment adviser must be audited at least annually

ALL

In order for an investment adviser to be compensated with a performance fee, which of the following must be disclosed in writing? I The periods that will be used to measure performance and their significance in the computation of the fee II That the fee arrangement is based on both unrealized appreciation and realized capital gains III The nature and significance of any index used as a comparative measure IV The reason why the adviser believes the use of any comparative index is appropriate

ALL

Sending out a BLANKET e-mail that makes recommendations of securities to a list of web addresses by a broker-dealer or agent is

prohibited

Charging commissions on trades effected for the client is

prohibited since the adviser is compensated based on a percentage of assets under management

If the investment adviser has its registration suspended or revoked in the State

then all of its representative's licenses are suspended or revoked as well

Because oral discretion can be taken for up to 10 days, the IAR had the authority to buy the stock. However, the IAR did not have the authority to sell the stock at a loss 3 weeks later unless either the client directed the trade or the client returned the signed power of attorney (which is not the case here).

Because the IAR did not have authority to sell the shares, any loss is the responsibility of the employing firm (the investment adviser). The IAR is simply an agent of the firm - the account is the property of the firm, not the agent. The investment advisory firm is liable for the loss.

A broker-dealer has a marketing agreement with a local bank and has located offices in each of the bank's branches. If a bank customer makes an inquiry about mutual funds offered by the broker-dealer in the branch, all of the following are true EXCEPT: A. oral disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal B. written disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal C. the customer's signature must be obtained on a document acknowledging receipt of the appropriate risk disclosures D. reasonable efforts must be made to obtain the customer's signature on a document acknowledging receipt of the appropriate risk disclosures

C

IA's can charge fee based on

highest value of assets during year

Under the Uniform Securities Act, if an investment adviser wishes to take custody of customer funds or securities, it MUST

hold the assets in either a bank or brokerage account where the adviser is the trustee acting for the benefit of the customer

Which form(s) MUST be signed by the customer in order to open a margin account?

Hypothecation Agreement

An agent of a broker-dealer or investment adviser must notify his employer if they wish to take outside work

in writing

An agent can perform advisory services for clients as long as they are

incidental to his work and no compensation is taken for the advisory work

IA's cannot charge fee based on

increase in assets under management over the calendar year

Which of the following is the LAST step in opening a new account for a customer?

Executing the first transaction

Must remove this word from advertising

FREE

An Investment Adviser MUST inform a client about: I Change of address II Change of phone number III Addition of client accounts from another advisory firm that was "bought out" IV Change in a majority of the partners of the advisory firm

I, II, IV

the prudent investor rule states that

investment decisions should be based on an overall investment strategy that seeks to balance risk and return

Refunding a customer's money for a transaction that violated the registration provisions of the Uniform Securities Act

is allowed

An investment adviser would be considered to have custody of client funds if it: I received a check from a customer made payable to the custodian that was sent inadvertently and the adviser immediately forwards it to the custodian II received a check from a customer made payable to the adviser, who deposits it and opens an account for the client III received a power of attorney from a customer authorizing it to buy and sell securities on the customer's behalf IV received a power of attorney from a customer authorizing it to withdraw client funds or securities maintained with the custodian

II, IV

A broker-dealer can "reward" an investment adviser for sending it commission trading business by placing

IPOs in the adviser's personal account

An investment adviser representative has worked with a client and his spouse for 10 years and has an excellent relationship with the couple. The representative has been notified that the husband is unconscious and is in the hospital. The account has several open orders that have not yet been executed. What can the representative do regarding the disposition of these orders?

Instructions can be taken from the customer's spouse

Which of the following is NOT a qualified custodian under NASAA rules

National Securities Clearing Corporation

Any changes to an advisory contract are a material change that must be filed with the

State Admin within 30 days on Form ADV

Sharing commissions between an agent and a broker dealer

is allowed

Which of the following is the MOST appropriate investment for an estate account?

T Bills

If an agent receives securities from a client to be placed in custody of the broker-dealer, the certificates must be

forwarded to the broker-dealer immediately

If a customer of a broker-dealer fails to pay for a securities purchase by the 5th business day from trade date, the customer's account must be

frozen

Under the NASAA Statement of Policy on unethical practices, written discretionary authority need not be obtained by an investment adviser if the customer

gives verbal discretionary authority and a written power of attorney from the customer is obtained within 10 days

A hedge fund offers to provide a minimum level of trades to a broker-dealer in return for receiving below-market office space from the broker-dealer. Which statement is TRUE?

This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator

IPOs are

hard to get and often jump in price because of the excess demand

An Investment Adviser Representative (IAR) is permitted to borrow money from

a close relative

An investment adviser that claims that it is a "fee only" adviser could be compensated based on

a flat annual or hourly fee for all work performed

Simultaneously buying a security on one exchange and selling it on another exchange is

a legitimate trading technique called "arbitrage"

Rapid-fire buying of a security on one exchange and simultaneously selling it, just to create the appearance of trading activity is

a manipulative and prohibited practice known as "wash trading"

Effecting securities transactions at the close of the market with the intent of manipulating the closing price is

a prohibited practice known as "marking-the-close."

Which of the following is a TRUE statement about managed wrap accounts? The customer is charged

a single annual fee based on total assets in the account for account transactions and maintenance; NO COMMISSION

Recommending the purchase of a non exempt unregistered security is

a violation

To exercise discretion in a customer account, the agent must first obtain

a written power of attorney from the customer

An agent cannot do this without being licensed

accept an unsolicited order

If the Administrator prohibits investment advisers in that State from taking custody of customer funds or securities, then the investment adviser would NOT be permitted to

accept securities from a customer that are registered in customer name

Taking custody means that the adviser is holding customer funds or securities or has the ability to

access customer funds/securities

Under the NASAA Statement of Policy, an agent of a broker-dealer that has discretionary authority would NOT be subject to the prohibition on excessive trading of a customer account as long as the

account is a non-managed fee based account

There is no requirement to notify customers of the

addition of new advisory clients

Investment advisers must inform their clients about a change of

address or phone number

The Investment Advisers Act of 1940 prohibits the use of customer testimonials in

advertising

Broker dealers cannot charge

advisory fees

Federal and state anti-money laundering rules apply to

all bd's and all ia's

investment advisory contracts cannot

allow for payment to the adviser based upon capital gains in the account

Prepaid advisory fees are

allowed

Under NASAA rules, within 120 days of fiscal year end, each customer must be sent a(n)

an updated brochure and brochure supplement

Changes to the terms of advisory contracts must be

approved by the customer

To satisfy the requirements of the NASAA brochure delivery rule, customers who wish to buy advisory services must receive a copy of the brochure

at least 48 hours prior to entering into an advisory contract

An investment adviser is prohibited from

borrowing money from a customer

An agent cannot say that income from a fund consists of

both dividends and capital gains

Who must approve an agent sharing gain/loss with a customer

broker dealer

Who is prohibited from commingling their funds with their customers funds

broker dealers and agents

Broker dealers advertising

can contain testimonial

IA advertising

cannot contain testimonial

IAs and IARs

cannot open a joint account or share gains

Prior to being licensed as an agent, an individual can only perform

clerical functions

Broker dealers charge

commissions

The Administrator examines the books and records of an investment adviser and notices that there appears to be an excessive level of trading in customer accounts. To determine if there is a violation of the Uniform Securities Act, the Administrator would

compare the transactions to the customers' stated investment objective(s)

Advisory fees must be

competitive with those charged by other advisers that provide similar services and cannot be unreasonable

Customer info must be disclosed only under

court order

Investment authority over the trust account may be

delegated to an investment adviser by the fiduciary under Prudent

The investment adviser can offer the discount as long as the fact that discounts are offered is

disclosed in the Form ADV Part 2A

All fees associated with the management of a customer's portfolio must be

disclosed to the customer by that customer's investment adviser

Quarterly account statements by IAs in general

do not have to be sent

A subscription order

does not need to be retained in records

A change in the adviser's style requires that

each customer sign a new advisory contract

A customer that buys a non-exempt new issue must be delivered a prospectus at, or prior to, the time of

entering into the contract to purchase the new issue

The exchange where the transaction was effected

is not required on confirmations

Whether the transaction was solicited or unsolicited

is not required on confirmations

A broker dealer can

publish and distribute reports detailing the performance of recommended transactions

The fee cannot be computed

quarterly

A statement of any free credit balance must be sent to the customer at least

quarterly; if custody is taken

During the period when an underwriter is negotiating with an issuer to do an underwriting, the firm cannot issue

research reports on that stock

IAs are allowed to charge a

retainer fee

A broker-dealer can hold a mutual fund

sales contest for its representatives

An account cannot be opened in a 3rd party's name unless

signature by 3rd party

Prizes are not considered to be

soft dollar compensation

A third party is prohibited from opening an account in

someone else's name

Legitimate promissory notes are marketed to

sophisticated, corporate investors

Under Prudent Rule, can still invest in

speculative stocks

Securities in margin accounts must be held in

street name

Only advisers that

take custody are audited

Quarterly account statements must be sent by investment advisers that

take custody of client funds or securities

An investment adviser is permitted to take physical custody of a customer's monies or securities only if

the Administrator does not prohibit this by rule; and if the adviser notifies the Administrator that he has, or will take, custody

If the customer is a bank

the IA may borrow funds from them

If a margin agreement is not signed

the account CANNOT be opened

If a customer dies

the account must be frozen

Nothing can be done after death until

the appropriate documentation is obtained, permitting the transfer of the account into the name of a beneficiary or an executor

IAs can charge a performance fee if

the client has $1M in assets under management or $2M net worth

The overriding rule is to follow the instructions of

the customer

When an agent recommends the purchase of a stock, he or she is only allowed to accept

the normal commission for the transaction

If the cash is an amount over $10,000, then

the receipt must be reported to FinCEN

An executor or trustee is permitted to delegate investment and management functions as long as

the trust or will permits such; and the agent actions are consistent with the purposes and terms of the trust or will

If an investment adviser will effect its recommended portfolio transactions through an affiliated broker-dealer that will charge commissions for each trade

this is a conflict of interest that must be disclosed, in writing, to the client at the time that the advisory contract is signed

If an investment adviser is a partnership, and there is a change in the majority of the partners

this is legally considered to be an "involuntary assignment" of the advisory contract to a new partnership; and therefore, customer approval of the assignment is required

Hypothecation agreement

this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer

Securities held in margin accounts cannot be

transferred and shipped

The Prudent Investor Rule does not detail the

types of investments to be made

Under the Uniform Securities Act, an investment adviser may share in the profits of a client's account

under no circumstances

Agents can accept orders for

unregistered exempt securities

Agents cannot solicit orders for

unregistered non-exempt securities

The research department of a bd/ia must be

walled off from the sales and trading activities

The Administrator can request filing of ALL

web pages that have ever been created - so they must be retained and archived

Can only sell away if

you have written permission from your firm