Prohibited and Ethical Business Practices Under the USA

Question 1

True or False: Principals must approve discretionary orders prior to entry.

Answer 1

False. The orders must be approved promptly afterward.

Question 2

Does SIPC protect separate customers or separate accounts?

Answer 2

Separate customers. A customer with both a cash and margin account with a BD would be covered once.

Question 3

True or False: Jim’s joint account with his wife is considered a separate customer by SIPC.

Answer 3

True. E.g. Jim’s cash and margin account are combined for coverage, but Jim’s joint account with his spouse is separate.

Question 4

If a BD goes bankrupt, what happens to securities registered in the customer’s name?

Answer 4

They are returned to the customer without regard to SIPC limitations.

Question 5

What triggers a BD’s filing of a Suspicious Activity Report (SAR)?

Answer 5

Any suspicious transactions of $5,000 or more

Question 6

Define painting the tape.

Answer 6

Traders effecting transactions back and forth to create a misleading appearance of activity

Question 7

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

Answer 7

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

Question 8

For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.

Answer 8

For an agent to exercise discretion over a client’s account, the client must have signed a power of attorney.

Question 9

True or False: If churning in a client’s account generates large profits, it is not considered a violation.

Answer 9

False

Question 10

BD securities and client securities must be segregated; in other words, they may not be ______________.

Answer 10

BD securities and client securities must be segregated; in other words, they may not be commingled.

Question 11

John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?

Answer 11

No, this prohibited practice is referred to as “painting the tape.”

Question 12

True or False: Soliciting orders for unregistered, non-exempt securities is prohibited.

Answer 12

True

Question 13

Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was _____________.

Answer 13

Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was unsolicited.

Question 14

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.

Answer 14

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is unsolicited.

Question 15

True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.

Answer 15

True

Question 16

When must BDs provide payment of customer free credit balances resulting from completed transactions?

Answer 16

Upon customer request

Question 17

Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?

Answer 17

No. Since discretion is limited to time and/or price, written authority is not required.

Question 18

May clients of BDs be charged reasonable fees for services performed?

Answer 18

Yes, for services such as collection of monies, exchange/transfer, appraisals, safekeeping, or custody

Question 19

What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?

Answer 19

Both oral and written disclosure of the relationship

Question 20

Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?

Answer 20

Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.

Question 21

A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?

Answer 21

No. This is unethical since it is considered a guarantee against loss.

Question 22

Does a registered principal approve all orders prior to execution?

Answer 22

No. However, the principal is required to review all activity promptly (not in advance).

Question 23

May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?

Answer 23

No. Material provided to clients must include all facts about the issue, not just the positive ones.

Question 24

The Telephone Consumer Protection Act (TCPA) allows calls from ________ to ________ local time of the called party.

Answer 24

The Telephone Consumer Protection Act (TCPA) allows calls from 8:00 a.m. to 9:00 p.m. local time of the called party.

Question 25

What restrictions exist in describing a fund as no-load?

Answer 25

It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25%.

Question 26

True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.

Answer 26

False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.

Question 27

True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.

Answer 27

False. The agent may still have omitted material facts.

Question 28

True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.

Answer 28

False. Past performance is not indicative of future results.

Question 29

An agent makes this statement to a client: "Go with us; we're approved by the Administrator and SEC." Is it acceptable?

Answer 29

No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.

Question 30

Define churning.

Answer 30

Excessive trading in a customer's account for the primary purpose of generating commissions and other fees

Question 31

May an adviser borrow money from a client?

Answer 31

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.

Question 32

May an adviser or BD lend money to a client?

Answer 32

Yes, if the adviser or BD is in the business of lending money.

Question 33

What is required of an IA that uses third-party research?

Answer 33

The IA must disclose the source of the research to its client.

Question 34

May an adviser release account information to the spouse of a client?

Answer 34

No, not without the client's written authorization.

Question 35

Are advisory fees fixed and are they subject to administrative review?

Answer 35

Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.

Question 36

The solicitation of buyers for unregistered, non-exempt securities is _____________.

Answer 36

The solicitation of buyers for unregistered, non-exempt securities is prohibited.

Question 37

________ is the willful or intentional act of deceiving another person for gain or profit.

Answer 37

Fraud is the willful or intentional act of deceiving another person for gain or profit.

Question 38

Define commingling.

Answer 38

The prohibited act of mixing client funds with those of the BD

Question 39

May an agent share in the profits of a client's account?

Answer 39

Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.

Question 40

True or False: All illegal activities are intentional.

Answer 40

False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.

Question 41

An agent of a BD lends $5,000 to his brother, is this acceptable?

Answer 41

Yes, lending to immediate family members is permissible.

Question 42

Define conversion.

Answer 42

The prohibited act of an agent using client funds for personal use.

Question 43

True or False: If an agent disagrees with a customer's order, he may disregard the order.

Answer 43

False. Agents and IARs must follow all customer requests, even those with which they disagree.

Question 44

True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.

Answer 44

False. An IA must always disclose a conflict, but they don't necessarily need to end the relationship.

Question 45

What's a no load fund?

Answer 45

A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year.

Question 46

May an IA use testimonials in its promotional material?

Answer 46

No

Question 47

Define testimonial.

Answer 47

An advertisement in which an individual recommends the IA’s services based on personal experiences with the firm.

Question 48

An newly hired investment adviser representative wants to put the initials "IAR" on her business card. Is this allowed?

Answer 48

No. However, she may spell out "Investment Adviser Representative."

Question 49

Define selling away.

Answer 49

The execution of transactions by an associated person outside his employment with a member firm

Question 50

True or False: If a BD receives a written complaint from a client, it may be ignored if the complaint seems baseless.

Answer 50

False. Failing to respond to a formal written complaint is prohibited.

Question 51

To whom are written or electronically-sent grievances (complaints) forwarded?

Answer 51

An immediate supervisor

Question 52

True or False: If a producer offers an advantageous premium payment plan to an insured, it is rebating.

Answer 52

False. This is not considered rebating.

Question 53

In lieu of a final prospectus, what may an RR send to clients?

Answer 53

Clients may be sent a preliminary prospectus along with additional documents containing the required information.

Question 54

What must be disclosed by agents who sell investment products on the premises of a bank?

Answer 54

That the securities are not FDIC insured, are not guaranteed by the bank, and are subject to possible loss of principal

Question 55

When effecting an agency cross transaction, at least one side of the trade must be____________.

Answer 55

When effecting an agency cross transaction, at least one side of the trade must be unsolicited.

Question 56

True or False: A trade of unregistered, non-exempt securities between two BDs is a violation of the USA.

Answer 56

False. This is an exempt transaction.

Question 57

Firms must keep client information confidential unless disclosure is authorized by the _______ or a __________ _________.

Answer 57

Firms must keep client information confidential unless disclosure is authorized by the client or a regulatory authority.

Question 58

Trading on material, non-public information is considered ________ ________.

Answer 58

Trading on material, non-public information is considered insider trading.

Question 59

True or False: In certain cases, fraud may be unintentional.

Answer 59

False

Question 60

Sam buys stock on one exchange and sells it short on another at a slightly higher price. Is this permitted?

Answer 60

Yes. Sam is engaging in arbitrage.

Question 61

Is an agent permitted to execute securities trades for compensation and not record the trades on his BD's books and records?

Answer 61

No. This is referred to as "selling away."

Question 62

_____________ is the prohibited practice of a BD trading for its own account ahead of a customer's block order.

Answer 62

Front-running is the prohibited practice of a BD trading for its own account ahead of a customer's block order.

Question 63

What three details must a client provide for an agent to make a time and/or price decision without written authorization?

Answer 63

Action (buy/sell), asset, and amount. Time and/or price may remain the agent's discretion without written authorization.

Question 64

True or False: Charging an unreasonably high commission is acceptable if disclosure is made to the client.

Answer 64

False

Question 65

Transactions should be executed at a price that is reasonably related to the ________ _______ price.

Answer 65

Transactions should be executed at a price that is reasonably related to the current market price.

Question 66

When selling mutual fund shares, an agent must adequately disclose the ______ _______.

Answer 66

When selling mutual fund shares, an agent must adequately disclose the sales charge.

Question 67

Is an agent allowed to recommend the sale of a fund’s shares in order to buy another fund’s shares with the same objective?

Answer 67

No. This is a prohibited practice and is considered an unsuitable recommendation.

Question 68

Is an adviser required to disclose the source of raw data that is used to determine the recommendations to its customers?

Answer 68

No. Disclosure is not required if the IA's recommendations are based on its own independent conclusions.

Question 69

What is needed for a BD to exercise discretion over a client’s account?

Answer 69

BDs need the client's prior written authorization.

Question 70

What is selling away?

Answer 70

An agent executing securities transactions for compensation and not recording the trades on the BD's books and records.

Question 71

If an agent has been given time and price discretion on a client order, is written power of attorney required?

Answer 71

No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required.

Question 72

When does a durable power of attorney become automatically cancelled?

Answer 72

At the time of death of the grantor of the POA

Question 73

When does a standard power of attorney become automatically cancelled?

Answer 73

At the time of either the grantor's death or declaration of grantor's incompetence

Question 74

An agent advises a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?

Answer 74

Yes, since this is a material fact, it must be disclosed before the customer buys the stock.

Question 75

May an agent and a client share in an account?

Answer 75

Yes, if both the firm and customer provide approval and all sharing is proportionate to each party's investment.