Question 1

What is Fraud?

Accepted Answer

``` Fraud — is INTENTIONAL misrepresentation, concealment, or omission of the truth for the purpose of deception. Ch 03(1) ```

Question 2

How and when are disclosures delivered (Advisory capacity)?

Accepted Answer

``` Disclosures must always be in writing, and must be provided prior to rendering any advice. Ch 03(1) ```

Question 3

How do Anti-Fraud Provisions of the act apply to the securities industry?

Accepted Answer

In a securities transaction, whether or not a sale occurred, anti-fraud provisions are applicable. ``` Anti-fraud and common law deceit provisions exist at all levels: Federal, State, and Local. Ch 03(1) ```

Question 4

Brokerage Activities -- It is unlawful for any person to directly or indirectly transact business in a state as a broker-dealer -OR- agent unless

Accepted Answer

``` registered under the Act. Ch 03(1) ```

Question 5

Brokerage Activities -- It is unlawful to:

Accepted Answer

Employ any device to defraud another person Make ANY untrue statement of material fact or omit MATERIAL facts. Ch 03(1)

Question 6

Brokerage Activities -- An Agent who commits fraud may be:

Accepted Answer

Expelled permanently Fined Imprisoned Suspended Ch 03(1)

Question 7

Advisory Activities -- Unlawful for any person to receive, directly/indirectly, any consideration for advising others in securities to:

Accepted Answer

Employ any device or scheme to defraud Act as a principal for their own account (to knowingly sell to or purchase any security from a client) account without proper disclosure to the client Ch 03(1)

Question 8

Advisory Activities -- What is proper disclosure?

Accepted Answer

Proper disclosure = delivery of a written disclosure to client PRIOR to completion of transaction. IAR must give WRITTEN consent to client. Client must give consent — but not required in writing Ch 03(1)

Question 9

Advisory Activities -- What is the exception to the principal disclosure requirement?

Accepted Answer

``` The principal disclosure requirement does NOT apply to ANY transaction with a customer of a broker-dealer IF the B-D is NOT acting as investment advisor in relation to the transaction. Ch 03(1) ```

Question 10

Enter Into, Extend, or Renew Investment Advisory Contract -- It is unlawful for any investment advisor to enter into, extend, or renew any investment advisory contract, unless it states in writing:

Accepted Answer

1). Advisory will not be compensated on “Performance Fees” 2). Rule permits compensation based on total value averaged over a defined period. 3). NO Assignment of the contract may be made by the advisor without the CONSENT of the client. 4). If the advisory company is a partnership, it shall notify the client of any change in the membership of the partnership. 5). If terms of an advisory contract are changed, the IA must have the client sign a revised contract. Ch 03(1)

Question 11

Enter Into, Extend, or Renew Investment Advisory Contract -- What are performance fees?

Accepted Answer

``` Performance Fees = the advisor will not be compensated on the basis of a share of capital gains or capital appreciation of funds. Ch 03(1) ```

Question 12

Enter Into, Extend, or Renew Investment Advisory Contract -- Are performance fees allowed in the USA (state level)?

Accepted Answer

No. Performance-based fees not allowed in the USA. ``` But Administrator CAN allow such arrangement by rule or order in the Administrator’s own state. Ch 03(1) ```

Question 13

Enter Into, Extend, or Renew Investment Advisory Contract -- Are performance fees allowed in the Investment Advisers' Act of 1940 (federal level)?

Accepted Answer

Yes, but only for Qualified Clients. ``` ’40 Act ALLOWS performance-based fees for Qualified Clients ONLY. Ch 03(1) ```

Question 14

Enter Into, Extend, or Renew Investment Advisory Contract -- What is a Qualified Client?

Accepted Answer

``` A Qualified Client is an investor with a net worth of $2.1 million -OR- $1 million in assets under management. Ch 03(1) ```

Question 15

Enter Into, Extend, or Renew Investment Advisory Contract -- What does NO Assignment of the contract may be made by the advisor without the CONSENT of the client mean?

Accepted Answer

Assignment is the transfer of rights and duties of a contract to another party. Third party assignment — somebody besides the contract holder wants to transfer the contract to another party. This would require the contract owner’s consent. Ch 03(1)

Question 16

Enter Into, Extend, or Renew Investment Advisory Contract -- No Assignment Without Consent If an IA is a partnership, would death, withdrawal or admission of IAs with minority interests in the business be considered an assignment?

Accepted Answer

No. ``` No assignment of an investment advisory contract is considered to result from the death, withdrawal, or admission to the IA of members having only a minority interest in the business. Ch 03(1) ```

Question 17

Enter Into, Extend, or Renew Investment Advisory Contract -- No Assignment Without Consent If an IA is a partnership, would a majority member dies or withdraws be considered an assignment?

Accepted Answer

Yes. ``` If a majority member dies or withdraws — then it IS an assignment, and client consent would be required. Ch 03(1) ```

Question 18

Enter Into, Extend, or Renew Investment Advisory Contract -- No Assignment Without Consent If a firm changes from a sole proprietorship to a partnership, is that considered an assignment?

Accepted Answer

Yes. ``` If a firm changes from a sole proprietorship to a partnership, it IS an assignment. Ch 03(1) ```

Question 19

Enter Into, Extend, or Renew Investment Advisory Contract -- What does: if the advisory company is a partnership, it shall notify the client of any change in the membership of the partnership mean?

Accepted Answer

``` You have to let clients know when the structure of a business changes. Particularly, if it is an advisory firm. Ch 03(1) ```

Question 20

Enter Into, Extend, or Renew Investment Advisory Contract -- What does: If terms of an advisory contract are changed, the IA must have the client sign a revised contract mean?

Accepted Answer

``` Changes to an advisory contract include new IA address or telephone number. From a realistic point of view, if somebody manages your money, you would want to know if they moved their address or changed their telephone number. So you, the client, would have to receive a revised contract, and you would have to Sign it to acknowledge you know about the changes. Ch 03(1) ```

Question 21

Enter Into, Extend, or Renew Investment Advisory Contract -- What is NOT required to be contained in Advisory Contracts?

Accepted Answer

Advisory contracts DO NOT need to contain the names, titles, addresses, and other personal info of all principles of the firm. Ch 03(1)

Question 22

Is using Inside Information a fraudulent practice?

Accepted Answer

Yes. Anytime anybody acts on inside info, it is a violation. When an Agent or IAR encounters inside information, they must NOT act on the information. Ch 03(1)

Question 23

Is failing to properly determine suitability for a client a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 24

Is mixing customer funds with Agent funds a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 25

Is deliberately ignoring customer’s instructions a fraudulent practice?

Accepted Answer

``` Yes. But with two conditions. Ch 03(1) ```

Question 26

Could you deliberately ignore a customer's instructions if it is legal for you to carry out those instructions?

Accepted Answer

``` No. That would be fraudulent. Ch 03(1) ```

Question 27

Could you ignore a client's instructions if the client asks you to violate the rules on the client's behalf?

Accepted Answer

Yes. That would NOT be fraudulent. ``` The Agent is not permitted to follow illegal instructions from the client. Ch 03(1) ```

Question 28

Given that Agents with discretionary authority must execute unsolicited orders for customers, can an Agent add shares to such orders?

Accepted Answer

Yes. Agents MAY add shares to such orders. as long as the Order Ticket accurately labels the shares that are "unsolicited" from the client, and the shares that are "discretionary purchase" by the agent. Ch 03(1)

Question 29

Is effecting transactions and not recording them in the customer’s account a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 30

Is failing to disclose that certain transactions will involve larger than ordinary commission or transaction costs a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 31

Is failing to bring customer’s written complaints to the attention of the agent’s broker-dealer a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 32

Is soliciting orders for or selling unregistered non-exempt securities a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 33

Is backdating order tickets a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 34

Is excessive trading in a customer’s discretionary account (“Churning”) a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 35

Are failing to properly disclose compensation and/or conflicts of interest, including: 1). Principal transactions from the firm’s account in securities recommended to clients. 2). Receipt of both commissions and advisory fees on a transaction. 3). Payment of a fee or commission to a third party fraudulent practices?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 36

When would 1). Principal transactions from the firm’s account in securities recommended to clients. 2). Receipt of both commissions and advisory fees on a transaction. 3). Payment of a fee or commission to a third party NOT be fraudulent practices?

Accepted Answer

``` if properly disclosed. Ch 03(1) ```

Question 37

Is failing to properly disclose preferential pricing, preferential allocations, and/or pricing that differs from customer-to-customer a fraudulent practice?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 38

Are knowingly permitting or assisting a client in activities that violate the USA: 1) . Allowing a customer to “free-ride.” 2) . Allowing customers to cancel trades which have already been executed. 3) . PERSONALLY arranging credit for customers. 4) . Arranging for stock to be purchased into the firm’s error account in order to insure that a customer does not take a loss. 5) . Allowing any other activities that would violate the Anti-Fraud provisions or statues of the USA. fraudulent practices?

Accepted Answer

``` Yes. Ch 03(1) ```

Question 39

Intentional Misrepresentations / Omissions -- What is Inaccurate market conditions (quote)?

Accepted Answer

``` Misrepresentation. Ch 03(1) ```

Question 40

Intentional Misrepresentations / Omissions -- What is Incorrect earning statements.

Accepted Answer

``` Misrepresentation. Ch 03(1) ```

Question 41

Intentional Misrepresentations / Omissions -- What is Inaccurate commission / mark-up / mark-down statement amounts?

Accepted Answer

``` Omission. Ch 03(1) ```

Question 42

Intentional Misrepresentations / Omissions -- What is Stating securities are listed on an exchange when they’re NOT?

Accepted Answer

``` Misrepresentation. Ch 03(1) ```

Question 43

Intentional Misrepresentations / Omissions -- What is Stating that registration means regulator “approval"?

Accepted Answer

``` Misrepresentation. SEC & state regulators do not pass, approve of, or endorse registrants. Ch 03(1) ```

Question 44

Intentional Misrepresentations / Omissions -- What is Misrepresenting customer account status?

Accepted Answer

``` Misrepresentation. Ch 03(1) ```

Question 45

Intentional Misrepresentations / Omissions -- What is Guaranteeing or assuring performance of securities?

Accepted Answer

``` Misrepresentation. Ch 03(1) ```

Question 46

Intentional Misrepresentations / Omissions -- What is Guaranteeing or assuring performance of securities?

Accepted Answer

``` Misrepresentation. Ch 03(1) ```

Ch 03 USA - Administration & Fraudulent Acts Flashcards

Understand Fraudulent and Prohibited Practices, Administrative Actions, and Advertising and Record Retention Rules.

Brainscape's Knowledge GenomeTM

Ch 03 USA - Administration & Fraudulent Acts Flashcards

Understand Fraudulent and Prohibited Practices, Administrative Actions, and Advertising and Record Retention Rules.

Brainscape's Knowledge Genome^TM