Module 9 Quiz

Question 1

The provision that certain mutual fund policies cannot be changed without shareholder approval is addressed in the

A) Investment Advisers Act of 1940.

B) Securities Exchange Act of 1934.

C) Investment Company Act of 1940.

D) Securities Act of 1933.

Answer 1

C) Investment Company Act of 1940.

The regulation of mutual funds is covered in the Investment Company Act of 1940.

Question 2

A major responsibility of FINRA is

A) registering agents of broker-dealers to do business with the public.

B) establishing rules for issuing new securities in primary markets.

C) insuring customer accounts in the event of the liquidation of brokerage firms.

D) developing rules and regulations for its members.

Answer 2

D) developing rules and regulations for its members.

FINRA is the largest securities industry self-regulating organization and, therefore, develops rules and regulations for its members.

Question 3

The recent regulatory and industry developments regarding fiduciary advice will most likely

A) not result in a change of policy.

B) increase client expectations of advisers and put downward pressure on fees.

C) decrease client expectations of advisers and fees will stay about the same.

D) have very little impact on client expectations of advisers or on any fees being charged.

Answer 3

B) increase client expectations of advisers and put downward pressure on fees.

The bar is being raised since the fiduciary standard is a higher standard than the suitability standard. The growing public and federal interest in establishing a fiduciary standard will increase client expectations of advisers and put downward pressure on fees, especially high fee products that have better, lower fee alternatives available.

Question 4

Which act repealed a prohibition that had been in place preventing financial institutions from offering a combination of commercial banking, investment banking, and insurance services?

A) Gramm-Leach-Bliley Act of 1999

B) USA Patriot Act of 2001

C) Commodity Futures Modernization Act of 2000

D) Securities Acts Amendments of 1975

Answer 4

A) Gramm-Leach-Bliley Act of 1999

The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act, repealed the part of Glass Steagall that had previously prohibited financial institutions from consolidating and offering a combination of commercial banking, investment banking, and insurance services.

Question 5

The Employee Retirement Income Security Act (ERISA) was primarily passed because of concern regarding the integrity and safety of

A) employee working conditions.

B) employer-sponsored retirement plans.

C) abuses in deferred compensation by corporate executives.

D) employee wages and benefits.

Answer 5

B) employer-sponsored retirement plans.

ERISA was the direct result of concern over the safety and integrity of workers’ company retirement plans.

Question 6

An investment professional who reads investment journals is complying with the

A) duty to disclose.

B) duty to consult.

C) duty to keep current.

D) duty to diagnose.

Answer 6

C) duty to keep current.

The duty to keep current requires an investment professional to be up to date with subjects relating to his or her job.

Question 7

You sell your client a GNMA based on your explanation that they are “safe” because they are guaranteed by the U.S. government. In which one of the following ethical duties may you have failed your customer?

A) Duty to disclose

B) Duty to diagnose

C) Duty to consult

D) Duty to keep current

Answer 7

A) Duty to disclose

The duty to disclose requires an investment professional to explain the risks of investments sold to clients, even those backed by the U.S. government. Even though they are free of default risk, GNMAs are still subject to many other risks, such as interest rate and purchasing power risk.

Question 8

Confidentiality is an important ethical obligation for all those who render investment advice. The CFP Board, however, allows the unauthorized disclosure of confidential client information in

A) situations where no harm is done by disclosure.

B) instances where the disclosure is irrelevant.

C) circumstances where a supervisor approves the disclosure.

D) connection with a civil dispute between a CFP certificant and a client.

Answer 8

D) connection with a civil dispute between a CFP certificant and a client.

Confidential client information may be released only to those authorized to have access. Presumably one such situation is during a civil dispute between a CFP certificant and a client.

Question 9

A potential client, Ross, is contacted by Amy, an investment professional with a fiduciary responsibility to her clients. Ross is interested in trading complex options and is willing to open an account if Amy is knowledgeable about options. Amy implies to Ross that she is an expert in option trading but, in fact, knows only the basic elements of it. Looking solely at Amy’s lack of competency in this area, which fiduciary duty has not been met?

A) Duty to keep current

B) Duty to consult

C) Duty of care

D) Duty to disclose

Answer 9

C) Duty of care

Amy has failed to adequately disclose her lack of knowledge concerning options. Lacking the competency to provide advice in the best interest of the client falls under the fiduciary duty of care.

Question 10

The fundamental duty of a fiduciary adviser is to look out for the client’s best interest. Which fiduciary duty is most directly tied to making sure all actions are being made solely for the benefit of the client?

A) Duty to avoid conflicts of interest

B) Duty to diagnose

C) Duty to consult

D) Duty of loyalty

Answer 10

D) Duty of loyalty

The duty of loyalty requires a fiduciary to always put the client’s interest ahead of their own, and that all actions be made solely for the benefit of the client. The duty to consult requires consulting with other professionals in areas that are not specialization areas of the investment professional. Avoiding conflicts of interest is not a separate duty, but falls under the duty of loyalty.

Question 11

The “suitability rule” is one of the key rules of the

A) Investment Company Act of 1940.

B) Securities Act of 1933.

C) Investment Advisers Act of 1940.

D) FINRA Conduct Rules.

Answer 11

D) FINRA Conduct Rules.

The FINRA Conduct Rules require that recommended investments be “suitable” for clients.

Question 12

Which one of the following statements comparing the suitability standard and the fiduciary standard is correct?

A) The suitability standard and the fiduciary standard are essentially the same thing.

B) Verbal disclosure may be adequate under the suitability standard but not the fiduciary standard.

C) Both approaches require looking out for the best interest of the client.

D) Both approaches are primarily solution driven rather than product driven.

Answer 12

B) Verbal disclosure may be adequate under the suitability standard but not the fiduciary standard.

Fiduciaries have written disclosure requirements whereas verbal disclosure may be all that is required under the suitability standard.

Question 13

In 2010, the Dodd-Frank Act tasked the SEC to study the feasibility of drafting a harmonized fiduciary standard for both investment advisers and broker-dealers. The SEC’s response was

A) continuing both a suitability standard for brokers and a fiduciary standard for advisers.

B) setting a 10-year phase-in period to a single fiduciary standard.

C) having just one fiduciary standard that would apply to both brokers and advisers.

D) requiring any broker or adviser providing investment advice to register as a registered investment adviser.

Answer 13

A) continuing both a suitability standard for brokers and a fiduciary standard for advisers.

The SEC did not recommend a harmonized fiduciary standard but rather maintained two different standards: a suitability standard for brokers and a fiduciary standard for advisers. Both standards would have additional requirements and expectations.

Question 14

Which of the following would NOT be considered a “red flag” concerning the fiduciary duties required of a retirement plan fiduciary plan under ERISA Section 404(c)?

A) On-going documentation about the process and results of fiduciary procedures leading to decisions.

B) High initial or recurring fees.

C) use of proprietary funds despite superior funds being available.

D) a revenue sharing agreement between the retirement fund and the third-party administrator (TPA).

Answer 14

A) On-going documentation about the process and results of fiduciary procedures leading to decisions.

\Courts have ruled that a fiduciary is not bound to select the lowest priced provider of a good or service, but fiduciaries are bound to look out for the best interests of the plan participants. A thorough documentation of the deliberations taken by fiduciaries guards against liability issues.

Question 15

What was the approximate dollar amount of U.S. retirement assets held in IRA accounts at the end of 2019?

A) $3 trillion

B) $11 trillion

C) $5 trillion

D) $7 trillion

Answer 15

B) $11 trillion

According to the Investment Company Institute at the end of 2019 there was $11 trillion being held in IRA accounts. Total U.S. retirement assets (including all U.S. retirement accounts, not just IRAs) stood at $32 trillion at the end of 2019.

Question 16

Which of the following statements regarding the level of trust in the financial services industry is correct?

A) Investor trust has never been an issue for the financial services industry.

B) Despite the overall stock market recovery since the market meltdown in 2008, trust levels of financial services remain low for most Americans.

C) The Edelman Trust Barometer consistently ranks financial services as one of the most trusted sectors in our economy.

D) According to a Pershing study, the financial services industry is more concerned about trust than investors.

Answer 16

B) Despite the overall stock market recovery since the market meltdown in 2008, trust levels of financial services remain low for most Americans.

Ever since the Great Recession in 2008-2009, trust levels of the financial services industry has remained low relative to other sectors, according to the Edelman Trust Barometer.

Question 17

The advent of advanced technology has

A) created more certainty in financial markets.

B) reduced the need for regulation and consumer protection.

C) reduced competition in the brokerage industry.

D) made management of brokerage firms more difficult.

Answer 17

D) made management of brokerage firms more difficult.

With the increased sophistication of technical specialists, managing and controlling them has become more difficult for managers at brokerage firms.

Question 18

Which of the following is the most important area of concern that was addressed in the Dodd-Frank Wall Street Reform Act?

A) Fiduciary standard

B) Hedge fund regulation

C) Derivatives trading

D) Systemic risk

Answer 18

D) Systemic risk

Concern over systemic risk and the need to maintain a stable financial system is the primary issue that Dodd-Frank addressed. The financial system itself almost came to a grinding halt in 2008. Derivatives did contribute to the crisis, but the crisis spread well beyond the derivatives market into areas that no one expected, such as the commercial paper market. Hedge fund regulation was addressed but was not the most important area of concern. Dodd-Frank asked the SEC to look into a uniform fiduciary standard for both broker-dealers and investment advisers.

Question 19

Roger is considering recommending one of two mutual funds for a client. Although both funds are generally appropriate for the client, one is a proprietary fund that pays Roger a higher commission and the other has a better risk/return profile. Roger decides to recommend the latter fund to the client. With which of the following fiduciary duties has Roger complied?

A) Suitability

B) Loyalty

C) Disclosure

D) Confidentiality

Answer 19

B) Loyalty

The fiduciary duty of loyalty requires the adviser to look out for the best interest of the client, which is what Roger did. The proprietary product may be suitable, but not in the best interest of the client since another similar fund is available with a better risk/return profile.

Question 20

Which of the following statements regarding the fiduciary standard is correct?

A) The fiduciary standard requires only a verbal contract with a client.

B) The fiduciary standard would never apply to an insurance agent.

C) The fiduciary standard is applied equally and consistently for all financial advisers.

D) The fiduciary standard is considered a higher standard than the suitability standard.

Answer 20

D) The fiduciary standard is considered a higher standard than the suitability standard.

The fiduciary standard is a higher standard than that required under the suitability standard. For example, an investment recommendation might be suitable, but not necessarily in the best interest of the client.

Question 21

What is the primary function of central clearing counterparties (CCPs) that have been set up as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

A) to eliminate counterparty risk

B) to regulate hedge fund transactions

C) to act as a clearing house for futures contracts.

D) to facilitate the netting of swap contracts

Answer 21

D) to facilitate the netting of swap contracts

CCPs facilitate the netting of swap contracts in order to reduce systematic risk.

Question 22

The SEC commissioned a RAND study, which found that there was a great deal of confusion for investors as far as understanding the differences between

A) insurance agents and broker-dealers.

B) advisers and insurance agents.

C) broker-dealers and investment advisers.

D) investment advisers and investment managers

Answer 22

C) broker-dealers and investment advisers.

The RAND study found that there was a great deal of investor confusion between investment advisers and broker-dealers, including confusion over their duties, the titles they use, the services they offer, and the fees they charge.

Question 23

Which of the following statements regarding disclosure is correct?

A) Research has shown that disclosure disclaimers are generally ineffective in alerting investors to the potential costs of conflict of interest.

B) When acting as a fiduciary adviser, the more thorough and detailed the disclosure is, the more effective it becomes.

C) Generally, a fiduciary standard can be met with just full and adequate disclosure through documents such as Form ADV Part 2.

D) Fiduciary advisers owe the duty of disclosure upon the written acceptance of the engagement.

Answer 23

A) Research has shown that disclosure disclaimers are generally ineffective in alerting investors to the potential costs of conflict of interest.

Full and adequate disclosure is required but is only one component of the fiduciary standard. A fiduciary must still carry out the duty of loyalty and do what is in the best interest of the client - this cannot be met with disclosure alone. Even though disclosure is important, research has shown that more disclosure and information is not necessarily better and can actually harm the people it is designed to protect.

Question 24

What is the estimated annual cost of conflicted advice according to the 2015 White House report?

A) 1.5%

B) 1.0%

C) 0.2%

D) 0.5%

Answer 24

B) 1.0%

The annual cost of conflicted advice is about 1% a year, according to the White House report. Various sources have disputed this amount, but the general consensus is that there are retirement investors paying too much in fees, which can significantly impact the value of their nest egg when they retire.

Question 25

Which of the following statements about the prudent investor rule is the most accurate?

A) The rule does not allow delegation of trust investment and management functions.

B) Prudent investing always requires including hedge funds or options.

C) The standard of prudence is applied to each individual investment in isolation from the rest of the portfolio.

D) Prudent investing requires that fiduciaries must diversify client investments.

Answer 25

D) Prudent investing requires that fiduciaries must diversify client investments.

The standard of prudence is applied to any investment as part of the total portfolio-it is not applied to each individual investment. The prudent investor rule recognized that there are risk and return tradeoffs, and that there are benefits to diversification. Delegation of trust investment and management functions is allowed.

Question 26

Which of the following is not one of the four areas that the CFP Board looks at to determine whether a CFP® professional is a financial planner or carrying out material elements of financial planning?

A) the breadth and depth of the recommendations

B) the CFP® professional’s understanding of the engagement

C) the comprehensiveness of data gathering

D) the degree to which multiple financial planning subject areas are covered

Answer 26

B) the CFP® professional’s understanding of the engagement

It is the client’s understanding and intent in engaging the adviser that the CFP Board considers, not the CFP® professional’s understanding of the engagement. All of the other choices are areas that the CFP Board takes into account to determine if a financial planning engagement is taking place.

Question 27

Which of the following parties providing guidance and advice to a company-sponsored retirement plan would be considered a fiduciary under ERISA Section 404(c)?

A) Plan trustee

B) Investment manager

C) Plan administrator

D) All of these

Answer 27

D) All of these

There are many fiduciary roles under ERISA, and essentially anyone with discretionary authority or providing advice or guidance regarding the company retirement plan itself (not just investments in the plan) would be considered a fiduciary.

Question 28

The word “fiduciary” comes from the Latin “fiducia” which means

A) trust.

B) duty.

C) loyalty.

D) integrity.

Answer 28

A) trust.

The word “fiduciary” comes from the Latin “fiducia” which means “trust.”

Question 29

On “May Day” (May 1, 1975), which of the following events occurred?

A) Glass Steagall was repealed

B) Fixed rate commissions were abolished

C) SIPC insurance fund was established

D) ERISA was enacted into law

Answer 29

B) Fixed rate commissions were abolished

On “May Day,” fixed rate commissions were abolished, and the first discount brokers came into existence. Prior to May Day, commission rates had been set by the NYSE.

Question 30

Which one of the following is a “best practice” for complying with the fiduciary standard?

A) Focus on “advice” and not “sales.”

B) Provide as much disclosure as possible.

C) Take disputes to arbitration.

D) Use complex products in order to diversify.

Answer 30

A) Focus on “advice” and not “sales.”

Providing sound advice at a reasonable fee is a best practice. Disclosure is important, but there are limits to its effectiveness, and too much disclosure can actually get in the way of a client making a sound decision.