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Series 63 > Prohibited and Ethical Business Practices Under the USA > Flashcards

Prohibited and Ethical Business Practices Under the USA Flashcards

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Series 63 flashcards
1
Q

True or False: Principals must approve discretionary orders prior to entry.

A

False. The orders must be approved promptly afterward.

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2
Q

Does SIPC protect separate customers or separate accounts?

A

Separate customers. A customer with both a cash and margin account with a BD would be covered once.

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3
Q

True or False: Jim’s joint account with his wife is considered a separate customer by SIPC.

A

True. E.g. Jim’s cash and margin account are combined for coverage, but Jim’s joint account with his spouse is separate.

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4
Q

If a BD goes bankrupt, what happens to securities registered in the customer’s name?

A

They are returned to the customer without regard to SIPC limitations.

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5
Q

What triggers a BD’s filing of a Suspicious Activity Report (SAR)?

A

Any suspicious transactions of $5,000 or more

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6
Q

Define painting the tape.

A

Traders effecting transactions back and forth to create a misleading appearance of activity

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7
Q

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

A

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

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8
Q

For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.

A

For an agent to exercise discretion over a client’s account, the client must have signed a power of attorney.

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9
Q

True or False: If churning in a client’s account generates large profits, it is not considered a violation.

A

False

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10
Q

BD securities and client securities must be segregated; in other words, they may not be ______________.

A

BD securities and client securities must be segregated; in other words, they may not be commingled.

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11
Q

John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?

A

No, this prohibited practice is referred to as “painting the tape.”

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12
Q

True or False: Soliciting orders for unregistered, non-exempt securities is prohibited.

A

True

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13
Q

Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was _____________.

A

Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was unsolicited.

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14
Q

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.

A

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is unsolicited.

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15
Q

True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.

A

True

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16
Q

When must BDs provide payment of customer free credit balances resulting from completed transactions?

A

Upon customer request

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17
Q

Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?

A

No. Since discretion is limited to time and/or price, written authority is not required.

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18
Q

May clients of BDs be charged reasonable fees for services performed?

A

Yes, for services such as collection of monies, exchange/transfer, appraisals, safekeeping, or custody

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19
Q

What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?

A

Both oral and written disclosure of the relationship

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20
Q

Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?

A

Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.

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21
Q

A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?

A

No. This is unethical since it is considered a guarantee against loss.

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22
Q

Does a registered principal approve all orders prior to execution?

A

No. However, the principal is required to review all activity promptly (not in advance).

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23
Q

May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?

A

No. Material provided to clients must include all facts about the issue, not just the positive ones.

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24
Q

The Telephone Consumer Protection Act (TCPA) allows calls from ________ to ________ local time of the called party.

A

The Telephone Consumer Protection Act (TCPA) allows calls from 8:00 a.m. to 9:00 p.m. local time of the called party.

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25
Q

What restrictions exist in describing a fund as no-load?

A

It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25%.

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26
Q

True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.

A

False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.

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27
Q

True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.

A

False. The agent may still have omitted material facts.

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28
Q

True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.

A

False. Past performance is not indicative of future results.

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29
Q

An agent makes this statement to a client: “Go with us; we’re approved by the Administrator and SEC.” Is it acceptable?

A

No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.

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30
Q

Define churning.

A

Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees

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31
Q

May an adviser borrow money from a client?

A

Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD.

32
Q

May an adviser or BD lend money to a client?

A

Yes, if the adviser or BD is in the business of lending money.

33
Q

What is required of an IA that uses third-party research?

A

The IA must disclose the source of the research to its client.

34
Q

May an adviser release account information to the spouse of a client?

A

No, not without the client’s written authorization.

35
Q

Are advisory fees fixed and are they subject to administrative review?

A

Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.

36
Q

The solicitation of buyers for unregistered, non-exempt securities is _____________.

A

The solicitation of buyers for unregistered, non-exempt securities is prohibited.

37
Q

________ is the willful or intentional act of deceiving another person for gain or profit.

A

Fraud is the willful or intentional act of deceiving another person for gain or profit.

38
Q

Define commingling.

A

The prohibited act of mixing client funds with those of the BD

39
Q

May an agent share in the profits of a client’s account?

A

Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.

40
Q

True or False: All illegal activities are intentional.

A

False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.

41
Q

An agent of a BD lends $5,000 to his brother, is this acceptable?

A

Yes, lending to immediate family members is permissible.

42
Q

Define conversion.

A

The prohibited act of an agent using client funds for personal use.

43
Q

True or False: If an agent disagrees with a customer’s order, he may disregard the order.

A

False. Agents and IARs must follow all customer requests, even those with which they disagree.

44
Q

True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.

A

False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.

45
Q

What’s a no load fund?

A

A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year.

46
Q

May an IA use testimonials in its promotional material?

A

No

47
Q

Define testimonial.

A

An advertisement in which an individual recommends the IA’s services based on personal experiences with the firm.

48
Q

An newly hired investment adviser representative wants to put the initials “IAR” on her business card. Is this allowed?

A

No. However, she may spell out “Investment Adviser Representative.”

49
Q

Define selling away.

A

The execution of transactions by an associated person outside his employment with a member firm

50
Q

True or False: If a BD receives a written complaint from a client, it may be ignored if the complaint seems baseless.

A

False. Failing to respond to a formal written complaint is prohibited.

51
Q

To whom are written or electronically-sent grievances (complaints) forwarded?

A

An immediate supervisor

52
Q

True or False: If a producer offers an advantageous premium payment plan to an insured, it is rebating.

A

False. This is not considered rebating.

53
Q

In lieu of a final prospectus, what may an RR send to clients?

A

Clients may be sent a preliminary prospectus along with additional documents containing the required information.

54
Q

What must be disclosed by agents who sell investment products on the premises of a bank?

A

That the securities are not FDIC insured, are not guaranteed by the bank, and are subject to possible loss of principal

55
Q

When effecting an agency cross transaction, at least one side of the trade must be____________.

A

When effecting an agency cross transaction, at least one side of the trade must be unsolicited.

56
Q

True or False: A trade of unregistered, non-exempt securities between two BDs is a violation of the USA.

A

False. This is an exempt transaction.

57
Q

Firms must keep client information confidential unless disclosure is authorized by the _______ or a __________ _________.

A

Firms must keep client information confidential unless disclosure is authorized by the client or a regulatory authority.

58
Q

Trading on material, non-public information is considered ________ ________.

A

Trading on material, non-public information is considered insider trading.

59
Q

True or False: In certain cases, fraud may be unintentional.

A

False

60
Q

Sam buys stock on one exchange and sells it short on another at a slightly higher price. Is this permitted?

A

Yes. Sam is engaging in arbitrage.

61
Q

Is an agent permitted to execute securities trades for compensation and not record the trades on his BD’s books and records?

A

No. This is referred to as “selling away.”

62
Q

_____________ is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.

A

Front-running is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.

63
Q

What three details must a client provide for an agent to make a time and/or price decision without written authorization?

A

Action (buy/sell), asset, and amount. Time and/or price may remain the agent’s discretion without written authorization.

64
Q

True or False: Charging an unreasonably high commission is acceptable if disclosure is made to the client.

A

False

65
Q

Transactions should be executed at a price that is reasonably related to the ________ _______ price.

A

Transactions should be executed at a price that is reasonably related to the current market price.

66
Q

When selling mutual fund shares, an agent must adequately disclose the ______ _______.

A

When selling mutual fund shares, an agent must adequately disclose the sales charge.

67
Q

Is an agent allowed to recommend the sale of a fund’s shares in order to buy another fund’s shares with the same objective?

A

No. This is a prohibited practice and is considered an unsuitable recommendation.

68
Q

Is an adviser required to disclose the source of raw data that is used to determine the recommendations to its customers?

A

No. Disclosure is not required if the IA’s recommendations are based on its own independent conclusions.

69
Q

What is needed for a BD to exercise discretion over a client’s account?

A

BDs need the client’s prior written authorization.

70
Q

What is selling away?

A

An agent executing securities transactions for compensation and not recording the trades on the BD’s books and records.

71
Q

If an agent has been given time and price discretion on a client order, is written power of attorney required?

A

No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required.

72
Q

When does a durable power of attorney become automatically cancelled?

A

At the time of death of the grantor of the POA

73
Q

When does a standard power of attorney become automatically cancelled?

A

At the time of either the grantor’s death or declaration of grantor’s incompetence

74
Q

An agent advises a client to buy stock of a company that just fired its CEO. Is disclosure to the client required?

A

Yes, since this is a material fact, it must be disclosed before the customer buys the stock.

75
Q

May an agent and a client share in an account?

A

Yes, if both the firm and customer provide approval and all sharing is proportionate to each party’s investment.

Series 63 (7 decks)

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