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Question 1 of 10
1. Question
What is not true about client confidentiality?
Correct
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
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.
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Question 2 of 10
2. Question
Which of the following are the material facts relating to a company’s historical performance?
I. Historical trends in the company’s stock price.
II. The company’s historical financial performance.
III. The company’s current goals.
IV. Historical success in meeting its performance goals.
Correct
Material facts include all information that may influence a client’s investment decisions. This includes information that may impact the client’s decision to purchase or sell a security as well as information that may impact the volume of a particular security the client may choose to buy or sell. All of these factors must be considered when determining which facts are material facts. Material facts relating to a company’s historical performance may include information such as historical trends in the company’s stock price, the company’s historical financial performance (including profits, losses, revenues, and expenses), the company’s current goals and historical success in meeting its performance goals, and the company’s historical payment of dividends to shareholders (if any). The previous list should not be viewed as all-inclusive. An historical fact is a material fact if it is likely to influence an investment decision.
Incorrect
Material facts include all information that may influence a client’s investment decisions. This includes information that may impact the client’s decision to purchase or sell a security as well as information that may impact the volume of a particular security the client may choose to buy or sell. All of these factors must be considered when determining which facts are material facts. Material facts relating to a company’s historical performance may include information such as historical trends in the company’s stock price, the company’s historical financial performance (including profits, losses, revenues, and expenses), the company’s current goals and historical success in meeting its performance goals, and the company’s historical payment of dividends to shareholders (if any). The previous list should not be viewed as all-inclusive. An historical fact is a material fact if it is likely to influence an investment decision.
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Question 3 of 10
3. Question
Which of the following is act of fraud?
Correct
Fraud only occurs when a person intentionally attempts to mislead. If a person misquotes a market price to a client due to the transposition of a number, a computer glitch or other error, the person has not committed fraud. If a person fails to provide a material fact to a client because the person was unaware of the fact, or because the person did not realize that the fact in question might influence the client’s investment decision, the person has not committed fraud. While these instances are not considered fraud, it is important to keep in mind that a securities professional is obligated to safeguard against this type of error. Furthermore, in all of the instances listed above, if the securities professional later became aware that a mistake had been made, failure to disclose the error to the client would be an act of fraud.
Incorrect
Fraud only occurs when a person intentionally attempts to mislead. If a person misquotes a market price to a client due to the transposition of a number, a computer glitch or other error, the person has not committed fraud. If a person fails to provide a material fact to a client because the person was unaware of the fact, or because the person did not realize that the fact in question might influence the client’s investment decision, the person has not committed fraud. While these instances are not considered fraud, it is important to keep in mind that a securities professional is obligated to safeguard against this type of error. Furthermore, in all of the instances listed above, if the securities professional later became aware that a mistake had been made, failure to disclose the error to the client would be an act of fraud.
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Question 4 of 10
4. Question
What all should be kept in mind while dealing with clients with margin accounts?
I. A broker-dealer with a margin account must obtain an effective written margin agreement from its client.
II. The broker-dealer may initiate the first transaction in the client’s margin account before the broker-dealer possesses an effective written margin agreement.
III. If the broker-dealer has not obtained a valid, executed margin agreement from the client prior to the initial margin account transaction, the broker-dealer must obtain such agreement shortly after the initial transaction.
IV. Failure to obtain a margin agreement from the client in a timely manner may be grounds for the Administrator to deny, suspend, or revoke the broker-dealer’s registration.
Correct
A broker-dealer must follow special procedures when dealing with clients that possess margin accounts. In addition to the standard requirement that the broker-dealer has to obtain client authorization prior to engaging in a securities transaction, a broker-dealer with a margin account must obtain an effective written margin agreement from its client. Although the broker-dealer must obtain standard client authorization prior to initiating any transaction in the client’s margin account, the broker-dealer may initiate the first
transaction in the client’s margin account before the broker-dealer possesses an effective written margin agreement. If the broker-dealer has not obtained a valid, executed margin agreement from the client prior to the initial margin account transaction, the broker-dealer must obtain such agreement shortly after the initial transaction. Failure to obtain a margin agreement from the client in a timely manner may be grounds for the Administrator to deny, suspend, or revoke the broker-dealer’s registration.Incorrect
A broker-dealer must follow special procedures when dealing with clients that possess margin accounts. In addition to the standard requirement that the broker-dealer has to obtain client authorization prior to engaging in a securities transaction, a broker-dealer with a margin account must obtain an effective written margin agreement from its client. Although the broker-dealer must obtain standard client authorization prior to initiating any transaction in the client’s margin account, the broker-dealer may initiate the first
transaction in the client’s margin account before the broker-dealer possesses an effective written margin agreement. If the broker-dealer has not obtained a valid, executed margin agreement from the client prior to the initial margin account transaction, the broker-dealer must obtain such agreement shortly after the initial transaction. Failure to obtain a margin agreement from the client in a timely manner may be grounds for the Administrator to deny, suspend, or revoke the broker-dealer’s registration. -
Question 5 of 10
5. Question
How can an agent perform proper borrowing and lending practices?
I. Agents must not borrow money or securities from their customers or lend money or securities to their customers.
II. An agent should not allow customers to leave funds or securities in the agent’s care.
III. An agent should not perform the functions of borrowing, lending, and protecting a client’s funds or securities.
IV. Agents must guard against any improper financial dealings with customers.
Correct
Agents must ensure that they maintain a proper relationship with their customers. To that end, agents must not borrow money or securities from their customers or lend money or securities to their customers. In addition, an agent should not allow customers to leave
funds or securities in the agent’s care. In short, an agent should not perform the functions of borrowing, lending, and protecting a client’s funds or securities. Agents should make recommendations to their clients regarding possible securities transactions. Agents must guard against any improper financial dealings with customers. Inappropriate borrowing or lending of funds or securities between customers and agents can result in the agent’s loss of registration. Similarly, the registration of agent that inappropriately takes custody of a customer’s funds or securities may be suspended, revoked, or denied.Incorrect
Agents must ensure that they maintain a proper relationship with their customers. To that end, agents must not borrow money or securities from their customers or lend money or securities to their customers. In addition, an agent should not allow customers to leave
funds or securities in the agent’s care. In short, an agent should not perform the functions of borrowing, lending, and protecting a client’s funds or securities. Agents should make recommendations to their clients regarding possible securities transactions. Agents must guard against any improper financial dealings with customers. Inappropriate borrowing or lending of funds or securities between customers and agents can result in the agent’s loss of registration. Similarly, the registration of agent that inappropriately takes custody of a customer’s funds or securities may be suspended, revoked, or denied. -
Question 6 of 10
6. Question
What is not true about sharing fees or commissions?
Correct
Agents may not share their commissions or any other form of compensation associated with the sale or purchase of a security with a customer or any other non-agent. Furthermore, an agent may only split commissions (or other forms of compensation associated with the sale or purchase of a security) with agents that also represent the same broker-dealer (or directly affiliated broker-dealers). Splitting commissions (and/or other forms of compensation associated with a securities transaction) with any party other than an eligible agent is an inappropriate conflict of interest. Such behavior has been deemed unethical, and any agent that engages in such unethical behavior may have their registration denied, suspended, or revoked.
Incorrect
Agents may not share their commissions or any other form of compensation associated with the sale or purchase of a security with a customer or any other non-agent. Furthermore, an agent may only split commissions (or other forms of compensation associated with the sale or purchase of a security) with agents that also represent the same broker-dealer (or directly affiliated broker-dealers). Splitting commissions (and/or other forms of compensation associated with a securities transaction) with any party other than an eligible agent is an inappropriate conflict of interest. Such behavior has been deemed unethical, and any agent that engages in such unethical behavior may have their registration denied, suspended, or revoked.
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Question 7 of 10
7. Question
In which situation investment advisers does not require authorization?
I. Prior to each and every securities transaction.
II. Placing any order on behalf of a client to purchase.
III. Selling securities.
IV. Disclosure of client information.
Correct
Investment advisers must always obtain proper client authorization prior to each and every securities transaction. Investment advisers are prohibited from placing any order on behalf of a client to purchase and/or sell securities unless the investment adviser has first obtained proper authorization from the client for the transaction in question. Although investment advisers are fiduciaries, an investment adviser may not operate without proper authorization from the client, even if the action is in the best interest of the client. Failure to obtain proper client authorization prior to initiating a securities transaction may result in the denial, revocation, or suspension of the investment adviser’s registration. This prohibition also applies to instances in which the investment adviser receives instructions to initiate a securities transaction from a third party. Investment advisers may accept orders from third parties, but the investment adviser must have written authorization from the client in order to do so.
Incorrect
Investment advisers must always obtain proper client authorization prior to each and every securities transaction. Investment advisers are prohibited from placing any order on behalf of a client to purchase and/or sell securities unless the investment adviser has first obtained proper authorization from the client for the transaction in question. Although investment advisers are fiduciaries, an investment adviser may not operate without proper authorization from the client, even if the action is in the best interest of the client. Failure to obtain proper client authorization prior to initiating a securities transaction may result in the denial, revocation, or suspension of the investment adviser’s registration. This prohibition also applies to instances in which the investment adviser receives instructions to initiate a securities transaction from a third party. Investment advisers may accept orders from third parties, but the investment adviser must have written authorization from the client in order to do so.
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Question 8 of 10
8. Question
In which of the following situations investment advisers must provide written notification to their clients of any material conflict of interest?
I. If the investment adviser may receive compensation from a source other than the client’s fees for activities associated with the client’s investments.
II. If the investment adviser may receive compensation from a source other than the client’s fees for activities associated with the securities transactions.
III. To receive commission for transactions in addition to the investment adviser’s advisory fee.
IV. Investment advisers must provide the written notification of the conflict of interest to their client or clients before providing any investment advice related to the conflict of interest.
Correct
Investment advisers must provide written notification to their clients of any material conflict of interest that the investment adviser or any of its employees have that could hinder the investment adviser’s ability to provide objective and unbiased investment advice. For example, if the investment adviser (or any of the investment adviser’s
employees) may receive compensation from a source other than the client’s fees (for example, from a broker-dealer) for activities associated with the client’s investments or securities transactions, the investment adviser must notify the client of this fact in writing. Similarly, investment advisers must also provide written notification if the investment adviser (or its employees) receive commission for transactions in addition to the investment adviser’s advisory fee. Investment advisers must provide the written notification of the conflict of interest to their client or clients before providing any investment advice related to the conflict of interest.Incorrect
Investment advisers must provide written notification to their clients of any material conflict of interest that the investment adviser or any of its employees have that could hinder the investment adviser’s ability to provide objective and unbiased investment advice. For example, if the investment adviser (or any of the investment adviser’s
employees) may receive compensation from a source other than the client’s fees (for example, from a broker-dealer) for activities associated with the client’s investments or securities transactions, the investment adviser must notify the client of this fact in writing. Similarly, investment advisers must also provide written notification if the investment adviser (or its employees) receive commission for transactions in addition to the investment adviser’s advisory fee. Investment advisers must provide the written notification of the conflict of interest to their client or clients before providing any investment advice related to the conflict of interest. -
Question 9 of 10
9. Question
What are the examples of private information that must be protected by investment advisers?
I. Clients Names
II. Clients Address
III. Client Financial Information
IV. Client securities portfolio
Correct
Investment advisers are trusted with private information belonging to their clients. It is critical that investment advisers safeguard all such private information. In order to ensure that investment advisers keep all such nonpublic information private, investment advisers must have written policies and procedures in place that outline the methods the investment adviser will use to ensure that it does not disclose nonpublic information. Investment advisers must enforce these written policies and procedures and ensure that all employees comply with these obligations. Examples of private information that must be protected include client names, client addresses, client financial information, client securities portfolios, and client-specific investment performance information. Investment advisers may not disclose this information without express permission from the client unless legally ordered to do so.
Incorrect
Investment advisers are trusted with private information belonging to their clients. It is critical that investment advisers safeguard all such private information. In order to ensure that investment advisers keep all such nonpublic information private, investment advisers must have written policies and procedures in place that outline the methods the investment adviser will use to ensure that it does not disclose nonpublic information. Investment advisers must enforce these written policies and procedures and ensure that all employees comply with these obligations. Examples of private information that must be protected include client names, client addresses, client financial information, client securities portfolios, and client-specific investment performance information. Investment advisers may not disclose this information without express permission from the client unless legally ordered to do so.
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Question 10 of 10
10. Question
What are the standards for Investment advisory contract?
I. Investment advisory contracts must outline each of the services that the investment adviser will provide to the client.
II. The investment advisory contract must outline the manner in which the investment adviser’s fee will be calculated.
III. The contract must also document the manner in which each fee (or portion thereof) will be refunded in the event that the contract is terminated or the investment adviser does not perform as specified.
IV. The contract must have a specified term of duration and must specify any discretionary authority the client has granted to the investment adviser.
Correct
Investment advisers must ensure that each investment advisory contract complies with minimum standards. Investment advisory contracts must outline each of the services that the investment adviser will provide to the client. For each of the services governed by the contract, the investment advisory contract must outline the manner in which the
investment adviser’s fee will be calculated. The contract must also document the manner in which each fee (or portion thereof) will be refunded in the event that the contract is terminated or the investment adviser does not perform as specified. In addition, the contract must have a specified term of duration and must specify any discretionary authority the client has granted to the investment adviser.Incorrect
Investment advisers must ensure that each investment advisory contract complies with minimum standards. Investment advisory contracts must outline each of the services that the investment adviser will provide to the client. For each of the services governed by the contract, the investment advisory contract must outline the manner in which the
investment adviser’s fee will be calculated. The contract must also document the manner in which each fee (or portion thereof) will be refunded in the event that the contract is terminated or the investment adviser does not perform as specified. In addition, the contract must have a specified term of duration and must specify any discretionary authority the client has granted to the investment adviser.