66-6 Flashcards
What is not pertinent when opening an account, a client’s educational or financial background?
educational
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
Describe a wrap account.
An account that charges the client a single fee that covers transactions and management
How do nonmanaged, fee-based accounts differ from wrap accounts?
A fee is charged to cover transaction costs (often a percentage of assets), but no management is performed.
Churning is described as _____________________ designed to _____________________.
excessive trading to generate commissions
What is the annual fee levied against a fund’s assets to pay expenses of commissions, advertising, and sales literature?
12b-1 Fee
True or False: If churning in a client’s account generates large profits, it is not considered a violation.
False
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.
unsolicited
If a client gives little information when opening an account, what securities may an agent recommend to the client?
Only securities that are suitable based on the information the client did provide
Define churning.
excessive trading to generate commissions and other fees
May an adviser borrow money from a client?
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.
May an adviser or BD lend money to a client?
Yes, if the adviser or BD is in the business of lending money.
What is soft-dollar compensation?
Non cash compensation paid by a BD to an IA for directing securities transactions.
What forms of soft-dollar compensation are acceptable?
Research reports, seminars, software used to provide analysis ; must benefit the client
What forms of soft-dollar compensation are NOT acceptable?
Rent, travel expense reimbursement, hardware, furniture, entertainment, meals
True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.
True
True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.
False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.
True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.
False. The management of risk is what is important. Investments such as options or commodities may reduce overall risk.
In what type of account would you most likely expect reverse churning?
wrap
IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s ___________ responsibility.
fiduciary
The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program.
wrap
True or False: A mutual fund asset allocation program requires a special wrap program disclosure document.
False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds
True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA’s services separately.
True
Identify the acronym: UPIA
Uniform Prudent Investor Act
Describe a soft-dollar arrangement between an IA and a BD.
An IA directs client transactions to a specific BD in return for research and brokerage services.
To be allowed, a soft-dollar arrangement must benefit ____________.
the client
Identify some permissible uses of soft-dollar arrangements.
Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.
What are some of the examples of items that cannot be covered by a soft-dollar arrangement?
Advertising, travel expense reimbursement, meals and entertainment, and computers
True or False: An agent must always have reasonable grounds for recommending a particular security.
True
An agent of a BD lends $5,000 to his brother, is this acceptable?
yes, lending to immediate family is permissible
True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.
False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.
Define an agency cross transaction.
A trade executed by a financial firm that is acting as a broker for both the buyer and seller.
Define fiduciary.
Someone who acts on behalf of another, which gives rise to a relationship of trust and confidence.
List some examples of fiduciaries.
IARs, executors of an estate, custodians in a UTMA/UGMA account, trustees, and pension plan administrators
What duties does an IAR have according to the “know your customer” rules?
Make a reasonable inquiry into a customer’s background and provide suitable advice based on known information.
May an IAR recommend that a client meet/speak with another financial professional?
Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it’s acceptable to recommend outside assistance.
If a BD is promoting wrap accounts, does it need to register as an IA?
yes
Will a client always pay lower fees in a wrap account?
no. Depending on how much the client trades, it’s possible he will pay more than if the fees were paid separately.
Does an IA need written consent before executing each agency cross trade with an advisory client?
No, the client must provide written consent initially, but not for every trade.
May an IAR solicit both sides of an agency cross transaction?
no, one side must be unsolicited
May investment adviser advertising refer to testimonials?
no
True or False: An agent of a broker-dealer may loan money to his son-in-law.
True. In-laws are considered immediate family members, so the loan would be acceptable.
Define wrap account.
A managed account that charges clients an annual fee to cover trading, research, and advisory services
True or False: A fiduciary’s duty includes ensuring that all investment advice is impartial and disinterested.
True
True or False: An adviser is required to deliver only ADV Part 2 when entering into a wrap fee program with a client.
False. For wrap accounts, the SEC requires IAs to provide clients with a special disclosure (ADV Part 2A-Appendix 1).
Retail communication generally requires _______________________.
principal preapproval
What document is required for an IA to be authorized to pay his client’s bills?
a full power of attorney
In what type of arrangement may an IA acquire research reports without paying for them directly?
a soft-dollar arrangement
Does a solicitor for an IA provide securities recommendations?
No. Solicitors only solicit new clients; they do not recommend or approve transactions.
When and by whom is Form ADV-E filed?
Filed within 120 days from completion of an audit of the IA’s books; filed by the auditor conducting the audit
Is office furniture (e.g., a desk chair) included in an IA’s net worth?
yes, provided it is fully owned by the IA
