Ch 7 Prohibited and Ethical Business Practices Under the USA Part II

Question 1

A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?

Answer 1

No. This is unethical since it is considered a guarantee against loss.

Question 2

True or False: Charging an unreasonably high commission is acceptable if disclosure is made to the client.

Answer 2

False

Question 3

Define commingling.

Answer 3

The prohibited act of mixing client funds with those of the BD

Question 4

May an agent and a client share in an account?

Answer 4

Yes. However, client and firm approval is required and the sharing must be proportionate to each person’s investment.

Question 5

When does a standard power of attorney become automatically cancelled?

Answer 5

At the time of either the grantor’s death or declaration of grantor’s incompetence

Question 6

If an agent (RR) received a power of attorney seven years ago, could she still trade that customer’s account?

Answer 6

Yes, powers of attorney do not need to be renewed.

Question 7

Define an agency cross transaction.

Answer 7

A trade executed by a financial firm that is acting as a broker for both the buyer and seller.

Question 8

________ is the willful or intentional act of deceiving another person for gain or profit.

Answer 8

Fraud

Question 9

To whom are written or electronically-sent grievances (complaints) forwarded?

Answer 9

An immediate supervisor

Question 10

True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.

Answer 10

True

Question 11

May an adviser release account information to the spouse of a client?

Answer 11

No, not without the client’s written authorization.

Question 12

If an agent has been given time and price discretion on a client order, is written power of attorney required?

Answer 12

No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required.

Question 13

Is discretionary authorization required to enter a not held order?

Answer 13

No, since discretion is limited to time and/or price for not held orders.

Question 14

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

Answer 14

False. Transactions reports are filed within 30 days of the end of each calendar quarter.

Question 15

An agent makes this statement to a client: “Go with us; we’re approved by the Administrator and SEC.” Is it acceptable?

Answer 15

No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.

Question 16

_____________ is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.

Answer 16

Front-running

Question 17

Define an insider.

Answer 17

Officers, directors, partners, greater than 10% owners, and immediate family members of all listed

Question 18

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

Answer 18

Capping

Question 19

Is an adviser required to disclose the source of raw data that is used to determine the recommendations to its customers?

Answer 19

No. Disclosure is not required if the IA’s recommendations are based on its own independent conclusions.

Question 20

True or False: An agent may trade a stock two days prior to a research report on the stock being released by his employer.

Answer 20

False. This is an example of trading ahead and is prohibited.

Question 21

True or False: If a BD receives a written complaint from a client, it may be ignored if the complaint seems baseless.

Answer 21

False. Failing to respond to a formal written complaint is prohibited.

Question 22

Does this order require prior discretionary authorization? “Buy 500 shares of DMB sometime today.”

Answer 22

No, this is a not held order. The customer specified the action (buy), the amount (500 shares), and the asset (DMB).

Question 23

Are advisory fees fixed and are they subject to administrative review?

Answer 23

Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.

Question 24

May an adviser or BD lend money to a client?

Answer 24

Yes, if the adviser or BD is in the business of lending money.

Question 25

Define the prohibited practice of shadowing.

Answer 25

After executing a large block order, but before the trade is reported, a BD trades for its own account.

Question 26

An agent of a BD lends $5,000 to his brother, is this acceptable?

Answer 26

Yes, lending to immediate family members is permissible.

Question 27

May an agent share in the profits of a client’s account?

Answer 27

Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.

Question 28

Is an agent permitted to execute securities trades for compensation and not record the trades on his BD’s books and records?

Answer 28

No. This is referred to as “selling away.”

Question 29

May an agent of a BD effect personal trades in a stock two days before her firm releases a research report on the stock?

Answer 29

No. Employees of a broker-dealer may not trade ahead of their firm’s research report.

Question 30

True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.

Answer 30

False. The agent may still have omitted material facts.

Question 31

An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to ___ days.

Answer 31

10 days.

Question 32

John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?

Answer 32

No, this prohibited practice is referred to as “painting the tape.”

Question 33

Does an IA need written consent before executing each agency cross trade with an advisory client?

Answer 33

No, the client must provide written consent initially, but not for every trade.

Question 34

What is needed for a BD to exercise discretion over a client’s account?

Answer 34

BDs need the client’s prior written authorization.

Question 35

Does this order require prior discretionary authorization? “Buy 300 shares of DMB this week”

Answer 35

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.

Question 36

Is an agent allowed to recommend the sale of a fund’s shares in order to buy another fund’s shares with the same objective?

Answer 36

No. This is a prohibited practice and is considered an unsuitable recommendation.

Question 37

What three items must be specified on a not held order?

Answer 37

Action (buy/sell), Amount (quantity), and Asset (security)

Question 38

An agent advises a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?

Answer 38

Yes, since this is a material fact, it must be disclosed before the customer buys the stock.

Question 39

For how long may a not held order be maintained?

Answer 39

A not held order is considered a day order.

Question 40

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

Answer 40

False. Agents only need disclose material facts, not all facts.

Question 41

An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice?

Answer 41

No, this is a prohibited action known as selling dividends.

Question 42

True or False: A power of attorney given to an agent (RR) must be renewed.

Answer 42

False. Powers of attorney do not have to be renewed.

Question 43

May an adviser borrow money from a client?

Answer 43

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.

Question 44

What is required for an agent to open a joint account with a customer?

Answer 44

Written approval of the client and the BD and any sharing must be proportionate to each person’s contribution.

Question 45

Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?

Answer 45

Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.

Question 46

Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?

Answer 46

No. Since discretion is limited to time and/or price, written authority is not required.

Question 47

For any securities that are delivered to a BD, an agent must ____________ provide the customer with a receipt.

Answer 47

immediately

Question 48

Transactions should be executed at a price that is reasonably related to the ________ _______ price.

Answer 48

current market price.

Question 49

When selling mutual fund shares, an agent must adequately disclose the ______ _______.

Answer 49

sales charge.