Unit 13: Communications with Customers and Prospects

Question 1

Acting as principal/agency

Answer 1

B/D must disclose by settlement, including commission if agency, or markup/down if principal

Question 2

If IA is acting as principal

Answer 2

prior to completion of transaction:
-client gets written disclosure,
-client provides oral/written consent.

Question 3

IA effecting transaction between advisory clients

Answer 3

permitted if there is no extra compensation

Question 4

Agency cross transaction

Answer 4

IA acts as broker for both their client and the other party.
-must disclose both commissions, COI, furnish history of transactions, any related disciplinary history
-must still get best price
-can only be solicited for one party

Question 5

Form CRS (client relationship summary)

Answer 5

delivered to client:
IA- at or before advisory contract
B/D- at or before a recommendation, order, or opening of account
-any updates to form must be sent to clients within 30 days

Question 6

Form CRS prohibited

Answer 6

-cannot misrepresent registration (either for the professional, or a security)
-no guarantees against loss
-no guarantees on a security

Question 7

IA contract

Answer 7

Same at State/Fed except:
-State requires it in writing
-State requires fees to be competitive, Fed requires “reasonable” fees
-State performance based comp criteria is stricter

Question 8

waivers/hedging language

Answer 8

is never permitted

Question 9

Change in partners

Answer 9

must notify clients
-INTERNAL discipline does not require client notification

Question 10

Advisors Brochure (Form ADV Part 2)

Answer 10

Part 2A- Firm brochure, appendix 1 wrap fee
Part 2B- Supervised persons- those who formulate advice and have discretionary authority.
Must be in narrative format, plain english, fiduciary obligations, full and truthful,

Question 11

Wrap fee

Answer 11

-not for buy and hold clients
-low risk for churning (advisor earns same fee no matter how many trades)

Question 12

Advisor brochure delivery

Answer 12

made by or before advisory agreement is made
-under USA, must be 48 hours before agreement
-Investment companies and periodicals are exempt from delivering brochures

Question 13

Updating brochures

Answer 13

must be updated annually, or promptly when any material changes.
Must file within 90 days of YE, and deliver within 120 days.

Question 14

Static content

Answer 14

remains as is until changed by author

Question 15

Interactive content

Answer 15

has input from author and viewer

Question 16

Electronic communication

Answer 16

has same policies for all written and hard copy communication

Question 17

Entanglement VS adoption

Answer 17

In entanglement, firm is producing content
Adoption, firm is endorsing content created by third party. will be at risk from any policy violations

Question 18

Advertising must be fair and balanced

Answer 18

no:
-nonfactual data,
-conjecture
-exaggerated claims
-undermining prospectus/disclosures

Question 19

Not considered a recommendation if:

Answer 19

-website with library of research
-search engine to research reports
-stock screener (as long as does not bias securities of interest)
-optional email subscription for particular securities

Question 20

Is considered recommendation if:

Answer 20

-customer specific communication to purchase
-email to customers recommending a sector with attached recommendations
-a recommendation list generated from portfolio analysis tool
-B/D tech data-mines client data to send recommendations to client

Question 21

IA Marketing Rule applies to:

Answer 21

-offering services to prospects, or new services to existing clients
-endorsements with cash or noncash compensation
-using third party info
-communication to investors in a private fund
-texting and chat rooms

Question 22

If investment strategy including a charting system (technical analysis)

Answer 22

it must be disclosed the difficulties and limitations with the program.

Question 23

Testimonials and Endorsements are permitted if:

Answer 23

-if client, then disclosed
-if compensation was provided
-any COI
-promoter: the person making the testimony. must have written agreement if over de minimis comp $1000 in T12.
-referencing past performance OK if disclosed correctly

Question 24

Social Media Training

Answer 24

B/D is required to have some type of training for agents prior to using social media

Question 25

Finder’s fees

Answer 25

are OK, but must be disclosed to client

Question 26

“First 50 clients” discount

Answer 26

is OK, due to negotiated fees allowance

Question 27

Client assigned new IA

Answer 27

client must consent in writing

Question 28

“Guaranteed” security

Answer 28

a third party that will guarantee payment of principal, interest, or dividend

Question 29

Testimonials are given by

Answer 29

clients

Question 30

Endorsements are given by

Answer 30

promoters

Question 31

Two exemptions to brochure rule

Answer 31

-investment company;
-impersonal advice with fee under $500