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Series 65 > Unit 14: Ethical Practices and Obligations > Flashcards

Unit 14: Ethical Practices and Obligations Flashcards

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Series 65 flashcards
1
Q

Fiduciary responsibility

A

IA/IARs have the responsibility to put their client’s interest ahead of their own.
-must disclose all COI, including “time away from market”

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2
Q

hedge/exculpatory clause

A

waivers are never permitted.
-IA cannot ask client to waive IA’s fiduciary obligation

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3
Q

UPIA (Uniform Prudent Investor Act)

A

-prudence is applied to portfolio, not just isolated investments
-primary concern: tradeoff of risk and return
-no categorical restrictions
-diversification
-trustee can delegate investment function (care, skill, caution)

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4
Q

Recommending Alt Investments

A

-must meet clients IO
-disclose any COI
-perform due diligence on investment, including any experienced investment teams

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5
Q

Compensation Diclosure

A

-method of computing
-refunding prepaid fees
-type of comp
-any other incentives

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6
Q

Performance Based Compensation Exception

A

if the client is QUALIFIED; $1.1M AUM, or LNW $2.2M, or officer/director/IAR.

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7
Q

State-registered IA share of capital gains

A

must disclose:
-could cause speculation
-unrealized vs realized
-periods used for calc
-what is the benchmark used?

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8
Q

fulcrum fee

A

most common type of performance fee.
-an agreed upon benchmark, averaged over at least a year, with proportionate crediting for over performance (or decrease in fee for underperformance).

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9
Q

soft dollar comp exception

A

-research provided to IA when they direct business to certain B/Ds.
-benefit provided must be related to security analysis.
-must be disclosed to client.
-also included in item 12 of Part 2A of Form ADV

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10
Q

referral compensation

A

IA must disclose to client if they are compensating B/D for their referral or directing business to them

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11
Q

Custody

A

IA typically does not take custody of funds- the B/D does as a qualified custodian.
-IA will also not have net worth/bonding requirements

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12
Q

Custody via pooled investment

A

must keep record:
-the date of audit
-copy of audited financial statements
-evidence of mailing audited statements to all interested parties within 120 days of fiscal YE

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13
Q

Considered custody

A

-possession of client funds/securities or ability to obtain possession.
-inadvertent possession is not considered custody if sent back within three days.

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14
Q

custody due to direct fee deduction

A

-needs written authorization
-notice each time deducted
-tell Administrator about the above safeguards
IA will not have financial req’s waived, and no obligation to file audited balance sheet

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15
Q

Form ADV-E

A

-only required when IA has custody rather than qualified custodian
-surprise annual exam, form contains info about exam conducted.

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16
Q

discretion

A

-which security
-number of shares
-whether to buy or sell

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17
Q

time and price

A

order will not be considered discretionary if client provides security, share amount, and buy/sell, but tells rep to determine time and price (through the EOD)

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18
Q

discretion written authorization

A

-must have written authorization
-exception for first ten business days, so IA can invest account.
-after ten days cannot trade w/ out written agreement, no matter the consequences.

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19
Q

Third-party Trading

A

Can only be done if written third-party authorization is on file.
If spouse, accountant, lawyer calls to place trade, can only do so if they’re on file.

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20
Q

Hypothecation

A

Must have written consent on file to hypothecate client securities.

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21
Q

CTR

A

-FinCEN Form 112 for every cash transaction over $15,000 within 15 days
-also any wires over $3,000.
-any designed money movements to avoid detection is prohibited.

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22
Q

Account statements

A

required to be sent at least quarterly. doesnt matter if maintained by IA or a qualified custodian.

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23
Q

Blanket Recomendations

A

Always unsuitable

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24
Q

Using third-party reports

A

Must be disclosed to client, so the client does not have over confidence in advisor

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25
Q

Borrowing from clients

A

You cannot borrow from any client unless they are a lending institution.
(This is more strict than FINRA rule)

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26
Q

Client Confidentiality

A

-IA responsible to ensure all client info is kept secure.
-exception is when client or the law authorizes release of info.

27
Q

Section 13f

A

If discretion over $100AUM in T12, must file within 45 days each quarter.

28
Q

Access Persons holdings

A

Must be submitted to CCO within 10 days of becoming an access person, and then quarterly thereafter, within 30 days of quarter.

29
Q

Code of Ethics

A

IA must keep one, and it managed by CCO

30
Q

Access Person

A

any of the adviser’s supervised persons who:
-have access to nonpublic info of client securities/holdings.
-involved in making securities recommendations to clients.

31
Q

Pre-clearance Access Person

A

-prior approval for placing trades
-list of recommended securities and AP trades
-reminder that clients should be able to act on opportunities prior to employees.

32
Q

Pay to Play Rule

A

Prohibits investment advisors from receiving compensation for advisory services to government entity for two years after political contribution is made.

33
Q

Pay to Play de minimis

A

covered associates can make contributions of $350 for elections they can vote in, and $150 for others.

34
Q

Covered associates

A

-GP, Executive Officer, Managing Director
-Employee who solicits government entity and those who supervise such employees.
-PAC controlled by IA

35
Q

Returned Contribution Exception

A

Contribution can be returned if:
-its within 4 months since contribution
-$350 or less
-obtain return within 60 days

36
Q

Compliance Procedures

A

IA is required to have written policies and procedures reviewed annually by CCO.
CCO should have sufficient authority to compel adherence.

37
Q

Delivery Delay

A

Unethical for the firm to delay delivery of securities/money to client.

38
Q

Making Recommendation to clients

A

If the client does not provide enough info, you cannot make a recommendation. Orders must be unsolicited.

39
Q

Free Lunch Seminar

A

Must clearly present the firm sponsoring and individuals involved with delivery.

40
Q

Unfair pricing

A

A transaction where price is not reasonably related to current market price, or, charging an unreasonable commission/profit.

41
Q

Withholding Public Offering shares

A

If firm is participating in IPO and is given shares to sell, they must make them available. Cannot keep them in their own account.

42
Q

Client complaints

A

-are written, not oral
-must be responded to
-must be reported

43
Q

Complaint records kept on file

A

-3 years for B/D
-5 years for IA

44
Q

Borrowing

A

Not permitted aside from B/D offering margin accounts.

45
Q

Fictitious Accounts

A

-Prohibited and unethical.

46
Q

Sharing in accounts

A

-Permitted for agents. Allowed to commingle, have JT accounts, and disproportionate interest.
-Not permitted for broker/dealers, IA’s, or IAR’s

47
Q

Splitting commissions

A

OK if it does not increase transaction cost (no disclosure needed), and if with agent for same B/D.

48
Q

Selling away

A

Cannot effect securities transactions away from B/D that agent represents unless transaction has been authorized in writing.

49
Q

Agent account at another B/D

A

Prohibited unless B/D gives prior written consent to do so.

50
Q

Sale of Securities at Financial Institution

A

-B/D services must take place in a setting different than where retail deposits occur
-disclose not FDIC, not obligation of the institution, subject to risks, and receive written acknowledgement from customer (not-not-may)
-OK to not include disclosures if radio commercial, billboards, and location indicators.

51
Q

Inside Info

A

-MNPI must be reported to compliance/risk officer immediately.
-Becomes a violation when info is acted upon.

52
Q

Insider/Control Person

A

-Officer, Director, Owns 10% of stock, or immediate family of any of the above.
-Anyone who comes into possession of MNPI becomes an insider.

53
Q

Inside info treble damages

A

Offender can be guilty for treble damages, up to three times gains/losses avoided.

54
Q

Market Manipulation

A

Matched Orders/Wash Trades- trades done for the purpose of increasing activity & market price (painting the tape).

55
Q

Arbitrage

A

is NOT considered a form of market manipulation, as it lowers spreads across markets.

56
Q

Identity theft

A

-attempted or committed fraud using identifying information of another without their authority.
-red flags indicate the possibility of identity theft

57
Q

Backing up client data should be

A

encrypted

58
Q

Regulation S-P

A

Firms must have adequate safeguards in place to protect nonpublic personal information.
Must present privacy notice to clients at account opening, and give them 30 days to opt out

59
Q

consumer/customer

A

consumer- transaction
customer-on-going relationship

60
Q

BCP

A

-protection of books and records
-alternate means of communication
-office relocation plan
-reassignment of duties
-other service disruption minimizations
-succession plans

61
Q

Balance Sheet to accompany adviser’s brochure when…

A

the advisor maintains custody of client assets OR accepts substantial prepayment of fees

62
Q

Designated Regulatory contact person

A

All IA’s must have one.

63
Q

Form ADV-E completion/submission

A

Form is completed by IA and submitted by independent examiner within 120 days of exam

64
Q

IA lending money to client

A

-is unethical;
-client can only receive loan from affiliated B/D or bank

Series 65 (24 decks)

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