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CFP Course Prep 1 > Business Law > Flashcards

Business Law Flashcards

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CFP® flashcards
1
Q

5 Elements of contract law

A

O/A= Offer & Acceptance
C= Consideration- exchange of value
L= Legal Object
C= Competent Parties
L= Legal Form

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2
Q

Fiduciary Liability

A

Those who manage property for others, who exercise discretionary authority or control over assets, and who render comprehensive continuous investment advice.
Can be held liable for a breach of their fiduciary responsibilities.

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3
Q

An agent owes the following duties to a principal:

A

Loyalty
Obedience

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4
Q

A principal owes the following duties to an agent:

A

Compensation
Indemnity
Protection

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5
Q

Who are fiduciaries?

A

Generally include trustees of individual trusts, trustees of pension and retirement trust funds under ERISA, corporate directors and corporate officers.
Financial Planners are considered fiduciaries when they manage their clients’ assets.

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6
Q

Definition of contract law

A

The law of contracts concerns the legal effects of making promises. The law determines when the performance of a promise is legally required and governs the relationship between parties to a contractual promise. Promises and their legal consequences are therefore the basis of contract study.

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7
Q

Promise:

A

A commitment that something will or will not happen in the future. A promisor is the person making the promise. A promisee is the person to whom the promise is made.

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8
Q

Contracts:

A

Promises or sets of promises for breach of which the law gives a remedy or the performance of which the law recognizes as a duty.

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9
Q

Types of contracts:

A

Include formal or informal, express or implied, unilateral or bilateral, enforceable or unenforceable, void or voidable, and executory or executed.

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10
Q

The chronology of a contract:

A

Begins when terms are offered, rejected or negotiated. Once an agreement is made, consideration will take place to determine which promises are legally enforceable.

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11
Q

The two fundamental requirements of enforceable contracts are:

A

Agreement: An agreement is created when one party accepts an offer made by the other. An enforceable contract requires an agreement, or bargain, between parties.
Consideration: Consideration refers to a benefit or performance that is bargained for and given in exchange for the promise.

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12
Q

A tort (Latin ‘tortus’: twisted)

A

is “a private or civil wrong or injury, other than a breach of contract, for which the court will provide a remedy in the form of an action for damages.”

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13
Q

Enforceable contract

A

A contract is legally enforceable if the promisee is entitled to a contract remedy and the promisor fails to perform.

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14
Q

If a contract is unenforceable-

A

no contract remedy (either damages or specific performance) is available for its breach.

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15
Q

what are the 4 defects that make the contract unforceable?

A

Lack of contractual capacity of one or both parties.
Lack of genuine assent to the bargain due to factors such as fraud, misrepresentation, mistake, duress, or undue influence.
A contractual purpose that is illegal or otherwise contrary to public policy.
Lack of proper formality when legal formalities are required.

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16
Q

A voidable contract is___

A

when one or more parties have the power, by electing to do so, to avoid the legal relations created by the contract.

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17
Q

A voidable contract is perfectly binding and enforceable unless and until the party with the power to disaffirm elects to do so-

A

That is, a person with a power to avoid a contract may choose instead to be bound.
Such a ratification extinguishes that person’s power of avoidance and makes the contract enforceable against him or her.
Conversely, disaffirmance discharges the contractual duty and terminates the “power of ratification.” This power of ratification distinguishes a voidable from an unenforceable contract.

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18
Q

If the basic elements of an enforceable contract are present, the promises involved are binding. With few exceptions, no particular formalities need be observed.

A

Informal Contracts

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19
Q

Formal contracts are governed by special rules -

A

Contract Under Seal- Actual seal put on written contract
Recognizance- Promise in court to make certain payments unless a specified event occurs
Negotiable Contract- Governed by the Uniform Commercial Code (UCC)

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20
Q

A contract may involve:

A

A single promise made from a promisor to a promisee.
A mutual exchange of promises by two persons.
Any other combination of persons and promises.

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21
Q

A unilateral contract-

A

involves a promise in exchange for performance of an act.
Unilateral contracts result when only one of the parties makes a promise.

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22
Q

Bilateral contracts-

A

involve at least two promises, in which each party is simultaneously a promisor and a promisee.
Bilateral contracts, therefore, involve a promise in exchange for a return promise.

23
Q

A promise may also be inferred from conduct other than language. In this case, the contract is said to be ____ in fact

A

implied

24
Q

A contract is _____ if it arises from the oral or written language of the parties.

A

express

25
Q

contract law generally imposes a duty of good faith and fair dealing upon the parties.

A

common law

26
Q

A quasi-contract is not really a contract at all, but a form of the remedy of restitution.

A

A quasi-contract is designed to provide a remedy when one party confers a benefit upon another and when the second party retains that benefit.

27
Q

A promise or contract is _____ if it has been completed or performed and ___ if it is yet to be performed.

A

executed
executory

28
Q

____ is a consensual fiduciary relationship in which one party agrees to act on behalf of and under the control of another.

A

Agency

29
Q

_____is the person for whom an action is to be taken and the agent is the person who is to act.

A

the principal

30
Q

Types of Agents:

A

General agents are authorized to conduct a series of transactions involving a continuity of service.
Special agents conduct a single transaction or a series of transactions not involving continuity of service.
A master is a principal who has the control of an agent’s physical conduct.
A servant is an agent whose physical conduct in the performance of duties is subject to the principal’s control or right of control.
Brokers are agents empowered to make or procure contracts on the principal’s behalf.
Factors are entrusted with possession and control of the principal’s goods for sale.
Del Credere Agents sell goods on credit and then guarantee to the principal the purchaser’s solvency and the purchaser’s performance of the contract.

31
Q

Duties of an Agent to Principal:

A

Include duties of service and obedience, as well as duties of loyalty.

32
Q

Duties of a Principal to an Agent:

A

Include compensation for work performed on the principal’s behalf, reimbursement of the agent’s expenses reasonably and properly incurred on the principal’s behalf in the conduct of the agency, and reasonable protection to prevent agents from being injured during their performance of the agency.

33
Q

Termination of Agency Powers:

A

Occurs when the agent no longer has the power to bind the principal to contracts with third parties. The termination can be for the actual authority or apparent authority

34
Q

The _____ governs the legal rights and duties that arise when one person acts on behalf of another.

A

law of agency

35
Q

The duties of obedience means the agent has a duty to obey all reasonable instructions from the principal regarding the manner of performing the agency and includes:

A

Duty to Act as Authorized:
Duty to Keep and Render Accounts:
Duty to Give Information:
Duty of Care and Skill:

36
Q

A principal owes the following duties to an agent:

A

Compensation - The agent is entitled to compensation for work performed on the principal’s behalf. If no specific amount is stated in the agency agreement, the agent is entitled to the fair value of the services performed.
Indemnity - the principal is required to indemnify, or reimburse, the agent for expenses reasonably and properly incurred on the principal’s behalf in the conduct of the agency. The principal als
Protection - The principal owes a general duty to use reasonable care to prevent agents from being injured during their performance of the agency.

37
Q

Actual authority-

A

The agent’s actual authority is terminated when the principal, by words or other conduct, leads the agent to believe that the principal no longer desires the agency to continue. Notice must be given before the relationship ends, and provided to third parties the agent deals with on behalf of the principal.

38
Q

Apparent authority-

A

is based upon the principal’s representations to third persons, not to the agent. Therefore, if an agent possesses apparent authority, the principal desiring to terminate the agency must extinguish both types of authority.

39
Q

_____ Includes breach of contract, negligence, and fraud, where planners may be held liable to their clients and to third parties on a variety of violations.

A

Common law liability

40
Q

____ includes liability under the Federal Securities Law. Specifically, under various civil liability provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 relating to the intentional preparation of false or misleading financial statements or other documents.

A

Statutory liability

41
Q

_____ includes liability for willfully violating any provision of the federal securities laws, including rules and regulations adopted under those laws, or to make material misstatements in registration statements or other documents filed with the SEC.

A

Criminal liability

42
Q

____ includes responsibility to act in the best interests of the beneficiaries of the fiduciary relationship.

A

Fiduciary liability

43
Q

Under____ planners are normally obligated To perform their assumed duties with the care, skill, and diligence normally exhibited by members of their profession.

A

contract law

44
Q

Negligence occurs ___

A

when a person does something that a reasonable person would not do, or fails to do something that a reasonable person would do, under the circumstances.

45
Q

A client seeking to recover against a planner in an action based on negligence must satisfy four requirements:

A

The plaintiff must show that the planner had a duty not to be negligent.
The planner must have breached that duty by failing to exercise reasonable care.
The plaintiff must establish a causal connection between the negligence and the injury.
The plaintiff must prove damage or actual loss.

46
Q

Planners can be found negliably liable under tort law when____

A

Tort law states that financial planners rely on third parties who the documents they prepare.
Examples include accountants, brokers, and tax preparers who could be injured by relying upon a n

47
Q

Section 11 of the Securities Act of 1933

A

imposes liability for misstatements or omissions in applicable registration statements. It applies to accountants, engineers, or other experts (financial planners) who prepare or certify parts of the registration statement.

A number of defenses are available against liability under Section 11. The most important of these is the “due diligence” defense.

48
Q

Under Section 18(a) of the Securities Exchange Act of 1934___

A

planners may be held liable for material misstatements or omissions in documents they prepare and file with the Securities and Exchange Commission (SEC).

49
Q

Planners may be held liable under Section 10(b) and Rule 10b-5 for fraud in the purchase or sale of any security if:

A

The fraudulent statement or omission was considered material.
There was an intent by the planner to deceive or defraud others.
As a result of misinformation, the client incurs a loss.

50
Q

What notable pieces of legislature and ethical codes applicable to financial planners require adherence to a fiduciary duty?

A

Investment Advisors Act of 1940- Section 21180b-11(1):
Employee Retirement Income Security Act (ERISA)- Section 404 (a)(1)(B):
CFP Board Code of Ethics and Standards of Conduct- Fiduciary Duty (Standard A.1):

51
Q

Investment Advisors Act of 1940- Section 21180b-11(1):

A

[T]he standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

52
Q

Employee Retirement Income Security Act (ERISA)- Section 404 (a)(1)(B):

A

A fiduciary must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

53
Q

CFP Board Code of Ethics and Standards of Conduct- Fiduciary Duty (Standard A.1):

A

At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:
Duty of Loyalty
Duty of Care
Duty to Follow Client Instructions

54
Q

what is a defense against negligence?

A

Acting in the same manner as a prudent planner would

CFP Course Prep 1 (15 decks)

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