Unit 7 (14) Flashcards
1
Q
When is the use of a hedge clause by an IA acceptable?
A
When the clause is used to limit liability due to losses from events beyond its control like war, strikes, natural disasters, new gov. restrictions, market fluctuations, communications disruptions, etc. The “market fluctuations” part refers to the overall market, you can’t do anything about the market in general going down
2
Q
What is the max prison sentence for insider trading?
A
20 years
3
Q
Fiduciaries should act how
A
With skill and caution in an effort to meet their clients objectives. They should attempt to maximize returns while minimizing risks.
4
Q
How often must the Chief Compliance Officer review the policies and procedures designed to prevent violation of securities laws?
A
Annually
5
Q
Under rule 206(4)-7 of the IA act of 1940, each IA reg. with the SEC is required to adopt and implement policies and procedures to prevent violating securities law. Who’s responsibility is that at the firm?
A
The chief compliance officer
6
Q
How long do you have to file form 13f
A
Within 45 days of the end of the quarter
7
Q
Who is permitted to maintain custody of client assets, IAR or IA?
A
IAs can have custody if not prohibited by the administrator
8
Q
What is the wealth requirement for someone to have performance based compensation for an individual
A
1 mil under mgmt of the advisor or 2.1 mil net worth
9
Q
The securities exchange act of 1934 requires written authority for a discretionary account, unless the securities professional’s discretionary authority is limited to determining
- The price of the stock
- The amount of the stock
- The time of the order
A
1 and 3. The ability to determine the time or price at which a specific customer order will be executed does not constitute discretionary power and therefore does not require written authorization
10
Q
What is the difference under state law about performance based fees?
A
The agent must make additional disclosures including the one about incentive to take more risks
11
Q
What is the purpose of form 13f
A
It allows the public to look at the strategies/holdings of the top money managers.
12
Q
Can an agent share in the profits and losses in a clients account?
A
Yes, as long as there is written consent from the client and the agent’s BD. IAs and IARs cannot share in profits/losses
13
Q
Who is responsible for administering the Bank Secrecy Act?
A
The Financial Crimes Enforcement Network or FinCEN
14
Q
An IA registered in state A decides it wishes to maintain custody of customer assets. As long as the securities laws of state A don’t prohibit custody, the investment advisor would have to promptly notify
A
The administrator using form ADV
15
Q
Is there a minimum net worth standard for IARs?
A
No, the minimum net worth standard is for IAs
16
Q
Written discretionary auth. is NOT required for an agent to choose which of the following order instructions?
- Security to be bought or sold
- # of shares
- Time of execution
- Price
A
Time and Price. If an agent chooses price or timing only, that order is not a discretionary order, and written auth. is not required. To be discretionary, the agent must choose one or more of: asset, action, amount.
17
Q
What is the first thing you must do when you find out your client wants to trade on insider info?
A
Tell your immediate supervisor/principal
18
Q
Which of the following may be in violating of the USA?
- IA charges a flat fee for all acts < 100k
- Adviser charges all accounts a percentage of assets under mgmt
- Client agrees to compensate adviser on a % of capital gains in excess of the SNP 500 in return for guaranteeing the SNP return
A
3 only is prohibited. Guaranteeing a level of performance is prohibited whether the client agrees to it or not. An adviser may charge clients a flat fee, as long as its fair and reasonable. Charging accounts a percentage of assets under mgmt is acceptable under the USA
19
Q
Who can have discretionary powers - an IA or IARs
A
Both. If so, only the IA may be required to be bonded (adequate net worth will suffice)
20
Q
What are the exceptions to the brochure rule?
A
Client is:
- Investment co
- Someone receiving impersonal advice with an annual fee less than $500
21
Q
Can you solicit orders in unregistered exempt securities?
A
Yes. Securities that do not require registration are exempt under the USA. The agent who solicits must be registered as well as the agents BD.
22
Q
Omitting non-material facts is not fraudulent
A
Nonmaterial facts are those that do not impact an investors decision making process. Omitting material facts is fraudulent.
23
Q
It is unlawful for any IA to take or have custody of customer funds or securities if
A
- The administrator prohibits custody by rule
2. In the absence of rule, the IA fails to notify the administrator that he has, or may have custody
24
Q
What is the wealth requirement for someone to have performance based compensation for an individual
A
1 mil under mgmt of the advisor or 2.1 mil net worth
25
Under the USA, which of the following IAs would be required to include a balance sheet in their brochure?
1. An IA who exercises discretion
2. IA who maintains custody over client funds and securities
3. IA who maintains less than 35k in net worth
4. IA who, 6 or more months in advance, collects prepaid fees of > $500
2 and 4. An IA who maintains custody and an IA who collects prepayment of > $500 6 or more mos in advance
26
Securities that don’t require registration under the USA are
Exempt securities
27
If a customer wants to trade on insider info, do you need to bring it to the attention of the administrator?
No, you only need to tell your direct supervisor/principal
28
Discretionary authority must be in written form with 2 exceptions
1. Client has determined the specific security and amount, leaving discretion as to price or timing only
2. If the client has just entered into an advisory contract or discretionary agreement and will give written authority within 10 biz days
29
Can the adviser be named the agent or trustee of customers funds in a discretionary account?
Yes. Unless using a qualified custodian, the adviser must be named as agent or trustee.
30
Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees?
1. Client must initially have 1mil under mgmt or net worth > 2.1mil
2. Compensation paid in this way must be for gains reduced by losses
3. Disclosure that the fee arrangement may cause riskier or more speculative trades than if there wasn’t performance based fees
All three. Performance based is permitted if client has 1mil under mgmt and net worth > 2.1mil, provided the compensation is based on gains and losses. NASAA is different in that state reg advisors must make addtl disclosures about incentive to take addtl risk
31
Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees?
1. Client must initially have 1mil under mgmt or net worth > 2.1mil
2. Compensation paid in this way must be for gains reduced by losses
3. Disclosure that the fee arrangement may cause riskier or more speculative trades than if there wasn’t performance based fees
All three. Performance based is permitted if client has 1mil under mgmt and net worth > 2.1mil, provided the compensation is based on gains and losses. NASAA is different in that state reg advisors must make addtl disclosures about incentive to take addtl risk
32
A customer upset with his agent for the execution price of a recent trade sends the agent a complaint via email. The agent should
Bring the customer complaint to his supervisor immediately.
33
Do you have to tell your client if you are splitting commissions?
No. You can split with someone at your BD or an affiliate BD
34
Your client owns a stock that has dropped 10% but you tell her it’s still been going up
This is fraudulent bc it is giving fictitious quotes/not accurate quotes
35
To come under the SEC’s requirement to file form 13f, an institutional manager must have discretion over
1. A portfolio of at least 50mil
2. A portfolio of at least 100mil
3. More than 10% of the outstanding voting securities of a reporting company
4. A portfolio of at least 100mil of 13(f) securities
An institutional money manager with at least 100mil of 13(f) securities under discretionary management is required to file form 13(f). This form must be filed within 45 days of the end of the quarter.
36
Which of the following regarding an IAs use of a full-service broker for an account over which the IA has discretion is true?
1. Full service broker may not be used for any transaction that could be done by a discount broker
2. Full service broker may only be used if the broker is not affiliated with the IA
3. Sales incentives such as free vacations, may be taken into consideration by the adviser in determining whether to use full service broker
4. A full service broker may only be used if the charge is reasonable in relation to the advice, analyses, or other services provided.
4. Use of a full service broker to effect transactions for an account the IA has discretion is not a breach of fiduciary duty, provided the full service brokers commission is reasonable in view of the services provided.
37
Can an IA or IAR share in profits or losses with a client?
No, only an agent of a BD can share in profits/losses and only with written permission from the client and the employing BD
38
Are churning, front running, and guaranteeing a customer against loss market manipulation?
These are prohibited practices but they are not market manipulation.
39
If an agent is assigned to an account previously handled by an agent who has since left the firm, what should the agent do first?
1. Liquidate the portfolio for immediate reinvestment in stocks the firm currently recommends
2. Suggest the customer buy one of the stock the firm is currently recommending
3. Verify the account information
4. Require the customer to sign a trading authorization naming the agent as the party with authority
The agent must first verify and update the client information before recommending trades. Without knowledge of the clients needs and financial profile, the agent cannot make suitable recommendations
40
When must a principal approve order tickets?
After trades, not before
41
Under rule 206(4)-7 of the IA act of 1940, each IA reg. with the SEC is required to adopt and implement policies and procedures to prevent violating securities law. Who’s responsibility is that at the firm?
The chief compliance officer
42
If a customer wants to trade on insider info, do you need to bring it to the attention of the administrator?
No, you only need to tell your direct supervisor/principal
43
Do you have to tell your client if you are splitting commissions?
No. You can split with someone at your BD or an affiliate BD
44
Fiduciary responsibility
Putting your clients needs ahead of your own
45
A customer upset with his agent for the execution price of a recent trade sends the agent a complaint via email. The agent should
Bring the customer complaint to his supervisor immediately.
46
You believe rates are about to fall so you contact all your clients and suggest they buy long term high quality debt securities. This action
1. Is an error because a drop in interest rates will cause bond prices to fall, leading to a loss in the clients account
2. May be acting on insider info
3. Prob not in violation of any suitability standards as long as the bonds are high quality
4. Has probably violated the USA’s suitability standards
The agent is at fault because the same recommendation cannot be suitable for all clients. The idea of buying long term debt when rates are about to peak is correct, but can’t be suitable for every single client. This is called a blanket recommendation
47
You are a registered agent of a BD and you believe your clients security is overvalued. You exaggerate the amount by which the security was overpriced to protect the client from a downturn in the price of the security
You acted in a dishonest and unethical manner, made an untrue statement in connection with the sale of a security, and engaged in fraud in connection with the sale of a security.
48
True or false: Flat fees and fees based on total portfolio value are permitted
True. Flat fees and fees based on total portfolio value are permitted. For example if you have 100k the fee is 5k but if you have 200k the fee is 2k
49
If you’re completing form ADV-E, that must mean your firm does what?
Maintains custody. Form ADV-E is used for an audit when you maintain custody
50
Wash trade
Simultaneous or near simultaneous selling and repurchase of the same security for the purpose of generating the appearance of trading activity and increasing the price. One of the most common forms of market manipulation
51
Front running is a prohibited practice because
It subordinates the the interest of the customer
52
What transactions over $10,000 would require you to file a Currency Transaction Report?
Cash transactions used to pay off loans, electronic transfer of funds, purchases of cds, stocks, bonds, mutual funds, or other investments with cash
53
Are persons supervising someone who traded on insider information subject to damages?
Yes. If improper supervision can be proven.
54
Currency transaction reports must be filed at what level of cash transaction?
$10,000. The bank secrecy act requires you to file a currency transaction report on FinCen form 112 for each cash transaction over 10k.
55
A client of an IA approaches the IA for a loan. The IA is not in the business of lending. Is there any circumstance when this would be permitted?
Only if the contract is terminated, otherwise it is prohibited
56
A fiduciary is
A person entrusted with the duty of acting for the benefit of another party is a fiduciary and must follow the standards of fiduciary duty appropriate to the nature of the relationship.
57
Can an IA or IAR share in profits or losses with a client?
No, only an agent of a BD can share in profits/losses and only with written permission from the client and the employing BD
58
What is the difference under state law about performance based fees?
The agent must make additional disclosures including the one about incentive to take more risks
59
How many exemptions are there from the brochure rule?
Client is an investment co or if advice rendered is impersonal and the annual fee is less than $500
60
True or false: Flat fees and fees based on total portfolio value are permitted
True. Flat fees and fees based on total portfolio value are permitted. For example if you have 100k the fee is 5k but if you have 200k the fee is 2k
61
Who has the obligation for delivering customer securities? The agent or the BD?
The BD.
62
Which of these is true regarding a discretionary account at a BD?
1. The opening must be approved by a supervisory person of the firm
2. It must be reviewed frequently
3. A discretionary order may be placed once the customer has placed the power of attorney in the mail
4. It must be approved by the SEC
1 and 2. A new discretionary account must first be approved by the appropriate supervisory person, orders approved on the day of the trade, and the account must be reviewed frequently for suitable activity. The written authorization must be in hand before any discretion can be exercised
63
You must disclose adverse regulatory events within the last what years?
10 years
64
Nasaa rule on custody reqs. for IAs requires that an IA with custody do all of the following except
1. Send monthly account statements
2. Deposit client $ into separate accounts and provide written notice of location of $
3. Submit to annual surprise audit by independent accountant
4. Submit an audited balance sheet to the Administrator with Part 2a of form ADV each year
You do not send statements monthly when you have custody. You send statements quarterly when you have custody
65
True or false: An IA must disclose misdemeanors regarding non-investment related actions.
False. You only have to report misdemeanors related to investment biz.
66
You are an agent for Garden City securities, a BD registered with the SEC and all 50 states. It would be considered an unethical or dishonest practice to
1. Fail to make prompt delivery of certificates when requested
2. Fail to obtain written auth for a discretionary account prior to the first trade
3. Accept an order from a clients spouse without written trading authorization prior to receiving the order
4. Share commissions with another agent at the BD
2 and 3 are unethical or dishonest. Failing to obtain a written authorization for a discretionary account prior to the first trade in that account and Accepting an order from a clients spouse without written trading authorization. In the first choice, it’s not the agents responsibility to deliver certificates it’s the BDs.
67
The securities exchange act of 1934 requires written authority for a discretionary account, unless the securities professional’s discretionary authority is limited to determining
1. The price of the stock
2. The amount of the stock
3. The time of the order
1 and 3. The ability to determine the time or price at which a specific customer order will be executed does not constitute discretionary power and therefore does not require written authorization
68
Which of the following is discretionary?
1. Determining the specific time to execute the order
2. Making the decisions in the account while awaiting delivery of the proper paperwork
3. Picking the specific security
4. Determining the specific price
Picking the specific security. An agent exercising discretion is picking the specific security, amount, or action. Time and price are excluded from the definition of discretion. An agent cannot makes any discretionary decisions until proper auth. has been received and approved
69
A fiduciary is
A person entrusted with the duty of acting for the benefit of another party is a fiduciary and must follow the standards of fiduciary duty appropriate to the nature of the relationship.
70
Nasaa rule on custody reqs. for IAs requires that an IA with custody do all of the following except
1. Send monthly account statements
2. Deposit client $ into separate accounts and provide written notice of location of $
3. Submit to annual surprise audit by independent accountant
4. Submit an audited balance sheet to the Administrator with Part 2a of form ADV each year
You do not send statements monthly when you have custody. You send statements quarterly when you have custody
71
If an agent is assigned to an account previously handled by an agent who has since left the firm, what should the agent do first?
1. Liquidate the portfolio for immediate reinvestment in stocks the firm currently recommends
2. Suggest the customer buy one of the stock the firm is currently recommending
3. Verify the account information
4. Require the customer to sign a trading authorization naming the agent as the party with authority
The agent must first verify and update the client information before recommending trades. Without knowledge of the clients needs and financial profile, the agent cannot make suitable recommendations
72
One of the distinguishing characteristics of an IA is that of fiduciary responsibility. That responsibility specifically requires the IA to
1. Be sure that all client recs. are suitable
2. Always place the clients interest ahead of its own
3. Disclose all potential conflicts of interests
4. Charge fees that are reasonable under the circumstances of the account
2. Always put client interests ahead of your own. Each of these is a requirement for acting ethically, but only putting client interests ahead of your own specifically reflects the obligation as a fiduciary.
73
Can an agent share in the profits and losses in a clients account?
Yes, as long as there is written consent from the client and the agent’s BD. IAs and IARs cannot share in profits/losses
74
Can churning happen even when the account is making money?
Yes
75
What damages can the SEC seek for trading on insider info?
3 times the amount gained or loss avoided
76
Which of the following regarding an IAs use of a full-service broker for an account over which the IA has discretion is true?
1. Full service broker may not be used for any transaction that could be done by a discount broker
2. Full service broker may only be used if the broker is not affiliated with the IA
3. Sales incentives such as free vacations, may be taken into consideration by the adviser in determining whether to use full service broker
4. A full service broker may only be used if the charge is reasonable in relation to the advice, analyses, or other services provided.
4. Use of a full service broker to effect transactions for an account the IA has discretion is not a breach of fiduciary duty, provided the full service brokers commission is reasonable in view of the services provided.
77
An IAR may share in the profits/losses of a clients account when?
Never. An IAR is not allowed to share in profits/losses in the same way as an agent.
78
What is the first thing you must do when you find out your client wants to trade on insider info?
Tell your immediate supervisor/principal
79
Think about what the question is asking. If it’s about compliance, think about what would have to do with compliance
Would education have something to do with compliance? Probably not
80
Matched orders
One or more BDs engage in buying and selling between themselves for the purpose of creating activity in a security. This is market manipulation
81
When is the only case when agents at 2 non-associated firms would be able to split commissions?
Only with the approval of the administrator, not the BDs themselves. Otherwise it is prohibited
82
Do 12b-1 trails on no load mutual funds count as compensation that needs to be disclosed?
Yes. All forms of compensation, whether direct or indirect, need to be disclosed.
83
A client approaches an agent and about investing in a risky security and insists on doing so, even after being told by the agent that it’s unsuitable. What do you do?
Explain the risks, and if the client still insists, Mark the trade as unsolicited
84
The receipt of a third party check is only considered custody under which law?
Under the USA. Under federal law, receipt of a third party check is not considered to be custody
85
You have a friend who is a CPA. For every successful referral, you give her $200. Last year you had over 10 referrals from her. Is this prohibited?
It is not prohibited as long as proper disclosure is made
86
Is there a length of time requirement for the chief compliance officer?
There is no specific experience requirement for the chief compliance officer. They should be competent and knowledgeable of applicable federal securities laws.
87
SEC Relase IA-1092 warns against effecting transactions in which the advisor has a personal interest in a manner that could result in preferring his own interests over clients. Some ways that is applied:
1. IA structures his own trades to trade in the impact caused by recs to clients w/o disclosing to his clients
2. IA fails to disclose his own trades are inconsistent with his advice
3. IA must disclose compensation received by the issuer of a security being recommended
4. An IA that sells non-securities like insurance must disclose his interests in those products
88
Under the act of 1940, an IA has to disclose the amount of compensation he will receive from which of the following
1. Commissions on recommended securities transactions
2. Commissions on insurance sales
3. Incentives from the issuer of a recommended security
All three. Advisors must disclose compensation received on sales of securities and non-securities products and also compensation received from the issuer of a recommended security.
89
What constitutes a client giving authority to trade his account?
If you give asset, amount, or action, you’ve given authority. Or, if you have given written discretionary authorization form.
90
Can you reward friends with cash for referrals?
No, there has to be a formal solicitors agreement
91
An agent is opening new account and the client refuses to provide his net worth and annual income. Should the agent refuse to open the account?
No, he can open the account but only accept unsolicited orders
92
If you have discretionary authority over a customers account, does that count as custody of a clients funds or accounts?
No. Custody means possession, even temporary, of clients funds or securities. It does not include accepting prepaid advisory fees or discretionary authority
93
Loaning money to a client is prohibited unless
Unless the IA is a financial institution engaged in the business of loaning money or the client is an affiliate of the IA
