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Question 1 of 10
1. Question
Which of the following statements is false regarding material fact of transaction fees?
Correct
Material fact of transaction fees
The amount of any fees or commissions that an agent or broker-dealer charges in connection with a security transaction is a material fact. If the transaction will result in a charge of any type, the nature of that charge must be disclosed. This is true whether the charge is applied in the form of a straight commission or in another form such as a markup. For example, it would be fraudulent for a broker-dealer or agent to inform a client, or a potential client, that no charges apply when, in fact, a charge is built in to the transaction in the form of a markup. A broker-dealer or agent must provide full disclosure to investors regarding the revenues that it will receive as a result of the transaction.Incorrect
Material fact of transaction fees
The amount of any fees or commissions that an agent or broker-dealer charges in connection with a security transaction is a material fact. If the transaction will result in a charge of any type, the nature of that charge must be disclosed. This is true whether the charge is applied in the form of a straight commission or in another form such as a markup. For example, it would be fraudulent for a broker-dealer or agent to inform a client, or a potential client, that no charges apply when, in fact, a charge is built in to the transaction in the form of a markup. A broker-dealer or agent must provide full disclosure to investors regarding the revenues that it will receive as a result of the transaction. -
Question 2 of 10
2. Question
Which of the following statements is true regarding truthful representation of client accounts?
Correct
Truthful representation of client accounts
Broker-dealers and agents must be truthful in their representations regarding their clients’ accounts. Account statements provided by the broker-dealer or agent must not include false information or be intentionally misleading. In addition, any discussions between the broker-dealer or agent and the client regarding the account must be truthful and accurate. It is fraudulent for a broker-dealer or agent to attempt to mislead a client in any way regarding the status of the client’s account. If a client has suffered a loss, the broker-dealer or agent must not attempt to hide this fact from the client or otherwise mislead the client. Such behavior is considered a misstatement or omission of a material fact, and, if done intentionally, is considered an act of fraud subject to criminal charges.Incorrect
Truthful representation of client accounts
Broker-dealers and agents must be truthful in their representations regarding their clients’ accounts. Account statements provided by the broker-dealer or agent must not include false information or be intentionally misleading. In addition, any discussions between the broker-dealer or agent and the client regarding the account must be truthful and accurate. It is fraudulent for a broker-dealer or agent to attempt to mislead a client in any way regarding the status of the client’s account. If a client has suffered a loss, the broker-dealer or agent must not attempt to hide this fact from the client or otherwise mislead the client. Such behavior is considered a misstatement or omission of a material fact, and, if done intentionally, is considered an act of fraud subject to criminal charges. -
Question 3 of 10
3. Question
Which of the following statements is false regarding committing fraud by omission?
Correct
Committing fraud by omission
Omitting a material fact is a fraudulent act. Fraud by omission occurs when a person knowingly fails to share information with a client when the information in question is likely to have an impact on the client’s investment decision. For example, if an agent is aware that the broker-dealer he represents has analyzed a particular stock and found that stock is currently a risky investment, but the agent chooses to withhold the results of his firm’s analysis with a client, the agent is committing an act of fraud. Persons are also prohibited from making true statements if they omit key facts that are necessary to ensure the statements are not misleading. For example, it would be misleading to state that particular security had increased in value every year for the last ten years, but fail to mention that the security had been steadily losing value over the last three months.Incorrect
Committing fraud by omission
Omitting a material fact is a fraudulent act. Fraud by omission occurs when a person knowingly fails to share information with a client when the information in question is likely to have an impact on the client’s investment decision. For example, if an agent is aware that the broker-dealer he represents has analyzed a particular stock and found that stock is currently a risky investment, but the agent chooses to withhold the results of his firm’s analysis with a client, the agent is committing an act of fraud. Persons are also prohibited from making true statements if they omit key facts that are necessary to ensure the statements are not misleading. For example, it would be misleading to state that particular security had increased in value every year for the last ten years, but fail to mention that the security had been steadily losing value over the last three months. -
Question 4 of 10
4. Question
Which of the following statements is true regarding investment recommendations?
Correct
Investment recommendations
Investment recommendations must always be made for the good of the client, not for the potential increase in commissions. The Uniform Securities Act requires that securities professionals have a legitimate basis for making recommendations to their clients. If an agent suggests that a client invest in a particular security, that agent must have a sound reason for making the recommendation. The Uniform Securities Act also prohibits making investment recommendations in a manner designed primarily to increase commission potential. For example, agents may not recommend that a client make frequent changes to their investments in order to obtain the additional fees associated with the additional transactions. Instead, an agent’s recommendations to shift investments in a client’s portfolio must always be driven by what is best for the client.Incorrect
Investment recommendations
Investment recommendations must always be made for the good of the client, not for the potential increase in commissions. The Uniform Securities Act requires that securities professionals have a legitimate basis for making recommendations to their clients. If an agent suggests that a client invest in a particular security, that agent must have a sound reason for making the recommendation. The Uniform Securities Act also prohibits making investment recommendations in a manner designed primarily to increase commission potential. For example, agents may not recommend that a client make frequent changes to their investments in order to obtain the additional fees associated with the additional transactions. Instead, an agent’s recommendations to shift investments in a client’s portfolio must always be driven by what is best for the client. -
Question 5 of 10
5. Question
Which of the following statements is true regarding borrowing money or securities from clients?
Correct
Borrowing money or securities from clients
The Uniform Securities Act has specific provisions that place limits on a security professional’s ability to borrow from clients. As a general rule, securities professional are prohibited from borrowing either securities or funds from their clients. This behavior is considered unethical and is a violation of the Uniform Securities Act. However, there are limited circumstances in which such behavior is permissible. If the client is a lending institution such as a bank or saving and loan that lends money as a standard business offering, the securities professional may borrow money from its client. Similarly, if the client is a securities firm or other business that offers securities loans as a standard business offering, the securities professional may borrow securities from the client as a customer of that client.Incorrect
Borrowing money or securities from clients
The Uniform Securities Act has specific provisions that place limits on a security professional’s ability to borrow from clients. As a general rule, securities professional are prohibited from borrowing either securities or funds from their clients. This behavior is considered unethical and is a violation of the Uniform Securities Act. However, there are limited circumstances in which such behavior is permissible. If the client is a lending institution such as a bank or saving and loan that lends money as a standard business offering, the securities professional may borrow money from its client. Similarly, if the client is a securities firm or other business that offers securities loans as a standard business offering, the securities professional may borrow securities from the client as a customer of that client. -
Question 6 of 10
6. Question
Which of the following statements is true regarding guaranteeing a security’s performance?
Correct
Guaranteeing a security’s performance
The Uniform Securities Act prohibits persons acting as securities professionals from making guarantees regarding the performance of securities to its clients. Under this provision of the Uniform Securities Act, the type of guarantee that is prohibited is any guarantee regarding the future performance of the security in terms of principal return, dividends, or interest. However, it should be noted that while a security professional may not make any such guarantee, the professional may reference an existing guarantee applying to a security if a party other than the security’s issuer has guaranteed the security in some way. In other words, the securities professional may not provide any guarantee against potential loss or a security’s future performance; however, if another party has guaranteed the security, the securities professional is permitted to inform its client of the existence of the guarantee.Incorrect
Guaranteeing a security’s performance
The Uniform Securities Act prohibits persons acting as securities professionals from making guarantees regarding the performance of securities to its clients. Under this provision of the Uniform Securities Act, the type of guarantee that is prohibited is any guarantee regarding the future performance of the security in terms of principal return, dividends, or interest. However, it should be noted that while a security professional may not make any such guarantee, the professional may reference an existing guarantee applying to a security if a party other than the security’s issuer has guaranteed the security in some way. In other words, the securities professional may not provide any guarantee against potential loss or a security’s future performance; however, if another party has guaranteed the security, the securities professional is permitted to inform its client of the existence of the guarantee. -
Question 7 of 10
7. Question
Which of the following statements is true regarding fiduciary responsibility?
Correct
Fiduciary responsibility
The regulations that apply to the prohibited actions for persons engaged in securities transactions are determined by the nature of the activity, not the person’s registration status. Regulations that apply to investment advice apply whether the advice is provided by an actual investment adviser or by an agent providing advice in connection with the sale of a security. The highest standards apply to persons acting as investment advisers. Persons that provide investment advice are considered fiduciaries. A fiduciary must put the interests of their clients above their own interests. Persons offering investment advice must meet this standard because they are acting in a position of trust in a capacity that impacts the clients’ finances. As part of this requirement, it is imperative that persons offering investment advice inform clients of any potential conflict of interest.Incorrect
Fiduciary responsibility
The regulations that apply to the prohibited actions for persons engaged in securities transactions are determined by the nature of the activity, not the person’s registration status. Regulations that apply to investment advice apply whether the advice is provided by an actual investment adviser or by an agent providing advice in connection with the sale of a security. The highest standards apply to persons acting as investment advisers. Persons that provide investment advice are considered fiduciaries. A fiduciary must put the interests of their clients above their own interests. Persons offering investment advice must meet this standard because they are acting in a position of trust in a capacity that impacts the clients’ finances. As part of this requirement, it is imperative that persons offering investment advice inform clients of any potential conflict of interest. -
Question 8 of 10
8. Question
Which of the following statements is true regarding client confidentiality?
Correct
Client confidentiality
Investment advisers are obligated to protect confidential client information. This means that investment advisers are prohibited from releasing any information regarding their client’s identity or the nature of the client’s investment. There are only two exceptions to the requirement. First, the client’s confidential information may be released if the client authorizes the investment adviser to release the information to a third party. The other exception is if the investment adviser is legally ordered to release the information. This exception normally occurs as the result of a subpoena for information. However, it should be noted that in instances in which the investment adviser is ordered to release the information, the investment adviser must still limit the release to the specific information legally ordered and provide the information only to the party indicated on the subpoena.Incorrect
Client confidentiality
Investment advisers are obligated to protect confidential client information. This means that investment advisers are prohibited from releasing any information regarding their client’s identity or the nature of the client’s investment. There are only two exceptions to the requirement. First, the client’s confidential information may be released if the client authorizes the investment adviser to release the information to a third party. The other exception is if the investment adviser is legally ordered to release the information. This exception normally occurs as the result of a subpoena for information. However, it should be noted that in instances in which the investment adviser is ordered to release the information, the investment adviser must still limit the release to the specific information legally ordered and provide the information only to the party indicated on the subpoena. -
Question 9 of 10
9. Question
Which of the following statements is false regarding advertising limitations?
Correct
Advertising limitations
The Uniform Securities Act includes specific limitations regarding the permissible contents of advertisements for investment advisers. Advertisements are classified as a message about the investment adviser that is directed to more than one person. Investment adviser advertisements may not include testimonials of any kind. If the advertisement contains any information regarding the historical performance of the securities recommended by the investment adviser, the advertisement may not limit the information to successful recommendations. Instead, if the advertisement references the performance of a particular recommended stock, the advertisement must reference the performance of all of the recommendations the investment adviser made regarding the same type of securities over that previous year (or longer). If historical performance is referenced, the advertisement must accurately reflect recommendations resulting in losses as well as those resulting in gains.Incorrect
Advertising limitations
The Uniform Securities Act includes specific limitations regarding the permissible contents of advertisements for investment advisers. Advertisements are classified as a message about the investment adviser that is directed to more than one person. Investment adviser advertisements may not include testimonials of any kind. If the advertisement contains any information regarding the historical performance of the securities recommended by the investment adviser, the advertisement may not limit the information to successful recommendations. Instead, if the advertisement references the performance of a particular recommended stock, the advertisement must reference the performance of all of the recommendations the investment adviser made regarding the same type of securities over that previous year (or longer). If historical performance is referenced, the advertisement must accurately reflect recommendations resulting in losses as well as those resulting in gains. -
Question 10 of 10
10. Question
Which of the following statements is true regarding accuracy of communication?
Correct
Accuracy of communication
Broker-dealers must ensure that all communications regarding securities transactions are accurate. This requirement applies to all communications reporting the purchase or sale of a security or securities including, but not limited to, advertisements, newspaper and periodical articles, and investment advisories. For example, an advertisement may not describe a mere offer to sell a security as though an actual sale had occurred. If the communication lists an offered sale price for a security or states an offer to purchase a security, the price contained in the communication must reflect the true price of the offer as understood by the broker-dealer. All communications must include any relevant information necessary to ensure that the communication is not misleading. In short, all broker-dealer communications relating to securities transactions should be accurate and complete.Incorrect
Accuracy of communication
Broker-dealers must ensure that all communications regarding securities transactions are accurate. This requirement applies to all communications reporting the purchase or sale of a security or securities including, but not limited to, advertisements, newspaper and periodical articles, and investment advisories. For example, an advertisement may not describe a mere offer to sell a security as though an actual sale had occurred. If the communication lists an offered sale price for a security or states an offer to purchase a security, the price contained in the communication must reflect the true price of the offer as understood by the broker-dealer. All communications must include any relevant information necessary to ensure that the communication is not misleading. In short, all broker-dealer communications relating to securities transactions should be accurate and complete.