Chapter 4 - Section 1 - The NASAA Statements of Policy and Model Rules

Question 1

NASSA was created to protect investors and consists of Administrators of the _____________, _____________, and ______________.

Answer 1

United States, Canada and Mexico

Question 2

Model Rules that apply to IAs, BDs, and Agents shall not recommend the purchase, sale, or exchange of any security without reasonable grounds to believe the recommendation is suitable considering the client’s: _______________, ________________, and _________________.

Answer 2

• investment objectives
• financial situation/needs
• character of the accounts

Question 3

True or False: pressuring clients to take additional risk may violate suitability standards and would damage the fiduciary relationship that exists between advisory firms and clients. Recommendations must be evaluated on a client-by-client basis.

Answer 3

True

Question 4

______________ is the unethical and illegal practice of excessively trading in a client’s investment account primarily to generate commissions for the broker, rather than to benefit the client. This practice can lead to significant financial losses for the client due to high trading costs and potential tax liabilities.

Answer 4

Churning

Question 5

______________: This measures how frequently the securities in the account are traded. A high turnover rate can indicate excessive trading.

Answer 5

Turnover Ratio

Question 6

This assesses the cost of trading relative to the account’s equity. A high ratio suggests that the trading costs are disproportionately high compared to the account’s value.

Answer 6

Cost to equity ratio

Question 7

This involves the purchase and subsequent sale of the same security within a short period. Frequent in-and-out trading can be a sign of churning.

Answer 7

In-and-Out Trading

Question 8

True or False: Model Rules state that an IA, BD, or Agent may place orders without authority and do not have to have client authorization.

Answer 8

False. According to the Model Rules, an Investment Adviser (IA), Broker-Dealer (BD), or Agent must have client authorization to place orders. Placing an order without the client’s authority is considered unethical and is prohibited. This ensures that all transactions are made in the best interest of the client and with their consent, maintaining trust and integrity in financial practices.

Question 9

True or False: Model Rules state that an IA, BD, or Agent shall not guarantee a client that a specific result will be achieved with the advice which will be rendered.

Answer 9

True. According to the Model Rules, an Investment Adviser (IA), Broker-Dealer (BD), or Agent shall not guarantee a client that a specific result will be achieved with the advice rendered. This prohibition helps maintain ethical standards and protects clients from unrealistic expectations and potential financial harm. Examples include Guaranteed Returns, No Loss Assurance, Fixed Income Promises, Guaranteed Principal Protection, Guaranteed Performance, and Guaranteed Income.

Question 10

True or False: Model Rules state that an IA, BD, or Agent shall not fail to make required disclosures and disclosures related to material facts such as conflicts of interest, stock positions being held in the security recommended and all forms of compensation.

Answer 10

True. According to the Model Rules, an Investment Adviser (IA), Broker-Dealer (BD), or Agent must make required disclosures, including those related to material facts such as conflicts of interest, stock positions being held in the security recommended, and all forms of compensation. This ensures transparency and helps maintain trust and integrity in financial practices.