14: TYPES OF RISK AND DISCLOSURES (79) Flashcards
The risk that is associated with changes to federal, state, and local laws is ____
Legislative risk
Name for type of risk of the political climate of a country changing dramatically
Political risk
What is sovereign risk?
Sovereign risk is inherent in the bonds of foreign governments and is essentially the default risk associated with the foreign bond.
Do temporary holds have to be reported to FINRA?
No
but detailed reports must be made and retained
T/F: Purchasing power risk has to do with inflation
True
T/F: The longer a fixed-income investment is held, the more vulnerable the investor is to purchasing power risk from inflation
True
What kind of securities are most vurenable to purchasing power risk?
Debt securities and securities w/ a fixed rate of return
T/F: Indexing is an active investment strategy
False
Indexing is a passive strategy that makes no attempt to anticipate market moves.
Value investing
Buying securities at a discount to their book value
Is dollar cost averaging an investment style?
No
Dollar cost averaging is a method of acquiring shares at a lower average cost over time and is not an investment style.
What type of risk had to do with trading in and out of the market?
Timing risk
Is interest rate and inflation risk more associated with fixed income or stocks?
Stocks
Under the safe harbor provisions of Section 28(e), is a BD allowed to reimburse an investment advisor for meal expenses incurred while attending an investment seminar?
No
> Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934
Under the safe harbor provisions of Section 28(e) of the Securities Exchange Act of 1934, can a BD pay an investment advisor for registration fees to attend an investment seminar?
Yes, can pay for registration fees for seminars
“Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).”
Under the safe harbor provisions of Section 28(e), would the following form of soft dollar compensation paid by a BD to an investment advisor be allowed: Payment for financial planning software
Yes
“Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).”
Are payments for travel expenses allowed under the safe harbor provisions of Section 28(e)
No
“Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934.”
T/F: Payment for travel expenses, furniture, or equipment is allowable under Section 28(e) of the Securities Exchange Act of 1934.
False, not allowable
“Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934.”
Suppose that an institutional investor pays a brokerage firm six cents per share in commissions. However, it might only cost three cents per share to perform the trade. The other three cents are known as “_____ “ used to pay for additional services provided by the brokerage
Soft dollars
What are “soft dollars”?
KEY TAKEAWAYS
Soft dollars are commission payments to a brokerage firm that are used, in part, to pay for other services such as research.
Soft-dollar transactions are frequently criticized for lacking transparency and hiding abuses.
Soft dollars are sometimes defended as providing access to a greater variety of research.
Suppose that an institutional investor pays a brokerage firm six cents per share in commissions. However, it might only cost three cents per share to perform the trade. The other three cents are soft dollars used to pay for additional services provided by the brokerage. In exchange for paying these higher fees, the institutional investor might receive access to research.
What is a good rule of thumb for determining if a soft dollar compensation item is allowable under the safe harbor provisions of Section28(e) of the SEA of 1934?
Whether or not benefits accrue directly to client
> If it benefits the client (i.e research software) usually allowed
If benefits do not accrue directly to client (i.e new cell phone for investment advisor) then usually not allowable
Regarding soft dollar compensation, is payment for custodial services provided by the BD allowed?
Yes
The use of a client’s commission dollars to purchase a broker-dealer’s custodial services is an allowable soft-dollar compensation. It is an investment benefit that accrues directly to the client and not to the adviser.
T/F: For accounts with owners age 65 or older, firms must try to obtain the name of a trusted contact person in the event of a red flag.
True
like if instructions are received to send all funds to unknown bank account overseas
T/F: If a rep thinks a senior is being exploited, prompt notification to the appropriate supervisory person is not required
False, is required
A senior official of an issuer learns that nonpublic information was disclosed to an institutional shareholder of the issuer and/or an analyst covering the issuer at a private meeting. To avoid violating Regulation FD, the issuer must do which of the following?
A)
Promptly disclose the information no later than 24 hours after discovery.
B)
Disclose the selective disclosure in its next SEC filing.
C)
Nothing need be done as long as no trading is done based on the selective disclosure.
D)
Obtain affidavits from those to whom the information was disclosed.
A) promptly disclose info in 24 hours
Explanation
Regulation FD prohibits selective disclosure to analysts and institutional shareholders. The disclosures must be made to all shareholders of the issuer. The SEC has agreed that public conference calls, press releases or press conferences, and webcasts are FD-compliant methods of public disclosure.
LO 14.b
