Trading Ahead "Trading ahead" is a specific NYSE violation where a Designated Market Maker - DMM - formerly called the Specialist), rather than matching a customer who wants to sell at the market to another customer who wants to buy at the market, "trades ahead" and instead, buys the security from the seller into the DMM's inventory account and then sells it to the buyer out of that inventory account at a penny higher price (another name for this is "pennying"). In contrast, when a trader gets a large institutional order that will have a "market impact," the temptation is to place an order to benefit from the expected market move prior to entering the large institutional order. This is called "front running" and is explicitly prohibited. Which of the following situations violates the contractual requirements for investment advisory partnerships under the Uniform Securities Act? A) A renewal of an investment advisory contract requires the written repetition that an adviser shall not be compensated on the basis of a share of capital gains, not assign a contract without consent, and notify clients of any change in membership of partnership. B) A partner with a 25% interest in an advisory firm dies and is replaced by a new member. The partnership continues business with its existing clients and informs them of the change in partnership composition within a reasonable period. C) A partner with a 5% interest in an advisory firm leaves the firm and the remaining partners do not inform their clients because the departing partner held a minority interest in the firm. D) A partnership, without undergoing any change in membership, assigns its smallest accounts to another firm with written consent of the clients. C) A partner with a 5% interest in an advisory firm leaves the firm and the remaining partners do not inform their clients because the departing partner held a minority interest in the firm. An investment advisory partnership must notify clients of any change in membership within a reasonable time. The death of a minority partner does not constitute assignment of contract. A partnership may assign contracts with written consent of clients. A contract renewal does require written repetition that an adviser shall not be compensated on the basis of a share of capital gains, not assign a contract without consent, and notify clients of any change in membership of partnership. U6LO4 As appropriate to the scale and complexity of a firm's business, elements of an effective practice framework for managing conflicts of interest include all of the following EXCEPT A) avoiding severe conflicts, even if that avoidance means foregoing an otherwise attractive business opportunity B) establishing mechanisms to identify conflicts in a firm's business as it evolves C) ensuring that the firm remains solvent for protection of customers and employees alike D) training staff to identify and manage conflicts in accordance with firm policies and procedures C) ensuring that the firm remains solvent for protection of customers and employees alike Managing conflicts of interest does not take into consideration making enough money to remain solvent. U6LO1 Under the Investment Adviser's Act of 1940, which of the following is NOT true with regard to advertising? A) The advertisement may not refer to specific past recommendations. B) The advertisement may not use testimonials from clients. C) The advertisement may not refer to any formula, charting device, or graphing method without disclosing the difficulties or limitations in their use. D) The advertisement may not make offers of free service. D) The advertisement may not make offers of free service. There is no prohibition against offers of free service, except that such offers must have absolutely no strings attached. Advertisements used by investment advisers may not use testimonials, specific past recommendations (though it may refer to all recommendations within a given period of time, provided a disclaimer is included stating there is no assurance that the same results will be obtained), or any formula, charting, or graphing device without disclosing the difficulties or limitations in their use; make offers of free service unless there is no obligation imposed on those who request it; or make false or misleading statements. U6LO5 All of the following activities and communications would fall outside the definition of a recommendation EXCEPT A) a broker-dealer's website places a search engine in a prominent spot on its landing page that can be used to access charts of multiple stocks in the large-cap sector B) a broker-dealer provides research tools on its website that allow customers to screen through all Nasdaq securities C) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks and includes a list of those paying the highest dividends D) a broker-dealer's website was created to be available to customers that contains a link to an electronic library of research reports that contains buy-sell recommendations from the author of the research reports C) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to inv21est in public utility stocks and includes a list of those paying the highest dividends Specificity, such as a list of securities, invariably results in communication being deemed a recommendation. All of the other choices given would generally be viewed as falling outside the definition of recommendation. U6LO5 It is not uncommon for many federal covered advisers to be affiliated with a broker-dealer. Take the case where an IAR with a federal covered adviser is also an agent with a broker-dealer. When dealing with advisory clients, all of the following are true EXCEPT A) the IAR must disclose that he is liable for any losses suffered in the account due to poor portfolio performance B) the IAR must disclose that he may earn commissions in addition to the fees charged for advice C) the IAR must disclose that the advisory services he offers are separate from the broker-dealer D) the IAR must disclose that trades will be executed through his broker-dealer unless the client elects otherwise A) the IAR must disclose that he is liable for any losses suffered in the account due to poor portfolio performance Full disclosure of all possible conflicts of interest must always be made. However, registered persons can never assume liability for losses due to poor portfolio performance. U6LO1 Under the USA, every investment adviser organized as a partnership, must include in its contracts an agreement to notify clients within a reasonable period of time of A) the decision to charge fees in advance rather than arrears C) the addition or removal of any of the partners Investment advisers organized as partnerships must include in their advisory contracts a statement that they will notify all clients of a change to the composition of the partnership within a reasonable period of time. All of the other choices mentioned here would require prompt notification, which although not quantified in the USA, is much sooner than a reasonable period of time. U6LO4 SEC Release IA-1092 requires an investment adviser representative to make each of the following disclosures EXCEPT A) that the IAR may structure his personal securities transactions to trade on the market impact caused by his recommendations to clients B) highest post-secondary educational level attained, the name of the institution, and the date of graduation or final attendance C) if his personal securities transactions are inconsistent with the advice given to clients D) any compensation received from an issuer of a security being recommended to clients B) highest post-secondary educational level attained, the name of the institution, and the date of graduation or final attendance Educational information is generally only required of executive personnel listed on Form ADV Part 1. It is also required on Form ADV Part 2 for those rendering advice who have no high school education and no formal education after high school (post-secondary education). U6LO4
Jackie Jackson is an agent with Hamilton Securities Co., an SEC-registered broker-dealer. Jackie's father, Andy, founded a start-up venture several years ago and the company, with Andy as its CEO, had its initial public offering 4 months ago. For Jackie to recommend shares of this company to clients, Jackie A) would have to obtain written consent of the client before completing the sale B) must receive approval from a supervisory person of Hamilton Securities Co. before making this recommendation C) would have to disclose the potential conflict of interest D) must apply a stricter suitability standard to this company because it is so new C) would have to disclose the potential conflict of interest When an immediate family member is in a control position with a recommended security, the agent must make disclosure of the potential conflict of interest. Consent of the client is not required, and we don't have enough information to know anything about the risk profile of this company that would require greater a suitability standard. Trades are approved by principals, not recommendations. U6LO1 A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is NOT true? A) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. B) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. C) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year end. D) Material changes to wrap fee programs must be filed promptly with the Administrator. B) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of ADV Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even non-material information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes. U6LO4 A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means A) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited B) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met C) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs D) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning D) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended. U6LO2 Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? I. An adviser that requires prepayment of $1,000 in fees, 9 months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. II. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. III. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) II and III A) II and III An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, 6 or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure. U6LO1 Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees B) An owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan C) Signing an investment advisory contract that did not outline the compensation arrangements D) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees (1) Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded if any, if the contract is terminated. (2) Nothing in the USA requires that there be a refund, only that the terms must be disclosed. (3) The Uniform Securities Act also requires investment advisers to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is considered an assignment of the IA's contracts. U6LO4 An investment advisory contract is considered assigned if an adviser formed as A) a partnership with 5 partners and adds 2 partners D) a partnership with 2 partners and adds five partners If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required. U6LO4 Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) filed a brochure with the Administrator, noting that it was available to clients upon request B) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year C) did not send an annual brochure to its clients if there was no material change from the previous year D) sent a brochure within 150 days of the end of AT's fiscal year C) did not send an annual brochure to its clients if there was no material change from the previous year The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Part 2A and 2B U6LO4 As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime within 6 months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be A) a right of rescission C) a prohibited guarantee against loss 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 was 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. U6LO3 There are a number of requirements placed upon investment advisers found in both the Uniform Securities Act and NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which of the following is NOT included in those requirements? A) The adviser may not provide a report or a recommendation to any advisory client prepared by someone other than the adviser without making a disclosure of that fact. B) Investment advisory contracts must be in writing. C) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. D) The adviser may only accept an order from a third party if the proper trading authorization is in hand. C) Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. Under both state and federal law, new clients must receive the adviser's brochure no later than the time of entering into the advisory contract, NOT in advance. The 48-hour rule (state only) refers to the provision that if the brochure is not delivered at least 48 hours in advance, the client has the right to a penalty-free withdrawal from the agreement. The USA requires all initial and renewal investment advisory contracts to be in writing. If a specific securities report or recommendation has been prepared by someone other than the adviser, the disclosure must be made to clients. In order to accept instructions from a third party (someone other than the client), the proper written authorization must be present. U6LO4 The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT I. when the service provided is an individual supervisory service II. when the client is an investment company III. when the contract is for an impersonal advisory service requiring payment of less than $500 IV. when the client is an individual with a net worth of more than $1 million A) II and III A) II and III A disclosure brochure is NOT required to be delivered if (1) the client is a registered investment company, or (2) if the advisory service is of an impersonal nature and costs less than $500. A brochure IS required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements. U6LO4 Which of the following would NASAA consider to be a substantial prepayment of fees? A) C) $600 covering the entire contract year NASAA defines a substantial prepayment of fees to be more than $500, 6 or more months in advance. U6LO4 Nifty Advisers Group made an announcement on its website that the firm was going to create a Facebook account to keep all its clients and prospective clients updated on the market. To get the word out, Nifty sent an email notice to its current clients and asked them to please refrain from airing complaints through that account; any negative comments would be addressed through the normal channels. Also, contained in the email was an announcement that all "likes" would receive a one-time 5% decrease in the client's quarterly fees. For this campaign, which of the following are NOT true? A) Third-party use of the "like" feature on an investment adviser's social media site could be deemed a testimonial. B) This would not be considered a testimonial and therefore permitted under the regulations. C) Currently, there has been no comment from NASAA concerning the use of "likes." D) Even though the rules do not prohibit testimonials for broker-dealers, they are strictly forbidden for use by investment advisers. B) This would not be considered a testimonial and therefore permitted under the regulations. Please note that this question is looking for the statement that is not true—in other words, find the false statement. In March 2014, the SEC published an interpretive release dealing with testimonials for investment advisers using social media. Included in that release is the statement that third-party use of the "like" feature on an investment adviser's social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's experience with the adviser. U6LO5 Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade was being executed by an officer or partner of the firm B) directing a securities transaction to an affiliated broker-dealer C) shares held in the account of an advisory client are purchased by the investment adviser D) engaging in an agency cross transaction C) shares held in the account of an advisory client are purchased by the investment adviser There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from the client who owns them places the IA in the position of being 1 of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent—that's the reason for the term. U6LO1 An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act, A) the agent is describing a guaranteed security B) a guaranteed security only guarantees payment of interest or dividends C) agents should always recommend securities that are familiar to the investor D) the agent is possibly committing fraud A) the agent is describing a guaranteed security A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that your client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if suitable. U6LO3 The agreement between an investment adviser and client is the advisory contract. To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they A) generally do not provide for discretion B) must disclose the amount or method of calculation of the adviser's fee C) must be in writing D) typically are renewed on an annual basis C) must be in writing Although it is not the general practice, the federal law does permit oral contracts, whereas the USA requires that ALL initial and renewal contracts be in writing. U6LO4 When must an updated brochure be delivered to existing customers of an investment adviser?The brochure rule states that the required information must be provided to new clients at least 48 hours before entering into an advisory contract. Advisors must give existing clients a new brochure every year. Failure to provide the brochure is considered fraudulent behavior.
Which of the following persons would be considered an investment adviser under the Investment Advisers Act of 1940?Which of the following persons would be considered an investment adviser under the Investment Advisers Act of 1940? Any firm that offers wrap accounts is considered an investment adviser.
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When must an updated brochure be delivered to existing customers of an investment advisor quizlet?
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