unit 6 quiz
The regulatory bodies are concerned about agents using social media to communicate with clients when they are using their I. office desktop computers .II. personal tablets. III. smartphones IV. personal laptops from home. I and II I and IV II, III, and IV I, II, III, and IV
D. I, II, III, and IV Any of these items may be used on social media regardless of whether they are owned personally or by the employer.
The purpose of the Customer Identification Program (CIP) is to enable a broker-dealer to form a reasonable belief that it knows the true identity of each customer. enable a broker-dealer to know how to contact a customer in the event of an emergency. provide a method by which broker-dealers could assist customers laundering money. provide broker-dealers with sufficient client information to make suitable recommendations.
A. enable a broker-dealer to form a reasonable belief that it knows the true identity of each customer. The CIP is part of the USA PATRIOT Act, and its primary concern is to make sure that broker- dealers (and other financial institutions, suchas banks) know exactly who the customer is. Money laundering is an illegal activity, and theCIP does not provide the kind of information necessary for making suitability judgments.
When an investor purchases a call option, the investor has all of the benefits of owning the stock when expecting the price of the stock togo down (bearish). all of the benefits of owning the stock when expecting the price of the stock to rise (bullish). none of the benefits of owning the stock when expecting the price of the stock to go down (bearish). none of the benefits of owning the stock when expecting the price of the stock to rise (bullish).
B. all of the benefits of owning the stock when expecting the price of the stock to rise (bullish). Call buyers are optimistic about the future movement of a stock's price. If the price of the stock goes up, the owner of the call option benefits in the same manner as owning the stock. Technically, the cost of the call option offsets some of the profit, but we do not believe the exam will go that deep.
To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name. verbal assurance that the customer is of legal age. a street address, unless the primary mailing address is a PO Box located in the state of residence. a Taxpayer Identification Number (TIN). A) III and IV B) II and III C) I and IV D) I and II
C) I and IV Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.
The NASAA Model Brochure Rule for investment advisers requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations except **** when the service provided is an individual supervisory service. when the client is an investment company. when the contract is for an impersonal advisory service requiring payment of less than $500. when the client is an individual with a net worth of more than $1 million. A) I and II B) I, III, and IV C) II and III D) II, III, and IV
C) II and III A disclosure brochure is not required to be delivered if the client is a registered investment company or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service. The client's net worth has no bearing on brochure delivery requirements.
Different types of accounts have different times for receipt of customer information. Which of the following correctly state the required time for the specified account?**** Margin account agreements must be received before the first margin trade in the account. Margin account agreements must be received promptly after the first margin trade in the account. Options account approval must be received in writing at or before the initial options trade. The options account agreement must be received 15 days before the customer's account has been approved. A) I, III, and IV B) II and IV C) II and III D) I and III
C) II and III The NASAA policy is that the signed margin agreement must be received by the broker-dealer promptly after the initial margin trade in the account. In the case of an options account, approval of the account in writing is required at or before the time of the first options trade. The 15-day requirement is after approval, not before. It will be helpful to remember these requirements—at least one of them is likely to appear on your exam.
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 A) replacement. B) disgorgement. C) entanglement. D) misrepresentation.
C) entanglement. The entanglement theory means the firm or its personnel is entangled with the preparation of the third-party post. A similar concept is that of adoption. This is when the broker-dealer explicitly or implicitly endorses or approves the content posted by the third party.
MaryJo Barkley is the CEO of MJB Securities. MJB is distributing an offering of ABC common stock to investors. Barkley 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*** A) material information. B) qualification. C) registration. D) authorization.
C) registration. Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. Material information deals with information about the issuer, not the fact that the securities are registered.
Acme Manufacturing Company's latest stock offering is registered with both the SEC and the states. This would permit a registered agent to make the comment that**** A) the investor will receive both a state and federal prospectus. B) Acme's stock will most likely be listed for trading on the New York Stock Exchange. C) the security is legal for sale. D) registration with multiple regulators means a greater likelihood that the investment has been thoroughly vetted.
C) the security is legal for sale. Registration of a security makes its sale legal. Stating approval by the regulators is a misrepresentation. There is one prospectus, used to satisfy both the SEC and the states. There is nothing here to indicate that the stock will be listed on the NYSE.
A state-registered investment adviser would be permitted to A) deliver the brochure to a new client within 48 hours of entering into the contract. B) use Part 1 of the Form ADV to satisfy the brochure requirement. C) use Part 2 of the Form ADV to satisfy the brochure requirement. D) make annual delivery of the brochure within 150 days of the end of the fiscal year.
C) use Part 2 of the Form ADV to satisfy the brochure requirement. Part 2 of the Form ADV may be used in lieu of a fancy brochure. The brochure must be delivered to a new client no later than the entry of the contract—the 48 hours is a "prior to" entry requirement in order to avoid having to offer a penalty-free withdrawal. The annual delivery must be made within 120 days, not 150.
Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Among the most common ways for making this disclosure are presenting a chart with all of the fees. preparing a list of all of the fees. displaying the fees in tabular form. A) I and III B) I, II, and III C) I and II D) II and III
B) I, II, and III Whether using a table, a chart, or a list, broker-dealers must make sure that it is easy for customers to determine what the fees and charges are and how they are computed.
All of the following actions must be completed by the time customers enter their first option trade except*** A) delivery of the options disclosure document (ODD). B) receipt of a completed options agreement. C) completion of the new account form. D) approval by a designated options supervisor.
B) receipt of a completed options agreement. While other option account requirements must be met no later than the time customers enter their initial options trade, under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.
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? A) This is not a recommendation, as the analysis tool is automated. B) This is not a recommendation, as the customer will receive a list or series of securities that the customer could buy or sell to meet the goal at a later date. C) This would be regarded as making a recommendation. D) This would be considered an example of social media communication and, therefore, would not be specifically covered by NASAA as a recommendation.
C) This would be regarded as making a recommendation.
Which of the following pieces of customer information must an agent attempt to obtain when opening a new account? Emergency contact person Financial condition Investment objective Education A) I and IV B) I and II C) II and III D) II and IV
C) II and III When opening a new account, the agent normally would request information about the customer's financial condition, investment objectives, and other relevant personal information.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, a broker-dealer may charge a reasonable fee for appraisals. transfers. collection of dividends. safekeeping. A) I, II, III, and IV B) I and II C) II and III D) III and IV
A) I, II, III, and IV As long as the charges are fair and reasonable, a broker-dealer may charge for services rendered.
An individual walks into the office of a broker-dealer wishing to open a new account. Which of the following is not required on the new account form? A) Citizenship B) Physical address C) Name of the employer D) Number of dependents
D) Number of dependents Although it is not unusual for a question about the number of dependents to be on a new account form, it is not a required item, whereas the other choices are.
Which of the following statements appearing on the website of a broker-dealer is most likely to be viewed as a recommendation?**** A) "Each month, our analysts prepare a list of their top five stock picks for our customers to consider. Click here to access that list." B) "We offer a screening program, allowing our customers to search a large database using their chosen parameters. Click here to access that program." C) "Each month, one of our analysts records a presentation analyzing stock market trends. Click here to access the current and past recordings." D) "We welcome new customers and urge you to view the public areas of our website, especially our chart of fees and charges. Click here for that information."
A) "Each month, our analysts prepare a list of their top five stock picks for our customers to consider. Click here to access that list." Of the choices given, the one that appears most likely to recommend specific securities is the top five picks. Stock screening programs help the investor decide what to buy. A presentation of market trends will rarely contain specific securities recommendations. Recommending that a prospective client check out the BD's fees is not a securities recommendation.
When does a customer have to receive the options disclosure document?**** A) Before or at the time the firm approves that customer's account or accepts the customer's order to trade options covered by the ODD B) Within 15 days of account approval C) Within five business days of the first options trade D) With the confirmation of his first options transaction
A) Before or at the time the firm approves that customer's account or accepts the customer's order to trade options covered by the ODD When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document entitled Understanding the Risks and Uses of Options before or at the time it approves that customer's account or accepts the customer's order to trade options covered by the ODD, the broker-dealer satisfies the risk disclosure.
The Uniform Securities Act mandates that contracts between investment advisers and their clients be in writing. provide that no discretion may take place without prompt notification to the client. disclose the method of compensation. include steps the adviser plans to take to reach the client's objectives. A) I and III B) III and IV C) I and II D) II and IV
A) I and III Any contract must disclose the method of compensation. The USA requires that initial and renewal contracts be in writing. If discretion is to be exercised, it requires consent of the client, not notification. The contract is not required to describe any of the investment adviser's plans for reaching the client's goals.
Which of the following conditions would most likely meet compliance standards of state regulators? A) Training both supervisory personnel and agents on the difference between interactive and static content B) Maintaining an under-the-radar system of monitoring social media use by its agents to determine compliance with NASAA's rules C) At a minimum, a firm that permits use of social media sites holding biennial training as part of its continuing education obligations D) Requiring that only those in a supervisory role need to recognize the difference between business and nonbusiness communications
A) Training both supervisory personnel and agents on the difference between interactive and static content Before allowing associated persons to use social media for business purposes, a firm's policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content and between business and nonbusiness communications. A firm should consider requiring training in the use of social media before permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations.
All of the following activities and communications would fall outside the definition of a recommendation except A) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks, and includes a list of those paying the highest dividends. B) a broker-dealer provides research tools on its website that allow customers to screen through all Nasdaq securities. C) a broker-dealer's website places a search engine in a prominent spot on its landing page that can be used to access charts of multiple stocks in the large-cap sector. D) a broker-dealer's website was created to be available to customers that contains a link to an electronic library of research reports that contains buy-sell recommendations from the author of the research reports.
A) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks, and includes a list of those paying the highest dividends. Specificity, such as a list of securities, invariably results in a communication being deemed a recommendation. All of the other choices given would generally be viewed as falling outside the definition of recommendation.
An agent is making a presentation of a mutual fund to a client. So that the client better understands the risks and expenses involved, the agent takes a yellow highlighter and uses it to mark the most important information in the prospectus. Under state and federal regulations, this is*** A) a prohibited practice because no markings may ever be made on a prospectus. B) a prohibited practice because, by making these marks, the agent is causing the client to ignore other relevant disclosures. C) permitted because it is critical that agent's disclose the risks and costs involved in any mutual fund purchase. D) permitted because the highlighting allows the investor to still read what it underneath.
A) a prohibited practice because no markings may ever be made on a prospectus. Both state and federal laws prohibit any marking up of a prospectus, even if the purpose is a noble one.
An investment adviser wishes to advertise a proprietary charting system used to time the market. To be in compliance with the Uniform Securities Act,**** A) a statement reflecting the limitations and difficulties of using the system must be included in the ad. B) results obtained by using the system must be shown using a time period of no less than 12 months. C) the advertisement must be filed with the appropriate SRO within 10 business days of first use. D) somewhere in the advertisement, the authorship of the system must be prominently disclosed.
A) a statement reflecting the limitations and difficulties of using the system must be included in the ad. An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using said system.
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 A) commissions on unsolicited trades. B) charges for wiring funds. C) account maintenance fees. D) account transfer fees.
A) commissions on unsolicited trades. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
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*** A) members of AT's board of directors who are active in the firm's business. B) those exercising discretion over assets of clients in this state, even if no direct contact is involved. C) those providing investment advice and having direct contact with retail clients in the state. D) those providing investment advice and having direct contact with institutional clients in the state.
A) members of AT's board of directors who are active in the firm's business. Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and members of the board of directors. Of course, if any of these individuals have direct client contact or exercise discretion, a supplement for them would need to be prepared.
Associated Wealth Managers (AWM) is registered with the Administrator as a registered investment adviser. Therefore, if there have been any material changes, AWM must send a copy of its brochure or a summary of the changes*** A) to all nonexempt clients within 120 days of the end of its fiscal year. B) to all nonexempt clients within 60 days of the end of its fiscal year. C) within 7 days of receiving a request from a client. D) to all nonexempt clients within 90 days of the end of its fiscal year.
A) to all nonexempt clients within 120 days of the end of its fiscal year. Whether the firm is a state or federal covered investment adviser (IA), if there have been material changes, a copy of the IA's brochure or a summary of the changes must be sent to all clients no later than 120 days after the close of the IA's fiscal year. Most material changes must be sent to the Administrator by filing an amended Form ADV promptly, but this question's responses are limited to customers.
For larger accounts, a broker-dealer is least likely to waive its normal fee for A) transferring the account to another broker-dealer. B) safekeeping of funds or securities in the account. C) wiring funds to the client's bank. D) the annual account maintenance charge.
A) transferring the account to another broker-dealer. Although there is no official standard, larger accounts tend to have many of the smaller fees waived. However, if the client is moving the account to another firm, it is likely that the transfer fee will be charged.
The marketing director of Antepenultimate Securities Inc. (ASI), a broker-dealer registered in States A, B, and C, notices an article in a major trade journal that shows ASI in a favorable light. Out of the 500 brokerage firms covered in the article, Antepenultimate Securities Inc. had the third fewest customer complaints over the past year. If the marketing director were to post that on ASI's website, it would be A. adoption. B. appropriation. C. entanglement. D. plagiarism.
A. . adoption. When a securities professional uses material created by an unrelated third party on social media, it has been adopted. If the firm or one of its associated persons had a hand in the preparation or funding of the material, it is entanglement.
Which of the following statements may be made by an issuer selling securities to the public that are registered with the Administrator? The Administrator has cleared this issue for sale to the public. The Administrator has passed on the adequacy of the information provided in the prospectus. The Administrator has approved the accuracy of the information contained in the prospectus. The Administrator has affirmed the merits of the security as an investment.
A. The Administrator has cleared this issue for sale to the public. The Administrator does not approve or disapprove of securities. Rather, the Administrator reviews registrations for omission of material facts and clarity of information and makes certain that all supporting documentation is included. If these requirements are met, the Administrator clears or releases the security for sale to the public.
As called for on the NASAA Model Fee Disclosure Template, which of the following is not required to be disclosed on a broker-dealer's fee chart? The commission schedule The account maintenance fee Charges to wire funds Postage and mailing charges
A. The commission schedule Commissions, markups and markdowns, and advisory fees are not part of the NASAA fee disclosure template.
A state-registered investment adviser must deliver a copy of its brochure to a new advisory client*** no later than the time of signing the advisory agreement. at least 48 hours before entering the advisory agreement. no later than 48 hours after entering the advisory agreement. within 120 days after the end of the adviser's fiscal year.
A. no later than the time of signing the advisory agreement. New clients must receive a copy of the adviser's brochure no later than the entry of the advisory agreement. That occurs when it is signed (under state law, the contract must be in writing). The 48-hour in advance rule says that brochure delivery after than time requires the IA to offer a penalty-free withdrawal from the contract if done within 5 days after the signing of the agreement. The 120-day requirement is for existing, not new clients.
Required broker-dealer disclosures include all of the following except the firm's net profit for the year. the capacity in which the firm acted in a securities transaction. conflicts of interest. fees.
A. the firm's net profit for the year. Broker-dealers are not required to disclose their operating results (profits or losses) to their customers. It is not prohibited, but it is not required. The other choices are requirements.
An agent with your firm is so confident that a stock will double within the next two months that he is offering his customers a guarantee that anything less than a 50% increase will be added to their account from his personal funds. Under the Uniform Securities Act, this is a dishonest and unethical practice and could lead to disciplinary action. this is a fair way to treat his customers. this is unfair because with a 100% predication, a 50% payout is unreasonable. if the agent does not back up his guarantee, he will be liable to potential incarceration.
A. this is a dishonest and unethical practice and could lead to disciplinary action. Guarantees such as this are prohibited in the securities industry. The Administrator would likely investigate this and, if found guilty ,it could result in a fine, suspension, or even revocation of the agent's registration. It is possible that the agent could be the subject of a civil action (monetary damages) brought by customers, but this is not the kind of activity resulting in a prison sentence.
With regard to an investment adviser's brochure, disclosure must be made to all current clients and to prospective clients regarding material disciplinary action. Which of the following would not have to be disclosed? A) Self-regulatory organization proceedings in which the adviser or management person caused the business to lose its registration; the firm or individual was barred, suspended, or expelled; or a fine in excess of $2,500 or a limitation was placed on the adviser or management person's activities B) A court of competent jurisdiction levied a civil fine of $100,000 against the firm resulting from a lawsuit filed by a newsletter publisher claiming the adviser used the publisher's intellectual property without permission C) State or regulatory proceedings in which the adviser or a management person was found to have violated rules or statutes that led to the denial, suspension, or revocation of the firm's or the individual management person's registration D) Court proceedings, such as a permanent or temporary injunction, against the firm or management person pertaining to an investment-related activity or any felony
B) A court of competent jurisdiction levied a civil fine of $100,000 against the firm resulting from a lawsuit filed by a newsletter publisher claiming the adviser used the publisher's intellectual property without permission Unless the civil case was in relation to an investment activity, disclosure is not required. Plagiarism is not investment-related and there is nothing in the Uniform Securities Act or NASAA's Model Rules where the topic is discussed.
Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery, which was covered in the new offering prospectus when explaining why he felt the issuer "found the next Aspirin." He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following? A) Phishing B) A performance guarantee C) Entanglement D) Fraud
B) A performance guarantee First of all, highlighting any information in an offering document is prohibited under both state and federal law. In addition, the nature of the claim and the urgency to act quickly implies future performance. An agent does not have to specifically guarantee the performance of a security; the implication is enough for the regulators.
When does a customer have to receive the OCC's options disclosure document?*** A) With the confirmation of the first options transaction B) At or before approval of the account to trade options C) Within 15 days of account approval by the firm's designated options supervisor D) Within 5 business days of the first options trade
B) At or before approval of the account to trade options When opening an account to trade options, the owner must be informed about the risks involved with trading options. By providing the owner with the options disclosure document titled "Understanding the Risks and Uses of Options," the broker-dealer (BD) satisfies the risk disclosure requirements. It may be done before or at the time the BD approves that customer's options account, but not later than that.
Which of the following actions should be taken by an agent when a client decides to open an options account?** A) Obtain approval from the designated options supervisor to open the account no later than one business day after the first options trade B) Before the first options trade, review with the client the risks involved when trading options C) Assure that the options agreement has been signed prior to the first trade takes place D) Provide the options disclosure document (ODD) no later than 15 days after the first trade
B) Before the first options trade, review with the client the risks involved when trading options It is imperative that suitability and risk be addressed with the client before allowing options trading to take place. The ODD must be delivered no later than with account opening, and the signed options account agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading taking place in the account.
Which of the following is among the items of information that must be entered on a new account form? A) What educational degree(s) the accountholder has earned B) Names of all persons who will have access to the account C) Names and addresses of at least two of the prospective customer's neighbors as personal references D) Names of other broker-dealer firms already holding accounts for the prospective customer
B) Names of all persons who will have access to the account The facts that are required on a new account form are aimed at facilitating the operation of the account, properly identifying the customer, and guarding against money laundering and other illegal activities. Of the choices offered, only the names of those with access to the account would help with these goals, so this item of information is the only one on the list that is required.
Which of the following statements regarding Form ADV Part 2 is true?*** A) It must always accompany the investment adviser's brochure. B) Unless there are no material changes, it must be delivered to clients annually. C) It must be delivered no later than receipt of the client's funds. D) It must be delivered no later than 48 hours prior to entering into an investment advisory contract.
B) Unless there are no material changes, it must be delivered to clients annually. Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients within 120 days of the end of the adviser's fiscal year. If it is not delivered 48 hours in advance of the initial contract, the client has a five-day penalty-free termination clause. It does not accompany the brochure—it is the brochure.
As an agent of a registered broker-dealer, one of the benefits of selling a security registered with the Administrator is**** A) the protection it gives the agent against a civil suit by a customer. B) being able to deliver a prospectus containing the information an investor needs to make the investment decision. C) removal of the need for the agent to register in that Administrator's state. D) the confidence it gives the investor that a regulatory body has approved of the sale of the issue.
B) being able to deliver a prospectus containing the information an investor needs to make the investment decision. When a security is registered with the Administrator, the customer is supplied with a prospectus containing the material information. The Administrator never approves or disapproves of a registration statement. There are many reasons why a customer might file a civil suit that have nothing to do with the registration of a security. Registration of a security in a state, or lack thereof, has nothing to do with the requirement for an agent to register in that state.
The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following except A) a physical address. B) current employment status. C) actual date of birth D) Social Security number.
B) current employment status. The four primary requirements of the CIP are the individual client's name, physical address, date of birth, and Social Security number. Although current employment status would be asked as part of opening a new account, that is not a CIP requirement.
Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it*** A) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year. B) did not send an annual brochure to its clients because there was no material change from the previous year. C) filed a brochure with the Administrator, noting that it was available to clients upon request. D) sent a brochure within 150 days of the end of AT's fiscal year.
B) did not send an annual brochure to its clients because there was no material change from the previous year. The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Parts 2A and 2B.
Stephanie Whitworth, an agent with a nationally known broker-dealer, 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, Whitworth 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, Whitworth*** A) has acted ethically because her actions are in the client's best interest, not her own. B) has committed the unethical business practice of guaranteeing against loss. C) has committed the unethical business practice of recommending a wash sale. D) has acted ethically because she has not guaranteed a profit to the client.
B) has committed the unethical business practice of guaranteeing against loss. The unethical business practice of guaranteeing against loss can take several forms. This is one of them—offering to buy back a security at the purchase price. A wash sale involves an investor repurchasing a security sold at a loss and has no relevance to this question—it is a tax issue and is not relevant to the exam. The prohibition against guarantees does not require that the client be assured a profit, only that there is no loss. Even when an agent is confident that an investment is in the client's best interest, a guarantee may not be offered.
Perpetual Investment Returns (PIR), a registered investment adviser in four states, has had no material changes to the information in its Form ADV Part 2 from the previous year. That means PIR is*** A) required to deliver a copy of its brochure to existing clients within 120 days of the end of its fiscal year. B) not required to deliver a copy of its brochure to existing clients. C) not required to deliver a copy of its brochure to those receiving impersonal advisory services at an annual charge of less than $500. D) not required to deliver a copy of its brochure to prospective and existing clients.
B) not required to deliver a copy of its brochure to existing clients. The NASAA Model Rule dealing with investment adviser brochures states that if there are no material changes to the previous year's brochure (remember, Form ADV Part 2 is the basis of the brochure), the annual delivery requirement to existing clients is waived. However, that does not affect new or prospective clients. Obviously, they do not have last year's brochure. It is true that those receiving impersonal advisory services at a cost of less than $500 per year do not require brochure delivery, but that does not answer the question. The question focuses on the fact that there has been no material change during the year. Even with material changes, those clients would not receive a brochure.
Which of the following customers of an investment adviser would meet the definition of a qualified client? An investor with $1.5 million in net worth and $700,000 under the management of the adviser An investor with $2.5 million in net worth and $10,000 under the management of the adviser An investor who has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of $2.2 million An accredited investor
B. An investor with $2.5 million in net worth and $10,000 under the management of the adviser There are two ways to be a qualified client. Either have a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2.2 million or have at least $1.1 million under management with the investment adviser. The requirement to be an accredited investor is less than a qualified client and, as a federal term, is not likely to be a correct answer on the exam
An investor opening a new margin account would be required to sign the new account form the hypothecation agreement the loan consent agreement the credit agreement II and III II and IV II, III and IV I, II, III and IV
B. II and IV The customer is not required to sign the new account agreement, regardless of the type of account. For a margin account, the customer's signature is required on the credit and hypothecation agreements. Giving consent to lend out securities held in the account is optional.
Which of the following is not required under the Customer Identification Program when opening a new account for an individual? Date of birth Name of employer Social Security number Physical residential address
B. Name of employer The name of the client's employer is part of the new account form, but is not one of the requirements of the CIP as are the other items.
LMN Securities, a broker-dealer registered with the SEC and more than a dozen states, has just become a member firm of the New York Stock Exchange. It would be permitted for LMN to tell its customers that the membership in the NYSE is a testimony to the integrity of the firm. they are now members of the NYSE. they are now federal covered and will no longer have to register in those states where they do not maintain a place of business. this adds one more level of approval of the firm's business.
B. they are now members of the NYSE. When it comes to the registration of any securities professional, any statement relating to approval or something similar is prohibited. There is no such thing as a federal covered broker-dealer, and becoming a member of a national stock exchange has no impact on the state registration of a broker-dealer.
NASAA has created a template for registered broker-dealers to disclose their fee schedules to existing and prospective customers. For those broker-dealers that are also registered as investment advisers, which of the following charges would not be disclosed? A) Charges made when a customer transfers the account to another broker-dealer B) Interest charged on borrowed money in margin accounts C) Advisory fees D) Charges for wiring funds
C) Advisory fees There are three items that are not part of the broker-dealer (BD) fee disclosure document. Those are commissions; markups and markdowns; advisory fees (for those BDs that are also investment advisers).
Which of the following prospective clients of a registered investment adviser is exempt from the requirement to receive delivery of the adviser's brochure?*** A) Fortune Investment Securities, a registered broker-dealer B) Fortune Investment Advisers, a registered investment adviser C) Fortune Income Fund, a closed-end investment company traded on the NYSE D) Fortune Global Hedge Fund with assets of over $500 million
C) Fortune Income Fund, a closed-end investment company traded on the NYSE The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. The other is when the advisory contract is with a registered investment company such as an open-end or closed-end fund.
Disclosure to customers of a control relationship between a broker-dealer and the issuer of the security recommended is required in agency transactions. principal transactions. exempt transactions. A) I and II B) I and III C) I, II, and III D) II only
C) I, II, and III The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.
NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Which of the following statements correctly identify those delivery requirements?*** The brochure must be delivered to prospective and new advisory clients at least 48 hours prior to entering into the advisory contract. The brochure must be delivered to prospective and new advisory clients no later than entering into the advisory contract. Annual delivery of the brochure to existing clients must be made within 90 days of the end of the adviser's fiscal year. Annual delivery of the brochure to existing clients must be made within 120 days of the end of the adviser's fiscal year. A) II and III B) I and III C) II and IV D) I and IV
C) II and IV The initial delivery requirement is no later than the date of entry into the advisory contract. The 48-hour rule deals with an advance delivery to avoid having to honor a five-day penalty-free withdrawal. The annual delivery date is within 120 days of the end of the adviser's year. The 90-day requirement is for the annual updating amendment to the Administrator.
When a brokerage firm sells stock from its own inventory, it is acting in the capacity of A) a principal, and charges a commission. B) an agent, and charges a markup. C) a principal, and charges a markup. D) an agent, and charges a commission.
C) a principal, and charges a markup. A broker-dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge markups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.
Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except*** A) changes to the fee schedule must be announced in advance. B) it must be up to date. C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. D) changes to the fee schedule may be shown on the firm's website.
C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. There is no requirement that the fee schedule be filed with the Administrator. It must be up to date, and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees—the firm's website is one of them.
Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract except*** A) a provision prohibiting the investment adviser from being compensated based on a share of capital gains. B) the manner in which the advisory fee will be computed. C) other states in which the investment adviser is registered. D) whether or not discretion will be exercised.
C) other states in which the investment adviser is registered. There is no requirement to advise clients of any other states in which the investment adviser is represented. The presence (or absence) of discretion must always be disclosed. Unless the question specifically refers to the rare cases when performance fees are permitted, always read the question as if they are prohibited.
Which of the following statements accurately describes the time limits for investment adviser documents?*** Filing of the annual updating amendment to Form ADV with the appropriate regulatory body is within 90 days of the end of the adviser's fiscal year. Filing of the annual updating amendment to FormADV with the appropriate regulatory body is within 120 days of the end of the adviser's fiscal year. Delivery of the investment adviser's brochure to the customer is due within 90 days of the end of the adviser's fiscal year. Delivery of the investment adviser's brochure to the customer is due within 120 days of the end of the adviser's fiscal year. IV only I and II I and IV II, III, and IV
C. I and IV The answer would be choices C. Some logic here might help. The investment adviser must get its paperwork into the state (or SEC) prior to the end of the 90-day period. Then, the IA has another 30 days to get the information into the brochure to be sent to the clients.
The regulatory bodies consider which of the following social media sites to be predominately used for business rather than personal communications? A. Facebook B. Instagram C. LinkedIn D. Twitter
C. LinkedIn LinkedIn is most commonly viewed as a tool for business rather than personal communication.
Which of the following is not a factor when a communication to be distributed to the public is either being reviewed or approved by the broker-dealer?*** Whether statements of benefits are balanced with statements of potential risks The nature of the audience to which the communication is intended to be distributed Whether the piece will be distributed in written form or on the firm's website Whether the communication is targeting existing customers or prospective ones
C. Whether the piece will be distributed in written form or on the firm's website The format is not what counts; it is the content that matters.
A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true?*** A) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. B) Material changes to wrap fee programs must be filed promptly with the Administrator. C) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end. D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.
D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. As a state-registered investment adviser (IA), all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV Part 2A Every IA, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included However, an amended Form ADV needs to be filed promptly with the Administrator only if there are material changes.
Under the Investment Advisers Act of 1940, if an investment adviser's sales literature describes an investment system, such as one using charts, the description must include*** the length of time the system has been used. the difficulties and limitations of using the system. the performance history of the system. A) II and III B) I, II, and III C) I and III D) II only
D) II only References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited. It is not necessary to indicate how long the system has been used or its performance history. However, nothing prevents this information from being included. The question asks only what must be included.
An individual walks into the office of a broker-dealer wishing to open a new account. Which of the following is not required on the new account form?*** A) Name of employer B) Physical address C) Citizenship D) Marital status
D) Marital status Although most new account forms do ask for marital status, it is not a required item, whereas the other choices are.
NASAA has created a template for registered broker-dealers to disclose their fee schedules to existing and prospective customers. Which of the following charges would not be disclosed? A) Charges for obtaining a stock or bond certificate B) Postage and handling fees C) Account transfer fees D) The broker-dealer's commission schedule
D) The broker-dealer's commission schedule There are three items that are not part of the broker-dealer (BD) fee disclosure document. Those are commissions; markups and markdowns; and advisory fees (for those BDs that are also investment advisers).
Under the Uniform Securities Act, the investment adviser brochure rule requires*** A) delivery no later than 48 hours before entering into an investment advisory contract. B) delivery of the Form ADV Part 1 prior to entering into the advisory contract. C) delivery no later than 5 business days after the formalizing of the advisory contract. D) a brochure, or summary of material changes, if any, to be delivered to all clients within 120 days of the end of the adviser's fiscal year.
D) a brochure, or summary of material changes, if any, to be delivered to all clients within 120 days of the end of the adviser's fiscal year. The NASAA Model Rule requires that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The 48-hour rule deals with avoiding an early cancellation penalty. When entering into a new contract, the brochure must be delivered no later than the signing of the agreement. Form ADV Parts 2A and 2B may be used as the brochure.
When a broker-dealer acts in the capacity of a principal in a trade, the firm is acting A) as an agent. B) in an unethical manner. C) for the benefit of the client. D) as a contra party to the trade.
D) as a contra party to the trade. In every trade, there are two principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.
Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD)** A) at or before the mailing of the next monthly statement. B) within 15 days of account approval. C) at or before the mailing of the confirmation representing the first options trade. D) at or before account approval.
D) at or before account approval. All prospective options customers must receive a copy of the ODD at or before the time the account is approved to trade options. It is the options account agreement that must be signed and returned to the broker-dealer within 15 days of account approval.
In general, a broker-dealer will disclose its fee schedule** A) when requested by the client. B) within 30 days following any changes in fees or charges. C) to its agents who are then responsible for sharing with client. D) at the time of the account opening.
D) at the time of the account opening. Although there are no specific industry requirements, typically, a broker-dealer's fee schedule is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.
A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) commingle the customer's securities with securities owned by the firm. B) hypothecate securities in the account. C) lend the customer money. D) loan out the customer's margin securities.
D) loan out the customer's margin securities. A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional. The credit agreement describes the creditor/debtor relationship established and gives the BD the ability to lend money to the client using the client's securities as collateral. The hypothecation agreement allows the BD the right to take the client's securities that have been pledged (hypothecated) as collateral for her loan and pledge (re-hypothecate) a portion of those to a lending institution for a loan to the broker-dealer.
Toby is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrator. Toby has a customer who is concerned about the possible decline in the value of her invested capital. Toby has suggested a U.S. Treasury bond maturing in 15 years, telling the client that you cannot lose money on a Treasury security. Toby has**** A) made an unsuitable recommendation because she will have to wait 15 years to receive the return of her invested capital. B) made a highly suitable recommendations because the repayment of principal is guaranteed by the Treasury. C) made an unsuitable recommendation because an investment in common stock will likely provide a greater return. D) misstated the facts because Treasury bonds do fluctuate in value.
D) misstated the facts because Treasury bonds do fluctuate in value. Although the U.S. government stands behind the bond, unless the bond is held to maturity, there is no guarantee that the price will not fluctuate due to changes in market conditions. If the customer should need the money before the maturity date, it is possible the bonds could be sold at a loss (or a gain).
A woman wants to buy from an agent who is not registered in her state. She decides to use a friend's address in the state in which the agent is licensed. This action is A) not acceptable because the other party does not know she is using the address. B) acceptable because the agent can do business only with those who have a residence address in those states in which he is registered. C) acceptable, as long as she has her friend's permission to use the address. D) not acceptable because there are no circumstances under which a customer is permitted to use someone else's address as their own.
D) not acceptable because there are no circumstances under which a customer is permitted to use someone else's address as their own. This should be obvious. The new account form must always include the customer's residence address.
A client of an investment adviser is thrilled with her portfolio's results and posts a note on her bridge club's corkboard suggesting that some of the other members would probably benefit from the adviser's skills. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers,**** A) if the investment adviser learns of the posting, it is not necessary to ask the client to remove it. B) this would be permissible because it was done without the knowledge of the adviser. C) corkboards are not considered social media, and that is the only place where testimonials are prohibited. D) this would not be permissible because it is clearly a testimonial.
D) this would not be permissible because it is clearly a testimonial. There is a limit as to how far an investment adviser (IA) or IAR can go to prevent clients from giving testimonials. After all, as in so many businesses, referrals are a key to growth As long as this note was posted without any knowledge of the IA (or IAR), there is no problem. However, once the IA (or IAR) finds out about it, a request must be made to remove it. The prohibition on testimonials is not limited to social media.
One of your clients approaches you to get your evaluation of an investment opportunity that was received through a Facebook post sent by a friend. The investment promises a monthly return in excess of 1% and claims that it is registered with an offshore regulatory body. You should explain to your client that these are reasonable expectations based on the investment and the location of the issuer. your firm does not sell that security and, as a result, you cannot make any comments about the issue. it is important to check with the friend to find out more about the deal. these are red flags and are a clear warning to stay away from this investment.
D. these are red flags and are a clear warning to stay away from this investment. Unreasonably high returns and not being registered in the U.S. are two items on the list of red flag warnings to investors published by NASAA.
A client has a cash account at his broker-dealer. Now, he wishes to open a margin account as well. Which of the following best describes the procedure the firm must follow?*** Oral instructions to open the account are sufficient because the customer relationship already exists. The customer must make the request in writing, either by postal mail, email, or by fax. The firm must obtain a properly executed written margin account agreement promptly after the initial transaction in the account. The customer must physically present himself at the agent's office and sign the appropriate papers.
The firm must obtain a properly executed written margin account agreement promptly after the initial transaction in the account. Opening a margin account is more involved than opening a cash account. There are some agreements requiring the customer's signature. The firm must obtain a properly executed written margin account agreement promptly after the initial transaction in the account. The presence of an existing cash account is meaningless here.
