Crunch Time : Chapter 7

Question 1

What is required to be delivered by the settlement date for all new issues?

Answer 1

A prospectus

A prospectus provides essential information about the investment offering.

Question 2

Can agents sell new issues to investors who have received the preliminary prospectus?

Answer 2

Yes, as long as the final prospectus information is also provided

This ensures investors have all necessary information for informed decisions.

Question 3

Under what conditions may investment advisers use testimonials?

Answer 3

If they are not misleading and created by a third party without editing by the IA

This helps maintain the integrity of the testimonials.

Question 4

What must be notified for agents to engage in private securities transactions with customers?

Answer 4

Their broker-dealer must be notified

The broker-dealer must also record these transactions.

Question 5

What is required if an agent will be compensated for a private securities transaction?

Answer 5

Broker-dealer’s approval is required

This is a safeguard to ensure compliance with regulations.

Question 6

What must be true for one side of an agency cross transaction executed by an IA?

Answer 6

One side must be unsolicited

This protects against conflicts of interest.

Question 7

What is front-running?

Answer 7

Entering a trade based on knowledge of a pending large order

This is considered unethical trading behavior.

Question 8

What is insider trading?

Answer 8

Trading in advance of material, non-public information about an issuer of securities

This is illegal and can lead to severe penalties.

Question 9

Can broker-dealer supervisors preapprove trades to encourage agents to open new accounts?

Answer 9

No

This is prohibited to prevent unethical practices.

Question 10

Is executing unsolicited trades in a customer’s account evidence of churning?

Answer 10

No, even if commissions are larger than average

Churning involves excessive trading for commission rather than client benefit.

Question 11

What is prohibited regarding personal trades by an agent?

Answer 11

Executing personal trades in a security prior to the firm’s research report release

This practice is known as trading ahead.

Question 12

Is stating that a security has been approved by a regulator allowed?

Answer 12

No, it is prohibited

This can mislead investors about the security’s legitimacy.

Question 13

What must broker-dealers do with customer cash and securities?

Answer 13

Commingling customer cash is allowed, but customer securities must be segregated

This is to protect client assets.

Question 14

Who may be convicted for insider trading?

Answer 14

Both the person who shared and the person who received inside information

This emphasizes the seriousness of insider trading violations.

Question 15

What does an order memorandum (order ticket) contain?

Answer 15

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.

Question 16

Does a not-held order require written power of attorney?

Answer 16

No

This allows for more flexibility in executing the order.

Question 17

What must broker-dealers disclose if a control relationship exists?

Answer 17

The control relationship with the issuer prior to selling the issuer’s securities

This is to ensure transparency to investors.

Question 18

How long can investment advisers accept discretionary orders before obtaining written power of attorney?

Answer 18

Up to 10 days

This provides a short window for acting on client needs.

Question 19

What type of fee may a no-load fund assess?

Answer 19

A 12b-1 fee not exceeding 25 basis points (0.25%)

This fee structure is regulated to protect investors.

Question 20

Under what conditions can an agent share in the profits or losses of a customer’s account?

Answer 20

With written authorization from the customer and permission from the employing broker-dealer

This helps prevent conflicts of interest.

Question 21

What constitutes a churning violation?

Answer 21

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.

Question 22

What must investment advisers have regarding ethics?

Answer 22

A written code of ethics that includes provisions for access persons

This ensures compliance and ethical behavior in the industry.

Question 23

What does excessive trading involve?

Answer 23

Recommending transactions outside of an investor’s ability to pay

This could lead to financial hardship for the investor.

Question 24

What responsibility do IAs have when providing links to third-party websites?

Answer 24

They have adopted the content and must verify the accuracy of the information

This is crucial for maintaining credibility.

Question 25

Who qualifies as an access person?

Answer 25

An officer, director, partner of an investment advisor, or any person with access to non-public information ## Footnote This definition helps identify individuals with potential conflicts of interest.

Question 26

What must IAs report to avoid conflicts of interest regarding access persons?

Answer 26

Personal holdings and securities transactions to the IA’s chief compliance officer ## Footnote This promotes transparency and accountability.

Question 27

When must access persons submit a holdings report?

Answer 27

Within 10 days of becoming an access person and at least once every 12 months ## Footnote This ensures ongoing compliance with reporting requirements.

Question 28

When must access persons submit a transaction report?

Answer 28

By no later than 30 days after the end of each calendar quarter ## Footnote This keeps transaction activities transparent and accountable.