66-7 Flashcards
May an RR and a client share in an account?
Yes, with firm approval and provided the sharing in gains and losses is proportionate to their investment.
Is discretionary authorization required to enter a not held order?
no
What three items must be specified on a not held order?
buy/sell, security name, quantity of shares
For how long may a not held order be maintained?
that day
True or False: Principals must approve discretionary orders prior to entry.
False. must be approved promptly afterwards
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
Name two prohibitions related to being an insider.
- No shorting of the stock and 2. No keeping of short-swing profits
Insiders must return short-swing profits, which are those earned on stock held less than ____ months.
six months
Trading on material, non-public information is considered __________________.
insider trading
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
__________ is a manipulative activity designed to keep the price of a stock from rising (and is prohibited).
capping
__________ is a manipulative activity designed to keep the price of a stock from falling (and is prohibited).
pegging
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
yes
The criminal penalties for insider trading by individuals is a maximum of $____________ and/or ____ years in prison.
$5 million, 20 years
What are treble damages?
The civil penalty for insider trading, which is three times the profit made or loss avoided
What is the criminal penalty for insider trading by corporations?
$25 million per violation
True or False: Not held orders may only be executed in a discretionary account.
False
“For insider trading violations, the SEC can sue for treble damages.” What does that statement mean?
The SEC can sue for three times the damage (profit made or loss avoided).
What is required for an RR to open a joint account with a customer?
Written principal approval and sharing in gains/losses must be in direct proportion to the employee’s contribution.
True or False: Fraud may sometimes be unintentional.
False
r an agent to exercise discretion over a client’s account, the client must have signed a ________________________.
power of attorney
BD securities and client securities must be segregated; in other words, they may not be ______________.
commingled
John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?
no, they’re painting the tape
Sam buys stock on one exchange and shorts it on another at a slightly higher price. Is this permitted?
yes, this is arbitrage
An IAR may exercise discretion over a client’s account based on oral authorization from the client for up to _____ days.
10 days
May an agent execute securities trades for compensation and not record the trades on the BD’s books and records?
no, this is “selling away”
__________________ is the prohibited act of a BD trading for its own account ahead of a customer’s block order.
front-running
True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.
True
Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?
no
What 3 details must be provided by a client so a BD may accept a discretionary order without written authorization?
security, buy/sell, quantity
True or False: Charging an unreasonably high commission is acceptable provided disclosure is made to client.
False
Transactions should be executed at a price that is reasonably related to the _________________ price.
current market price
What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?
both oral and written disclosure of relationship
With whom may an agent split commissions?
Another agent registered with the same BD, or another BD under common control
Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?
yes. Insiders are required to wait until an earnings report is released publicly before selling shares.
A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?
no
An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable?
Yes, provided the IA provides written disclosure (often in Form ADV) to clients.
May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?
no. Material provided to clients must include all facts about the issue, not just the positive ones.
When selling mutual funds, an agent must adequately disclose the _____________.
sales charge
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited.
Is it acceptable to recommend that a client sell a mutual fund in order to buy another fund with the same objective?
no
True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.
False. The agent may still have omitted material facts.
True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.
False
An agent makes this statement to a client: “Go with us; we’re approved by the Administrator and SEC.” Is it acceptable?
No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.
What may an investment adviser do with full discretion, but not with limited discretion?
Withdraw money from the account
The rule governing the disclosure requirement of an IA to its clients is called the __________ Rule.
Brochure Rule
What is required of an IA that uses third-party research?
The IA must disclose the source of the research to its client.
Is an adviser required to disclose the source of raw data used to determine the recommendations to its customers?
No. Disclosure is not required if the IA’s recommendations are based on its own independent conclusions.
Are advisory fees fixed and are they subject to administrative review?
Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.
How are advisory fees most commonly charged?
As a percentage of assets under management over a specific period of time
What is needed for an investment adviser to exercise discretion over a client’s funds?
An adviser may exercise discretion for 10 days with oral authorization as long as it is followed up in writing.
What is needed for a BD to exercise discretion over a client’s account?
BDs need prior written authorization.
An IA is required to deliver the brochure to its clients no later than the __________ of the contract.
signing of
If an IA delivers a brochure at the time of contract signing, clients must be given ____ days to cancel without penalty.
5 days
If an IA contract stipulates cancellation penalties, a brochure must be provided ____ hours before the contract signing.
48 hours
________ is the willful or intentional act of deceiving another person for gain or profit.
fraud
What is selling away?
An agent executes securities transactions for compensation and does not record the trades on the BD’s books and records.
Define commingling.
The prohibited act of mixing client funds with those of the BD
May an agent share in the profits of a client’s account?
Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.
If an agent has been given time and price discretion on a client order, is written power of attorney required?
No. Provided the client determines the action (buy/sell), amount, and asset, power of attorney is not required.
When does a durable power of attorney become automatically cancelled?
Upon the death of the grantor of the POA
When does a standard power of attorney become automatically cancelled?
Upon either the death of the grantor or declaration of incompetence of the grantor
__________ stock is the repeated practice of placing stock in the account of someone who is not the rightful owner.
parking
What step must an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.
What is a client’s right if an IA does not deliver the required brochure 48 hours prior to the signing of the contract?
The client may terminate the contract without penalty within 5 business days from the signing of the contract.
True or False: An IA must physically deliver its brochure to clients at least annually.
False. At a minimum, the IA must (in writing) offer to deliver its brochure annually.
When assigning an IA contract to another IA, __________ must be obtained from the client prior to assignment.
consent
Identify the acronym: POA
Power of Attorney
Define the prohibited practice of shadowing.
After executing a large block order, but before the trade is reported, a BD trades for its own account.
Define front running.
A firm/individual executing trades for its own account with knowledge of an impending large block customer order.
True or False: All illegal activities are intentional.
False
An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice?
No
You advise a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?
yes
Define conversion.
The prohibited act of an agent using client funds for personal use.
True or False: If an agent disagrees with a customer’s order, he may disregard the order.
False
May an agent and a client share in an account?
Yes, with firm & customer’s approval provided the sharing in gains & losses is proportionate to each party’s investment.
What is a not held order?
An order giving RRs discretion as to the time/price of execution. Clients must specify buy/sell, security, and quantity.
Not held orders are considered to be in effect for ___________________.
day of order
Does this order require prior discretionary authorization? “Buy some ABC today if it begins to fall”
yes; quantity not specified
Does this order require prior discretionary authorization? “Buy 500 shares of DMB sometime today”
no
Does this order require prior discretionary authorization? “Buy 300 shares of DMB this week”
Yes, since it is NOT a not held order. Not held orders are only good for a trading day, and this order is for the week.
True or False: BDs may accept oral permission from clients to exercise discretion in their accounts.
False
True or False: A power of attorney given to an agent (RR) must be renewed.
False
If an agent (RR) received a power of attorney seven years ago, could she still trade that customer’s account?
yes
Define selling away.
The execution of transactions by an associated person outside his employment with a member firm
Not held orders allow for what level of discretion?
time and price of execution
It is a violation of the USA for an IA to act as a broker-dealer for a buyer of securities without __________________.
written disclosure
True or False: A BD may withhold shares of an IPO for the purpose of later selling them to customers at a higher price.
False
True or False: It is always prohibited for agents to split commissions.
False. Splitting commissions is allowed if both agents are licensed with the same firm and in the same state.
True or False: Agents of a broker-dealer must disclose material facts about a stock they are recommending.
True. Agents should make a good-faith effort to disclose all material facts to an investor.
True or False: Agents of a broker-dealer must disclose all facts about a stock they are recommending.
False. Agents only need disclose material facts, not all facts.
What type(s) of transaction(s) are exempt from the antifraud provisions of the USA?
None are exempt
True or False: If a BD receives a written complaint from a client, it may be ignored if the complaint seems baseless.
False.
To whom are written or electronically-sent grievances (complaints) forwarded?
an immediate supervisor
True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.
False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.
An IA’s brochure must have the same information that appears in what part of Form ADV?
Part 2
In lieu of an IA-prepared brochure, what document may be delivered to IA clients?
Part 2 of Form ADV
May an RR and a client share in an account?
Yes. However, firm approval is required and sharing in gains and losses must be proportionate to a person’s investment.
May an IAR and a client share in an account?
No. However, an RR may share in a client’s account.
For any securities delivered to a BD, an agent must provide the customer with a receipt ____________.
immediately
Give some examples of insurance company offerings that are exempt from the antifraud provisions of the USA.
Life insurance policies and fixed annuities are exempt from the provisions since they are not securities.
May an RR of a BD effect personal trades in a stock two days before her firm releases a research report on the stock?
No
True or False: An RR may trade a stock two days prior to a research report on the stock being released by his employer.
False. This is trading ahead
