Unit 3 Business Practices

Question 1

Fraud

Answer 1

• Using any device or scheme to defraud any
  person is defined as fraud
• No one and nothing is exempt from the anti-fraud provisions when dealing with Securities.

Question 2

Fraudulent Practices

Answer 2

• Making untrue statements (quoting the wrong stock price, giving incorrect earnings estimates, on purpose)
• Failing to state important facts (withholding negative information about the issuer)
  *Recommending unsuitable transactions for
  customers

Question 3

Prudent Investor Rule

Answer 3

*Must act in the best interest of the client
* As a “prudent investor” would.

Question 4

Primary Intent of the Uniform Securities Act

Answer 4

Prevent fraud in 2 areas:
*The sale and purchases of securities
*Investment advisory practices

Question 5

Material Fact

Answer 5

*A fact most people would
consider essential in making an informed decision

Question 6

Non-Public Information

Answer 6

*You may not use non-public
information in any way to:
*Effect any securities transaction
*Make recommendations

Question 7

Insider Trading

Answer 7

*Any person who purchases or sells securities while in possession of material non-public information, or communicates such information to another person is a violation
* Civil Penalties
* Not to exceed the greater of $1-million (indexed) or 3 times the profit gained, or loss avoided (treble damages)
* Criminal Penalties
* Up to 20 years in prison

Question 8

Client Funds (IA statement timing)

Answer 8

• Investment advisors who have custody of client’s funds must: Send statements on a quarterly basis
• Must have an independent accountant
  audit the account and send a report to
  the Administrator annually

Question 9

Discretion and Trading Authority (Three A’s)

Answer 9

*If any of the 3 A’s are missing, it is a discretionary order

Action, Amount, Asset

Action=Buy/Sell
Amount=Number of shares
Asset=Name of security
* Price or Time is NOT discretionary

• Discretionary authority allows an IA to use power of attorney to buy or sell securities on behalf of a client at the advisor’s discretion (must be in writing)