Chapter 5 Flashcards
Disclosures when making a recommendation
-Price & dates previous recs were made
-Recs in similar securities for 12 months
-Whether firm managed underwriting of any of issuer’s securities
What are the different investment objectives and most suited asset classes for each?
-Growth: common stock (cs fund)
-Preservation: MM fund, gov, muni, high grade corporate bonds
-Tax: muni
-Liquidity
-Speculation: penny stocks, small cap, some growth, junk bonds
What are reinvestment risk and call risk?
Reinvestment risk: if rates go down, can’t get as good a deal after higher yielding bonds have been called or matured
Call risk is the risk that a bond issuer will redeem a callable bond prior to maturity. Investors exposed to call risk are also exposed to reinvestment risk, because they then have to reinvest the money received from the called bond.
What is Reg BI?
-Form CRS needs to be provided (ADV part 3)
-Conversation starters (questions in basic English)
-For BDs and IAs
-Provided at earlier of:
recommending account type or strategy
opening an account
placing an order
for IAs: prior to or when contract is entered into (even if oral)
Changes required must be made <30 days. New forms sent <60days to existing clients
What should be disclosed with regards to retail communications about mutual funds?
-highest sales charge (not breakpoint!)
-current yields based on dividends only (not including capital gains!)
-10y or life perf
What is a breakpoint sale violation?
If agent spreads client capital over multiple AMs => breakpoint sale violation
if client wants diversification: find one AM with multiple funds, to take advantage of breakpoint sales charge reductions.
Is short term trading in mutual funds prohibited?
Yes
What are examples of manipulative and deceptive practices?
Churning & reverse churning
Capping & pegging
Front running (large client) & trading ahead (research report)
Painting the tape (create false trading activity)
Rings & pools (price manipulation)
Selling dividends: agent can’t use imminent dividend as an argument to recommend a stock
What is an institutional investor and what are restrictions regarding advice to them?
Institutional investor: >$50M. Agents can make any recommendation it wants, except if person managing institutional account can’t determine risks & suitability
What restrictions surround research reports? (approval, interaction with bankers / exemption…)
must be approved by supervisory analyst or principal
Chinese wall between analysts and bankers (only accuracy of info can be checked, emails are monitored, oral com only in presence of compliance officer)
exemption: firm with < 10 underwritings and < $5M in fees in last 3 y on avg
What are some things that need to be disclosed in a research report? What is considered a public appearance by an analyst?
analyst comp tied to IB must be disclosed in reports
disclosure if firm
-owns >1% of security
-received IB fees within 12 months
-seeking IB biz < 3 months
public appearance by analyst: if 15 or more attendees or >1 media. Disclosures necessary
What timeline regarding research report publication needs to be respected?
(only for equity) IPO: wait 10 days. Secondary / follow on: 3 d.
Can a BD trade ahead of its own research report?
BD can “trade ahead” if: unsolicited orders, orders from other BDs
What are Reg AC certification obligations?
analyst must re-certify within 30 days of end of each quarter that views are personal + compensation not tied to recommendation . If analyst fails, all reports for next 120 days are marked “uncertified”
What happens if nonpublic material info disclosed?
intentionally: simultaneous disclosure via filing (8K) or announcement (Twitter)
unintentionally: 24h or next NYSE opening (whichever later) to announce
