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Question 1

What is not pertinent when opening an account, a client’s educational or financial background?

Answer 1

educational

Question 2

May a wife enter trades in a husband’s account?

Answer 2

Yes, with written third-party authorization.

Question 3

Describe a wrap account.

Answer 3

An account that charges the client a single fee that covers transactions and management

Question 4

How do nonmanaged, fee-based accounts differ from wrap accounts?

Answer 4

A fee is charged to cover transaction costs (often a percentage of assets), but no management is performed.

Question 5

Churning is described as _____________________ designed to _____________________.

Answer 5

excessive trading to generate commissions

Question 6

What is the annual fee levied against a fund’s assets to pay expenses of commissions, advertising, and sales literature?

Answer 6

12b-1 Fee

Question 7

True or False: If churning in a client’s account generates large profits, it is not considered a violation.

Answer 7

False

Question 8

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.

Answer 8

unsolicited

Question 9

If a client gives little information when opening an account, what securities may an agent recommend to the client?

Answer 9

Only securities that are suitable based on the information the client did provide

Question 10

Define churning.

Answer 10

excessive trading to generate commissions and other fees

Question 11

May an adviser borrow money from a client?

Answer 11

Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD.

Question 12

May an adviser or BD lend money to a client?

Answer 12

Yes, if the adviser or BD is in the business of lending money.

Question 13

What is soft-dollar compensation?

Answer 13

Non cash compensation paid by a BD to an IA for directing securities transactions.

Question 14

What forms of soft-dollar compensation are acceptable?

Answer 14

Research reports, seminars, software used to provide analysis ; must benefit the client

Question 15

What forms of soft-dollar compensation are NOT acceptable?

Answer 15

Rent, travel expense reimbursement, hardware, furniture, entertainment, meals

Question 16

True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.

Answer 16

True

Question 17

True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.

Answer 17

False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.

Question 18

True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.

Answer 18

False. The management of risk is what is important. Investments such as options or commodities may reduce overall risk.

Question 19

In what type of account would you most likely expect reverse churning?

Answer 19

wrap

Question 20

IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s ___________ responsibility.

Answer 20

fiduciary

Question 21

The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program.

Answer 21

wrap

Question 22

True or False: A mutual fund asset allocation program requires a special wrap program disclosure document.

Answer 22

False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds

Question 23

True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA’s services separately.

Answer 23

True

Question 24

Identify the acronym: UPIA

Answer 24

Uniform Prudent Investor Act

Question 25

Describe a soft-dollar arrangement between an IA and a BD.

Answer 25

An IA directs client transactions to a specific BD in return for research and brokerage services.

Question 26

To be allowed, a soft-dollar arrangement must benefit ____________.

Answer 26

the client

Question 27

Identify some permissible uses of soft-dollar arrangements.

Answer 27

Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.

Question 28

What are some of the examples of items that cannot be covered by a soft-dollar arrangement?

Answer 28

Advertising, travel expense reimbursement, meals and entertainment, and computers

Question 29

True or False: An agent must always have reasonable grounds for recommending a particular security.

Answer 29

True

Question 30

An agent of a BD lends $5,000 to his brother, is this acceptable?

Answer 30

yes, lending to immediate family is permissible

Question 31

True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.

Answer 31

False. An IA must always disclose a conflict, but they don't necessarily need to end the relationship.

Question 32

Define an agency cross transaction.

Answer 32

A trade executed by a financial firm that is acting as a broker for both the buyer and seller.

Question 33

Define fiduciary.

Answer 33

Someone who acts on behalf of another, which gives rise to a relationship of trust and confidence.

Question 34

List some examples of fiduciaries.

Answer 34

IARs, executors of an estate, custodians in a UTMA/UGMA account, trustees, and pension plan administrators

Question 35

What duties does an IAR have according to the "know your customer" rules?

Answer 35

Make a reasonable inquiry into a customer's background and provide suitable advice based on known information.

Question 36

May an IAR recommend that a client meet/speak with another financial professional?

Answer 36

Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it's acceptable to recommend outside assistance.

Question 37

If a BD is promoting wrap accounts, does it need to register as an IA?

Answer 37

yes

Question 38

Will a client always pay lower fees in a wrap account?

Answer 38

no. Depending on how much the client trades, it's possible he will pay more than if the fees were paid separately.

Question 39

Does an IA need written consent before executing each agency cross trade with an advisory client?

Answer 39

No, the client must provide written consent initially, but not for every trade.

Question 40

May an IAR solicit both sides of an agency cross transaction?

Answer 40

no, one side must be unsolicited

Question 41

May investment adviser advertising refer to testimonials?

Answer 41

no

Question 42

True or False: An agent of a broker-dealer may loan money to his son-in-law.

Answer 42

True. In-laws are considered immediate family members, so the loan would be acceptable.

Question 43

Define wrap account.

Answer 43

A managed account that charges clients an annual fee to cover trading, research, and advisory services

Question 44

True or False: A fiduciary's duty includes ensuring that all investment advice is impartial and disinterested.

Answer 44

True

Question 45

True or False: An adviser is required to deliver only ADV Part 2 when entering into a wrap fee program with a client.

Answer 45

False. For wrap accounts, the SEC requires IAs to provide clients with a special disclosure (ADV Part 2A-Appendix 1).

Question 46

Retail communication generally requires _______________________.

Answer 46

principal preapproval

Question 47

What document is required for an IA to be authorized to pay his client's bills?

Answer 47

a full power of attorney

Question 48

In what type of arrangement may an IA acquire research reports without paying for them directly?

Answer 48

a soft-dollar arrangement

Question 49

Does a solicitor for an IA provide securities recommendations?

Answer 49

No. Solicitors only solicit new clients; they do not recommend or approve transactions.

Question 50

When and by whom is Form ADV-E filed?

Answer 50

Filed within 120 days from completion of an audit of the IA's books; filed by the auditor conducting the audit

Question 51

Is office furniture (e.g., a desk chair) included in an IA's net worth?

Answer 51

yes, provided it is fully owned by the IA