Business Practices Flashcards
Churning
Also known as twisting, it is the practice of excessively trading in a client’s account to earn more commissions, disregarding the best interests of the client.
Excessive trading can include both size and frequency of trades.
cyberattack actors
organized crime groups, state sponsors (foreign governments that are interested in obtaining data from major agencies), and terrorist groups
material fact
information essential for making an informed investment decision
misleading statements
statements such as exaggerating the performance or inaccurately stating the issuer’s earnings, or projected earnings, to induce someone to engage in securities transactions that are prohibited.
wrap account
an account whereby a client pays an investment adviser a flat fee for “advisory and order execution” transactions.
hypothecation agreement
this form must be properly executed (signed) promptly after the initial transaction in the margin account. This is in addition to the required margin agreement and new account form.
Investment adviser brochure (delivery requirements)
Brochures must be made at least 48 hours before the customer signs the contract. If impossible, the customer is allowed 5 business days to void the contract without penalty after signing the contract.
Annual Brochure Delivery
An AI firm must deliver a copy of the firm’s brochure to customer upon written request of the client. If the client asks for the brochure, the IA must mail it to the customer within 7 calendar days of the client’s request.
internet communication
Using the internet to distribute information on products and services is not considered “transacting business” in a state provided the communications are limited to general information and do not involve effecting, or attempting to effect, securities transactions, or rendering personalized advice regarding securities for compensation.
insider trading
Using material, non-public information when engaging in a securities transaction.
An agent may not reveal that information to anyone except the supervisor or another principal of the BD.
Omissions of Material Facts
Deliberately withholding information from a client necessary to make an investment decision.
This is considered a fraudulent act.
Brochure Rule
An IA must provide clients with a written disclosure document.
This may be a copy of the adviser’s ADV Part 2, or it may be a separate document that contains at least the same information as ADV Part 2.
Full Discretion (Full POA)
Allows the adviser the ability to remove assets and money from the account along with placing buy and sell orders.
Matched Sale
When two or more parties are involved in a pattern of buying and selling a security merely to give the appearance of active trading.
Cash Accounts
An account at a broker-dealer in which the customer pays for each transaction in full.
This is the most common type of account opened at a broker-dealer.
Selling Dividends
Encouraging a customer to purchase a mutual fund just before payment of a dividend, implying that the investor will receive an immediate return of capital.
This is a prohibited practice.
Prudent Man Rule (Investor Standards)
The rule directs advisers:
“to observe how persons of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
Protecting Customer Information
These policies and procedures must be designed to ensure the security and confidentiality of customer records and information.
Protect against anticipated threats or hazards to the security or integrity of customer’s records and protect against unauthorized access or use of information that could result in harm or inconvenience to any customer.
Discretionary Authority (Investment Advisers)
Authorization for an IA to execute transactions for their customers.
The IA must obtain written authority from the customer within 10 business days of receiving the first order based on oral discretionary authorization from the client.
Trust Accounts
An account where the fiduciary manages assets for the beneficiary.
These may be set up to protect assets from creditors, or for gifting assets to beneficiaries.
They may be either revocable or irrevocable.
Prospectus
This document should provide a detailed list of material risk factors immediately after the cover.
Option Accounts
These accounts can have considerable risk and require approval by a ROP. Customers must receive the ODD and the new account form must have a notation of the date the customer received the ODD.
Publicly Distributed Written Material
Materials that are paid for by the recipients and sent to at least 35 persons.
Selling Away
An agent representing a broker-dealer in a security transaction may not sell investments the broker-dealer does not offer, without disclosing this transaction to the firm.
Breakpoint Sale
Intentionally not disclosing a potential discount when the client is close to reaching the required dollar threshold for a class A mutual fund share.
Personal Identifiable Information (PII)
Any information that is linked to a specific investor such as their driver’s license number, passport information, street address, email address, and taxpayer ID number.
Wrap Fee
A flat fee paid for “advisory and order execution” transactions. The wrap fee contains the advisory fee, administration fees, and the costs for trades executed by a broker-dealer.
Discretionary Authority (Broker-Dealers)
Authorization for a BD to execute transactions for their customers. The BD must obtain written POA from the customer, verbal authorization is not allowed.
Limited Discretion (Limited POA)
Allows the adviser to place buy and sell orders, but not remove money or securities from an account.
Unauthorized Trading
Unless the customer has given the agent discretionary authority, each transaction in a customer’s account must be approved by the client.
Splitting Commissions
Agents may not divide compensation for securities transactions with anyone who is not also an agent of the same BD or an affiliated BD and both representatives must be registered in the state.
Painting the Tape
Type of manipulative trading which involves a series of purchases, or a series of sales. This is an illegal activity.
Qualified custodian
FDIC insured financial institutions, a registered BD who holds client assets, a registered futures commission merchant who hold client assets, or a foreign financial institution holding assets for clients.
Reports (Written Recommendations)
Investment advisers may provide written recommendations or reports to customers.
It is unethical for an IA to provide a report or written recommendation prepared by someone other than the adviser to any advisory client without disclosing that fact.
Brochure Rule (delivery requirements)
Delivery must be either 48 hours prior to entering into contract or 5 business days to rescind, if delivered at contract signing.
Commingling
The prohibited practice of mixing client and firm securities.
Misrepresenting Qualifications
Misleading statements regarding registration and qualification of any person.
Performance Based Fees
Compensation based on capital gains or appreciation in a customer’s account. These fees may be charged only to qualified client accounts.
Margin Accounts
Accounts which involve the extension of credit to the customer by the BD and involve more risk than traditional cash accounts. Customers borrow money or securities from the BD as a loan (collateral) to pay for trades.
Agency Cross Transaction
A sale of securities from one client to another, facilitated by the IA. The adviser is the broker for both sides of the trade and must disclose this conflict of interest.
Soft Dollars
An arrangement that exists when a BD provides certain free services to an IA with the expectation that the IA will direct trades to the BD for execution. These may only be used for the purchase of investment related services, primarily research services, that benefit the client.
Suitability
Recommendations must be appropriate given the relevant information known about the client, such as their investment objectives, financial condition, and tolerance for risk.
