Chapter 10 - Conflicts of Interest and Fiduciary Issues

Question 1

Excessive trading is also called _______

Answer 1

churning

Question 2

Churning, or excessive trading, is recommending or making a trade simply to ______

Answer 2

generate a commission

Question 3

Most basic conflict of interest is the client’s _____ vs the professional’s _______

Answer 3

net worth vs net worth

Question 4

All transactions recommended or made must be in the best interest of the _____. If not, they are considered excessive

Answer 4

client

Question 5

Excessive trading can happen in both ______ and non-______ accounts

Answer 5

discretionary and non-discretionary

Question 6

An IAR is not permitted to borrow from a client unless that client is actually a

Answer 6

• BD
• an affiliate of the IA
• a lending institution

Question 7

An IAR or IA may not loan money to a client unless the firm is

Answer 7

• a lending institution

- loan is to an affiliate

Question 8

NASAA does not prohibit _____ from lending or borrowing from customers, but they must comply with margin and lending rules

Answer 8

BDs

Question 9

For BDs that do lend to customers, they must

Answer 9

• for margin accounts, a written margin agreement must in place promptly after first trade on margin
• for other loans, written agreement must be in place

Question 10

Professionals CANNOT share in a client’s profit or loss. When violated, this typically looks like

Answer 10

• agreeing to work for a percentage of gains during a year

- reimbursing clients for losses

Question 11

An IA can enter into “performance-based” compensation only with the following parties

Answer 11

• high net worth individuals ($2m in net worth or $1m investing with firm)
• qualified purchasers (individuals with more than $5m or corps with over $25m)
• business development companies
• private investment companies (no more than 100 owners)
• registered investment companies
• certain advisory firm personnel (officers, directors, IARs)
• non residents of the US

Question 12

CANNOT discuss a client’s information unless:

Answer 12

• client consents to it
• is required by law
• is required by a court order

Question 13

“Selling away” is

Answer 13

when an agent sells securities not sold through their BD

Question 14

4 methods of market manipulations

Answer 14

• taking part in a buy/sell transaction that doesn’t involve an actual transfer (a fake purchase or sale)
• intentionally entering in identical buy and sell orders for the same security (false trading activity)
• buying or selling security in a series of transactions to bid price up or down (painting the tape)
• using false information to open and trade in an account

Question 15

If an adviser is acting as both the IA and the Principal (ie they are selling the client securities that they actually own), they must

Answer 15

get written consent prior to the trade by the customer by the date the transaction is complete

Question 16

Agency cross transactions are when an IA is acting as the ______ to both parties

Answer 16

agent/broker

Question 17

In a agency cross transaction, the IA may only advise _______

Answer 17

one party

Question 18

In an agency cross transaction, an IA must provide written ______ to the client and receive written ______

Answer 18

disclosure, consent

Question 19

In an agency cross transaction, an IA must send written _______ to the client at or before the completion of each transaction.

Answer 19

Confirmation

Question 20

An IA must annually disclose how many _________ transactions they have made during the year and the amount of ______ they received for them

Answer 20

agency cross transactions, commission

Question 21

Anytime an IA recommends a security they personally own, they must ________

Answer 21

disclose it

Question 22

If an IA acts against a recommendation to a client, they must _______

Answer 22

disclose it

Question 23

Must abide by the duty of best ______ for all trades

Answer 23

best execution

Question 24

An IA or IAR cannot engage in an activity through a ______ that would be illegal for them to do directly

Answer 24

3rd party or another person