Ch. 7 Flashcards
What is a not held order?
An order giving agents discretion as to execution time/price. Clients must specify but/sell, security, and quantity.
What is a no load fund?
A mutual fund with no front end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year
List the access persons of an investment adviser.
Officers, directors, partners, or persons with access to client investment positions or investment company holdings
T/F: Charging an unreasonably high commission is acceptable if disclosure is made to the client.
F
Identify the acronym: POA
Power of Attorney
Sam buys stock on one exchange and sells it short on another at a slightly higher price. Is this permitted?
Yes. Sam is engaging in arbitrage
T/F: A BD may withhold shares of an IPO for the purpose of later selling them to customers at a higher price.
F
When must an access person file a transaction report?
Within 30 days of the end of each calendar quarter
____________ is the prohibited practice of a BD trading for its own account ahead of a customers block order.
Front running
Define commingling.
The prohibited act of mixing client funds with those of the BD
T/F: If churning in a clients account generates large profits, it is not considered a violation.
F
T/F: If an agent disagrees with a customers order, he may disregard the order.
F; Agents and IARs must follow all customer requests, even those with which they disagree
A holdings report filed by an access person must be current as of ____ days prior to the date the report is submitted.
45
An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice?
No, this is a prohibited action known as selling dividends
Transactions should be executed at a price that is reasonably related to the _________ _________ price.
Current market
When selling mutual fund shares, an agent must adequately disclose the ________ _________.
Sales charge
__________ stock is the repeated practice of placing stock in the account of a person who is not the rightful owner.
Parking
An IAR may exercise discretion over a clients account based on the clients oral authorization for up to ____ days.
10
What is required of a BD controller by/affiliated with an issuer of a security being sold to/purchased by a customer?
Both oral and written disclosure of the relationship
May an agent share in the profits of a clients account?
Yes, I’m a joint account with proportionate sharing. Permission is required from both the client and the firm.
What is needed for an investment adviser to exercise discretion over a clients funds?
An adviser may exercise discretion for 10 days with the clients oral authorization as long as it is followed up in writing.
May an agent and a client share in an account?
Yes, if both the firm and customer provide approval and all sharing is proportionate to each party’s investment.
Next week ABC plans to announce its earnings. If ABCs 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
May an agent and a client share in an account?
Yes. However, client and firm approval is required and the sharing must be proportionate to each persons investment.
T/F: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.
F; the agent may still have omitted material facts
What is the annual fee levied against a funds assets and used to pay expenses of commissions and retail communications?
12b-1 fee
T/F: Forward looking statements regarding mutual fund performance may be used when soliciting clients.
F; past performance is not indicative of future results.
Firms must keep client information confidential unless disclosure is authorized by the ________ or a ___________ __________.
Client; regulatory authority
An agent advises a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?
Yes, since this is a material fact, it must be disclosed before the customer buys the stock.
May an agent of a BD effect personal trades in a stock two days before her firm releases a research report on the stock?
No. Employees of a BD may not trade ahead of their firms research report
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act
Is an agent permitted to execute securities trades for compensation and not record the trades on his BDs books and records?
No. This is referred to as “selling away”
Does this order require prior discretionary authorization? “Buy some ABC shares today if it’s price begins to fall.”
Yes. This is NOT a not held order since the client did not specify the quantity of shares to be purchased.
Churning is described as ______________ designed to _____________.
Excessive trading; generate commissions
If an agent has been given time and price discretion on a client order, is written power of attorney required?
No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required
Not held orders are considered to be in effect for ______ trading day(s).
One
Does an IA need written consent before executing each agency cross trade with an advisory client?
No, the client must provide written consent initially, but not for every trade
Does this order require prior discretionary authorization? “Buy 500 shares of DMB sometime today.”
No, this is a not held order. The customer specified the action (buy), the amount (500 shares), and the asset (DMB)
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is _____________.
Unsolicited
When does a standard power of attorney become automatically
cancelled?
At the time of either the grantors death or declaration of grantors incompetence
___________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
Pegging
May an adviser release account information to the spouse of a client?
No, not without the clients written authorization.
When does a durable power of attorney become automatically cancelled?
At the time of death of the grantor of the POA
BD securities and client securities must be segregated; in other words, they may not be ____________.
Commingled
___________ is the willful or intentional act of deceiving another person for gain or profit.
Fraud
A firm promises a refund to all clients who invest in an IPO of shares fail to rise 20%. Is this permitted?
No. This is unethical since it is considered a guarantee against loss
T/F: A power of attorney given to an agent (RR) must be renewed.
F; POA do not have to be renewed
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
___________ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
Capping
T/F: Access persons must file holdings reports annually.
T
Define front running.
A firm/individual executing trades for its own account with knowledge of an impending large block customer order.
T/F: If a BD received a written complaint from a client, it may be ignored if the complaint seems baseless.
F; failing to respond to a formal written complaint is prohibited
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
May an IAR and a client share in an account?
No. However, an agent may share in a clients account
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity.
What restrictions exist in describing a fund as no load?
It may have no front end or deferred sales charge, and a 12b-1 fee may not exceed .25%
May an adviser or BD lend money to a client?
Yes, if the adviser or BD is in the business of lending money.
Trading on material, non-public information is considered _________ __________.
Insider trading
May an adviser borrow money from a client?
Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD
May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?
No. Marietta provided to clients must include all facts about the issue, not just the positive ones.
For how long may a not held order be maintained?
A not held order is considered a day order
Is discretionary authorization required to enter a not held order?
No, since discretion is limited to time and/or price for not held orders
What three items must be specified on a not held order?
Action (buy/sell), amount (quantity), and asset (security)
T/F: An agent may trade a stock two days prior to a research report on the stock being released by his employer
F; this is an example of trading ahead and is prohibited
T/F: Principals must approve discretionary orders prior to entry
F; the orders must be approved promptly afterward
T/F: BDs may accept oral permission from clients to exercise discretion in their accounts
F; the clients prior written authorization is required
An IA direct 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.
T/F: All illegal activities are intentional.
F; some
Accidental or unintentional actions are considered unethical and, therefore, illegal
T/F: An agent of a BD may loan money to his son in law.
T; in laws are considered immediate family members; therefore, the loan would be acceptable
Define conversion.
The prohibited act of an agent using client funds for personal use
What step just an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is sufficient, the IA must abstain from the action
T/F: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
F; selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
T/F: It is unethical for a BD to delay the delivery of securities purchased by a customer.
T
What is needed for a BD to exercise discretion over a clients account?
BDs need the clients prior written authorization
For any securities that are delivered to a BD, an agent must __________ provided the customer with a receipt.
Immediately
What three details must a client provide for an agent to make a time and/or price decision without written authorization?
Action (buy/sell), asset, and amount. Time and/or price may remain the agents discretion without written authorization
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.
Define selling away.
The executions of transactions by an associated person outside his employment with a member firm
May an IAR solicit both sides of an agency cross transaction?
No, one side must be unsolicited
T/F: Access persons must file transactions reports annually.
F; Transactions reports are filed within 30 days of the end of each calendar quarter
Is an agent allowed to recommend the sale of funds shares in order to buy another funds shares with the same objective?
No. This is a prohibited practice and is considered an unsuitable recommendation.
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.
T/F: Agents of a BD must disclose all facts about a stock they are recommending.
F; agents only need disclose material facts, not all facts
If an agent (RR) received a power of attorney seven years ago, could she still trade that customers account?
Yes, powers of attorney do not need to be renewed
What is required for an agent to open a joint account with a customer?
Written approval of the client and the BD and any sharing it’s be proportionate to each persons contribution.
What are the two reports that an access person of an investment adviser must file?
The transaction report and the holding report
What is selling away?
An agent executing securities transactions for compensation and not recording the trades on the BDs books and records.
May a wife enter trades in a husbands account ?
Yes, with written third party authorization
Is an adviser required to disclose the source of raw data that is used to determine the recommendations to its customers?
No. Disclosure is not required if the IAs recommendations are based on its own independent conclusions.
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
Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?
No. Since discretion is limited to time and/or price, written authority is no required.
It is a violation of the USA for an IA to act as a BD for a buyer of securities without _______ __________.
Written disclosure
When must an access person file a holding report?
Within 10 days of becoming an access person and at least once every 12 months thereafter
T/F: Agents of a BD must disclose material facts about a stock they are recommending.
T; agents should make a good faith effort to disclose all material facts to an investor.
T/F: In certain cases, fraud may be unintentional
F
An agent of a BD lends $5,000 to his brother, is this acceptable?
Yes, lending to immediate family members is permissible
Define churning.
Excessive trading in a customers account for the primary purpose of generating commissions and other fees
Define an agency cross transaction.
A trade executed by a financial firm that is acting as a broker for both the buyer and seller
For an agent to exercise discretion over a clients account, the client must have signed a _______________.
Power of attorney
To whom are written or electronically sent grievances (complaints) forwarded?
An immediate supervisor
John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?
No, this prohibited practice is referred to as “painting the tape”
What is required of an IA that uses third party research?
The IA must disclose the source of the research to its client.
