Chapter 13 flashcards

Question 1

Referrals to other professionals may be made as long as

Answer 1

the reciprocal nature of the arrangement is disclosed. Referrals are considered endorsements. Should the compensation exceed $1,000 over a 12 month period, a written agreement must be in effect.

Question 2

Social media supervisory & compliance

Answer 2

Both supervisory personnel and agents need to understand the difference between interactive and static content.

Before allowing associated persons to use social media for business purposes, a firm’s policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content and between business and nonbusiness communications. A firm should consider requiring training in the use of social media prior to permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations.

Question 3

Advisory contracts must disclose services provided

Answer 3

the term of the contract;
the amount of the advisory fee or the formula used to compute the fee; the amount of the fee to be refunded (if any) if the advisory fee is prepaid and the contract is terminated;
a provision as to discretionary authority; and
a provision requiring the consent of the client to assign the contract.

Question 4

Referrals from unaffiliated third parties

Answer 4

Are considered endorsements under the investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect. Compensation for endorsements cannot be scaled based on the size of any referred account. That would be considered asset-based compensation and would require registration as an IAR. Bona fide clients give testimonials; it is only unrelated third parties who give endorsements. In order to charge a performance-based fee, investors must have a net worth in excess of $2.2 million, while they can meet the accredited investor standard when their net worth exceeds a much lower amount: $1 million.

Question 5

When acting in capacity as an IAR (or) broker dealer

Question 6

Broker dealers must indicate their capacity acting as principal on

Answer 6

The trade confirmation, sent no later than the completion of the trade (settlement date) and will indicate if they acted as broker or if they acted as principal. Amount of commission is always disclosed.

Question 7

IA’s acting as principal (buying or selling)

IA is an advisor and also an agent of Broker Dealer

Answer 7

Full written disclosure to the capacity & client consent is obtained. Consent can be oral or written, and may be obtained before OR after the trade, but both of these MUST be done prior to COMPLETION of the transaction.

HOWEVER, this does NOT apply if the transaction was NOT a recommendation of the IA.

Question 8

Completion of transaction is when

Answer 8

2 days after, which is the SETTLEMENT DATE

Question 9

agency cross transactions

Answer 9

IAR is acting as an agent (same BD) for both parties.
Must disclose IN WRITING:
- receiving commissions
- Potential conflict of interest
- Annual basis summary of all transactions
- indicates can be terminated at any time
- No other transaction is effected in which the same iIA or IA and any person controlling, controlle dby, or under common control with that IAR reccomended the transaction to any seller

Can only recommend to one side

Question 10

Written trade confirmation for agency cross

Answer 10

Statement of nature of transaction
date and time
source and amount of any remuneration to be recieved

Question 11

Disciplinary material disclosure

Answer 11

Any actions against the firm or management by court or regulatory authority in the past 10 years which includes SRO & excess of $2500 fines, court proceedings, violation, suspension, denial, etc

Question 12

Disclosure of conflict of interest

Answer 12

any doubt about the transparency of recommendation, make FULL disclosure

Question 13

Disclosure of fees

Answer 13

When account is opened
Chart, table , list, etc
Standard and non complicated terms

At least 30 days notice prior to implementing fee changes, can be electronically made.

NOT included in fee disclosure document
- Commissions
- Markups
- Advisory fees

Question 14

The schedule should be

Answer 14

On the firms website without needing a password

Question 15

Typical broker fees

Answer 15

Issue of stock certificate
Transferring an account
Wiring funds
Margin account interest
Account maintance fees
Safekeeping of funds / securities
Late settlement fee
Postage and handling

Question 16

NOT included in fee disclosure document

Answer 16

Commissions
Markups
Advisory fees

There are other docs where these are

Question 17

Form CRS - client relationship summary tells

Answer 17

Type of service
Fee and costs ivnestors pay for services
conflicts of interest
required standard of conduct
legal / discpline history
key questions
links more info

Question 18

Guarentee

Answer 18

3rd party other than issuer guarentees the payment of principal and interest (depending on debt security or equity security)

Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity

Statements that make SURE they don’t lose money “we will buy it back +10% or I’ll make up the difference etc” is prohibited

Question 19

Who can correct a bona fide error

Answer 19

If justified, a BD but not an associated person of the firm, can make a correction.

Question 19

Advisory contract includes

Answer 19

services
term of contract - state law must be in writing
amount of advisory fee or how computed
amount of prepaid fee to be returned in cancellation
discresionary power or not
no assignment may be made without consent
if partnership, any minor changes will be shared, majority will be consider assignment

Question 20

Investment advisor brochure

Answer 20

2A brochure
2A appendix 1 is wrap fee
2B supplement (describes supervised persons)

Cover page: name , biz address, contact info, website, date of brochure

Only state reg IA have to file brochure supplements

Question 21

advisor brochure supplement

Answer 21

cover page
educational background
disciplinary information
other busines activites (agent, comissions, other products, etc)
additional compensation (bonus or sales award)
supervision - name title and phone number of the person responsible for supervising this person

Question 22

IA must create brochure for supervised persons

Answer 22

1 - direct contact
2 - discretionary over client assets even if that person has no direct contact with the client

Question 23

Fed covered brochure delivery
State covered brochure delivery

Answer 23

Fed - if no changes, then nothing needs to be sent, but updated promptly and sent out. 120 days end of fiscal year, must be before moving into advisory contract

State - the exact same ^ HOWEVER, 48 hour 5 day free look

Question 24

Not required to deliver brochure SUPPLEMENTS

Answer 24

wrap fee programs
impersonal investment advice ($500 or
folks apart of the firm , employees, etc

Question 25

Exemptions of brochure

Answer 25

State and federal - Contracts with investment company mutual fund under the investment company act 1940 exempt, and advisors entering into a contract providing soley for impersonal advisory services, —-however if $500 or greater then they must send.

Question 26

Making reccomendations

Answer 26

websites, social media included in making reccomendations

Within reccomendations:
- sending electronic communcations to specific folks about a specific security
- email with stocks they’re urging them
- analysis tool that spits out stuff
- data mining technology then makes suggestions

Outside of reccomendations
- think anything that is purely up to the customer, it isn’t spitting out reccomendations, limiting their search, or impacting the way they make a decision

Question 27

Testimonials

Answer 27

• must disclose if endorsement or client
• if there was some sort of compensation
• any material conflict of the person giving the testimonial
• solicitors may be considered promoters for the purpose of this rule
• WRITTEN agreement with promoters, except where promoter is affiliate of the adviser or recieves de minimis compensation ($1k or less, or equivelent in non cash during the preceding 12 months) IF EXCEEDING, then a copy of this agreemetn shall be made available to those receving testimonials and endorsements

Solicitor - engaged to find business and paid
Promoter - testimonial or endorsement whether comped or not
provider - uncomepnsated for testimonial or endorcement

LIKE feature is testimonial IF it is an excplicity or implicit statement of the clients eperience with the advisor

Question 28

Past peformance

Answer 28

“fair and balanced”

Question 29

Advertising record keeping

Answer 29

ALL marketing ads to 2 or more persons

Question 30

When does the signed statement from the customer must be in writing on a “cross transaction”

Answer 30

IA - it can be oral
IAR / Agent - must be in writing

Question 31

Consent of the client before completion of a trade made between the firm and a client must be made when (IA vs BD)

Answer 31

an investment adviser will be acting in the capacity of a principal.

In the case of broker-dealers, disclosure of capacity on the trade confirmation, but not consent, is needed.

Question 32

wrap fee charges cover

Answer 32

advisory services and execution of trades

Question 33

Material conflicts

Answer 33

Advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products.