Chapter 4 Flashcards
Rules
IA discretionary
Need written authority from client within 10 biz days after first transaction (exception when time and place only)
IA order for third party (spouse)
Written third party authorization from client
IA- client unable to make decisions for himself
Only accept instruction if durable power of attorney
IA- borrow money from client
Shall not. Unless client BD, affiliate of IA, or financial instituion in biz of lending money
IA- loan money to client
Shall not even if client relative unless IA is financial instution in biz of lonas or client affiliate
IA conflict of interest
Disclose in writing. IA must disclose all forms of compensation
IA discounts
Not required to provide for mulitple accounts form same family or househodls. If available, must disclose
IA has custody of client funds- requirements
min net worth $35K, audited balance sheet
IA requires pre payment of 6 month fees or more in advance in excess of $1,200
+ net worth, audited balance sheet
IA discretionary authority
$10,000 min net worth, BS (not audited)
IA custody due to direct fee reduciton or MF
exempt minimum net worth
IA fail net worth requirements
IA must notify state administatro by close of biz next day
IA records
Books and records at least 5 years
Partnership agreement or incorporation articles preserve until three years after termination of the biz
NASAA custody
Actual possession or authority to obtain possesion
BD discreitonary account
Written consent unless time and or price
BD prospectus
Required for MF, not for secondary market trades
BD control relatioships
Must be disclsoed
Agent lending/borrowing
not allowed
Agent: open account at another firm
Notify employing firm and executing firm.
Agent- share commision/profits
Splitting of commissions is only allowable if the two agents work for the same broker/dealer firm and are both registered . Must be registered in state where transaction made to get a commission. Do NOT need to inform clients
Agent discretionary
Prior written discretionary authority unless time and price order
Agent: sales charge, def sales charge, breakpoints and rights of accumulaiton
Must disclose
Discretion- Distinction between BD/Agents and IA/IAR
Broker-dealers and Agents of broker-dealers are required to obtain written discretionary authorization PRIOR to effecting transaction for a customer on a discretionary basis.
Investment Advisory Firms and Investment Advisory Representatives may execute a discretionary trade pursuant to verbal discretionary authority and then have 10 business days to obtain written discretionary authority from the client.
Timing of prospectus of mutual fund
NASAA Statements of Policy state that the prospectus of a mutual fund must be delivered to the client no later than the due date of confirmation of the transaction.
Guarantee of treasury result
The Model Rules prohibit an IA from guaranteeing an investment result. Even though the likelihood of default is extremely low when dealing with US Treasury Securities, it is possible that the treasury could default on an interest or principal payment.
IA min financial requirements if offices in multiple states
IA need only comply with min net worth requirements of state in which they maintain their principal place of biz
BD determination of sale of security
The sale price of securities MUST be reasonably related to the current market price of the stock.
Soft dollar arrangements
Soft dollars are a means for Investment Advisers to pay brokerage firms for their products or services rather than through direct payment of actual dollars. Soft dollar arrangements could include research reports, software applications, and real time quotes, but not a person’s salary (hard dollars).
Offering to buy back shares from client
Guarantee against a loss- illegal- not permitted
Opening up margin account
under NASAA Statements of Policy, Broker-dealers shall not execute any transaction in a margin account without securing from the customer a properly executed written margin agreement promptly AFTER the initial transaction in the margin account. Verbal authorization cannot replace the written agreement.
net worth falls below minimum amount
According to NASAA Statements of Policy, notification must be given to the state securities Administrator on the business day following the occurrence where net worth fell below the minimum requirement.
IA has and maintains custody
- The IA must notify the client promptly in writing as to the location of the funds. It must also give prompt written notice of any change of location.
- The annual audit of the funds must be done by an independent public accountant once a year, not the Administrator.
- The IA must notify the Administrator promptly in writing when it takes custody.
- IA must maintain separate bank accounts for each clients fund under client name OR under IA’s name as gent or trustee for customer
- Account statements must be sent at least quarterly
Agent cannot have custody
sharing of P/L with clients
IAR never allowed
Agents allowed if joint account permission of BD and client
Custody
Only available for BD and IA
NOT agents
Fee disclosure template
There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are
commissions;
markups and markdowns; and
advisory fees for those firms that are also registered as investment advisers.
if IA fail to maintain net worth requireements
According to NASAA Rule 202, the IA would have to submit
- trial balance of all ledger accounts (balance sheet)
- a statement of all funds and securities belonging to clients that are not segregated
- a computation showing the aggregate amount of ledger debit balances belonging to clients
- and a statement as to the number of client accounts held.
Agent opening up joint account with client
Need BD and client written permission
Agency cross transaction
An agency cross transaction is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan. An adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. The adviser may not recommend the transaction to both parties.
Rescission
The right of rescission is the right of the buyer to recover the purchase price and interest, less income received on the security, resulting from an illegal sale of securities. When offered by the broker-dealer, no court costs or attorney fees are involved.The agent may not ask the customer to sign a customer agreement that releases the agent. Registration by notice filing (or any other method) is not part of the rescission process. A security cannot be registered retroactively.
