Chapter 5 - Recommendations to Customers

Question 1

Investment Objectives

Answer 1

• Income
• Growth
• Preservation of capital
• Tax benefits
• Liquidity
• Speculation

Question 2

Income investments

Answer 2

• Corporate bonds
• Municipal bonds
• Government bonds
• Preferred stocks
• Money market funds
• Bond funds

Question 3

Growth investments

Answer 3

• Common stock
• Common stock funds

Question 4

Preservation of capital

Answer 4

• Money market funds
• Government bonds
• Municipal bonds
• High-grade corporate bonds

Question 5

Liquid investments

Answer 5

From most liquid to least liquid:

• Money market funds
• Stocks/bonds/mutual funds
• Annuities
• CMOs
• Direct participation programs
• Real estate

Question 6

Speculation investments

Answer 6

• Penny stocks
• Small-cap stocks
• Some growth stocks
• junk bonds

Question 7

Types of risk

Answer 7

• Capital risk
• Market risk
• Non-systematic risk
• Legislative risk
• Timing risk
• Credit risk
• Reinvestment risk
• Interest rate risk
• Call risk
• Opportunity risk
• Liquidity risk

Question 8

Alpha

Answer 8

Projected independent rate of return or the difference between an investment’s expected (benchmark) return and its actual return.

Question 9

Beta

Answer 9

It’s the projected rate of change relative to the market as a whole.

Question 10

Developing the client profile

Answer 10

Recommendations are suitable, based on a review of the client’s:

• Investment objectives
• Financial status
• Income
• Investment holdings
• Retirement needs
• College and other major expenses
• Tax bracket
• Attitude toward investing

When developing the client’s profile advisor should also calculate the client’s:

• Assets
• Liabilities
• Net worth
• Monthly discretionary cash flow or income

Question 11

Regulation Best Interest (Reg-BI)

Answer 11

Adopted by the SEC in June 2019 as an amendment to the securities exchange act of 1934. Advisers must act in the best interest of the client and provide a client relationship summary (CRS).

Known as ADV part 3.

Any changes required to be made to the CRS must be completed within 30 days and sent to existing clients within 60 days.

Question 12

Churning & Reverse-churning

Answer 12

Churning is a practice of making transactions that are excessive in size or frequency, with the intention of generating higher commissions for the representative.

Reverse-churning is the practice of placing inactive accounts or accounts that do not treat frequently into fee-based programs that charge an annual fee based on the assets in the account. Since these inactive accounts do not trade frequently it will cause the total fees charged to the account to increase and make a fee-based account unsuitable.

Question 13

Capping

Answer 13

A minipulative act designed to keep a stock price from rising or to keep the price down.

Question 14

Pegging

Answer 14

Manipulative act designed to keep a stock price up or to keep the price from falling.

Question 15

Front-running

Answer 15

The entering of an order for the account of an agent or firm prior to the entering of a large customer order.

Question 16

Trading ahead

Answer 16

The entering of an order for a security based on the prior knowledge of a soon to be released research report.

Question 17

Painting the tape / matched purchases and sales

Answer 17

A manipulative act by two or more parties design to create false activity in the security without any beneficial change in ownership. The increased activity is used to attract new.

Question 18

Selling dividends

Answer 18

Registered representatives may not use the pending dividend payment as the sole basis of the recommendation to purchase a stock. Using the pending dividends as a means to create urgency on the part of the investor to purchase the stock is an example of this type of violation.

Question 19

Required disclosures for research reports

Answer 19

• If the firm makes a market in the security.
• If the firm owns 1% or more of the security.
• If the analyst or a member of the analyst household owns the security, has an interest in the issuer, or is an officer, Director, or adviser to the issuer.
• If the member has received investment banking fees from the subject company within the last 12 months.
• If the member is seeking investment banking business from the subject company within the next 3 months.
• Any material conflict of interest known by the firm.

Question 20

Regulation FD

Answer 20

Regulation Full Disclosure

Adopted by the SEC in order to prevent the selective disclosure of non-public material information to securities industry professionals.

Question 21

When communication reached levels of recommendation

Answer 21

When a communication is deemed to be a recommendation it becomes subject to the suitability requirements of FINRA rule 2111.