Quizzes

Question 1

All order tickets must include which information?

Answer 1

All order tickets must contain:

• The terms and conditions of the order (e.g., limit order, market order, etc.)
• Whether the order is solicited or unsolicited
• The account name or designation for which the order is entered
• The identity of the registered representative (if any) responsible for the account
• The identity of anyone else who accepted or entered the order for the client
• Whether the order involved the exercise of discretionary authority
• The time at which the firm received the order
• The time and price at which the order was executed, or modified or cancelled (to the extent possible)

Question 2

Soft Dollars

Answer 2

• Defined as a means of paying brokerage firms for their services through trade commissions.
• The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients.

Question 3

Third Party Trading Authorization

Answer 3

Can be done in written form.

Question 4

What an investment advisory contract must disclose

Answer 4

• An investment advisory contract must disclose the manner in which the adviser will be compensated.
• The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and
• may not be compensated based on a share of capital gains.

Question 5

Where must rebates be disclosed for referral compensation?

Answer 5

This practice is acceptable provided it is disclosed in writing as a conflict of interest. Disclosing the practice on Form ADV, which all clients must receive, should be sufficient. This would be an unethical practice if the adviser did not disclose the rebate to its clients

Question 6

A broker-dealer is registering a new issue with the Administrator of State A. What information must be sent to the Administrator?

Answer 6

• The number of shares,
• the issuer’s financial information, and
• Articles of Incorporation (the charter) generally are all required by the states.
• A tax identification number is NOT required

Question 7

An agent may split commissions with which of the following people?

Answer 7

• Same firm, registered in same state.
• The Uniform Securities Act allows for the splitting of commissions provided that the agents involved are employed by the same firm and are registered in the same state.

Question 8

Accredited Investors under Reg D

Answer 8

• Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future
• A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future
• An individual or a couple with a net worth of at least $1 million
• Senior officers are included if they are senior officers of the issuer.
• Institutional investors, such as banks, are specified in the regulation.
• No more than 35 non-accredited investors can participate in a Reg D offering

Question 9

Withdrawal of registration with an Admin

Answer 9

• An application for withdrawal generally becomes effective 30 DAYS after it is filed.
• However, the withdrawal will not become effective until the Administrator declares whether there are proceedings pending against the firm at the time the application for withdrawal is filed.
• The Administrator has ONE YEAR after the registration is withdrawn to begin revocation or suspension proceedings against the firm

Question 10

Notification requirements if a B/D agent leaves a B/D to go to another B/D

Answer 10

-Administrator must be notified by the agent and BOTH broker-dealers.

Question 11

What a suspended firm can do

Answer 11

• The firm may apply to the state court to review the Administrator’s order
• BUT there is no stay of the order, the firm is still suspended during the appeal process and cannot participate in any securities-related activities in that state

Question 12

Only appropriate recommendation for capital preservation

Answer 12

Money market securities

Question 13

Fee not allowed by IAs

Answer 13

An investment adviser may not charge a fee which is based on a share of the capital gains in the account or a share in the capital appreciation of the funds in the account.

You CAN have a performance fee for QUALIFIED CLIENTS (at least $1mm under management or over $2mm net worth) –> fulcrum fee

Question 14

Network Arrangement

Answer 14

• A networking arrangement is an agreement between a broker-dealer and a bank (or a savings and loan or credit union) under which the broker-dealer does business at a retail banking location.
• According to the NASAA Model Rules, these agreements must be IN WRITING and must specify how both the bank and the broker-dealer will be COMPENSATED.
• The agreement must also state the duties and responsibilities of both the broker-dealer and the bank, and provide that the broker’s supervisory personnel and state regulators will have access to the bank to examine the records maintained there.

Question 15

Penalties for insider trading

Answer 15

• SEC CIVIL penalties of up to three times the amount gained or loss avoided (treble damages).
• CRIMINAL penalties for individuals can be as much as a $5,000,000 fine AND 20 years in prison.
• In addition, private individuals who believe their investments were harmed by the actions of an insider trader may file a CIVIL lawsuit to recover damages.

-Corporations are subject to a criminal penalty of $25,000,000 per violation.

Question 16

Criminal Penalties for violating the USA

1) X years in Prison?
2) Fine amount?
3) Statute of limitations?

Answer 16

1) 3 years in prison
and/or
2) $5,000
3) Five years

Question 17

A broker-dealer’s original application filed with the state includes all of the following items, EXCEPT

Answer 17

1) Place of business
2) Form of business organization
3) Type of services rendered

NOT
-Fingerprints

Question 18

Investment adviser representatives of federal covered advisers can be required to register in a state if they have a place of business there

Answer 18

Fact.

Question 19

Under USA an investment adviser can fit the definition of a broker-dealer

Answer 19

Fact.

Question 20

Arbitrage

Answer 20

Selling a security short on one exchange and buying it back on another exchange for the purpose of making a profit

Permitted for an agent of a broker-dealer

Question 21

In order for an investment adviser to maintain custody of funds and securities:

Answer 21

• An adviser must notify the Administrator of its intention to maintain custody of client funds and securities.
• In some cases, an Administrator may adopt a rule prohibiting an investment adviser from taking possession

Question 22

A married couple in their early forties with no children has decided it is time to start thinking about retirement. Which of the following portfolio allocations would you recommend for them?

Answer 22

• 25% fixed-income and 75% equity securities
• This couple is in their early forties. Presumably, they have about 20 years before retirement. Their primary investment objective should be growth.
• But, still need some diversification

Question 23

Reqs for sales of securities at financial institutions

Answer 23

• the activities of broker-dealers and their agents should be physically segregated from the areas where retail banking business is handled whenever possible
• A broker-dealer that opens a securities account at a bank must disclose that securities products are not FDIC-insured.
• The disclosure that securities products are not FDIC-insured must also be on all account statements and confirmations.
• Remember that it’s FDIC not SIPC
• When opening an acct a broker must make a reasonable attempt to obtain a WRITTEN ACKNOWLEDGMENT from clients that they have received the disclosures required under this rule

Question 24

When a broker can publish quotes

Answer 24

• A broker-dealer is permitted to publish quotes (bid and ask prices) on behalf of its clients or for its own account.
• The broker-dealer must believe the quotes are BONA FIDE and not intended to manipulate the market price of a security.

Question 25

Clients qualified to charge a performance fee to

Answer 25

$1mm under management w adviser

$2mm in net worth excluding primary residence

Question 26

Use of a rumor to induce a transaction

Answer 26

Liquidating client positions based on hearsay constitutes the prohibited use of a rumor to induce a transaction.

Question 27

In an Admin has declared a registration effective, what part of its registration statement may the issuer change by amendment without being required to file a new registration statement with the state?

Answer 27

The number of shares

Question 28

Reqs for agent and client profit sharing

Answer 28

• The client has approved of it in writing
• The broker-dealer employing the agent has approved it
• The agent may only share in direct proportion to the amount the agent has contributed to the client’s account

Question 29

State Administrators are not allowed to set net capital requirements for broker-dealers

Answer 29

Fact.

Question 30

If a security is said to be guaranteed under the Uniform Securities Act, it is guaranteed as to:

Answer 30

-The term guaranteed refers to a security for which payment of dividends, interest, and principal are guaranteed

Question 31

Which administrator sets minimum capital requirements?

Answer 31

• The minimum capital requirements of the state where an investment adviser maintains its principal place of business sets its registration requirements.
• No other state may impose higher requirements than the adviser’s home state.

Question 32

Surety Bond vs. Fidelity Bond

Answer 32

Surety Bond
-It is used to cover the costs of possible legal actions

Fidelity Bond
-protects a brokerage firm from employee fraud, such as embezzlement

Question 33

Admin may deny registration based on

Answer 33

• The state Administrator only may cite reasons found in state law to disqualify a person from registration (i.e., the felony conviction, violation of commodities laws, misleading statements, etc.)
• The Administrator may deny registration for any felony conviction, not just those involving securities. Registration can also be denied if there is a misdemeanor conviction involving securities. Being arrested or charged with a criminal act falls short of being convicted.

Question 34

Requirements for keeping prospectus on file electronically

Answer 34

• 25 days after the effective date for securities that will be listed on a national exchange
• For secondary offerings of securities that will trade over-the-counter (securities that are not eligible to be listed), this obligation lasts for 40 days.
• For an offering is an IPO that will not be listed, which means the prospectus must be available for 90 days

Question 35

Civil Liabilities if securities were sold in violation of USA or if advice was fraudulent or unethical and client suffered a loss, client has a “right of action” and may sue in civil court to recover:

Answer 35

• The original consideration or any loss due to the advice
• PLUS interest
• PLUS court costs and reasonable attorney’s fees
• MINUS any income received by the security/device

-Registered person may offer to buy back the security + interest - any income received through a “letter of rescission”, a customer has 30 days to respond o/w waives right to sue

Statute of limitations
-3 years from incidence
OR
-2 years from discovery, whichever comes first

Question 36

Fees a B/D can charge

Answer 36

It is permissible to charge clients reasonable and equitable fees for miscellaneous services performed by a broker-dealer. Some of these services would include appraisals, safekeeping, transferring, and custody of a client’s securities. They could also include collection of dividends, interest, and principal payments. All of the other choices listed, as well as charging unreasonable and inequitable fees for these services, would be considered unethical business practices.

Question 37

It is considered an unethical business practice for a broker-dealer not to inform a customer of larger-than-ordinary commissions or other charges

Answer 37

Fact.

Question 38

Define impersonal advisory services

Answer 38

Activities of an investment adviser that:
-do not meet the specific needs or objectives of a client
OR
-that do not render an opinion of the investment merits of a particular security

Question 39

It is a fraudulent practice to withhold material information from a client regarding the purchase or sale of a security. The key word is material—information that is relevant to a client’s investment decision.

Answer 39

Fact.