Prohibited and Ethical Business Practices Under the USA Flashcards
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
Does SIPC protect separate customers or separate accounts?
Separate customers. A customer with both a cash and margin account with a BD would be covered once.
True or False: Jim’s joint account with his wife is considered a separate customer by SIPC.
True. E.g. Jim’s cash and margin account are combined for coverage, but Jim’s joint account with his spouse is separate.
If a BD goes bankrupt, what happens to securities registered in the customer’s name?
They are returned to the customer without regard to SIPC limitations.
What triggers a BD’s filing of a Suspicious Activity Report (SAR)?
Any suspicious transactions of $5,000 or more
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.
For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.
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 ______________.
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.”
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.
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is unsolicited.
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
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.
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
Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?
Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.
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.
Does a registered principal approve all orders prior to execution?
No. However, the principal is required to review all activity promptly (not in advance).
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.
The Telephone Consumer Protection Act (TCPA) allows calls from ________ to ________ local time of the called party.
The Telephone Consumer Protection Act (TCPA) allows calls from 8:00 a.m. to 9:00 p.m. local time of the called party.
What restrictions exist in describing a fund as no-load?
It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25%.
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.
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.
Define churning.
Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees
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.
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.
The solicitation of buyers for unregistered, non-exempt securities is _____________.
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 is the willful or intentional act of deceiving another person for gain or profit.
Define commingling.
The prohibited act of mixing client funds with those of the BD
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.
True or False: All illegal activities are intentional.
False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.
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.
False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.
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.”
Define selling away.
The execution of transactions by an associated person outside his employment with a member firm
True or False: If a BD receives a written complaint from a client, it may be ignored if the complaint seems baseless.
False. Failing to respond to a formal written complaint is prohibited.
To whom are written or electronically-sent grievances (complaints) forwarded?
An immediate supervisor
True or False: If a producer offers an advantageous premium payment plan to an insured, it is rebating.
False. This is not considered rebating.
In lieu of a final prospectus, what may an RR send to clients?
Clients may be sent a preliminary prospectus along with additional documents containing the required information.
What must be disclosed by agents who sell investment products on the premises of a bank?
That the securities are not FDIC insured, are not guaranteed by the bank, and are subject to possible loss of principal
When effecting an agency cross transaction, at least one side of the trade must be____________.
When effecting an agency cross transaction, at least one side of the trade must be unsolicited.
True or False: A trade of unregistered, non-exempt securities between two BDs is a violation of the USA.
False. This is an exempt transaction.
Firms must keep client information confidential unless disclosure is authorized by the _______ or a __________ _________.
Firms must keep client information confidential unless disclosure is authorized by the client or a regulatory authority.
Trading on material, non-public information is considered ________ ________.
Trading on material, non-public information is considered insider trading.
True or False: In certain cases, fraud may be unintentional.
False
Sam buys stock on one exchange and sells it short on another at a slightly higher price. Is this permitted?
Yes. Sam is engaging in arbitrage.
Is an agent permitted to execute securities trades for compensation and not record the trades on his BD’s books and records?
No. This is referred to as “selling away.”
_____________ is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.
Front-running is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.
What three details must a client provide for an agent to make a time and/or price decision without written authorization?
Action (buy/sell), asset, and amount. Time and/or price may remain the agent’s discretion without written authorization.
True or False: Charging an unreasonably high commission is acceptable if disclosure is made to the client.
False
Transactions should be executed at a price that is reasonably related to the ________ _______ price.
Transactions should be executed at a price that is reasonably related to the current market price.
When selling mutual fund shares, an agent must adequately disclose the ______ _______.
When selling mutual fund shares, an agent must adequately disclose the sales charge.
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?
No. This is a prohibited practice and is considered an unsuitable recommendation.
Is an adviser required to disclose the source of raw data that is 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.
What is needed for a BD to exercise discretion over a client’s account?
BDs need the client’s prior written authorization.
What is selling away?
An agent executing securities transactions for compensation and not recording the trades on the BD’s books and records.
If an agent has been given time and price discretion on a client order, is written power of attorney required?
No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required.
When does a durable power of attorney become automatically cancelled?
At the time of death of the grantor of the POA
When does a standard power of attorney become automatically cancelled?
At the time of either the grantor’s death or declaration of grantor’s incompetence
An agent advises 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.
May an agent and a client share in an account?
Yes, if both the firm and customer provide approval and all sharing is proportionate to each party’s investment.
