Series 63 Unit 5
An agent submits a list of recommendations to a customer that includes 5 different securities. The customer chooses to buy a round lot of 1 of the 5 securities recommended (a stock in which the agent's broker-dealer makes a market). The firm, in completing the trade, charges a markup that is larger than normal for a stock transaction. Is this allowable under the Uniform Securities Act? A) No, under the circumstances given, it is a prohibited practice to charge a higher than normal markup. B) Yes, it is allowable, but proper disclosure is required. C) No, the markup schedule is set and cannot be changed for an individual trade. D) Yes, markup schedules are dependent upon the type of security, broker-dealer risk, services that the broker-dealer provides, and effort in acquiring the security.
A) No, under the circumstances given, it is a prohibited practice to charge a higher than normal markup. Higher than average markups or commissions are not prohibited if they are justifiable and disclosed. However, in this case, there would appear to be no justification because the customer bought a round lot, the normal trading unit of stock. The firm is a market maker, so the security is being sold from their inventory and the stock is on the company's recommended list.
Under the Uniform Securities Act, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT A) Send clients itemized statements no less frequently than every 6 months detailing the funds and securities in the adviser's custody at the end of the period B) Maintain one or more separate bank accounts where client funds are deposited and keep customers' securities clearly marked and segregated C) Have client funds and securities examined at least once a year by an independent public accountant on a surprise basis D) Notify the Administrator in writing that the adviser is maintaining custody
A) Send clients itemized statements no less frequently than every 6 months detailing the funds and securities in the adviser's custody at the end of the period The adviser must send clients quarterly (not semi-annual) itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. The adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.
The term churning means
A) excessive trading in the account of a client primarily for the purpose of generating commissions for the agent
There are four things that will prohibit a fund from being referred to as no-load:
ANY front-end load Any CDSC A 12b-1 charge in excess of .25% of average net fund assets per year A service fee in excess of .25% of average net fund assets per year
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following are required for an agent to lawfully share in the profits of a customer's account? The customer's written approval The broker-dealer's written approval The agent may share only in proportion to his or her own financial contribution to the account
B) I and II To share in a customer's account, written consent of both the client and the broker-dealer need to be obtained. Unlike FINRA rules, there are no requirements for proportionate sharing.
Which of the following may be required by the Administrator to post surety bonds? An agent who has discretion over client funds and securities A broker-dealer who has custody of, or discretion over, client funds and securities An investment adviser who has custody of, or discretion over, client funds and securities
B) I, II, and III A broker-dealer, investment adviser, or agent (but not an IAR) who has discretion over or, in the case of broker-dealers and advisers, custody of funds or securities may be required to post a bond.
Which of the following statements regarding brokerage and advisory activities under the USA are TRUE? It is not unlawful for an investment adviser or broker-dealer to employ any device, scheme, or artifice to defraud in the sales of securities to institutional investors because the USA is designed to protect individual investors. Under the USA, it is unlawful for an investment adviser to deceive a person when an advisory relationship does not exist. Sanctions for both investment advisers and broker-dealers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities.
B) III and IV Sanctions for violations are administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is also true that any individual, whether technically defined as an adviser or not, may not deceive another person when providing investment advice if he is compensated for providing the advice. However, the Uniform Securities Act has no jurisdiction over an investment adviser when the deceitful action occurs in a non-advisory situation, such as social interaction.
When does a deliberate omission of a fact in a securities sale constitute fraud? A) Only when a new issue of securities is being offered B) If a reasonable person would base an investment decision on the omitted information C) Any time the information is known by more than 15 people D) Only if the information was known to be true
B) If a reasonable person would base an investment decision on the omitted information Deliberate omission of a fact constitutes fraud if the omitted information is material in nature (i.e., if a reasonable investor would use the information in making an investment decision). This is true whether the information is made in connection with a primary offering or a secondary market transaction.
It has long been custom for broker-dealers to provide research and other customer-related services to investment advisers who direct brokerage business to them. Details about what is and what is not allowable are found in A) Section 206 of the Investment Advisers Act of 1940 B) Section 28(e) of the Securities Exchange Act of 1934 C) Section 414 of the Uniform Securities Act of 1956 D) the Dodd-Frank Act of 2010
B) Section 28(e) of the Securities Exchange Act of 1934 It is Section 28(e) of the Securities Exchange Act of 1934 that deals with the topic of soft-dollar compensation from broker-dealers to investment advisers.
In which of the following situations did an agent commit fraud? A) On review of his files, an agent discovered he had sold a nonexempt, unregistered security to a retail client. B) A client claims an agent sold him unsuitable securities. C) An agent knowingly sold a nonexempt, nonregistered security to a retail client for whom the security was deemed suitable. D) An agent sold shares in a company to a client by omitting immaterial information during the discussion, so as not to distract the client from making the purchase.
C) An agent knowingly sold a nonexempt, nonregistered security to a retail client for whom the security was deemed suitable. Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or non-institutional clients.
An investment adviser maintains custody of customer's funds and securities. In order to comply with the Uniform Securities Act, the adviser must, at least quarterly, send written notice to each custodial client stating the location of the assets under custody changes to the location of the assets under custody amount of prepaid fee to be refunded upon early termination of the contract value of the assets under custody
C) I and IV Under both state and federal law, investment advisers maintaining custody of customers' funds and securities must notify their clients no less frequently than quarterly of the location of the assets and their value. If there should be a change to their location, it must be communicated promptly.
One of the unethical practices under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? Arbitrage Churning Matched orders Wash trades
C) III and IV Matched orders occur when one or more broker-dealers engage in buying and selling between themselves for the purpose of creating the misleading appearance of increased activity in a security. A wash trade is an attempt to manipulate a security's price by creating an apparent interest in the security that really does not exist. Arbitrage is the simultaneous buying and selling of the same security in different markets to take advantage of different prices. It is not a form of market manipulation. Churning is a prohibited activity, but has nothing to do with the market, just a client's account. Reference: 5.2.13 in the License Exam Manual
Under the Uniform Prudent Investor Act of 1994, trustees are required to A) limit the diversification of the portfolio so as not to subject it to undue risk B) delegate investment functions to qualified persons C) exercise reasonable care, skill, and caution over the assets they manage D) consider the risk of each investment on its individual merits
C) exercise reasonable care, skill, and caution over the assets they manage The UPIA knows that trustees can't be perfect, but they must use care, skill, and caution to conserve the value over the assets they manage. Delegation of investment functions is permitted, but not required. The risk of each investment must be viewed in the totality of the overall portfolio, not as an individual unit, and limiting the diversification generally increases the risk.
The Administrator may, by rule A) suspend federal law if the Administrator believes it to be in the public interest B) allow an agent to waive provisions of the USA C) forbid investment advisers registered in that state from taking custody of client funds D) suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract
C) forbid investment advisers registered in that state from taking custody of client funds The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes.
If a customer reveals material inside information to an agent, that agent should
C) immediately report it to the supervisor and await further instructions An agent who learns of material nonpublic information from a client should inform the supervisor, await instructions, and not pass on the information to other customers.
A client with a margin account notifies an agent of his vacation next week. The day after the client departs, there is a substantial market sell off, and the drop in the value of the client's portfolio requires additional margin in the client's account immediately. Which of the following actions of the agent would NOT be prohibited? A) Lending the client sufficient funds to meet the margin call B) Transferring funds from the client's spouse's account to meet the margin call C) Contacting the client's banker and arranging a loan on behalf of the client to meet the margin call D) Doing his best to reach the client, and, if unsuccessful, notifying his supervisor, who will direct that sufficient securities in the account be liquidated to meet the margin call
D) Doing his best to reach the client, and, if unsuccessful, notifying his supervisor, who will direct that sufficient securities in the account be liquidated to meet the margin call
An agent would be engaged in a prohibited practice if he shared commissions with other agents of his broker-dealer sold a nonexempt, unregistered security to an individual who has a net worth in excess of $2 million shared both the gains and losses in a client's account with written approval of both the client and the employing broker-dealer aggressively traded, on a daily basis, a discretionary account with long-term growth as an objective
D) II and IV An agent cannot lawfully sell an unregistered, nonexempt security other than in an exempt transaction. The sale to the wealthy individual is not an exempt transaction as would be the sale to a financial institution. Day trading in an account with long-term growth as an objective would constitute an unsuitable transaction and, therefore, is prohibited under USA. Sharing commissions is only permitted with agents of the same or affiliated broker-dealers. Remember that investment adviser representatives never may share in the gains and losses in a customer's account in the same fashion that agents can.
Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? When the investment adviser is not bonded When the Administrator has not prohibited custodial arrangements When the investment adviser does not have discretionary authority over the account When the investment adviser has notified the Administrator that it has custody
D) II and IV The Administrator may, by rule, prohibit investment advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an investment adviser has custody. In almost all jurisdictions, a bond or sufficient net worth is required to maintain custody. Discretionary authority does not affect an investment adviser's ability to have custody.
Which of the following practices could be considered fraudulent under the Uniform Securities Act? A) Participating in active trading of a security in which an unusually high trading volume has occurred B) Failing to inform the firm's principal of frequent verbal customer complaints C) Altering the customer's order at the request of a customer which subsequently results in a substantial loss D) Promising services that an agent cannot realistically perform because of his broker-dealer's limitations
D) Promising services that an agent cannot realistically perform because of his broker-dealer's limitations An agent may not promise services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints if they are serious.
All of the following are unethical business practices for an investment adviser representative EXCEPT A) placing an order to purchase or sell a security for a client's account per the instruction of a third party, without having first obtained a written third-party trading authorization from the client B) deliberately misinforming a client regarding the representative's age C) placing an order to purchase or sell a security for a client's account without specific authority to do so D) borrowing money or securities from a client who is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds
D) borrowing money or securities from a client who is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds
According to the Uniform Securities Act, market manipulation includes all of the following EXCEPT A) buying and selling intentionally to show market activity B) pegging C) giving a false quote D) buying on one exchange and selling on another
D) buying on one exchange and selling on another Buying on one exchange and selling on another is called arbitrage, not market manipulation, and it is an accepted business practice.
All of the following practices are unethical under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) charging higher commissions than normal for executing a transaction in a thinly traded foreign security without prior disclosure to the client B) executing transactions in a margin account when receiving a properly executed written margin agreement promptly after the initial transaction C) effecting transactions in a security that involve no change in beneficial ownership but do indicate higher trading volume than normal D) using deceptive or misleading advertising or sales presentations
Margin agreements must be obtained promptly after the initial margin trade in the account. The other activities are unethical business practices prohibited by NASAA's Statement of Policy.
Prohibited practices under USA
material inside information that may never be used until it becomes known to the public. engaging in wash sales or matched transactions guaranteeing that the customer will not suffer loss deliberately ignoring a customer's instructions An agent may not promise services that he cannot perform Furnishing fictitious quotations Agents are required to suggest investments that are suitable to an investor's objectives and financial resources Misrepresenting the status of a customer's account Participating in a series of trades where there is no change to beneficial ownership
The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's Website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an agent, you would A) be permitted to contact your clients with this recommendation right now B) be required to send your clients to the firm's website before making any comments regarding this security C) not be permitted to contact your clients until it was determined that the report was officially released to the public D) never be permitted to contact your clients with this recommendation
not be permitted to contact your clients until it was determined that the report was officially released to the public