Ch. 6

Question 1

T/F: Under the Uniform Prudent Investor Act (UPIA), an IAs main objective should be risk avoidance.

Answer 1

F; the UPIA indicates that advisers are responsible for managing risk, not avoiding risk

Question 2

What document is required for an IAR to be authorized to pay his clients bills?

Answer 2

A full power of attorney

Question 3

What is not pertinent when opening an account, a clients educational or financial background?

Answer 3

Educational background

Question 4

What forms of soft dollar compensation are acceptable?

Answer 4

Research reports, seminars, software used to provide analysis

Question 5

Describe a soft dollar arrangement between an IA and a BD.

Answer 5

An IA directs client transactions to a specific BD in return for research and brokerage services.

Question 6

T/F: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.

Answer 6

F; Risk should be managed, not avoided. Speculative investments (like options and commodities) may reduce overall risk

Question 7

Is office furniture (desk chair) included in an IAs net worth?

Answer 7

Yes, provided it is fully owned by the IA

Question 8

If a client gives little information when opening an account, what securities may an agent recommend to the client?

Answer 8

Only securities that are suitable based on the information the client did provide

Question 9

T/F: If a conflict of interest exists, an IA must always terminate a relationship with a client.

Answer 9

F; An IA must always disclose a conflict, but they don’t necessarily need to end the relationship

Question 10

May an IAR recommend that a client meet/speak with another financial professional?

Answer 10

Yes. If an IAR lacks expertise in a certain area (insurance), it is acceptable to recommend outside assistance.

Question 11

In what type of arrangement may an IA acquire research reports without paying for them directly?

Answer 11

In a soft dollar arrangement, an IA may acquire research reports without directly paying the BD.

Question 12

To be allowed, a soft dollar arrangement must benefit ___________.

Answer 12

The client

Question 13

Define wrap account.

Answer 13

A manager account that charges clients an annual fee to cover trading, research, and advisory services

Question 14

What is soft dollar compensation?

Answer 14

Non cash compensation paid by a BD to an IA for directing securities transactions.

Question 15

Identify the acronym: UPIA

Answer 15

Uniform Prudent Investor Act

Question 16

What are some of the examples of items that cannot be covered by a soft dollar arrangement?

Answer 16

Advertising, travel expense reimbursement, meals and entertainment, and computers

Question 17

Define fiduciary.

Answer 17

A person who acts on behalf of another, which gives rise to a relationship of trust and confidence

Question 18

T/F: A mutual fund asset allocation program requires a special wrap program disclosure document.

Answer 18

F; these programs charge a percentage of assets to manage a portfolio of no load mutual funds

Question 19

T/F: An agent must always have reasonable grounds for recommending a particular security.

Answer 19

T

Question 20

List some examples of fiduciaries.

Answer 20

IARs, executors of estates, custodians of UTMA/UGMA accounts, trustees, and pension plan administrators

Question 21

In what type of account is reverse churning most likely found?

Answer 21

A fee based (wrap) account

Question 22

IAs have greater responsibility to their clients than BDs. This is referred to as the IAs _________ responsibility.

Answer 22

Fiduciary

Question 23

T/F: A fiduciary’s duty includes ensuring that all investment advice is impartial and disinterested.

Answer 23

T

Question 24

T/F: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.

Answer 24

T

Question 25

What duties does an IAR have according to the “know your customer” rules?

Answer 25

Make a reasonable inquiry into a customers background and provide suitable advice based on known information

Question 26

What forms of soft dollar compensation are NOT acceptable?

Answer 26

Rent, travel expense reimbursement, hardware, furniture, entertainment, meals

Question 27

Identify some permissible uses of soft dollar arrangements.

Answer 27

Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars