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Series 66 > Ch 7 Prohibited and Ethical Business Practices Under the USA > Flashcards

Ch 7 Prohibited and Ethical Business Practices Under the USA Flashcards

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Series 66 flashcards
1
Q

What are the two reports that an access person of an investment adviser must file?

A

The transaction report and the holding report

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2
Q

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.

A

unsolicited.

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3
Q

When does a durable power of attorney become automatically cancelled?

A

At the time of death of the grantor of the POA

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4
Q

What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?

A

12b-1 fee

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5
Q

Define painting the tape.

A

Traders effecting transactions back and forth to create a misleading appearance of activity

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6
Q

What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?

A

Both oral and written disclosure of the relationship

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7
Q

What three details must a client provide for an agent to make a time and/or price decision without written authorization?

A

Action (buy/sell), asset, and amount. Time and/or price may remain the agent’s discretion without written authorization.

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8
Q

What step must an IA complete when faced with a conflict of interest?

A

The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.

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9
Q

True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.

A

False. Past performance is not indicative of future results.

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10
Q

What is a not held order?

A

An order giving agents discretion as to execution time/price. Clients must specify buy/sell, security, and quantity.

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11
Q

Firms must keep client information confidential unless disclosure is authorized by the _______ or a __________ _________.

A

client or a regulatory authority.

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12
Q

BD securities and client securities must be segregated; in other words, they may not be ______________.

A

commingled.

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13
Q

True or False: In certain cases, fraud may be unintentional.

A

False

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14
Q

What’s a no load fund?

A

A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year.

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15
Q

Not held orders are considered to be in effect for _____ trading day(s).

A

one trading day.

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16
Q

True or False: If an agent disagrees with a customer’s order, he may disregard the order.

A

False. Agents and IARs must follow all customer requests, even those with which they disagree.

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17
Q

When must an access person file a transaction report?

A

Within 30 days of the end of each calendar quarter

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18
Q

True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.

A

False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.

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19
Q

May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?

A

No. Material provided to clients must include all facts about the issue, not just the positive ones.

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20
Q

True or False: Agents of a broker-dealer must disclose material facts about a stock they are recommending.

A

True. Agents should make a good-faith effort to disclose all material facts to an investor.

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21
Q

__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

A

Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

22
Q

True or False: An agent of a broker-dealer may loan money to his son-in-law.

A

True. In-laws are considered immediate family members; therefore, the loan would be acceptable.

23
Q

What is needed for an investment adviser to exercise discretion over a client’s funds?

A

An adviser may exercise discretion for 10 days with the client’s oral authorization as long as it is followed up in writing.

24
Q

May an IAR and a client share in an account?

A

No. However, an agent may share in a client’s account.

25
Q

What restrictions exist in describing a fund as no-load?

A

It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25%.

26
Q

May a wife enter trades in a husband’s account?

A

Yes, with written third-party authorization.

27
Q

True or False: Access persons must file holdings reports annually.

A

True

28
Q

________ stock is the repeated practice of placing stock in the account of a person who is not the rightful owner.

A

Parking stock

29
Q

True or False: BDs may accept oral permission from clients to exercise discretion in their accounts.

A

False. The client’s prior written authorization is required.

30
Q

An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable?

A

Yes, provided the IA provides written disclosure (often in Form ADV) to clients.

31
Q

True or False: All illegal activities are intentional.

A

False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.

32
Q

What is required of an IA that uses third-party research?

A

The IA must disclose the source of the research to its client.

33
Q

True or False: Principals must approve discretionary orders prior to entry.

A

False. The orders must be approved promptly afterward.

34
Q

Churning is described as _____________________ designed to _____________________.

A

excessive trading designed to generate commissions.

35
Q

Sam buys stock on one exchange and sells it short on another at a slightly higher price. Is this permitted?

A

Yes. Sam is engaging in arbitrage.

36
Q

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

A

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

37
Q

Does this order require prior discretionary authorization? “Buy some ABC shares today if its price begins to fall.”

A

Yes. This is NOT a not held order since the client did not specify the quantity of shares to be purchased.

38
Q

Define selling away.

A

The execution of transactions by an associated person outside his employment with a member firm

39
Q

For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.

A

power of attorney.

40
Q

It is a violation of the USA for an IA to act as a broker-dealer for a buyer of securities without _______ ___________.

A

written disclosure.

41
Q

True or False: A BD may withhold shares of an IPO for the purpose of later selling them to customers at a higher price.

A

False

42
Q

List the access persons of an investment adviser.

A

Officers, directors, partners, or persons with access to client investment positions or investment company holdings

43
Q

May an IAR solicit both sides of an agency cross transaction?

A

No, one side must be unsolicited.

44
Q

Define front running.

A

A firm/individual executing trades for its own account with knowledge of an impending large block customer order.

45
Q

Define churning.

A

Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees

46
Q

May an agent and a client share in an account?

A

Yes, if both the firm and customer provide approval and all sharing is proportionate to each party’s investment.

47
Q

Trading on material, non-public information is considered ________ ________.

A

insider trading.

48
Q

A holdings report filed by an access person must be current as of ___ days prior to the date the report is submitted.

A

45 days

49
Q

Define conversion.

A

The prohibited act of an agent using client funds for personal use.

50
Q

When must an access person file a holding report?

A

Within 10 days of becoming an access person and at least once every 12 months thereafter

Series 66 (21 decks)

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