Part 2: Chapter 4 - NASAA Statements of Policy and Model Rules

Question 1

What does NASAA stand for?

What countries created it?

Who was it created to protect?

Answer 1

North American Securities Administrators Association

USA, Canada, and Mexico

Investors

Question 2

What do NASAAs FIVE model rules for BDs and IAs address?

Answer 2

Suitability
Churning
Authority (given by a customer)
Guaranteeing results
Disclosures

Question 3

What are THREE considerations to determine churning?

Answer 3

Turnover ratio
Cost-to-Equity ratio
In-and-Out Trading

Question 4

With respect to Turnover Ratio, is there a set ratio that’s problematic?

What about Cost-to-Equity ratio?

Answer 4

No

Yes, 20%

Question 5

What is In-and-Out trading?

Answer 5

Buying the same security repeatedly within a short period of time.

Question 6

What are considered acceptable Advisory and Performance Based fees?

Answer 6

2% AUM (or less)
20% of Profits (or less)

Question 7

An IA is also considered a ____________.

This means, they must act in ……..

Answer 7

Fiduciary

Customer’s best interest

Question 8

What does an IA need in order to exercise discretionary power for a customer in placing a trade?

What does an IA need to obtain from a customer After placing the trade? Within what timeframe? What is a caveat to this?

Answer 8

Verbal authority.

Written authority
10 days
Discretion over time and price ONLY

Question 9

What allows an IA to place a trade for a customer based on third party instruction?

Answer 9

Prior written authorization to do so

Question 10

What allows an IA to accept third-party instruction over discretion for a customer who is unable to make decisions?

Answer 10

Durable Power of Attorney

Question 11

What should an IA do if they there’s an open order for a customer who dies?

Answer 11

Cancel the order and contact the attorney or executor.

Question 12

Can an IA borrow or lend securities or money to a customer? Answer in detail.

Answer 12

Only if the customer is a BD, affiliate of the IA, or a customer engage in the business of lending.

Question 13

What constitutes and affiliate of an IA?

Answer 13

A person who directly controls OR is controlled by an IA.

Question 14

Can an IA provide recommendations top a customer prepared by a third party? How?

Answer 14

Yes

By disclosing

Question 15

At what time should an IA disclose Conflicts of Interest?

Answer 15

Before advising

Question 16

What sources of compensation must an IA disclose?

Answer 16

ALL

Question 17

IA advertising must comply with ……

Answer 17

Investment Advisors Act of 1940

Question 18

In what TWO instances can an IA disclose information about a customer’s account?

Answer 18

Required by law
Customer consent

Question 19

What must an IA do if they wish to take custody of client securities?

Answer 19

Notify the Administrator

Question 20

Are IAs required to offer discounts for multiple accounts? If they do, who must be eligible for them?

Answer 20

No

All clients

Question 21

What is “trading ahead?”

What is “front-running?”

Answer 21

Trading based on unpublished research

Trading ahead of large transactions that will impact prices.

Question 22

What TWO things require an IA to maintain a minimum net worth?

What other thing is required in this instance?

Answer 22

Custody of securities
OR
Prepaid fees

Balance sheet filed with the Administrator

Question 23

If an IA maintains custody of client funds OR requires prepaid fees, when must they file their balance sheet? With who is it filed?

Answer 23

90 days before end of the IAs fiscal year

Administrator

Question 24

If an IA has office in multiple state, with what Administrator do they file their balance sheet?

Answer 24

In the state of their primary office.

Question 25

Rules for IAs: Net Worth / Balance Sheet - Custody of Client Funds - Fed Reg'd & >$1200 >6mo prepaid fees - State Reg'd & >$500 >6mo prepaid fees - Discretion over Client Funds

Answer 25

- $35,000 / Audited Balance Sheet - + Net Worth / Audited Balance Sheet - + Net Worth / Audited Balance Sheet $10,000 / NOT Audited Balance Sheet

Question 26

If an IAs net worth falls below the minimum requirement, when must they notify the Administrator?

Answer 26

By close of the next business day.

Question 27

How long must an IA maintain books and records? Be specific.

Answer 27

5 years and with the first 2 years in the principal office.

Question 28

Where and for how long after termination must an IA maintain its partnership / organization documents?

Answer 28

Principal office 3 years

Question 29

How does the NASAA define custody?

Answer 29

Possession of OR Authority to obtain possession of customer funds.

Question 30

If funds are inadvertently sent to an IA or funds meant for a third party, what action must be taken and within what timeframe for each?

Answer 30

- Returned / 3 days - Forwarded / 3 days

Question 31

Are prepaid fees paid by a customer considered custody?

Answer 31

No

Question 32

Does an IA need to keep separate accounts for EACH customer's funds?

Answer 32

Yes

Question 33

What are THREE examples of "soft-dollar" payments?

Answer 33

Software Research Real-time quotes

Question 34

Can an IA contract include exculpatory or hedge clauses?

Answer 34

No

Question 35

Which level of regulation do each of the following refer to (State or Federal)? - Investment Advisors Act of 1940 - Uniform Securities Act

Answer 35

- Federal (IAA 1940) - State (USA)

Question 36

With respect to Discretionary Authority, how does permission work for ... - IAs - BDs

Answer 36

IA Can proceed with verbal, but must obtain written authority within 10 days. BD MUST obtain written authority FIRST.

Question 37

When a BD takes custody of client funds, when must they give the customer a receipt?

Answer 37

Immediately

Question 38

On margin trades, when must a BD obtain written customer authority?

Answer 38

Promptly after the initial transaction.

Question 39

What is "Hypothecation?"

Answer 39

A pledge of a customer's securities as collateral for a loan on a customer's account.

Question 40

What is "Market Manipulation?"

Answer 40

Creating the false appearance of active trading.

Question 41

With respect to a BD, what is an "Agency Cross?"

Answer 41

When the BD represents the buyer and seller in the same transaction.

Question 42

What are "Wash Sales" or "Matched Orders?"

Answer 42

Trading alone or with other to create the appearance of active trading to influence others.

Question 43

For a BD located within a financial institution where retail deposits occur, what THREE things must a BD disclose?

Answer 43

Investments ... - Are not FDIC insured - Not obligations of the bank - Involve risk

Question 44

With respect to each, how is borrowing and lending to customers handled: - IA - BD - Agent

Answer 44

IA - Borrow: ONLY if client is a BD, affiliate, or in the lending business. - Lend: ONLY if IA is engaged in business of lending or an affiliate. BD - Borrow: nothing - Lend: ONLY in Margin Account Agent - NOT ALLOWED

Question 45

What is "Selling Away?"

Answer 45

An Agent effecting transactions that do not involve the BD they represent.

Question 46

If an Agent quotes a funds "current yield," what timeframe does this refer to? What else must they quote?

Answer 46

The most recent one-year return. One, Five and Ten year returns.

Question 47

What is it called if an Agent states or implies a customer should invest in securities before an ex-dividend date?

Answer 47

Selling Dividends

Question 48

If an Agent delivers a prospectus, does this qualify as full and fair disclosure?

Answer 48

No