flashcard 4
Identify the acronym: IA
Investment Adviser
Identify the acronym: IAR
Investment Adviser Representative
Identify the acronym: NSMIA
National Securities Markets Improvement Act
dentify the acronym: NASAA
North American Securities Administrators Association
What is the ABC Test for investment advisers?
The test that defines an IA as a firm that provides Advice as part of a Business for Compensation
Identify the acronym: IARD
Investment Adviser Registration Depository
Identify the acronym: RIA
Registered Investment Adviser
Who enforces the Uniform Securities Act?
The Administrator
Name some of the federal covered securities.
Listed on an exchange, issued by an investment company, sold as a private placement (Reg. D), and municipal bonds
What’s notice filing?
The process in which information that is filed with the SEC is also filed or shared with the Administrator.
True or False: The states may make rules that are more restrictive than SEC (federal) rules.
False. NSMIA prohibits states from making requirements that are more restrictive than existing federal requirements.
True or False: The Administrator may bring a case in a civil court.
True. Both the Administrator and a private citizen may bring a case in civil court.
What is the general definition of an issuer?
Any person who issues or proposes to issue a security, such as government entities and corporations.
True or False: The USA requires all employees of a BD to register.
False. Only those representing a BD in effecting transactions (as an agent) must register.
An _______of an ________ is an individual who represents an issuer in effecting transactions with the general public.
agent of an issuer
What’s an issuer transaction?
A transaction in which the issuer receives the proceeds.
Define jurisdiction.
The power to interpret and apply the law or the territorial range of authority or control.
An _______ is any attempt or solicitation to dispose of a security for value.
offer (offer to sell)
Define assessable stock.
Stock in which the issuer is allowed to demand additional funds from existing stockholders.
Can a BD punish one of its agents for responding to a subpoena?
No. This is a prohibited action.
True or False: An individual may be denied registration due to lack of experience.
False. However, a lack of training, knowledge, and experience may be grounds for denial.
A BD in New York gets an order from a client who is on vacation in Florida. Does the firm need to register in Florida?
No. Registration is not required since the client is an existing client who is temporarily in Florida.
True or False: BDs must file advertising and sales literature with the Administrator.
True
Is an individual who represents an issuer in the sale of stock to the public considered an agent?
Yes. An individual representing an issuer of securities being offered publicly must register as an agent.
What form do IAs file to register?
Form ADV
Define the term custody.
The legal responsibility for, or control over, someone’s assets
What are some reasons for the Administrator denying a securities’ registration statement?
Filing false registration documents, issuer’s business is illegal, spread is unfair, or failing to pay the filing fee.
True or False: A transaction by an executor is exempt.
True. Any transaction by an executor, administrator, trustee in bankruptcy, or conservator is considered exempt.
Who must prove that an exemption exists?
The party claiming the exemption
May the Administrator revoke the registration of a federally covered adviser?
No. However, she may require the IA to notice file.
Is the publisher of a newspaper required to register as an investment adviser?
No. Publishers are excluded if the newspaper has general circulation and any advice is impersonal and untailored.
For how long must an IA maintain records?
5 years
An investment adviser with more than $___________ under management must register with the SEC.
$100 million
Is registration with the SEC required of an adviser that manages $97 million of assets?
No. If the IA manages under $100 million of assets, it must register with a state Administrator.
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
What triggers a BD’s filing of a Suspicious Activity Report (SAR)?
Any suspicious transactions of $5,000 or more
Trading on material, non-public information is considered __________________.
insider trading
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.
Does the payment date requirement of Regulation T apply to cash or margin accounts?
Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account).
True or False: Fraud may sometimes be unintentional.
False
For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.
power of attorney.
True or False: If churning in a client’s account generates large profits, it is not considered a violation.
False
BD securities and client securities must be segregated; in other words, they may not be ______________.
commingled
John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?
No, this prohibited practice is referred to as “painting the tape.”
Sam buys stock on one exchange and shorts it on another at a slightly higher price. Is this permitted?
Yes. Sam is engaging in arbitrage.
True or False: Soliciting orders for unregistered, non-exempt securities is prohibited.
True
Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was _____________.
Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was unsolicited.
True or False: According to the USA, investment advisers may generally charge performance-based fees.
False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.
True or False: An IA that has full discretion over a client’s account at a separate BD is considered to have custody.
True
An IAR may exercise discretion over a client’s account based on oral authorization from the client for up to _____ days.
10
May a cash account be opened without the customer’s signature?
Yes
May a margin account be opened without the customer’s signature?
No
May an agent execute securities trades for compensation and not record the trades on the BD’s books and records?
No. This is referred to as “selling away.”
Before an IA may assign a client’s contract to another advisory firm, it must obtain _________________________.
the client’s consent.
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.
unsolicited.
__________________ is the prohibited act of a BD trading for its own account ahead of a customer’s block order.
Front-running
True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.
True
When must BDs provide payment of customer free credit balances resulting from completed transactions?
Upon customer request
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?
No. Since discretion is limited to time and/or price, written authority is not required.
What 3 details must be provided by a client so a BD may accept a discretionary order without written authorization?
Action (buy/sell), asset, and amount. Time and/or price may remain the BD’s discretion without written authorization.
True or False: The initial transaction in a margin account requires a written margin agreement promptly after the trade.
True
True or False: Charging an unreasonably high commission is acceptable provided disclosure is made to client.
False
Transactions should be executed at a price that is reasonably related to the _________________ price.
current market
May clients of BDs be charged reasonable fees for services performed?
Yes, for services such as collection of monies, exchange/transfer, appraisals, safekeeping, or custody
What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?
Both oral and written disclosure of the relationship
With whom may an agent split commissions?
Another agent registered with the same BD, or another BD under common control
If a client gives little information when opening an account, what securities may an agent recommend to the client?
Only securities that are suitable based on the information the client did provide
A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?
No. This is unethical since it is considered a guarantee against loss.
An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable?
Yes, provided the IA provides written disclosure (often in Form ADV) to clients.
Does a registered principal approve all orders prior to execution?
No. However, the principal is required to review all activity promptly (not in advance).
What information is included on an order ticket?
Client’s name and account number, price and time of execution, time order is received, entered, and executed
May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?
No. Material provided to clients must include all facts about the issue, not just the positive ones.
When selling mutual funds, an agent must adequately disclose the _____________.
sales charge.
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
Is it acceptable to recommend that a client sell a mutual fund in order to buy another fund with the same objective?
No. This is a prohibited practice and would be considered an unsuitable recommendation.
True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.
False. The agent may still have omitted material facts.
True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.
False. Past performance is not indicative of future results.
An agent makes this statement to a client: “Go with us; we’re approved by the Administrator and SEC.” Is it acceptable?
No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.
According to the USA, all investment advisory contracts must be in __________ form.
written
Firms must keep client information confidential unless disclosure is authorized by the _______ or a ___________________.
client or a regulatory authority.
If an adviser has check-writing privileges in a client’s account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.
If an IA maintains custody of a client’s funds or securities, how often must account statements be provided to clients?
Statements must be sent quarterly.
If an IA maintains custody of client funds, are unannounced audits required?
Yes. IAs must arrange for unannounced audits on an annual basis.
An IA inadvertently receives client funds/securities and doesn’t return them within 3 business days. Is this custody?
Yes
True or False: An IA maintaining custody of client assets need not notify the Administrator.
False. The Administrator must be notified in writing using Form ADV.
When an IA has custody, with whom are the assets held?
Assets are held by a qualified custodian. Clients must be notified of custodian’s name, address, and manner of holding.
Define “assignment” as it relates to IA contracts.
The transfer of ownership of a client’s account from one advisory firm to another. Client consent is required.
What may an investment adviser do with full discretion, but not with limited discretion?
Withdraw money from the account
May an adviser borrow money from a client?
Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD.
May an adviser or BD lend money to a client?
Yes, if the adviser or BD is in the business of lending money.
What is required of an IA that uses third-party research?
The IA must disclose the source of the research to its client.
Is an adviser required to disclose the source of raw data used to determine the recommendations to its customers?
No. Disclosure is not required if the IA’s recommendations are based on its own independent conclusions.
May an adviser release account information to the spouse of a client?
No, not without the client’s written authorization.
Are advisory fees fixed and are they subject to administrative review?
Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.
Under the USA, all IA contracts must be __________ and must disclose __________ provided and related ______.
in writing, Services, Fees
What is required of an IA if the firm goes through a majority change in ownership?
The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided.
What is required of an IA if there has been a minority change in firm ownership?
Provide written notification to clients
An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?
No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.
How are advisory fees most commonly charged?
As a percentage of assets under management over a specific period of time
What is needed for a BD to exercise discretion over a client’s account?
BDs need prior written authorization.
The solicitation of buyers for unregistered, non-exempt securities is _____________.
prohibited.
________ is the willful or intentional act of deceiving another person for gain or profit.
Fraud
May an agent share in the profits of a client’s account?
Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.
If an agent has been given time and price discretion on a client order, is written power of attorney required?
No. Provided the client determines the action (buy/sell), amount, and asset, power of attorney is not required.
In general, does the USA allow an adviser to charge performance-based fees?
No. However, such fee arrangements may be permitted by rule or order of the Administrator.
If an adviser exercises full discretionary control over a client’s account, does this constitute custody?
Yes. Full discretionary control (having the ability to remove funds from the client’s account) is considered custody.
When does a durable power of attorney become automatically cancelled?
Upon the death of the grantor of the POA
When does a standard power of attorney become automatically cancelled?
Upon either the death of the grantor or declaration of incompetence of the grantor
An IA has custody if it inadvertently receives client securities and hasn’t returned them within ____ business days.
3
What is soft-dollar compensation?
Non cash compensation paid by a BD to an IA for directing securities transactions.
What forms of soft-dollar compensation are NOT acceptable?
Rent, travel expense reimbursement, hardware, furniture, entertainment, meals
True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.
False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.
True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.
False. The management of risk is what is important. Investments such as options or commodities may reduce overall risk.
What step must an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.
Identify the acronym: POA
Power of Attorney
Describe a soft-dollar arrangement between an IA and a BD.
An IA directs client transactions to a specific BD in return for research and brokerage services.
To be allowed, a soft-dollar arrangement must benefit ____________.
the client.
Identify some permissible uses of soft-dollar arrangements.
Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.
What are some of the examples of items that cannot be covered by a soft-dollar arrangement?
Advertising, travel expense reimbursement, meals and entertainment, and computers
True or False: All illegal activities are intentional.
False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.
You advise a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?
Yes, since this is a material fact, it must be disclosed before the customer buys the stock.
True or False: An agent must always have reasonable grounds for recommending a particular security.
True
An agent of a BD lends $5,000 to his brother, is this acceptable?
Yes, lending to immediate family members is permissible.
Define conversion.
The prohibited act of an agent using client funds for personal use.
True or False: If an agent disagrees with a customer’s order, he may disregard the order.
False. Agents and IARs must follow all customer requests, even those with which they disagree.
True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.
alse. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.
True or False: The Administrator may issue an injunction.
False. Only a court may issue an injunction, however, the Administrator may issue a cease and desist order.
What’s a no load fund?
A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year.
May an IA use testimonials in its promotional material?
No
Define testimonial.
An advertisement in which an individual recommends the IA’s services based on personal experiences with the firm.
An newly hired investment adviser representative wants to put the initials “IAR” on her business card. Is this allowed?
No. However, she may spell out “Investment Adviser Representative.”
May an agent and a client share in an account?
Yes, with firm & customer’s approval provided the sharing in gains & losses is proportionate to each party’s investment.
To whom are written or electronically-sent grievances (complaints) forwarded?
An immediate supervisor
good
jobba the hut
