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Flashcards in State Regulations (Antifraud) Deck (76):
1

If a person who is not an agent or broker/dealer makes a false statement of material fact in connection with the sale of a security, that person:

A) has not violated the Uniform Securities Act if the sale was made to an institutional account.
B) will probably be arrested by the Administrator.
C) has violated the antifraud provisions of the Uniform Securities Act.
D) is not covered by the Uniform Securities Act.

C) has violated the antifraud provisions of the Uniform Securities Act.

The Uniform Securities Act makes it illegal for any person to commit a fraudulent act in connection with the sale or offer for sale of a security, not just agents and broker/dealers. The Administrator does not have the power to arrest anyone. He may bring the case to the attention of the Attorney General of the State who can issue a warrant for the arrest.

2

In discussing investment ideas with a new, income-oriented customer, an agent explains to the customer that unlike a government bond, which pays interest semiannually, this fund invests in government bonds, will produce income monthly, and has the potential to provide a greater return as interest rates decline and the prices of the bonds in the portfolio increase. This representation by the agent is:

A) inaccurate but not misleading.
B) accurate but misleading.
C) accurate and complete.
D) FALSE.

B) accurate but misleading.

The representative's statements are technically accurate but misleading. The fund may pay dividends monthly, and, if interest rates decline, the bonds in the portfolio may increase in value. However, if bonds are sold and the funds are subsequently reinvested at a lower interest rate, the investor's income may decline. If interest rates increase, the bonds in the portfolio would most likely decline in value.

3

In cases of fraudulent sales practices or advice with respect to securities, state securities Administrators may:

1. not take enforcement action against federal covered investment advisers.
2. take enforcement action against federal covered investment advisers.
3. not take enforcement action against state registered investment advisers.
4. take enforcement action against state registered investment advisers.

2. take enforcement action against federal covered investment advisers.
4. take enforcement action against state registered investment advisers.

State securities Administrators have jurisdiction over any securities transaction or investment advice that involves fraud, whether or not the person involved is a federal covered investment adviser. If it involves a security, there are no exemptions from the Uniform Securities Act for fraud.

4

Under the Uniform Securities Act, an agent may NOT make which of the following statements to a customer?

A) This security is not registered with the Administrator.
B) This security is exempt from registration.
C) This security is approved by the Administrator.
D) This security is registered with the state.

C) This security is approved by the Administrator.

The state Administrator does not approve any security.

5

Which of the following statements regarding the antifraud provisions of the USA is TRUE?

A) No securities are exempt from the antifraud provisions of the act.
B) Exempt securities are not subject to the antifraud provisions of the USA.
C) The only securities exempt from the provisions are those issued by national governments or political subdivisions of countries that maintain diplomatic relations with the United States.
D) The only securities exempt from the provisions are those that are properly registered under blue-sky laws.

A) No securities are exempt from the antifraud provisions of the act.

Neither exempt nor nonexempt securities are ever exempt from the USA's antifraud provisions.

6

Which of the following sales would be exempt from the antifraud provisions of the USA?

A) Sale of an exempt security in an exempt transaction.
B) Sale of whole life insurance.
C) Sale of an exempt security.
D) Sale of a nonexempt security.

B) Sale of whole life insurance.

The antifraud statutes of the USA apply only to securities. Whole life insurance is not a security. However, the sale would be subject to the anti-fraud provisions of the state insurance code.

7

Which of the following sales would be exempt from the antifraud provisions of the Uniform Securities Act?

A) Sale of an exempt security.
B) Sale of a nonexempt security.
C) Sale of an exempt security in an exempt transaction.
D) Sale of an index annuity.

D) Sale of an index annuity.

The antifraud statutes of the USA apply only to securities. Index annuities are not a security. However, the sale would be subject to the anti-fraud provisions of the state insurance code.

8

Which of the following statements regarding an investment adviser representative is TRUE?

A) It is unlawful under the USA for an adviser to deceive another person when engaged in nonsecurities-related activities.
B) It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities.
C) The investment adviser representative is not subject to the antifraud provisions of the USA when engaged in securities sales activities.
D) The investment adviser representative is exempt from the USA's antifraud provisions if the adviser has fewer than 3 clients residing in the state.

B) It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities.

It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities. The antifraud provisions of the USA apply to any person advising another person for compensation as to the value of securities. Broker/dealers and agents, although not technically defined as advisers, are subject to the same restrictions on prohibited advisory practices when they are engaged in advisory activities. It may be unlawful to deceive another person when engaged in nonsecurities-related activities, but that would come under other legislation, not the USA.

9

In which of the following situations did an agent commit fraud?

A) An agent knowingly sold a nonexempt, nonregistered security to a retail client who could well afford the risk involved.
B) A client claims an agent sold him unsuitable securities.
C) On review of his files, an agent discovered he had sold a nonexempt, unregistered security​ to a retail client​.
D) An agent sold an excellent growth company to a client by omitting immaterial information​ during the discussion, so as not to distract the client from purchasing a suitable security.

A) An agent knowingly sold a nonexempt, nonregistered security to a retail client who could well afford the risk involved.

Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or non-institutional clients.

10

All of the following actions, if performed by a registered agent, would be considered a prohibited activity under the Uniform Security Act EXCEPT:

A) The client informs the agent that the appropriate written discretionary authorization forms are being hand-couriered to the agent and should arrive within the hour. Knowing the required paperwork is on its way, the agent begins discretionary trading in the account.
B) The agent saves the client money by deliberately withholding the client's buy order for a stock when the agent sees the stock price is trending down. When the order is finally placed later in the day, the execution price is $1 less than when the agent received the order.
C) Accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state.
D) The agent backdates customer confirmations in order to enable the client to achieve a long-term holding period, thereby saving considerable income taxes.

C) Accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state.

An unsolicited order is an exempt transaction so accepting this from the agent's client would not be a prohibited practice. There is never a case when backdating of confirmations is permitted, even by 1 day. No discretionary activity may take place until the written authorization is actually received by the firm. Although an agent can use discretion as to time and price without written authority, oral instructions from the client are required and nothing in the question indicates that the client instructed the agent to "buy when you think the price is right".

11

Which of the following is (are) unethical business practices if conducted by a broker/dealer?

1. Acting as agent for both buyer and seller on a transaction.
2. Conducting transactions that do not result in the transfer of ownership between buyers and sellers.
3. Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security.
4. Engaging in trades between other broker/dealers to increase or decrease the price of securities

2. Conducting transactions that do not result in the transfer of ownership between buyers and sellers.
3. Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security.
4. Engaging in trades between other broker/dealers to increase or decrease the price of securities

A broker/dealer may act as agent for both buyer and seller in a transaction. All the other activities represent market manipulation and are therefore unethical practices.

12

A client with a margin account notifies an agent of his vacation next week. The day after the client departs, there is a substantial market sell off, and the drop in the value of the client's portfolio requires additional margin in the client's account immediately. Which of the following actions of the agent would be prohibited?

1. Transferring funds from the client's spouse's account to meet the margin maintenance call.
2. Lending the client sufficient funds to meet the margin maintenance call.
3. Contacting the client's banker and arranging a loan on behalf of the client to meet the margin maintenance call.
4. Doing his best to reach the client, and, if unsuccessful, notifying his principal, in order that sufficient securities in the account be liquidated to meet the margin maintenance call.

1. Transferring funds from the client's spouse's account to meet the margin maintenance call.
2. Lending the client sufficient funds to meet the margin maintenance call.
3. Contacting the client's banker and arranging a loan on behalf of the client to meet the margin maintenance call.

If the client cannot be reached, or otherwise does not come up with funds, the only way to satisfy the margin maintenance call is through the liquidation of shares in the account. The broker-dealer determines which securities are to be liquidated. None of the other actions described here would be permitted. An agent can never lend money to a client, nor may loans be arranged through banks. To transfer funds from another account, permission of all owners of that account must be obtained.

13

Fraud would include the willful omission of:

A) any material fact.
B) any fact.
C) a material fact, but only one that might be pertinent to making an investment decision.
D) the public offering price in a preliminary prospectus.

A) any material fact.

In order for the action to be fraud, it must be willful. But, not all willful acts are fraudulent depending on what is and is not a material fact. Material facts are those that a potential investor uses to make an investment decision. Nonmaterial facts may be omitted as they don't affect the selection process. If they are not pertinent, they are not material. The preliminary prospectus (red herring), does not include the public offering price so there is nothing being omitted.

14

An agent learns of material, inside information regarding a company that is publicly held. Which of the following with respect to the information would NOT violate the Uniform Securities Act?

A) Trading for the agent's personal account based on this information.
B) Discussing the information at a seminar but not making an investment recommendation.
C) Discussing the situation with a superior or compliance officer in the agent's firm.
D) Soliciting orders based on this information.

C) Discussing the situation with a superior or compliance officer in the agent's firm.

Discussing the situation with a superior or compliance officer is the appropriate action. An agent may not solicit or trade on the basis of material inside information. Discussing material inside information in a public forum is prohibited, regardless of investment recommendations.

15

Under the Uniform Securities Act, it is NOT considered unlawful if an agent:

A) actively solicited orders in unregistered exempt securities.
B) made an untrue statement of a material fact.
C) omitted a material fact because she knew she did not have time to cover everything in a short presentation.
D) deliberately failed to follow a customer's instructions.

A) actively solicited orders in unregistered exempt securities.

Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker/dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions

16

Under the Uniform Securities Act, an agent who deliberately gives a fictitious quote to a customer:

A) has committed a fraudulent and misleading business practice.
B) is guilty of a felony and subject to criminal penalties.
C) must execute at the price quoted regardless of the market.
D) is committed to selling or buying only 100 shares at that price.

A) has committed a fraudulent and misleading business practice.

Disseminating false or misleading quotes is a prohibited practice under the USA, but is not necessarily a felony. Trades must be executed at market prices, not fictitious or fabricated prices.

17

Which of the following is a fraudulent or prohibited activity for an agent under the Uniform Securities Act?

A) Stating that zero-coupon bonds pay no current interest.
B) Implying that registration of a security means approval of the security.
C) Using the dividends paid in the last 12 months to determine the current yield of a common stock.
D) Selling common stock to a customer with income objectives.

B) Implying that registration of a security means approval of the security.

Registration of a security with the SEC or the state implies neither approval nor disapproval. To state otherwise is fraudulent. Dividends paid in the last 12 months determine the current yield of a common stock. Selling common stock to a customer with income objectives is not a fraudulent activity if suitable to the client's objectives. Zero-coupon bonds pay no current interest and to state so is not a fraudulent activity.

18

If an agent misrepresents the price of a customer's stock by $10 per share to encourage the client to sell, this activity is:

A) allowed if the customer ultimately makes a profit in the account.
B) a misrepresentation but not a fraudulent act.
C) a misrepresentation and a fraudulent act.
D) allowed if the agent views the difference as a service charge.

C) a misrepresentation and a fraudulent act.

The agent has committed a fraudulent act by willfully misrepresenting the value of the stock to encourage the customer to sell a security.

19

A customer asks an agent for a valuation of his securities portfolio. Because the agent does not want to cause the customer to panic and sell his shares at a loss, the agent inflates the value of the stock. Under the Uniform Securities Act, this action is:

A) not permitted because the agent must not deceive the customer by misstating a material fact.
B) permitted because the agent determined that selling the securities was not suitable.
C) permitted because the agent was not recommending a transaction.
D) not permitted because the agent must not attempt to influence the market value of a security.

A) not permitted because the agent must not deceive the customer by misstating a material fact.

An agent must not deceive a customer by misstating a material fact. Furthermore, ethical behavior is not limited to the recommendation of actual trades. However, misinforming the customer does not constitute market manipulation.

20

Under the Uniform Securities Act, which of the following statements regarding the use of material facts is TRUE?

A) Omitting material facts when selling securities is a fraudulent and unethical practice.
B) The agent must not use material facts unless they are the only ones available.
C) Restrictions apply only to sales as to the use of material facts, not to the purchases of securities.
D) The client is the final arbiter on what is material and what is not.

A) Omitting material facts when selling securities is a fraudulent and unethical practice.

Material facts are essential to making informed investment decisions; to omit them is fraudulent or deceitful. The agent must insure that all relevant material facts are presented.

21

An agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is:

A) not fraudulent if there was willful intent to omit the information.
B) fraudulent for both exempt and nonexempt securities.
C) fraudulent for nonexempt securities only.
D) fraudulent for exempt securities only.

B) fraudulent for both exempt and nonexempt securities.

An investor relies on material facts to make investment decisions. The omission of a material fact in the sale, purchase, or offer of a security is fraudulent whether the security offered is exempt or nonexempt.

22

An agent puts together a recommendation for a customer but is unable to attend the meeting. Another agent from the firm meets with the customer and presents the recommendation, but omits some material facts. According to the Uniform Securities Act, this is:

A) prohibited.
B) permitted if the recommendation pertains to an exempt security.
C) permitted if the second agent was unaware of the omission.
D) permitted if the second agent receives no compensation for presenting the recommendation.

A) prohibited.

The agent making a recommendation to a customer is responsible for presenting all of the material facts. Material facts must be presented to a customer regardless of the type of security sold or whether a commission is to be earned or not. Remember, a material fact is one that is critical to the investment decision making of a client.

23

You are an agent for a fully licensed broker/dealer and one of your clients is the chairman of a drug company who tells you that the government will shortly disapprove a patent for a new drug. According to the Uniform Securities Act, you should:

A) sell the company's shares short for your discretionary customer accounts.
B) promptly inform your supervisor.
C) tell your best customers to sell their holdings of the corporation immediately.
D) contact the SEC because you have inside information.

B) promptly inform your supervisor.

If you receive inside information, you should inform your supervisor immediately so that he may take the appropriate steps to avoid any transaction that may be construed to violate the Uniform Securities Act. An agent cannot lawfully trade on inside information and is not obligated to inform the SEC.

24

An agent receives inside information concerning an impending merger. Under the Uniform Securities Act, the agent may divulge the information to

A) the broker/dealer three days after public notice
B) anyone after public notice
C) his best customers three days before a public announcement
D) anyone three days before a public announcement

B) anyone after public notice

After the inside information has become public, it may be disseminated to anyone.

25

James Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is TRUE?

A) The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
B) As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act.
C) Jones's failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration.
D) The antifraud provisions of the USA do not apply to Jones because he is not suitably trained nor does he have a securities license.

A) The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.

The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.

26

John, a newly registered agent with a broker/dealer in Illinois, violated the Uniform Securities Act if he:

A) knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk.
B) mistakenly told a client that the dividend yield on a common stock selling at $75 per share was 5%, though he accurately indicated that the dividend payment was $.75 per quarter.
C) deliberately omitted the number of employees at a corporation making its first issue of securities to the public because he did not consider that fact relevant to the investor's decision making process.
D) told his clients, against his better judgment, that past performance is no guarantee of future performance.

A) knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk.

Knowingly selling revenue bonds as general obligation bonds is a misstatement of material fact and therefore fraudulent. An agent, when making a sale to a client, need not include all facts, such as the number of employees. The agent must not deliberately fail to mention the material facts regarding the nature of the investment. For example, it is not fraud to make a mathematical mistake, such as inadvertently misquoting the dividend yield on a common stock as 5% when in fact it is 4%, while accurately indicating that the actual dividend payment is $.75 per quarter. An agent may never state that past performance is expected to be replicated.

27

Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of these EXCEPT:

A) engaging in any practice that the Administrator defines by rule as unethical.
B) failing to state nonmaterial facts.
C) employing any device, scheme, or artifice to defraud.
D) engaging in any fraudulent or deceitful practice in the normal course of business.

B) failing to state nonmaterial facts.

Nonmaterial facts are those which do not impact an investor's decision making process. Omitting them would not be a fraudulent activity as would be the case if the facts were material.

28

Which of the following would most likely be considered a prohibited practice under the Uniform Securities Act?

1. Recommending tax shelters to low-income retirees.
2. Stating that a state Administrator has approved an offering based on the quality of information found in the prospectus.
3. Soliciting orders for unregistered, nonexempt securities.
4. Employing any device to defraud

1. Recommending tax shelters to low-income retirees.
2. Stating that a state Administrator has approved an offering based on the quality of information found in the prospectus.
3. Soliciting orders for unregistered, nonexempt securities.
4. Employing any device to defraud

All of the choices are prohibited. Recommending tax shelters to low income retirees is an example of an unsuitable transaction. Stating that an Administrator has approved an offering based on the quality of information in the prospectus, soliciting orders for unregistered nonexempt securities, and employing a device to defraud are all prohibited practices under the USA.

29

Which of the following transactions are prohibited?

1. Borrowing money or securities from a high net-worth customer.
2. Selling speculative or hot issues to a retired couple of modest means on a fixed income.
3. Failing to follow a customer's orders to prevent investment in a security not adequately covered by well-known securities analysts.
4. Backdating confirmations for the benefit of the client's tax reporting

1. Borrowing money or securities from a high net-worth customer.
2. Selling speculative or hot issues to a retired couple of modest means on a fixed income.
3. Failing to follow a customer's orders to prevent investment in a security not adequately covered by well-known securities analysts.
4. Backdating confirmations for the benefit of the client's tax reporting

An agent may not borrow money or securities from a customer unless that customer is a bank or broker/dealer in the business of lending money and/or securities. Selling speculative or hot issues to a retired couple of modest means is an unsuitable transaction because it is not consistent with the client's objectives. An agent must follow legal orders of the customer, even if the agent believes the order is unwise. An agent may not backdate confirmations for the benefit on the client.

30

Under the Uniform Securities Act, the Administrator may deny or revoke a registration if an agent:

1. borrows money from his wealthy clients' accounts.
2. solicits orders for nonexempt unregistered securities.
3. buys and sells securities in accounts to generate a high level of commissions.
4. alters market quotations to induce a client to invest in an attractive growth stock

1. borrows money from his wealthy clients' accounts.
2. solicits orders for nonexempt unregistered securities.
3. buys and sells securities in accounts to generate a high level of commissions.
4. alters market quotations to induce a client to invest in an attractive growth stock

An Administrator may deny or revoke an agent's registration if the agent engages in practices that are prohibited. Borrowing money from clients who are not in the money-lending business, churning, and manipulating market quotes are all prohibited. The solicitation of a nonexempt security that has not been registered is also a violation.

31

According to NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker/dealers and Agents, which of the following business practices are dishonest or unethical and may constitute grounds for denial, suspension, or revocation of an agent's registration?

1. Executing a transaction on behalf of a customer without authorization to do so.
2. Sharing in profits or losses in the account of any customer without the written authorization of the customer and the broker/dealer which the agent represents.
3. Splitting commissions from a securities purchase or sale with an agent of a different broker/dealer, or a broker/dealer not under direct or indirect common control.
4. Recommending securities that possess a high probability of loss and a low probability of gain

1. Executing a transaction on behalf of a customer without authorization to do so.
2. Sharing in profits or losses in the account of any customer without the written authorization of the customer and the broker/dealer which the agent represents.
3. Splitting commissions from a securities purchase or sale with an agent of a different broker/dealer, or a broker/dealer not under direct or indirect common control.
4. Recommending securities that possess a high probability of loss and a low probability of gain

According to NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker/Dealers and Agents, it is a dishonest or unethical business practice to execute a transaction on behalf of a customer without authorization to do so; share in profits or losses in the account of any customer without the written authorization of the customer and the broker/dealer that the agent represents; and split commissions or profits from the purchase or sale of securities with any person not also registered as an agent for the same broker/dealer, or a broker/dealer under direct or indirect common control. It would likely be considered dishonest or unethical for an agent to sell securities that possess high probabilities of loss and low probabilities of gain .

32

Walt and Bryan are old friends who are agents with different broker/dealers. Bryan attends one of Walt's investment seminars and, at a prearranged point in the presentation, stands up and exclaims that his rich brother-in-law wisely purchased the same investment. This action is:

A) a dubious sales practice but not strictly prohibited.
B) only problematic if someone invests in the product and loses money.
C) a deliberate attempt to mislead and deceive investors.
D) a legitimate sales tactic known as priming the pump.

C) a deliberate attempt to mislead and deceive investors.

This tactic is a deliberate attempt to mislead investors, get them to invest, and is expressly prohibited

33

Prohibited business practices under the Uniform Securities Act would include:

1. failure to state material facts.
2. trading on inside information.
3. failing to forward a complaint letter to the agent's supervisor.
4. sharing commissions with an agent of a nonaffiliated broker/dealer

1. failure to state material facts.
2. trading on inside information.
3. failing to forward a complaint letter to the agent's supervisor.
4. sharing commissions with an agent of a nonaffiliated broker/dealer

Failure to state material facts and trading on inside information are prohibited business practices. Forwarding complaint letters to your supervisor is required; sharing commissions with an agent licensed with the same or affiliated broker/dealer, but not one with which there is no affiliation, is permitted.

34

An agent tells his customer that a corporation has graduated to the level of quality acceptable for trading on the New York Stock Exchange and, therefore, has less market risk. If he recommends the stock to the customer based on the exchange's listing requirements, the agent has acted:

A) unlawfully, because listing on the New York Stock Exchange does not reduce the client's loss exposure and, therefore, the agent misled his client.
B) lawfully, because the New York Stock Exchange requires that the companies it lists are substantially capitalized.
C) lawfully, because returns were not guaranteed.
D) unlawfully because the NYSE listing requirements are not a matter of public knowledge.

A) unlawfully, because listing on the New York Stock

The New York Stock Exchange listing requirements are quantitative rather than qualitative. Exchange listing does not indicate the level of risk associated with owning a stock. The agent is acting unlawfully if he indicates that NYSE listing is indicative of a security's quality. An agent may not indicate that a security graduated to the level of quality acceptable for trading on the New York Stock Exchange, even if the agent indicates that returns are not guaranteed. Information regarding listing requirements is widely disseminated.

35

A customer buys 200 shares of a common stock at $30 per share. On a day when the stock's price is down $5, the customer calls her agent and inquires as to its current price, and the agent tells her the price is around where she bought it. In the next few weeks, the stock's price turns around and the customer liquidates the shares at $35 per share realizing a $5 per share profit excluding commission. In the above situation, the agent has acted:

A) unlawfully, because the customer could easily discern that the price quoted by the agent did not match readily available quotes in the financial media.
B) unlawfully, because accurate quotes must be provided to the customer at all times.
C) lawfully, because he prevented the customer from losing a profit opportunity.
D) lawfully, because the interim price fluctuation did not impact the customer's results.

B) unlawfully, because accurate quotes must be provided to the customer at all times.

The agent must provide customers with accurate market quotes at all times.

36

Pat Conway, a risk-averse investor, has never invested money outside of bank instruments. Recognizing Pat's conservative nature, his agent recommends Treasury notes, pointing out that federal government-backed securities are riskless securities. In the above situation, the agent has acted:

A) unlawfully, because the agent failed to disclose that the customer retains interest rate risk.
B) lawfully, because Treasury notes are suitable for a risk-averse customer.
C) lawfully, because Treasury notes carry no risk of principal default.
D) unlawfully, because Treasury notes are unsuitable for a risk-averse customer.

A) unlawfully, because the agent failed to disclose that the customer retains interest rate risk.

Although Treasury securities (such as T-notes) issued by the federal government do not carry default risk, the customer who buys them retains interest rate risk because the value of the notes will fall if interest rates rise. The agent has acted unlawfully in not disclosing this to the customer.

37

Which of the following practices is prohibited under the Uniform Securities Act?

A) Altering the customer's order at the request of a customer which subsequently results in a substantial loss.
B) Failing to inform the firm's principal of frequent verbal customer complaints.
C) Offering services that an agent cannot realistically perform because of his broker/dealer's limitations.
D) Participating in active trading of a security in which an unusually high trading volume has occurred.

C) Offering services that an agent cannot realistically perform because of his broker/dealer's limitations.

An agent may not offer services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints if they are serious.

38

Thomas Smith, a registered agent of XYZ Broker/Dealer, believed that his client's security was overvalued. If Smith exaggerated the amount by which the security was overpriced to protect the client from a downturn in the price of the security, each of the following statements is true EXCEPT:

A) Smith engaged in fraud in connection with the sale of a security.
B) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice.
C) Smith acted in a dishonest and unethical manner.
D) Smith made an untrue statement in connection with the sale of a security.

B) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice.

Smith acted in a dishonest and unethical manner, made an untrue statement in connection with the sale of a security, and engaged in fraud in connection with the sale of a security. The advice to sell the securities was good investment advice, but the sales method was fraudulent.

39

An agent informs a customer who does not want to invest in equity securities that it is possible to get the benefits of equity exposure without investing in securities by purchasing S&P 500 stock-index options instead. In this case, the agent provided the client with:

1. accurate information because stock-index options are not securities and offer exposure to equity price movements.
2. inaccurate information because stock-index options are securities that offer broad exposure to equity price movements.
3. accurate information because stock-index options do not provide exposure to equity price movements because they are not securities.
4. inaccurate information because index options are securities.

2. inaccurate information because stock-index options are securities that offer broad exposure to equity price movements.
4. inaccurate information because index options are securities.

The agent provided inaccurate information because stock-index options are securities and therefore the client would be investing in securities.

40

NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker/Dealers and Agents lists which of the following as a prohibited business practice by a broker/dealer?

1. Informing a customer that the price of a security is the current market price when the broker is the only party to offer a quote on the stock.
2. Charging a higher than usual commission on a thinly-traded stock.
3. Entering into a transaction with a customer at a price not related to the current market price.
4. Segregating customers' fully paid-for securities

1. Informing a customer that the price of a security is the current market price when the broker is the only party to offer a quote on the stock.
3. Entering into a transaction with a customer at a price not related to the current market price.

The broker/dealer must have reasonable grounds for an offering price when it is the only party issuing a quotation. Entering into a transaction with a customer at a price not related to the current market price is a prohibited transaction under NASAA's Statement of Policy. The nature of thinly traded stocks makes higher than usual commissions acceptable as long as disclosure is made. Broker/dealers must segregate customers' fully paid-for securities.

41

Bryan, an agent registered with a broker/dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is:

A) only unethical if investors lose money in the investment.
B) not an unethical sales practice.
C) an illegitimate sales tactic.
D) only unethical if Bryan sells his shares after informing his clients of his intention to do so.

B) not an unethical sales practice.

This practice is ethical providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem.

42

Under the Uniform Securities Act, all of the following are prohibited in a sale EXCEPT:

A) an agreement by the agent to repurchase the security from the customer for the same price at a future date.
B) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so.
C) telling a client that he is trading commission free when, in actuality, your firm is acting as a principal and placing a mark-up on his trades.
D) telling a client that her stock is a sure candidate for a takeover bid.

B) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so.

An agent cannot guarantee to buy back the securities at the same price, cannot claim there are no transaction costs when the firm charges a mark-up, and cannot make exaggerated statements relating to future activity in a security. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.

43

A risk-averse investor wants to invest in Treasury securities. The investor's agent recommends Treasury notes, pointing out that federal government-backed securities are default-free securities not subject to interest rate risk. In the above situation the agent has acted:

A) lawfully because Treasury notes carry no risk of principal default.
B) unlawfully because Treasury notes are unsuitable for a risk-averse customer.
C) unlawfully because the agent failed to disclose that the investor carries interest rate risk.
D) lawfully because Treasury notes are suitable for a risk-averse customer and are free of all investment risk.

C) unlawfully because the agent failed to disclose that the investor carries interest rate risk.

Although Treasury securities (such as T-notes issued by the federal government) do not carry default risk, the customer who buys them bears interest rate risk because the value of the notes will fall if interest rates rise. The agent has acted unlawfully in not disclosing this risk to the customer.

44

Which of the following practices is fraudulent?

A) Selling a security to a customer with a commission that exceeds industry standards.
B) Marking up a security by 10% more than industry standards with the customer's knowledge and consent.
C) Marking up a security by 5%, but indicating to the client that the markup is only 2%.
D) Failing to state all the facts related to a security.

C) Marking up a security by 5%, but indicating to the client that the markup is only 2%.

Fraud is the willful deception of a client. Stating that the markup will be 2% and then effecting a 5% markup is a fraudulent act. Marking up a security by more than industry practices is a prohibited practice but is not necessarily fraudulent. It is not necessary to state all of the facts; only those that are material are required.

45

An agent has a client who is relatively new to investing in securities having been a bank CD purchaser most of her life. One of the client's holdings is a stock that the agent recommended and its market price has recently fallen by over 10%. Knowing her fear of loss, the agent comforts her by continuing to report that the stock is moving upwards with the market. Under the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker/Dealers and Agents, this action is:

A) prohibited as it is equivalent to giving fictitious quotations.
B) prohibited as the agent has a fiduciary responsibility to the client to manage the account in her best interests.
C) prohibited unless the agent receives permission from a designated supervisor.
D) permitted because the client is not selling anytime soon and why cause her to be upset.

A) prohibited as it is equivalent to giving fictitious quotations.

Fictitious quotations, not giving accurate prices, is a dishonest and unethical practice, even when done to make the client feel better.

46

An agent omits certain details about an issue during a sales presentation. This omission would be fraudulent if:

A) this were a solicited transaction.
B) made to an individual client, but not to an institution.
C) the information was not available in the prospectus.
D) the information was material and was necessary to make other statements not misleading.

D) the information was material and was necessary to make other statements not misleading.

All material information must be disclosed. Omission or misstatement of material information would be prohibited regardless of whether the presentation was to an individual or institution or the sale was solicited or unsolicited. The key here is that certain details may be omitted, but those which are material may never be.

47

With regard to the Uniform Securities Act, which of the following statements regarding the omission of a material fact by an agent is NOT true?

A) It is a violation even if the client failed to make a transaction.
B) It is not a violation if the security is exempt from registration under the Uniform Securities Act.
C) It is a violation because it is a unethical or fraudulent practice.
D) It is a violation even if material facts were unknowingly omitted.

B) It is not a violation if the security is exempt from registration under the Uniform Securities Act.

Deliberate omission of material facts is a fraudulent practice under the Uniform Securities Act, whether securities are exempt or nonexempt or even if the transaction was exempt. If done unknowingly, then it is a unethical business practice (fraud requires deliberate action) and is still a violation.

48

All of the following activities would probably be considered a prohibited business practice EXCEPT:

A) recommending the purchase of a security on the basis of an excellent investment rating, but not disclosing a change in the number of shares outstanding as a result of a stock split three years ago.
B) not inquiring into the financial background of a client because the agent is recommending a conservative large-cap company.
C) not determining a client's investment objectives because the agent is recommending an excellent growth stock that has been carefully analyzed by the firm's security analysts.
D) not indicating the relevant risks of an investment because the agent believes the investment is safe.

A) recommending the purchase of a security on the basis of an excellent investment rating, but not disclosing a change in the number of shares outstanding as a result of a stock split three years ago.

While it is not a prohibited practice to omit certain information, material information may never be omitted. A stock split three years ago is not considered material. Relying on the reports and ratings of the firm's security analysts is sufficient justification for recommending the security, providing it is a suitable purchase for the client. An agent must inquire about the client's investment objectives and financial background, as well as disclose the relevant risks of an investment (even if the investment is considered relatively safe) to make suitable recommendations.

49

If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the Uniform Securities Act, this omission constitutes:

A) a criminal violation punishable by up to three years in prison.
B) a civil violation punishable by a fine up to $5,000.
C) a misdemeanor.
D) no violation.

D) no violation.

No violation occurs because the Uniform Securities Act requires the disclosure of only material facts. Material facts are those that could influence the price of a security. Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision.

50

If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has:

A) not committed a prohibited business practice.
B) not violated the Uniform Securities Act because no untrue statements were made.
C) committed a prohibited business practice by selling an unsuitable investment.
D) violated the Uniform Securities Act.

D) violated the Uniform Securities Act.

The agent has violated the Uniform Securities Act by fraudulently omitting material information in the sale of a security.

51

All of the following activities could result in the revocation of an agent's registration EXCEPT:

A) failing to state all known facts about an investment when presenting it to a client.
B) excessively trading for the purpose of generating commissions.
C) making recommendations based on material nonpublic inside information.
D) borrowing from retail customers.

A) failing to state all known facts about an investment when presenting it to a client.

Failure to state all known facts about an investment is not a violation of the Uniform Securities Act; omitting material facts, however, would be a violation of the act. Excessive trading, making recommendations on material nonpublic information, and borrowing from retail customers are prohibited business practices that could result in revocation of a registration.

52

Deliberately failing to disclose sufficient information pertinent and relevant to a client making an informed investment decision is:

A) churning an account without discretion.
B) effecting transactions without specific authority.
C) a fraudulent business practice because a client must have sufficient information to make a rational decision.
D) a misuse of material inside information.

C) a fraudulent business practice because a client must have sufficient information to make a rational decision.

Failure to disclose sufficient information for a client to make an informed investment decision is a fraudulent practice. The other choices are prohibited practices but not necessarily fraudulent.

53

When does a deliberate omission of a fact in a securities sale constitute fraud?

A) If a reasonable person would base an investment decision on the omitted information.
B) Only if the information was known to be true.
C) Only when a new issue of securities is being offered.
D) Any time the information is known by more than 15 people.

A) If a reasonable person would base an investment decision on the omitted information.

Deliberate omission of a fact constitutes fraud if the omitted information is material in nature (i.e., if a reasonable investor would use the information in making an investment decision). This is true whether the information is made in connection with a primary offering or a secondary market transaction.

54

An agent's customer says that ABC Corporation is about to be bought out. The customer wishes to place an order to buy ABC common stock based upon this yet unreleased information, which he claims he learned from an officer in the company. How should the agent respond in this situation?

A) Bring the information to the attention of the firm's supervisory principal named to handle such matters in the Supervisory Procedures Manual.
B) Accept the customer's order and mark it solicited.
C) Bring the information to the attention of the State Securities Administrator.
D) Discuss the matter with other, more experienced agents of the firm to evaluate the validity of the information.

A) Bring the information to the attention of the firm's supervisory principal named to handle such matters in the Supervisory Procedures Manual.

The customer seeks to place an order based on inside information or rumor. The agent should not accept the order before discussing it with her supervisor/principal. Under no circumstances should the agent repeat the information to fellow agents. There is no requirement that such information be reported to the state securities Administrator.

55

Baird, a registered agent, receives an order from Miller, her customer, for an unusually large order of common stock in XYZ Incorporated. He states that he overheard the CFO of XYZ, Inc. telling his golfing partner that XYZ was close to being acquired by Monolith Communications, Incorporated. In light of ethical standards under the Uniform Securities Act, which of the following actions is most acceptable?

A) Baird tells her immediate supervisor (principal) of Miller's intent to trade based upon nonpublic (inside) information.
B) Baird purchases 1,000 shares of XYZ for her personal account.
C) Within the trading day, Baird recommends XYZ to 20 of her customers who have indicated aggressive growth as their main trading objective.
D) Baird takes Miller's order and does not discuss the conversation she has with Miller regarding XYZ and Monolith with anyone.

A) Baird tells her immediate supervisor (principal) of Miller's intent to trade based upon nonpublic (inside) information.

Baird should inform the firm that a customer wishes to trade a security using inside (nonpublic) information. Under no circumstances should Baird trade for her own account using inside information or use such information as the basis for recommendations to customers. Because Miller's order may cause Baird's employer to violate securities law, she should bring Miller's order to the attention of her supervisor.

56

Allen Richards is the next-door neighbor of Marc Terry, the CEO of a Nasdaq Stock Market security. Mr. Terry tells Mr. Richards that a major NYSE-listed corporation is in the process of submitting an offer to buy out his company at a very handsome premium over the current market price. Mr. Richards would be permitted to:

1. immediately purchase shares of Mr. Terry's company.
2. immediately purchase shares of the NYSE-listed company.
3. purchase shares of Mr. Terry's company once the news becomes known to the investing public.
4. purchase shares in the NYSE listed company once the news becomes known to the investing public

3. purchase shares of Mr. Terry's company once the news becomes known to the investing public.
4. purchase shares in the NYSE listed company once the news becomes known to the investing public

Mr. Richards has acquired material inside information that may never be used until it becomes known to the public.

57

The NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker/Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice?

1. Stating material facts in such a manner that they may be easily understood by a prospective client.
2. Making unsuitable investment recommendations even when the client agrees with your assessment.
3. Exercising discretion without previous written authority.
4. Using inside information, but only if the client makes money as a result of the trade.

2. Making unsuitable investment recommendations even when the client agrees with your assessment.
3. Exercising discretion without previous written authority.

No broker/dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them.

58

At dinner one night, your father-in-law, a member of the board of directors of ABC Company, tells you the firm failed to gain government approval of a new product under development. This information, when it is made public, will seriously harm the value of the company's stock. You should:

A) advise your customers to sell ABC stock immediately.
B) sell any holdings you have in ABC stock.
C) purchase out-of-the money put options on the stock.
D) inform your supervisor and ask for instructions.

D) inform your supervisor and ask for instructions.

This information is considered inside information because it is not yet available to the general public. It is illegal to conduct securities transactions either for your own account or the accounts of customers based upon inside information or to advise your customers of the information. You notify your supervisor in order to obtain instructions how to handle client inquiries about this stock without running into compliance problems.

59

This morning's financial section of your newspaper has an article discussing several significant material facts relating to a stock held in the portfolio of several of your clients. You would be able to share these facts with your clients:

A) under no circumstances until the clients have had a chance to read the article themselves.
B) with or without the issuer's permission.
C) only if the statement without this fact would make your previous statements misleading.
D) only if the customer did not work for the issuer and did not know this information.

B) with or without the issuer's permission.

Public information may be disseminated with or without the permission of the issuer, even if it is material information that casts the issuer in an unfavorable light.

60

Which of the following statements regarding brokerage and advisory activities under the USA are TRUE?

1. It is not unlawful for an investment adviser or broker/dealer to employ any device, scheme, or artifice to defraud in the sales of securities to institutional investors because the USA is designed to protect individual investors.
2. Under the USA, it is unlawful for an investment adviser to deceive a person when not providing advice to that person.
3. Sanctions for both investment advisers and broker/dealers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions.
4. It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities.

3. Sanctions for both investment advisers and broker/dealers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions.
4. It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities.

Sanctions for violations are administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is also true that any individual, whether technically defined as an adviser or not, may not deceive another person when providing investment advice if he is compensated for providing the advice. However, the Uniform Securities Act has no jurisdiction over an investment adviser when the deceitful action occurs in a non-advisory situation, such as social interaction.

61

Under the Uniform Securities Act, which of the following agents are in violation of the act?

1. An agent persuades a client to cosign for a loan and does not disclose that he is facing financial difficulties.
2. An agent's customer instructs her to buy shares in ABC Pharmaceuticals. ABC is experiencing financial troubles, so the agent buys shares in XYZ Health Care instead.
3. An agent purchases shares of a new issue and hopes to cause the price of the shares to rise by recommending that all her clients purchase the stock. She does not tell clients that she owns the stock.

1. An agent persuades a client to cosign for a loan and does not disclose that he is facing financial difficulties.
2. An agent's customer instructs her to buy shares in ABC Pharmaceuticals. ABC is experiencing financial troubles, so the agent buys shares in XYZ Health Care instead.
3. An agent purchases shares of a new issue and hopes to cause the price of the shares to rise by recommending that all her clients purchase the stock. She does not tell clients that she owns the stock.

The antifraud provisions of the USA prohibit any deceptive act by an agent in the course of business with a client. Even if the disclosure is made, one may not borrow from a client unless the client is in the business of lending money. This fact has not been disclosed in this question, so it cannot be assumed.

62

Which of the following is an improper activity under the Uniform Securities Act?

A) An investment adviser collects a commission on the sale of insurance products that he recommended, disclosing that a commission would be earned.
B) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer.
C) An investment adviser charges two customers two different fees for a similar service.
D) An investment adviser charges a customer a fee for advice leading to the sale of a security, receives a commission on the sale, and discloses the amount of the commission to the customer.

B) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer.

Dealers who act as principals in transactions charge markups, not commissions. The adviser can charge customers different fees for similar services without violating the Uniform Securities Act.

63

An investment adviser representative recommends that a customer purchase shares of Silicon Switches. The representative indicates that the company has reduced market risk because it has graduated to the level of quality acceptable to the New York Stock Exchange. According to the Uniform Securities Act, the adviser's statement is:

A) permitted because the NYSE sets stringent earnings requirements for listed stocks.
B) permitted because an investment adviser may recommend listed stocks.
C) not permitted because the transaction is not suitable for the customer.
D) not permitted because it is misleading to imply that meeting listing requirements reduces market risk.

D) not permitted because it is misleading to imply that meeting listing requirements reduces market risk.

Meeting the listing requirements of the New York Stock Exchange does not reduce the risk of loss to the client, so the agent's statement is misleading and therefore prohibited. NYSE listing requirements are numerical standards and do not imply that the exchange has passed on the quality of the issue

64

Under the Uniform Securities Act, which of the following would constitute a fraudulent practice in connection with a sale or offer of securities?

1. Susan tells a client that she is good friends with the CFO of a listed company and has the “inside track” on what is going on. Susan has never met the CFO.
2. John makes a material misstatement during a sale, but the sale is not made.
3. Joe omits material facts while making an offer, but the client makes money on the securities.
4. Harold, who is excluded from the definition of investment adviser, omits material facts during an offer.

1. Susan tells a client that she is good friends with the CFO of a listed company and has the “inside track” on what is going on. Susan has never met the CFO.
2. John makes a material misstatement during a sale, but the sale is not made.
3. Joe omits material facts while making an offer, but the client makes money on the securities.
4. Harold, who is excluded from the definition of investment adviser, omits material facts during an offer.

Failure to state material facts that are known to the agent or adviser and which would make other statements not misleading is fraudulent. Securities professionals may not be deliberately selective of which material facts to present to clients or prospective clients. In recommending the purchase or sale of a security, misleading or untrue statements of material facts include inaccurate market quotations; incorrect statements of earnings or projected earnings; inaccurate statements of commissions, mark-up, mark-down, or other charges; implying approval by the SEC or state Administrator; using rumors or inside information to induce transactions; indicating approval of a security by any regulatory body; or failure to describe important facts or risks.

65

Which of the following would NOT be considered a fraudulent practice under the Uniform Securities Act?

A) An adviser omits a material fact to a client during the sales presentation, but the client ends up making money.
B) An adviser omits a material fact, but the sale is not made.
C) An adviser tells a client that registered securities are approved by the SEC.
D) An adviser correctly advises a client, but the client ends up losing money.

D) An adviser correctly advises a client, but the client ends up losing money.

There is no fraud in the case of an adviser whose clients lose money in the absence of any willful violations. Examples of fraud under the Uniform Securities Act include inaccurate market quotations; incorrect statements of earnings or projected earnings; inaccurate statements of commissions, mark-ups, mark-downs, or other charges; implying approval by the SEC or Administrator; using rumors or inside information to induce transactions; indicating approval of a security by a regulatory body; and failure to describe important facts or risks.

66

Your advisory customer calls to check on her account value at 9:00 am but you were unavailable at the time. It is now 2:00 pm and you are able to call her back. If between 9:00 am and 2:00 pm her account value dropped from $711,500 to $710,000, what should you tell her?

A) Your account is valued at $710,000 at this time.
B) Your account has a value of $711,500.
C) Your account value cannot be determined until the market closes.
D) Your account was down to $699,700 earlier today but is up to $711,500.

A) Your account is valued at $710,000 at this time.

All other choices are clearly a misrepresentation of account status.

67

If John Good, a properly registered investment adviser, opens his own office and hires several representatives to work for him, his business card may NOT read:

A) John Good Investment Advisers, Inc.
B) Good Performance Advisers, Inc.
C) Good's Investment Advisers, Inc.
D) Good and Associates Investment Advisers, Inc.

B) Good Performance Advisers, Inc.

John Good, a registered investment adviser, cannot put on his business card "Good Performance Advisers". In this instance, the word Good can be interpreted as an adjective modifying the word performance, as opposed to John's given name, Good. An adviser cannot present himself to the public in terms that can be misleading or interpreted as exaggerating performance. The other three choices are appropriate because they do not use the term Good as an adjective touting the results of the adviser, but as the name of the adviser.

68

As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should:

A) refer the customer to an attorney that can set up the trust.
B) prepare the trust, transfer funds, and begin investing.
C) tell the customer to contact a tax specialist.
D) explain to the customer that trusts cannot be traded.

A) refer the customer to an attorney that can set up the trust.

The best choice is to have the customer contact a qualified attorney to set up a trust.

69

Which of the following is the best example of an exaggerated claim that may NOT be used in investment adviser advertising?

A) Saying that the firm practices asset allocation principles when it generally designs portfolios consisting of equity, debt, and other investment classes.
B) Reporting actual portfolio returns of 15% in the prior year, accompanied by a disclaimer that past performance does not indicate future performance.
C) Saying that the firm has $300 million under management when it manages only $50 million.
D) Saying that every one of the firm's securities analysts has earned the CFA designation.

C) Saying that the firm has $300 million under management when it manages only $50 million.

Overstating the amount of client funds under management is an exaggeration. It is not an exaggeration to state the qualifications of the firm's analysts, unless the statement is untrue. Referring to asset allocation principles when the firm practices such principals is not an exaggeration. If superior investment performance is fact (actual), it is not an exaggeration to report such returns, as long as the report is accompanied by an appropriate disclaimer explaining that past performance does not indicate future performance.

70

Jack, a registered investment adviser will take the Certified Financial Planner Examination when it is offered in 2 months. He is currently enrolled in an educational program to prepare for the exam. He has just run out of business cards. Because he is confident that he will pass the exam through diligent study, Jack begins to use new business cards with the letters CFP following his name. This would be:

A) permissible because Jack is enrolled in an appropriate education program.
B) permissible because designations are not licenses.
C) prohibited as a conflict of fundamentals.
D) prohibited as an exaggerated claim.

D) prohibited as an exaggerated claim.

Indicating that an adviser holds a recognized financial services credential, when that is not so, is an example of an exaggerated claim and prohibited

71

The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's Website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an investment adviser representative, you would:

A) be required to send your clients to the firm's Website before making any comments regarding this security.
B) be permitted to contact your clients with this recommendation right now.
C) be permitted to contact your clients with this recommendation tomorrow.
D) not be permitted to contact your clients until it was determined that the report was general public knowledge.

B) be permitted to contact your clients with this recommendation right now.

A firm's internal research is not considered inside information. Clients may be contacted as soon as the IAR has access to the report. What is prohibited would be for the IAR to purchase this stock personally before release of the report and then contact clients.

72

Which of the following must be disclosed during a transaction recommendation under the Investment Advisers Act of 1940?

A) All facts needed to assess the risks of an investment.
B) All facts in the prospectus.
C) All material facts.
D) All facts.

C) All material facts.

It is a violation of the act for any person willfully or knowingly to make untrue statements of a material fact or omit to state a material fact in connection with a securities recommendation by an adviser. A material misstatement is one that may have an effect on an issuer's future financial prospects or the market value of its securities or may influence the decision of a customer.

73

The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's Website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight, this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an investment adviser representative, you would:

A) be required to send your clients to the firm's Website before making comments regarding this security.
B) be permitted to contact your clients with this recommendation right now.
C) be permitted to contact your clients with this recommendation tomorrow.
D) not be permitted to contact your clients until it was ascertained that the report was general public knowledge.

B) be permitted to contact your clients with this recommendation right now.

A firm's internal research is not considered inside information. Clients may be contacted as soon as the IAR has access to the report. What is prohibited would be for the IAR to purchase this stock personally, before release of the report, and then contact clients.

74

A credit union is issuing participation units in this state. Which of the following statements relating to the Uniform Securities Act is TRUE?

A) Any advertisement for the issue must be filed with the Administrator.
B) Registration may be done by qualification.
C) This is a federal covered security.
D) The issue is subject to the antifraud provisions of the Act.

D) The issue is subject to the antifraud provisions of the Act.

Even though interests in a credit union are normally exempt securities, the exemption does not apply to the antifraud provisions of the Act.

75

A securities trade is made. Under normal circumstances, all of the following would be noted on the order ticket EXCEPT:

A) the time stamp of the time of order submission.
B) the account number.
C) the registered agent who accepted the order.
D) the name of the individual who transmitted the order.

D) the name of the individual who transmitted the order.

Transmitting an order is a clerical function and we don’t put that on the order ticket. A typical ticket will include: the account for which the trade is being made, the registered individual placing the order for the client, time stamps for entering and execution (or cancellation), execution price, and terms and conditions of the order (market, limit, etc.).

76

All of the following industry violations would probably constitute fraud EXCEPT

A) inaccurate market quotations
B) omitting material facts in the offer/sale of securities
C) charging unreasonable commissions
D) misrepresentation of the status of a client’s account

C) charging unreasonable commissions

Charging an unreasonable commission (or markup or markdown) is a prohibited practice, but it is not considered fraud. It would be fraudulent to make inaccurate statements regarding the amount of commission being charged, such as, when acting as a principal, telling the customer that there was no commission being charged when, in fact, there is a markup or markdown built into the price.

Decks in Series Class (76):