Ch 7 Prohibited and Ethical Business Practices Under the USA Flashcards
What are the two reports that an access person of an investment adviser must file?
The transaction report and the holding report
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 durable power of attorney become automatically cancelled?
At the time of death of the grantor of the POA
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fee
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?
Both oral and written disclosure of the relationship
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 agent’s discretion without written authorization.
What step must an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.
True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.
False. Past performance is not indicative of future results.
What is a not held order?
An order giving agents discretion as to execution time/price. Clients must specify buy/sell, security, and quantity.
Firms must keep client information confidential unless disclosure is authorized by the _______ or a __________ _________.
client or a regulatory authority.
BD securities and client securities must be segregated; in other words, they may not be ______________.
commingled.
True or False: In certain cases, fraud may be unintentional.
False
What’s 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.
Not held orders are considered to be in effect for _____ trading day(s).
one trading day.
True or False: If an agent disagrees with a customer’s order, he may disregard the order.
False. Agents and IARs must follow all customer requests, even those with which they disagree.
When must an access person file a transaction report?
Within 30 days of the end of each calendar quarter
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?
No. Material provided to clients must include all facts about the issue, not just the positive ones.
True or False: Agents of a broker-dealer must disclose material facts about a stock they are recommending.
True. Agents should make a good-faith effort to disclose all material facts to an investor.
__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
True or False: An agent of a broker-dealer may loan money to his son-in-law.
True. In-laws are considered immediate family members; therefore, the loan would be acceptable.
What is needed for an investment adviser to exercise discretion over a client’s funds?
An adviser may exercise discretion for 10 days with the client’s oral authorization as long as it is followed up in writing.
May an IAR and a client share in an account?
No. However, an agent may share in a client’s account.
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 a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
True or False: Access persons must file holdings reports annually.
True
________ stock is the repeated practice of placing stock in the account of a person who is not the rightful owner.
Parking stock
True or False: BDs may accept oral permission from clients to exercise discretion in their accounts.
False. The client’s prior written authorization is required.
An IA directs 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.
True or False: All illegal activities are intentional.
False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.
What is required of an IA that uses third-party research?
The IA must disclose the source of the research to its client.
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
Churning is described as _____________________ designed to _____________________.
excessive trading designed to generate commissions.
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.
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.
Does this order require prior discretionary authorization? “Buy some ABC shares today if its 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.
Define selling away.
The execution of transactions by an associated person outside his employment with a member firm
For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.
power of attorney.
It is a violation of the USA for an IA to act as a broker-dealer for a buyer of securities without _______ ___________.
written disclosure.
True or False: A BD may withhold shares of an IPO for the purpose of later selling them to customers at a higher price.
False
List the access persons of an investment adviser.
Officers, directors, partners, or persons with access to client investment positions or investment company holdings
May an IAR solicit both sides of an agency cross transaction?
No, one side must be unsolicited.
Define front running.
A firm/individual executing trades for its own account with knowledge of an impending large block customer order.
Define churning.
Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees
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.
Trading on material, non-public information is considered ________ ________.
insider trading.
A holdings report filed by an access person must be current as of ___ days prior to the date the report is submitted.
45 days
Define conversion.
The prohibited act of an agent using client funds for personal use.
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
