Chapter 4

Question 1

IA discretionary

Answer 1

Need written authority from client within 10 biz days after first transaction (exception when time and place only)

Question 2

IA order for third party (spouse)

Answer 2

Written third party authorization from client

Question 3

IA- client unable to make decisions for himself

Answer 3

Only accept instruction if durable power of attorney

Question 4

IA- borrow money from client

Answer 4

Shall not. Unless client BD, affiliate of IA, or financial instituion in biz of lending money

Question 5

IA- loan money to client

Answer 5

Shall not even if client relative unless IA is financial instution in biz of lonas or client affiliate

Question 6

IA conflict of interest

Answer 6

Disclose in writing. IA must disclose all forms of compensation

Question 7

IA discounts

Answer 7

Not required to provide for mulitple accounts form same family or househodls. If available, must disclose

Question 8

IA has custody of client funds- requirements

Answer 8

min net worth $35K, audited balance sheet

Question 9

IA requires pre payment of 6 month fees or more in advance in excess of $1,200

Answer 9

+ net worth, audited balance sheet

Question 10

IA discretionary authority

Answer 10

$10,000 min net worth, BS (not audited)

Question 11

IA custody due to direct fee reduciton or MF

Answer 11

exempt minimum net worth

Question 12

IA fail net worth requirements

Answer 12

IA must notify state administatro by close of biz next day

Question 13

IA records

Answer 13

Books and records at least 5 years

Partnership agreement or incorporation articles preserve until three years after termination of the biz

Question 14

NASAA custody

Answer 14

Actual possession or authority to obtain possesion

Question 15

BD discreitonary account

Answer 15

Written consent unless time and or price

Question 16

BD prospectus

Answer 16

Required for MF, not for secondary market trades

Question 17

BD control relatioships

Answer 17

Must be disclsoed

Question 18

Agent lending/borrowing

Answer 18

not allowed

Question 19

Agent: open account at another firm

Answer 19

Notify employing firm and executing firm.

Question 20

Agent- share commision/profits

Answer 20

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

Question 21

Agent discretionary

Answer 21

Prior written discretionary authority unless time and price order

Question 22

Agent: sales charge, def sales charge, breakpoints and rights of accumulaiton

Answer 22

Must disclose

Question 23

Discretion- Distinction between BD/Agents and IA/IAR

Answer 23

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.

Question 24

Timing of prospectus of mutual fund

Answer 24

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.

Question 25

Guarantee of treasury result

Answer 25

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.

Question 26

IA min financial requirements if offices in multiple states

Answer 26

IA need only comply with min net worth requirements of state in which they maintain their principal place of biz

Question 27

BD determination of sale of security

Answer 27

The sale price of securities MUST be reasonably related to the current market price of the stock.

Question 28

Soft dollar arrangements

Answer 28

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).

Question 29

Offering to buy back shares from client

Answer 29

Guarantee against a loss- illegal- not permitted

Question 30

Opening up margin account

Answer 30

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.

Question 31

net worth falls below minimum amount

Answer 31

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.

Question 32

IA has and maintains custody

Answer 32

1. 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.
2. The annual audit of the funds must be done by an independent public accountant once a year, not the Administrator.
3. The IA must notify the Administrator promptly in writing when it takes custody.
4. IA must maintain separate bank accounts for each clients fund under client name OR under IA’s name as gent or trustee for customer
5. Account statements must be sent at least quarterly
   Agent cannot have custody

Question 33

sharing of P/L with clients

Answer 33

IAR never allowed

Agents allowed if joint account permission of BD and client

Question 34

Custody

Answer 34

Only available for BD and IA

NOT agents

Question 35

Fee disclosure template

Answer 35

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.

Question 36

if IA fail to maintain net worth requireements

Answer 36

According to NASAA Rule 202, the IA would have to submit

1. trial balance of all ledger accounts (balance sheet)
2. a statement of all funds and securities belonging to clients that are not segregated
3. a computation showing the aggregate amount of ledger debit balances belonging to clients
4. and a statement as to the number of client accounts held.

Question 37

Agent opening up joint account with client

Answer 37

Need BD and client written permission

Question 38

Agency cross transaction

Answer 38

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.

Question 39

Rescission

Answer 39

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.