Investment Advisory Practices

Question 1

List some important considerations when determining the suitability of recommendations made to customers. 4

Answer 1

1. Investment objectives,
2. financial situation,
3. risk tolerance,
4. tax status

Question 2

If a client gives little information when opening an account, what securities may an agent recommend to the client?

Answer 2

Only securities that are suitable based on the information the client did provide

Question 3

What is soft-dollar compensation?

Answer 3

Non cash compensation paid by a BD to an IA for directing securities transactions.

Question 4

What forms of soft-dollar compensation are NOT acceptable? 6

Answer 4

1. Rent,
2. travel expense reimbursement,
3. hardware,
4. furniture,
5. entertainment,
6. meals

Question 5

True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.

Answer 5

False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.

Question 6

What step must an IA complete when faced with a conflict of interest?

Answer 6

The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.

Question 7

Identify the acronym: UPIA

Answer 7

Uniform Prudent Investor Act

Question 8

Describe a soft-dollar arrangement between an IA and a BD.

Answer 8

An IA directs client transactions to a specific BD in return for research and brokerage services.

Question 9

To be allowed, a soft-dollar arrangement must benefit ____________.

Answer 9

To be allowed, a soft-dollar arrangement must benefit the client.

Question 10

Identify some permissible uses of soft-dollar arrangements. 3

Answer 10

Soft dollars are permitted for

1. obtaining research reports,
2. software, and
3. fees for attending conferences/seminars.

Question 11

What are some of the examples of items that cannot be covered by a soft-dollar arrangement? 4

Answer 11

1. Advertising,
2. travel expense reimbursement,
3. meals and entertainment, and
4. computers

Question 12

True or False: An agent must always have reasonable grounds for recommending a particular security.

Answer 12

True

Question 13

True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.

Answer 13

False. Risk should be managed, not avoided. Speculative investments (e.g., options and commodities) may reduce overall risk.

Question 14

What is/are the suitable investment class(es) for clients whose sole objective is capital preservation?

Answer 14

Money market securities or money-market funds.

Question 15

What forms must an agent obtain from a client in order to purchase securities in a margin account?

Answer 15

An agent of a broker-dealer must obtain from a client written authorization to open a margin account at a broker-dealer. It is considered an unethical business practice for an agent to allow a client to execute transactions in a margin account without the client’s written authorization. The client would sign a document referred to as a margin agreement, which would include an hypothecation agreement and a credit agreement. A loan consent agreement is not mandatory. Clients are not required to sign new account forms.