Chapters 5/6 Flashcards

Question

Agents and IAs may create rumors to affect the price of a stock?

Answer 1

Any material info that has not yet been disseminated to the public. An agent who has access to material nonpublic info may not make recommendations and may not discuss it w/ anyone (except for a supervisor).

Answer 2

The SEC may impose penalties of up to 3X the profits earned or losses avoided. The violators will obviously be required to forfeit their profits. Investors who believe they were harmed may sue. The government may prosecute offenders criminally w/ fines of up to $5MM and jail sentences up to 20 years. Corporations may face criminal penalities up to $25MM.

Answer 3

The practice of intermixing securities belonging to customers w/ those belonging to the BD. Client securities held by the BD must be separated from securities owned by the BD. This is done to prevent the misuse of customer securities and to eliminate the risk of commingling. ## Footnote * Commingling is usually mitigated by securities being registreed in a client's name and sent directly to the client. OR, securities may be held in safekeeping by the BD w/ the firm charging the client a reasonable fee for the service.

Answer 4

True, they may be kept in the same vault as long as it's clear which certificates belong to the BD and which certificates belong to customers.

Answer 5

When an agent illegally takes possession of a client's assets for their own personal use. An agent MAY NOT deposit cash or securities that belong to a customer into their personal or business account under any circumstances.

Answer 6

1. The customer is a member of the agent's immediate family 2. The customer is a financial institution that's regularly engaged w/ extending credit 3. The customer and the agent are both registered persons of the same BD 4. The customer and the agenet have either a personal or business relationship that exists outside of the brokereage relationship ## Footnote * A BD MUST have written procedures for borrowing/lending money to/from a client. * Unless the situation is #1 or #2, agents must provide notification to their member firms and obtain written approval prior to entering into the arrangements.

Answer 7

* The client is a BD * The client is an affiliate of the IA * The client is a financial institution

Answer 8

- The sharing arrangement is approved in writing by the customer and the agent's BD - The sharing is proportionate based on the amount invested by each party

Answer 9

False, they MUST get prior written approval from their employer. Additionally, the employee MUST notify the outside firm that they work for a different firm. This rule also applies to any account that the employee has beneficial interest: - the employee's spouse - The employee's children - Any related person - Any other individual that the employee has control ## Footnote * If the employee already had the account before starting with the firm, they have 30 days within starting the job to notify their employer and the executing firm. * Once an account has been opened for a member firm employee, the executing firm is not required to obtain the employing firm’s approval prior to the entry of each order.

Answer 10

False, they DO NOT

Answer 11

BDs must respond to ALL customer complaints whether the complaints is electronic or in writing. If an agent receives a complaint, they must forward it to their immediate supervisor. IGNORING OR FAILING TO RESPOND TO A COMPLAINT IS A VIOLATION OF USA.

Answer 12

When a brokerage exectues orders for its own account to take advantage of advance knowledge of pending orders from its customers.

Answer 13

When a BD executes a trade for its own account immediately after it executes a subtantial client trade but before the trade is reported.

Answer 14

When finanical professionals buy/sell securities among themselves in order to create false trade volume. The appearance of increased trading volume is intended to attract investors.

Answer 15

When a firm's sales team trades right before the release of a research report. FINRA created a rule that prohibits a member from establishing, increasing, decreasing, or liquidating an inventory position in a security or derivative of that security based on material, non-public, advanced knowledge of the content and timing of a research report in that security. This includes debt/equity/derivatives, exchange and non-exchange-listed securities.

Answer 16

When an agent executes a securities transaction w/o notifying their BD. In other words, the agent is selling away from the supervisor.

Answer 17

No. Although delaying the execution of the market order resulted in a benefit to the client, knowingly failing to follow client instructions is an unethical business practice. This rule applies even if the broker-dealer or agent has discretion over the account.

Answer 18

True. However, the Administrator may require a signed acknowledgement from the client confirming that the order was unsolicited. Agents MAY NOT place a solicited order for unreigstered, non-exempt securiites.

Answer 19

True. ## Footnote * An agent should NEVER highlight any portion of the prospectus.

Answer 20

- For a non-listed IPO: 90 days - Fora non-listed follow-on offering: 40 days - For an IPO to be listed on the NYSE or NASDAQ: 25 days - For an NYSE or NASDAQ follow-on offering: No requirement

Answer 21

True. The firm may vebally disclose the relationship as long as they provide written notice by no later than the date when the transaction is completed. Obviously BDs can provide written notice prior to the transaction and satisfy this obligation as well.

Answer 22

False, firms are not allowed to delay the delivery of securities that were purchased by a client, delay the payment to a client for securities sold from their account, or delay the payment of funds that a client has available in his account (free credit balance).

Answer 23

False, IAs and IARs may buy and sell securities on a client’s behalf if the client grants them oral permission for 10 days. BDs MUST first obtain written discretionary authority. ## Footnote * Written discretionary authority is not required when the customer instructs an agent to buy or sell a specific amount of a security and leaves only the exact price and time to the agent.

Answer 24

An order where the client determines the action, asset, and amount but leaves the decision to the price and/or time of execution up to the agent. These DO NOT require written authorization but ONLY may be executed on the day during which the order was entered.

Answer 25

When a client names an authorized person to manage their financial affairs in the case of a coma. ALL FORMS OF POWER OF ATTONEY BECOME VOID AT THE TIME OF THE CUSTOMER'S DEATH.

Answer 26

* Cold calling can only be done between 8am and 9pm local time, unless given prior approval by the household. * The callers must give basic info about themselves and the firm * Each broker-dealer is responsible for creating a Do Not Call List. * RRs may not harrass the people being called. * Firms must ensure that the phone # is not being blocked by caller ID. * Pre-recorded messages are prohibited unless the person being called gives consent. ## Footnote * The time-of-day and disclosure requirements don’t apply to existing customers if the purpose of the call is to service the client’s account.

Answer 27

The minimum amt of money that clients need to invest in order to receive a discounted sales charge. The more money invested the lower the sales charge.

Answer 28

Allows clients to qualify for a breakpoint w/o immediately depositing the required funds. Once the letter is signed, investors are given 13 months to meet their investment target.

Answer 29

True. The agent must also inform clients about breakpoints and letters of intent.

Answer 30

When soliciting sales of mutual funds, agents may not state or imply: - A fund's current yield or income w/o disclosing the most recent average annual return calculated for 1, 5, and 10 year periods. - Compare a mutual fund to a savings account w/o disclosing that mutual funds are not FDIC insured. - The existence of credit quality, insurance, or any sort of guarentee w/o disclosing relevent risks. - That purchasing shares before the ex-dividend date is advantageous unless there are specific tax advantages.

Answer 31

1. Setting 2. Netwoerking arrangements 3. Customer disclosure 4. Written acknowledgement 5. Communications with the public 6. Notification of termination

Answer 32

Whenver possible, a brokerage's activities should be separated from the where the bank accepts retail deposits. If impossible, the brokerage's activities MUST be clearly distinguished from that bank's activities.

Answer 33

An understanding between a BD and bank under which a BD conducts business on the premises of a retail bank. These arrangements must be governed by written agreements that define the responsibilities of all parties in order to be compensated. These agreements MUST state that the firm's supervisory personnel and state admin can access bank's premises to inspect the records maintained by the brokerage.

Answer 34

The following disclosures must be made any time a brokerage opens up an investment account for a client on the premises of a bank: 1. These products are not insured by FDIC 2. They are not bank deposits nor savings accounts 3. They are subject to investment risk, which includes loss of principal

Answer 35

All confirmations and account statements must clearly indicate that the BD is the one providing investment services, not the bank. Advertisements must also provide customer disclosures, however a shorter logo format is optional: - Not FDIC insured - No bank guarentee - May lose value

Answer 36

False, they must promptly alert the bank

Answer 37

The general rule for handling conflicts of interest for IAs. IAs must disclose any conflict of interest to a client before providing service.

Answer 38

1. Acting as a BD or agent for advisory clients 2. IAs intending to use the services of a BD of whom they're associated with 3. When the IARs personal transactions are different from advice given to clients 4. Effecting agency cross or principal transactions for advisory clients 5. Using 3rd party research 6. Receving hidden fees 7. Receving any form of compensation for soliciting or referrring clients to another IA or BD 8. Receving transaction-based compensation, including 12b-1 or other marketing fees, related to securities recommended to clients.

Answer 39

1. Acting as an issuer or affiliate of an issuer 2. Recommending unregistered, non-exempt securities or the use of unregistered BDs 3. Engaging in any fraud 4. Charging unreasonable fees 5. Failing to disclose availability of fee discounts 6. Using contracts intended to limit or avoid any liability under the law 7. Limiting a client's option's w/ regard to the pursuit of a civil case or arbitration 8. Borrowing money from or lending money to clients

Answer 40

Principal trades: When an IA buys/sells securities for its own inventory Cross trades: When an IA acts as a broker for both a client and another person. For the firm to effect a cross trade, one side of the trade must be unsolicited

Answer 41

If the firm discloses what they're doing prior to the transaction AND obtains EACH client's written consent ## Footnote * These requirements are ONLY for IAs, not BDs

Answer 42

Yes, as long as firm A oobtains each cleint's written consent prior to the trade and discloses the firm's dual capaity to each customer.

Answer 43

When it's required to do so by law or w/ the client's approval. The Administrator, the SEC, FINRA, and the IRS are regulatory organizations that have the authority to demand access w/o the client's approval.

Answer 44

* State that a report, analysis, or other service will be furnished free, unless these items have no cost or obligation. * Contain false statements of material info.

Answer 45

False, they're allowed to permitted that the list contains all recommendations in the relevant time frame which must be at least one year. The list must also state the name of each security, the date on which the recommendation was made, the type of recommendation (buy, sell, hold) and the current market price of the security.

Answer 46

True, however, if they heavily utilize research reports they much disclose that they are not the author of these materials.

Answer 47

A firm/individual that's a registered IA, whose principal business is being an IA w/ a substantial part of their duty being investment superivsery services. ## Footnote * Investment council or registered investment adviser may be used on a business card but acronyms are not allowed (ex: IAR or RIA)

Answer 48

The continuous individualized advice related to the investment of a client's funds

Answer 49

True. All of the other rules that apply to communications w/ the public apply to social media.

Answer 50

- Usage guidelines: appropriate ways or usage and restrictions - Content standards - Monitoring - Approval of content - Training - Personal/professional sites - IT

Answer 51

- Disclosure: IAs must disclose whether the person making the testimonial is a client, whether person making the testimonial is being compensated, and any conflicts of interest. - Oversight: IA must supervise testimonials and a written contract must be created if the person doing the testimonial is getting paid unless the person is getting paid <= $1M during the preceeding 12 month period - Disqualification: Certain bad actors are not permitted to make testimonitals

Answer 52

The SEC considers adoption to be when third-party content is created w/o being requested by an IA, however the firm uses it in their marketing campaign. A common example of this is when an IA reposts and comments on something. If they report but don't comment, it's not considered adoption.

Answer 53

False, they can

Answer 54

When an IA pays a 3rd party to create a post on the 3rd party's website ex: An IA pays a blogger to create a list of the most succesful IAs ## Footnote * Adopted and entangled content are allowed as long as they don't mislead the consumer.

Answer 55

- Fees: A firm cannot say how much return it generated for its clients in an advertisement unless it discloses its return net of fees (ex: 7% total return - 1% mgmt fee = 6% net return) - Time frames: IAs should use returns over 1 year, 5 year, AND 10 year periods. If the firm hasn't existed for 5 or 10 years, use the lifetime of the firm. - No approval: Firms cannot imply that the SEC has approved or reviewed performance #s. - Hypothetical returns: IAs can use hypothetical returns (estimates) as long as they're not misleading. There are no timeline requirements for hypothetical returns. ## Footnote * IAs should also be sure to use similar portfolios if comparing their returns.

Answer 56

IA firms must have IT policies. Many firms have begun to maintain cybersecurity insurance.

Answer 57

Designed to protect vulnerable adults from financial exploitation. This applies to BDs and IAs. NASAA requires BDs to report suspected financial exploitation of *eligible adults* to state regulators and Adult Protective Services (APS). ## Footnote -FINRA has also adopted a financial exploitation rule.

Answer 58

1. Any person who is 65 or older 2. Any mentally- or physically-impaired adult (18 or older)

Answer 59

- Wrongful/unauthorized taking, withholding, or misuse of someone's funds or securities - When someone other than the specified adult obtains control through fraud of the specified adult's money, assets, or property. - When someone other than the specified adult converts the specified adult's money, assets, or property.

Answer 60

Specified adults may have certain individuals they trust that a financial professional must contact in the event of fraud.

Answer 61

A BD or IA can delay disbursements from a specified adult's account if: - After initiating an internal review of the requested disbursement, the BD or IA has reason to believe there is potential exploitiation. - **By no later than 2 business days** the IA or BD notifies all parties (unless they're suspect of the wrongdoing) of the delay - **By no later than 2 business days** the IA or BD notifies the Administrator and APS - The firm continues its interal review and reports its findings to the Administrator or APS **within 7 business days** after the initial request for disbursement.

Answer 62

The delay of disbursement will expire upon the sooner of: 1. A determination by the IA or BD that there's no financial exploitation, OR 2. 15 business days after the date that the IA or BD initially delayed the disbursement UNLESS the Administrator or APS agency requests the delay be extended which in that case the delay will expire in 25 business days after the date the disbursement was initially delayed.

Answer 63

(100% - age) = % of growth or equity investments (w/ the remaining % as income or bond investments).

Answer 64

Underlying security: Expiration date: for a standardized contract, the 3rd Friday of the expiration month Exercise price/strike price: the price the contract owner is entitled to buy/sell the underlying for. Premium: The amount the option buyer pays for the contract. The writer is entitled to keep the premium regardless of whether the owner chooses to exercise the option.

Answer 65

Time value + intrinsic value Intrinsic value = the amt the option is in-the-money Time value= the portion of an option's premium that exceeds the intrinsic value ## Footnote * Intrinsic value will either be zero or a positive value. This means that premiums of options that are at-the-money or out-the-money will consist only of time value. * An option's time value will diminish over time and at expiration there will be no time value.

Answer 66

Before the sale. Under USA, a prospectus must be delivered to an investor at the time a security is being offered under registration by qualification.

Answer 67

When an IAR executes trades outside the client's ability to pay

Chapters 5/6 Flashcards

(103 cards)