Crunch Time : Chapter 7 Flashcards
What is required to be delivered by the settlement date for all new issues?
A prospectus
A prospectus provides essential information about the investment offering.
Can agents sell new issues to investors who have received the preliminary prospectus?
Yes, as long as the final prospectus information is also provided
This ensures investors have all necessary information for informed decisions.
Under what conditions may investment advisers use testimonials?
If they are not misleading and created by a third party without editing by the IA
This helps maintain the integrity of the testimonials.
What must be notified for agents to engage in private securities transactions with customers?
Their broker-dealer must be notified
The broker-dealer must also record these transactions.
What is required if an agent will be compensated for a private securities transaction?
Broker-dealer’s approval is required
This is a safeguard to ensure compliance with regulations.
What must be true for one side of an agency cross transaction executed by an IA?
One side must be unsolicited
This protects against conflicts of interest.
What is front-running?
Entering a trade based on knowledge of a pending large order
This is considered unethical trading behavior.
What is insider trading?
Trading in advance of material, non-public information about an issuer of securities
This is illegal and can lead to severe penalties.
Can broker-dealer supervisors preapprove trades to encourage agents to open new accounts?
No
This is prohibited to prevent unethical practices.
Is executing unsolicited trades in a customer’s account evidence of churning?
No, even if commissions are larger than average
Churning involves excessive trading for commission rather than client benefit.
What is prohibited regarding personal trades by an agent?
Executing personal trades in a security prior to the firm’s research report release
This practice is known as trading ahead.
Is stating that a security has been approved by a regulator allowed?
No, it is prohibited
This can mislead investors about the security’s legitimacy.
What must broker-dealers do with customer cash and securities?
Commingling customer cash is allowed, but customer securities must be segregated
This is to protect client assets.
Who may be convicted for insider trading?
Both the person who shared and the person who received inside information
This emphasizes the seriousness of insider trading violations.
What does an order memorandum (order ticket) contain?
Name of the security, the agent, whether the order was solicited, discretionary usage, and type of order
This documentation is essential for record-keeping and compliance.
Does a not-held order require written power of attorney?
No
This allows for more flexibility 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 is to ensure transparency to investors.
How long can investment advisers accept discretionary orders before obtaining written power of attorney?
Up to 10 days
This provides a short window for acting on client needs.
What type of fee may a no-load fund assess?
A 12b-1 fee not exceeding 25 basis points (0.25%)
This fee structure is regulated to protect investors.
Under what conditions can an agent share in the profits or losses of a customer’s account?
With written authorization from the customer and permission from the employing broker-dealer
This helps prevent conflicts of interest.
What constitutes a churning violation?
Recommending the sale and purchase of different mutual funds with the same objective
This is seen as excessive trading for commission rather than client benefit.
What must investment advisers have regarding ethics?
A written code of ethics that includes provisions for access persons
This ensures compliance and ethical behavior in the industry.
What does excessive trading involve?
Recommending transactions outside of an investor’s ability to pay
This could lead to financial hardship for the investor.
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 is crucial for maintaining credibility.
Who qualifies as an access person?
An officer, director, partner of an investment advisor, or any person with access to non-public information
This definition helps identify individuals with potential conflicts of interest.
What must IAs report to avoid conflicts of interest regarding access persons?
Personal holdings and securities transactions to the IA’s chief compliance officer
This promotes transparency and accountability.
When must access persons submit a holdings report?
Within 10 days of becoming an access person and at least once every 12 months
This ensures ongoing compliance with reporting requirements.
When must access persons submit a transaction report?
By no later than 30 days after the end of each calendar quarter
This keeps transaction activities transparent and accountable.
