Chapters 6 & 7 Flashcards
Ch 6 INVESTMENT ADVISORY PRACTICES Ch 7 PROHIBITED AND ETHICAL BUSINESS PRACTICES UNDER THE USA
What information should advisers ask for to make suitable recommendations?
Client’s age, occupation, and objectives
Understanding a client’s personal circumstances is essential for tailored financial advice.
What is required for investment advisers to fulfill their fiduciary duty?
Details on when investments will begin and end
This ensures the adviser acts in the best interest of the client.
Is receiving a list of investors who purchased an IPO acceptable as soft-dollar compensation?
No
Acceptable forms include research reports and attending investment conferences.
What is a key feature of the Uniform Prudent Investor Act (UPIA)?
Emphasis on the trade-off between a portfolio’s risk and reward
UPIA guides investment decisions to align with investor goals.
Does the UPIA restrict any investments within a portfolio?
No
It allows flexibility in investment choices.
What must be delivered by the settlement date for all new issues?
A prospectus
This document provides essential information about the investment.
Can agents sell new issues to investors who have received a preliminary prospectus?
Yes, if the final prospectus information is also provided
This ensures investors have complete information before purchasing.
Under what conditions may investment advisers use testimonials?
If they are not misleading and created by a third party without editing
This is to ensure authenticity and compliance.
What must agents do before engaging in private securities transactions?
Notify their broker-dealer and record the transactions
This prevents unauthorized transactions (selling away).
What must occur in an agency cross transaction?
One side of the trade must be unsolicited
This protects against conflicts of interest.
What is front-running?
Entering a trade based on knowledge of a pending large order
It is considered unethical and illegal.
What is insider trading?
Trading in advance of material, non-public information about an issuer
This violates securities regulations.
Can broker-dealer supervisors preapprove trades to encourage account openings?
No
This would create a conflict of interest.
Is executing unsolicited trades evidence of churning?
No
Churning involves excessive trading for commissions, not unsolicited trades.
What is prohibited regarding personal trades and research reports?
Agents may not execute personal trades prior to their firm releasing a research report
This prevents unfair advantages.
Is stating that a security is approved by a regulator allowed?
No
This could mislead investors about the security’s value.
What must broker-dealers do with customer cash and securities?
Commingle customer cash but segregate customer securities
This protects customer assets.
Who can be convicted for insider trading?
Both the person who shared and the person who received inside information
This emphasizes accountability in trading practices.
What does an order memorandum (order ticket) contain?
Name of the security, agent, order solicitation status, discretionary usage, and type of order
This documentation is crucial for compliance and record-keeping.
What is a not-held order?
An order that does not require written power of attorney
This gives the broker discretion in executing the order.
What must broker-dealers disclose if a control relationship exists?
The control relationship with the issuer prior to selling the issuer’s securities
This ensures transparency in transactions.
How long can investment advisers accept discretionary orders without a signed power of attorney?
Up to 10 days
After this period, written consent is required.
What fee can a no-load fund assess?
A 12b-1 fee not exceeding 25 basis points (0.25%)
This fee is related to marketing and distribution costs.
Under what condition can an agent share in profits or losses in a customer’s account?
With written authorization from the customer and permission from the broker-dealer
This protects both the agent and the customer.
What constitutes a churning violation?
Recommending the sale and purchase of different mutual funds with the same objective
This is considered excessive trading for commissions.
What must investment advisers have regarding ethics?
A written code of ethics that includes provisions for access persons
This promotes ethical conduct in the advisory profession.
What does excessive trading involve?
Recommending transactions outside of an investor’s ability to pay
This can lead to financial distress for the client.
What responsibility do IAs have when providing links to third-party websites?
They have adopted the content and must verify the accuracy of the information
This ensures clients receive reliable information.
Who is considered an access person?
An officer, director, partner of an investment advisor, or anyone with access to non-public information
This designation requires specific compliance measures.
What must IAs do to avoid conflicts of interest regarding access persons?
Report personal holdings and securities transactions to the IA’s chief compliance officer
This transparency is essential for ethical compliance.
When must access persons submit a holdings report?
Within 10 days of becoming an access person and at least once every 12 months
This keeps the IA informed of potential conflicts.
When must access persons submit a transaction report?
Within 30 days after the end of each calendar quarter
This ensures ongoing monitoring of transactions.
