A. Communications with clients and prospects
1. Under the Uniform Securities Act, if a client give verbal instructions to a sales representative for discretionary trading, without signing a discretionary authorization, what actions can the sales representative take?
a. It depends on how many shares are traded
b. Only the price and the time of the trade can be decided
c. Only the time of the trade
d. It depends on which securities are traded
2. All of the following information must be disclosed by an investment adviser to a potential client under the brochure rule except
a. Types of investments offered by the investment adviser
b. The investment adviser’s investment policies
c. The investment adviser’s investment practices
d. States where the investment adviser is registered
3. Under the Uniform Securities Act, advertisements are NOT required to be filed for:
I Mutual fund shares
II Municipal bonds
III Exchange listed stocks
IV US Government bonds
b. I, II, III & IV
c. I & II
d. I & IV
4. Under the Uniform Securities Act, a sales representative may pay a referral fee to:
I insurance agent
II investment adviser
III real estate agent
a. I only
b. I, II & IV
c. I, II, III & IV
d. I & II
5. Under the Uniform Securities Act, under what circumstances is sharing of securities transactions commissions permitted?
a. Sharing is permitted as long as it is disclosed to the broker-dealer
b. Sharing is not prohibited unless the client agrees in writing
c. Sharing is prohibited in any circumstance
d. Sharing is permitted if both individuals are registered with the Administrator
6. Under the Uniform Securities Act, which of the following actions are prohibited?
I Soliciting orders for unregistered exempt securities
II Soliciting orders for unregistered non-exempt securities
III Guaranteeing client accounts
IV Loaning money to a client
a. I & IV
b. II, III & IV
c. I, II, III & IV
d. II & III
C. Client funds and Securities
7. Under what circumstances may an investment adviser take custody of a client’s assets?
a. Only if the Administrator does not prohibit this and the investment adviser notifies the client that he intends to take custody of client assets
c. Only if the Administrator does not prohibit this and the investment adviser notifies the Administrator that he intends to take custody of client assets
d. Only if the investment adviser is registered with the Administrator
8. Under which conditions can a sales representative exercise discretion in a client’s account?
a. The client gives verbal direction to the representative to use their discretion in choosing trades to make
b. The sales representative makes only prudent trades while the client is out of town
c. The client states that the power of attorney was signed and placed in the mail
d. The sales representative has a signed power of attorney form on file
9. Which of the following statements concerning business practices of sales representative are NOT true?
a. A sales representative may not share in the gain or loss in a client’s account
b. A sales representative is not permitted to personally guarantee a client’s account against loss
c. sales representative may not borrow money from a client
d. A sales representative may not recommend that a client use options to hedge their account against loss
D. Conflicts of interest and fiduciary issues
10. Market manipulation includes all of the following EXCEPT:
a. Placing trades right before the market closes in an effort to impact the closing price
b. Spreading rumors in an attempt to increase the market price of a security
c. Giving inaccurate securities quotes
d. Placing unsolicited trades in penny stocks
11. Which of the following statements is NOT an examples of necessary disclosure of potential conflicts?
a. Receiving referrals from the client, in addition to a fee for investment advice
b. Receiving mutual fund commissions, in addition to a fee for investment advice
c. Receiving “soft dollar” compensation (such as research reports, stock quotes, etc) from broker-dealers who make trades for the client, in addition to a fee for investment advice
d. Receiving a referral fee from the broker who places trades for the client, in addition to a fee for investment advice
12. Which of the following statements is true regarding anti-fraud provisions that apply to securities?
a. Anti-fraud provisions apply neither to exempt or non-exempt securities
b. Anti-fraud provisions apply to both exempt and non-exempt securities
c. Anti-fraud provisions apply to non-exempt securities only
d. Anti-fraud provisions apply to exempt securities only
13. Which of the following are not prohibited business practices?
a. Being deliberately selective in the material information given to a client about a security
b. Opening a discretionary account
c. Making inaccurate statements about a security’s projected earnings
d. Stating that a company will be listed soon on the NYSE without knowing if that is true
A trade is not considered discretionary if the sales representative decides only chooses the price and time of the trade. A power of attorney is required from the client if the sales representative chooses the security to sell, or how many shares.
The brochure rule requires the investment adviser to provide the ADV Part II (or a brochure disclosing the same information) to potential clients. The ADV Part II does contain information such as the adviser’s background, experience, investment policies and practices, as well as types of investments. However, basic registration information such as States where the adviser is registered is contained in the ADV Part I, which is not required to be given to clients.
The Administrator may not require the filing of advertising for exempt securities, exempt transactions or federal covered securities. Municipal bonds are US government bonds are exempt securities, while mutual funds and exchange listed stocks (such as NYSE) are federal covered securities.
Referral fees can only be paid to others licensed with the Administrator, such as the investment adviser or broker dealer. A real estate agent or insurance agent are not licensed and cannot receive a fee.
Commissions may be shared only if both individuals are registered with the Administrator.
Orders may be solicited for unregistered exempt securities (such as US Government bonds). Loaning money to a client, guaranteeing client accounts and soliciting orders for unregistered non-exempt securities are prohibited.
With appropriate disclosure, an investment adviser may take custody of assets. There are reporting requirements, such as providing detailed quarterly statements.
The sales representative may only use discretion if he has a signed power of attorney. The only exception is that the representative can use their own discretion as to price and timing of a trade if they have received a verbal authorization.
While a sales representative may not guarantee an account against loss, there is no prohibition against recommending investment strategies that may help to reduce losses
Any activity designed to move the market price of a security in any direction is market manipulation and is prohibited.
Investment advisers may request or receive referrals from clients without needing to disclose that they may receive compensation if these referrals become clients. However, the adviser must disclose to the client if they expect to receive any compensation (such as commissions, referral fees or soft-dollar arrangements) in addition to the advisory fee
All antifraud provisions under the Act, apply to all securities.
It is not prohibited to open a discretionary account for a client, as long as the appropriate forms are signed. However, being selective in choosing what material information to give to a client, and making inaccurate or untrue statements are all prohibited
Modified: October 4th, 2017
Published: August 4th, 2014