Unit 13 | Communications with Customers & Prospects Flashcards
BJS Advisory Service maintains no custody of customer funds or securities, requires no substantial prepayments of fees, and does not have investment discretion over clients’ accounts. Which of the following would have to be promptly disclosed to clients?
I. The SEC has entered an order barring the firm’s executive vice president from association with any firm in the investment business.
II. The NYSE has just fined BJS $3,500.
III. A civil suit has just been filed against BJS by one of its clients, alleging that BJS made unsuitable recommendations.
A. I and Il
B. land Ill
C. Il and Ill
D. I, II, and III
A. Material disciplinary violations must be reported by all investment advisers, regardless of whether they keep custody. The first two answers fit the definition of material actions, but not the third. If the suit favors the client and the adviser is found guilty, disclosure must be made. However, there is something that investment advisers who do not maintain custody or receive substantial prepayments avoid having to do. What is that? They do not have to notify their clients about any financial situation that might impair their ability to meet contractual commitments to clients.
As called for on the NASAA Model Fee Disclosure Template, which of the following must not be disclosed on a broker-dealer’s fee chart?
A. The commission schedule
B. The account maintenance fee
C. Charges to wire funds
D. Postage and mailing charges
A | Commissions, markups and markdowns, and advisory fees are not part of the NASAA fee disclosure template.
LO 13.a
Fiduciary Investment Group (FIG), an investment adviser registered in six states, occasionally acts as a principal in trades recommended to advisory clients. Under the provisions of the Uniform Securities Act,
A. FIG is engaging in an unlawful practice.
B. FIG must receive consent from the clients and disclose its capacity no later than the trade execution.
C. FIG must receive consent from the clients and disclose its capacity no later than the trade completion.
D. FIG does not need consent because the trade was recommended to existing advisory clients.
C | This practice is not unlawful as long as the investment adviser obtains the required consent and makes the appropriate disclosures on time. That time limit is no later than the completion of the trade (the settlement date). If FIG is also a broker-dealer and a client makes a trade not initiated through an advisory recommendation, then acting as a principal only requires disclosure of capacity, not consent.
LO 13.b
LMN Securities, a broker-dealer registered with the SEC in more than a dozen states, has just become a member firm of the New York Stock Exchange. It would be permitted for LMN to tell its customers that
A. the membership in the NYSE is a testimony to the firm’s integrity.
B. they are now members of the NYSE.
C. they are now federally covered and will no longer have to register in those states where they do not maintain a place of business.
D. this adds one more level of approval for the firm’s business.
B. When registering any securities professional, any statement relating to approval or something similar is prohibited. There is no such thing as a federally covered broker-dealer, and becoming a member of a national stock exchange has no impact on the state registration of a broker-dealer.
Which of the following statements may be made by an issuer selling public securities registered with the Administrator?
A. The Administrator has cleared this issue for sale to the public.
B. The Administrator has passed on the adequacy of the information provided in the prospectus.
C. The Administrator has approved the accuracy of the information contained in the prospectus.
D. The Administrator has affirmed the merits of the security as an investment.
A | The Administrator does not approve or disapprove of securities. Instead, the Administrator reviews registrations for omission of material facts and clarity of information and ensures all supporting documentation is included. If these requirements are met, the Administrator clears or releases the security for sale to the public.
LO 13.c
The broker-dealer tells clients that within six months after the purchase date, they may sell the stock back to the firm at the original cost plus interest at the state’s legal rate to encourage clients to invest in a particular stock recommended by the broker-dealer. This action would be
A. a right of rescission.
B. a violation of the antifraud provisions of the Uniform Securities Act.
C. an offer that could only be made to accredited investors.
D. a prohibited guarantee against loss.
D | Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss. Rescission is only when there is something improper about the sale. Technically, this offer is not a case of fraud, and in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price.
LO 13.d
ABC Investment Advisers, organized as a partnership, has seven equal partners. At ABC’s annual partnership meeting, one of the partners announces their retirement, while another is leaving to partner in another firm. As a result, ABC must notify
A. the Administrator of the change in partners within a reasonable time
B. the other party to the contract of the change in partners within a reasonable period.
C. the SEC of the change in partners within a reasonable time.
D. its advisory clients of the change before the renewal date of the firm’s registration.
B. When a minority interest changes in an IA structured as a partnership, notification to the firm’s advisory clients (the other party to the advisory contract) must be made within a reasonable time.
The Investment Advisers Act of 1940 would permit investment advisory contracts to provide for
I. assignment without the client’s consent.
Il. changes to be made in a partnership with notification to clients within a reasonable time.
Ill. compensation based on average assets under management over a particular period.
A. I and II
B. I and III
C. Il and III
D. I, II, and III
C. A client’s contracts, whether written or oral (technically, the Investment Advisers Act of 1940 does not require written contracts), may not be assigned without the client’s consent. If the adviser is a partnership, notice must be made to clients of any changes in the partnership’s membership within a reasonable time.
It is always permitted to charge a fee based on the average value of assets under management.
Which fee arrangements are legal under the Investment Advisers Act of 1940?
A. Adviser B charges an annual fee of 0.075%, guaranteed to be waived if the account’s value does not increase during the year.
B. Adviser A charges an annual fee of 0.05% of the value of the client’s account, due on the first day of the client’s fiscal year.
C. Adviser C charges an annual fee of 0.05%, waived if the account does not grow by at least 5% during the year.
D. Adviser D guarantees the annual fee will be waived if the account decreases in value while under her management.
B | An adviser’s fee may not be based on portfolio appreciation or capital gains except under certain circumstances not detailed in the question. Advisory fees may be based on a percentage of assets under management. There should be no question on the exam where
“waiving” something will be permitted.
LO 13.e
Unless qualifying for an exemption, which of the following advisory fee structures is not allowed under the Uniform Securities Act?
A. Fees based on a percentage of the change in value of funds from quarter to quarter
B. Fees based on an hourly rate
C. Fees based on a fixed dollar schedule tied to the value of funds under management
D. Fees based on a percentage of the aggregate value of funds under management
A | Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures.
LO 13.e
Which two of the following statements accurately describe the time limits for investment adviser documents?
1. Filing of the annual updating amendment to Form ADV with the appropriate regulatory body is within 90 days of the end of the adviser’s fiscal year.
II. Filing of the annual updating amendment to Form ADV with the appropriate regulatory body is within 120 days of the end of the adviser’s fiscal year.
Ill. Delivery of the investment adviser’s brochure to the customer is due within 90 days of the end of the adviser’s fiscal year.
IV. Delivery of the investment adviser’s brochure to the customer is due within 120 days of the end of the adviser’s fiscal year.
A. I and Ill
B. land IV
C. Il and III
D. Il and IV
B. Some logic here might help. The investment adviser must get its paperwork into the state (or SEC) before the end of the 90 days. Then, the lA has another 30 days to get the information into the brochure to send to the clients.
Which legal or disciplinary actions occurring within the past ten years would not have to be disclosed on an investment adviser’s brochure?
A. Conviction of a misdemeanor in a civil action regarding payment of parking tickets
B. Conviction of a misdemeanor involving an investment-related business
C. SEC or other federal regulatory agency proceedings in which the person was found in violation of an investment-related statute
D. A proceeding before FINRA in which the person was barred or suspended from membership
A | An investment adviser must disclose, in its brochure, all adverse regulatory events to clients and prospective clients if they occurred within the past ten years. Examples would include a conviction relating to a misdemeanor involving an investment-related business, SEC or other federal regulatory agency proceedings in which the person was found to have violated an investment-related statute, or proceedings before FINRA in which the person was barred or suspended from membership. Misdemeanors regarding noninvestment-related actions are not considered material and need not be disclosed (e.g., parking tickets).
LO 13.f
Concerning the brochure rule of the Investment Advisers Act of 1940, which of the following is exempt from the delivery requirements of that rule?
A. An adviser whose only clients are registered investment companies
B. An adviser whose only clients are insurance companies
C. An adviser who only provides impersonal advisory services at an annual charge of less than $500
D. All of the above
D | An adviser to investment companies and an adviser who provides only impersonal advisory services are specifically listed as being exempt from the delivery requirements of the brochure rule (impersonal advice with a charge of $500 or more would require an offer to deliver). An adviser who provides advice only to insurance companies is exempt from registration as an investment adviser and, therefore, would also be exempt from the requirements of the brochure.
LO 13.g
One of your clients approaches you to get your evaluation of an investment opportunity that was received through a Facebook post sent by a friend. The investment promises a monthly return of over 1% and claims it is registered with an offshore regulatory body. You should explain to your client that
A. these are reasonable expectations based on the investment and the issuer’s location.
B. your firm does not sell that security, and, as a result, you cannot comment on the issue.
C. it is important to check with the friend to learn more about the deal.
D. these are red flags and are a clear warning to stay away from this investment.
D. Unreasonably high returns and not being registered in the United States are two items on the list of red flag warnings to investors published by NASAA.
The regulatory bodies are concerned about agents using social media to communicate with clients when they are using their
I. office desktop computers.
Il. tablets supplied by the firm.
Ill. smartphones.
IV. personal laptops while on vacation.
A. I and II
B. I and IV
C. II, III, and IV
D. I, II, III, and IV
D. The format is not what counts; the content matters.
