Unit 5 Flashcards
An agent based in Alabama directs a solicitation to a customer who lives in Connecticut while the customer is temporarily in Indiana. The customer does not accept the offer until he arrives back in Connecticut. According to the Uniform Securities Act, the Administrators of which of the following states have jurisdiction?
All 3 sates.
The Administrator from any state from which an offer is made, directed, or accepted has jurisdiction over the offer.
Administrators have no jurisdiction over the activities of federal covered investment advisers.
when a covered adviser pursues an activity in the Administrator’s state that violates the antifraud provisions of the Uniform Securities Act. In that case, the Administrator can take action against the covered adviser.
The Uniform Securities Act invests the office of the Administrator with a number of powers
However, the act does not permit the Administrator to
A)
inspect offices of registered broker-dealers without prior notice
B)
issue an injunction when there is evidence of wrongdoing
C)
issue a cease and desist order without prior notice
D)
insist that specific forms be used to register securities
Exclusions from the definitions of Sale/Sell and Offer/Offer to Sell
bona fide pledge or loan, gift of nonasessable stock, stock dividend, class vote, merger, claims, property interest
As defined in the Uniform Securities Act, the term “offer to sell” would include
a gift of warrants
Even though a gift is not normally a sale or an offer to sell, when it is of a warrant, a right, or any convertible security, it is considered to be an offer to sell the underlying security.
An applicant for registration as an IAR in this state was convicted 4 years ago of a nonfinancially related crime in another state. Under that state’s laws, the crime was a misdemeanor, but under this state’s laws, it is a felony. When viewing this IAR’s application, the Administrator will
treat the crime as a nonfinancial misdemeanor
B)
censure the investment adviser for even thinking of employing this individual
C)
treat the crime as any felony
D)
treat the crime as a nonfinancial felony
Even though the crime is a felony in the state where registration is being sought, the applicant’s record shows a misdemeanor and, therefore, this individual would not be subject to statutory disqualification.
Investment adviser brochure rules
– Brochure is Form ADV Part 2A (describes the firm) and Supplement, Form ADV Part 2B (personnel).
Deliver annually
within 120 days after the end of fiscals year if there are changes
only the portion of changes
Deliver the current brochure to a client or prospective
client before or at the time of entry into an investment advisory contract with that client.
– Delivered 48 hours before contract
or
at time of contract with five business days right to rescind without penalty (USA)
Brochure include
Must include balance sheet if investment adviser requires substantial prepayment of fees <6 months or in advance Federal IA $1,200 USA IA $500 or custody (USA)
legal action taken on IA
• Disclosure of material legal or disciplinary action within past 10 years, including fines of $2,500 or more
Brochure exemptions
investment companies, inpersonal subscriptions under $500 (both Federal and USA)
When it comes to advertising by investment advisers and their representatives, which of the following would be most likely to be acceptable to the Administrator?
A)
A “like” from a client on an investment adviser representative’s Facebook page post that announced the birth of her most recent child
B)
Showing past performance over the past 12 months of a group of securities selected from all of the adviser’s recommendations
C)
A “like” from a client on an investment adviser representative’s Facebook page with a comment on the wonderful service the client received
D)
Offering prospective clients a free 3-month trial to the investment adviser’s special investment formula that assures success
When showing past performance, an investment adviser cannot “cherry-pick” the ones it wishes to show—all recommendations of similar types of securities (all common stock, or all bonds) must be shown. No securities professional can ever assure investment success—that would be considered a performance guarantee.
Which of the following would NASAA consider to be a substantial prepayment of fees?
A) $1,000 covering the next month B) $600 covering the next calendar quarter C) $500 covering the next 6 months D) $600 covering the entire contract year D is a better answer than C
Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except
A)
changes to the fee schedule must be announced in advance.
B)
it must be filed with the Administrator of the state in which the broker-dealer’s principal office is located.
C)
changes to the fee schedule may be shown on the firm’s website.
D)
it must be up-to-date.
There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees, the firm’s website is one of them.
According to NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT
A)any record of securities industry violations by the investment adviser
B)
whether or not the contract grants discretionary authority
C)
that assignment of the contract cannot occur without client consent
D)
the amount of prepaid fee to be returned if the contract is terminated
An investment advisory contract is not required to disclose securities industry violations by the investment adviser.
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts,
A)
as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers
B)
the schedule should be made available on the broker-dealer’s public website without requiring any login or password
C)
the schedule should be made available on the broker-dealer’s public website and should be password protected
D)
fee schedules should only be delivered by hand or postal mail to reduce cyber security threats
Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects
Entanglement
term used to describe material posted to a securities professional’s social media site by a third party where the securities professional has taken part in the preparation of the material
advertisements may not contain
(1) untrue statements of material fact;
(2) testimonials;
(3) references only to specific past recommendations;
(4) references to charts, tables, formulas, or other devices used to forecast securities prices without setting forth the difficulties or limitations in their use;
(5) offerings of free service without the intent or ability to perform; or
(6) guarantees of future performance.
Form ADV
An officer or partner of the firm need not sign the disclosure brochure.
agency cross transactions
The investment adviser handling an agency cross transaction may not recommend the transaction to both parties.
An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan.
An investment adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties.
selling away
transactions that are not recorded on the books, not authorized in prior to execution
ABC Advisers, Inc., a federal covered investment adviser is a wholly owned subsidiary of ABC Corporation, a holding company that also owns ABC Securities, a full-service broker-dealer that is a member of the New York Stock Exchange and FINRA. One of the clients of ABC Advisers calls his IAR to explain that he has just received a margin call in his ABC Securities account. Under these circumstances, it would NOT be prohibited for the IAR to use securities owned in the advisory account to obtain a loan for this client
because 2 firms are affiliated
In most cases, the only money lenders on the exam will be banks and broker-dealers. If an advisory client receives a margin call from activity in his brokerage account, securities owned in the advisory account may be used by the affiliated broker-dealer to meet the margin deficiency.
An agent’s client calls on Monday to discuss the current market situation. They discuss how 100 shares of KAPCO common stock would be an appropriate addition to the client’s portfolio. On Thursday, the client calls and tells the agent to place an order for the KAPCO stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday’s low. In this case the agent acted
improperly; the order should have been placed on Thursday
In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day—those are considered “day” orders, so the agent is able to use judgment, but the order must be placed during the day it was received.
The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm’s clients is known as
blanket recommendations
When the same security is recommended to all or most of an IA’s clients, the regulators considered this to be an unethical practice known as “blanket recommendations” because the same security will almost never be suitable for everyone.
