Business Practices

Question 1

Churning

Answer 1

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.

Question 2

cyberattack actors

Answer 2

organized crime groups, state sponsors (foreign governments that are interested in obtaining data from major agencies), and terrorist groups

Question 3

material fact

Answer 3

information essential for making an informed investment decision

Question 4

misleading statements

Answer 4

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.

Question 5

wrap account

Answer 5

an account whereby a client pays an investment adviser a flat fee for “advisory and order execution” transactions.

Question 6

hypothecation agreement

Answer 6

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.

Question 7

Investment adviser brochure (delivery requirements)

Answer 7

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.

Question 8

Annual Brochure Delivery

Answer 8

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.

Question 9

internet communication

Answer 9

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.

Question 10

insider trading

Answer 10

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.

Question 11

Omissions of Material Facts

Answer 11

Deliberately withholding information from a client necessary to make an investment decision.
This is considered a fraudulent act.

Question 12

Brochure Rule

Answer 12

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.

Question 13

Full Discretion (Full POA)

Answer 13

Allows the adviser the ability to remove assets and money from the account along with placing buy and sell orders.

Question 14

Matched Sale

Answer 14

When two or more parties are involved in a pattern of buying and selling a security merely to give the appearance of active trading.

Question 15

Cash Accounts

Answer 15

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.

Question 16

Selling Dividends

Answer 16

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.

Question 17

Prudent Man Rule (Investor Standards)

Answer 17

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.”

Question 18

Protecting Customer Information

Answer 18

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.

Question 19

Discretionary Authority (Investment Advisers)

Answer 19

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.

Question 20

Trust Accounts

Answer 20

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.

Question 21

Prospectus

Answer 21

This document should provide a detailed list of material risk factors immediately after the cover.

Question 22

Option Accounts

Answer 22

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.

Question 23

Publicly Distributed Written Material

Answer 23

Materials that are paid for by the recipients and sent to at least 35 persons.

Question 24

Selling Away

Answer 24

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.

Question 25

Breakpoint Sale

Answer 25

Intentionally not disclosing a potential discount when the client is close to reaching the required dollar threshold for a class A mutual fund share.

Question 26

Personal Identifiable Information (PII)

Answer 26

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.

Question 27

Wrap Fee

Answer 27

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.

Question 28

Discretionary Authority (Broker-Dealers)

Answer 28

Authorization for a BD to execute transactions for their customers. The BD must obtain written POA from the customer, verbal authorization is not allowed.

Question 29

Limited Discretion (Limited POA)

Answer 29

Allows the adviser to place buy and sell orders, but not remove money or securities from an account.

Question 30

Unauthorized Trading

Answer 30

Unless the customer has given the agent discretionary authority, each transaction in a customer’s account must be approved by the client.

Question 31

Splitting Commissions

Answer 31

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.

Question 32

Painting the Tape

Answer 32

Type of manipulative trading which involves a series of purchases, or a series of sales. This is an illegal activity.

Question 33

Qualified custodian

Answer 33

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.

Question 34

Reports (Written Recommendations)

Answer 34

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.

Question 35

Brochure Rule (delivery requirements)

Answer 35

Delivery must be either 48 hours prior to entering into contract or 5 business days to rescind, if delivered at contract signing.

Question 36

Commingling

Answer 36

The prohibited practice of mixing client and firm securities.

Question 37

Misrepresenting Qualifications

Answer 37

Misleading statements regarding registration and qualification of any person.

Question 38

Performance Based Fees

Answer 38

Compensation based on capital gains or appreciation in a customer’s account. These fees may be charged only to qualified client accounts.

Question 39

Margin Accounts

Answer 39

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.

Question 40

Agency Cross Transaction

Answer 40

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.

Question 41

Soft Dollars

Answer 41

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.

Question 42

Suitability

Answer 42

Recommendations must be appropriate given the relevant information known about the client, such as their investment objectives, financial condition, and tolerance for risk.