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Question 1 of 30
1. Question
Which of the following is a criterion required in the written supervisory procedures for customer complaints to be sent to the main office or guarantor?
I. Monetary amount involved
II. Date of incident
III. Seriousness of allegation
IV. APs or principals involvedCorrect
There are pre-defined criteria that should be included in the written supervisory procedures established by the members and be sent to the main office or guarantor. Examples given were: criteria based on the seriousness of the allegations, monetary amount involved, APs or principals involved, or number of complaints against a certain AP or principal.
Reference: Customer complaints (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
Incorrect
There are pre-defined criteria that should be included in the written supervisory procedures established by the members and be sent to the main office or guarantor. Examples given were: criteria based on the seriousness of the allegations, monetary amount involved, APs or principals involved, or number of complaints against a certain AP or principal.
Reference: Customer complaints (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
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Question 2 of 30
2. Question
Which of the following screening procedures ensure the qualification of prospective employees at a branch office or guaranteed IBs?
I. Contacting prior employees to confirm work experience.
II. Inquiring about prior or pending disciplinary matters
III. Reviewing prospective employee’s educational background
IV. Requiring additional disclosures from previously registered APs.Correct
For previously registered APs, the information related to the prospective employee’s disciplinary and registration history must be obtained from NFA. The registration and disciplinary history (if any) of the prospective employee’s prior employers should also be reviewed.
Reference: Hiring (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
Incorrect
For previously registered APs, the information related to the prospective employee’s disciplinary and registration history must be obtained from NFA. The registration and disciplinary history (if any) of the prospective employee’s prior employers should also be reviewed.
Reference: Hiring (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
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Question 3 of 30
3. Question
Which of the following describes a problematic activity with regard to trading activity in customer accounts?
I. Trading in the personal trading accounts of APs and principals
II. Accounts with large number of trades
III. Unusual positions of transfers or error trades
IV. Trading results among a particular AP’s customersCorrect
Trading in the personal accounts of APs and principals is not a problematic activity in itself. However, it should be regularly reviewed and compared with the trading in customer accounts to identify potential improper trade allocations or frontrunning. Also, trading results among a particular AP’s customers are not a problematic activity but they should be compared to identify potential preferential treatment.
Reference: Account Activity (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
Incorrect
Trading in the personal accounts of APs and principals is not a problematic activity in itself. However, it should be regularly reviewed and compared with the trading in customer accounts to identify potential improper trade allocations or frontrunning. Also, trading results among a particular AP’s customers are not a problematic activity but they should be compared to identify potential preferential treatment.
Reference: Account Activity (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
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Question 4 of 30
4. Question
Which of the following factors should a Member firm consider in determining branch offices or guaranteed IBs for an on-site examination every other calendar year?
I. The number of APs
II. The frequency or nature of problems or concerns that arise from routine surveillance or supervision of the branch office or guaranteed IBs activities
III. The number and nature of customer complaints
IV. The qualification of APsCorrect
A lot of factors are considered when a Member identifies branch offices or guaranteed IBs to examine through an on-site inspection every other calendar year. Aside from the given, here are some examples:
-The amount of revenue generated by the branch office or guaranteed IB
-The type of business conducted
-The previous training, experience, and disciplinary history of the branch office or guaranteed IB and its personnel
-Whether there has been a change in either ownership or supervisory personnel at the branch office or guaranteed IBReference: Annual Inspection Requirement (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
Incorrect
A lot of factors are considered when a Member identifies branch offices or guaranteed IBs to examine through an on-site inspection every other calendar year. Aside from the given, here are some examples:
-The amount of revenue generated by the branch office or guaranteed IB
-The type of business conducted
-The previous training, experience, and disciplinary history of the branch office or guaranteed IB and its personnel
-Whether there has been a change in either ownership or supervisory personnel at the branch office or guaranteed IBReference: Annual Inspection Requirement (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
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Question 5 of 30
5. Question
Which of the following is NOT a/are NOT reason/s for ongoing training be provided to NFA members?
Correct
It is a supervisory responsibility of a Member (not of an IB) as well as an obligation and adherence to NFA Compliance Rule 2-9 to provide ongoing training for branch offices, employees, certain APs, and guaranteed IBs included.
Reference: Ongoing Training (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
Incorrect
It is a supervisory responsibility of a Member (not of an IB) as well as an obligation and adherence to NFA Compliance Rule 2-9 to provide ongoing training for branch offices, employees, certain APs, and guaranteed IBs included.
Reference: Ongoing Training (9019 – COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS)
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Question 6 of 30
6. Question
Which of the following is one factor that the Board identified as a common problem with Member firms in relation to the supervision of Telemarketing Activity?
Correct
NFA Compliance Rule 2-9 is designed to prevent deceptive and abusive sales practices. In this regard, telemarketing activities are an avenue for such practices and one common factor that the Board pointed out is the employment history and training of sales force from Member firms that were closed for fraud.
Reference: Interpretive Notice to Compliance Rule 2-9: Supervision of Telemarketing Activity
Incorrect
NFA Compliance Rule 2-9 is designed to prevent deceptive and abusive sales practices. In this regard, telemarketing activities are an avenue for such practices and one common factor that the Board pointed out is the employment history and training of sales force from Member firms that were closed for fraud.
Reference: Interpretive Notice to Compliance Rule 2-9: Supervision of Telemarketing Activity
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Question 7 of 30
7. Question
Which of the following is correct in the presentation of fees and expenses?
Correct
Before any upfront fees and expenses (as well as organization and offering expenses) are deducted, the beginning net asset value of a pool or managed account must be calculated first. The reason for this is that upfront fees and organizational expenses must be reflected as a reduction of net performance in the period in which the contribution was made to the pool or client’s managed account unless such fees and expenses can be amortized pursuant to Generally Accepted Accounting Principles.
Reference: Treatment of Up Front Fees in the Required Past Performance Presentation (9006 – NFA COMPLIANCE RULE 2-13: GUIDELINE FOR THE DISCLOSURE BY CPOS AND CTAS OF “UP FRONT” FEES AND ORGANIZATIONAL AND OFFERING EXPENSES)
Incorrect
Before any upfront fees and expenses (as well as organization and offering expenses) are deducted, the beginning net asset value of a pool or managed account must be calculated first. The reason for this is that upfront fees and organizational expenses must be reflected as a reduction of net performance in the period in which the contribution was made to the pool or client’s managed account unless such fees and expenses can be amortized pursuant to Generally Accepted Accounting Principles.
Reference: Treatment of Up Front Fees in the Required Past Performance Presentation (9006 – NFA COMPLIANCE RULE 2-13: GUIDELINE FOR THE DISCLOSURE BY CPOS AND CTAS OF “UP FRONT” FEES AND ORGANIZATIONAL AND OFFERING EXPENSES)
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Question 8 of 30
8. Question
Which is NOT included in the cover letter of a statement of additional information for CPO/CTA Disclosure Documents?
Correct
Disclosures, not included in the Disclosure Document, that are required by the Securities and Exchange Commission or state securities administrators are not part of the cover letter of Statement of Additional Information. What’s included instead is the date of the most recent disclosure document.
Reference: RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS
Incorrect
Disclosures, not included in the Disclosure Document, that are required by the Securities and Exchange Commission or state securities administrators are not part of the cover letter of Statement of Additional Information. What’s included instead is the date of the most recent disclosure document.
Reference: RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS
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Question 9 of 30
9. Question
Which of the following should be minimized or avoided in making a Disclosure Document?
I. In the active voice
II. Legal jargon and highly technical terms
III. Repeating information that is/are important
IV. Bullets and tables and making sure everything is explained in words properly.Correct
Using the active voice and avoiding legal jargon and highly technical terms make the disclosure document clearer and more concise especially for the investors who may not be “sophisticated” in legal or financial matters.
Important information must be said ONCE where it is MOST IMPORTANT. Also, using bullets and tables are allowed where they are appropriate. These are not hard and fast rules but the Disclosure Document must be concise and clear.Reference: 9025 – COMPLIANCE RULE 2-29: USE OF PROMOTIONAL MATERIAL CONTAINING HYPOTHETICAL PERFORMANCE RESULTS
Incorrect
Using the active voice and avoiding legal jargon and highly technical terms make the disclosure document clearer and more concise especially for the investors who may not be “sophisticated” in legal or financial matters.
Important information must be said ONCE where it is MOST IMPORTANT. Also, using bullets and tables are allowed where they are appropriate. These are not hard and fast rules but the Disclosure Document must be concise and clear.Reference: 9025 – COMPLIANCE RULE 2-29: USE OF PROMOTIONAL MATERIAL CONTAINING HYPOTHETICAL PERFORMANCE RESULTS
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Question 10 of 30
10. Question
Which of the following situations violate/s the Customer Information and Risk Disclosure?
I. An AP instructed a customer to put down “self-employed” for his occupation instead of “unemployed actor”.
II. An AP instructed a customer who has no futures trading experience to fill out the forms within the day after explaining the forms and additional risks.
III. An AP told a customer that his actual annual income of $12,500 was too low and that if he did not change that figure to read between $20,000 and $40,000, his account would be rejected.
IV. An AP told a customer who has no futures trading experience but is very ecstatic in applying for an account that the customer should wait for a few days and should read first the disclosure document before signing up the forms.Correct
Any act that fails to give additional risk disclosure when required, or disguising a fact that additional risk disclosure may be required is already a violation of the NFA Compliance Rule 2-30 (Customer Information and Risk Disclosure). This goes as well for any act that violates record-keeping requirements and supervisory requirements.
Reference: 9013 – NFA COMPLIANCE RULE 2-30: CUSTOMER INFORMATION AND RISK DISCLOSUREIncorrect
Any act that fails to give additional risk disclosure when required, or disguising a fact that additional risk disclosure may be required is already a violation of the NFA Compliance Rule 2-30 (Customer Information and Risk Disclosure). This goes as well for any act that violates record-keeping requirements and supervisory requirements.
Reference: 9013 – NFA COMPLIANCE RULE 2-30: CUSTOMER INFORMATION AND RISK DISCLOSURE -
Question 11 of 30
11. Question
Which of the following is TRUE when it comes to RecordKeeping and Supervisory Requirements of Members in terms of Customer Risk and Risk Disclosure?
I. A Member is required to provide their APs with any sort of grid-like formula to identify those customers who identify risk disclosure.
II. A Member firm is required to articulate the general factors its Aps are instructed to consider in determining whether additional risk disclosure is required.
III. A Member is not required to retain the information of customers like occupation and futures trading experience as this is a responsibility of APs.
IV. A Member may obtain guidance regarding the Rule’s application by reviewing case summaries described in the Rulebook.Correct
A member is NOT required to provide their APs with any sort of grid-like formula to identify those customers who identify risk disclosure.
Reference: 9013 – NFA COMPLIANCE RULE 2-30: CUSTOMER INFORMATION AND RISK DISCLOSUREIncorrect
A member is NOT required to provide their APs with any sort of grid-like formula to identify those customers who identify risk disclosure.
Reference: 9013 – NFA COMPLIANCE RULE 2-30: CUSTOMER INFORMATION AND RISK DISCLOSURE -
Question 12 of 30
12. Question
Which of the following is held TRUE when it comes to a CPO’s internal controls system?
Correct
The particulars of a CPO’s internal controls system vary based on the Member’s size and complexity of operations. With that said, it can’t be one-size-fits-all. Also, the internal controls system should always make sure that no single employee is allowed to carry out two phases of a transaction or an operation. CPOs may prepare shadow books to ensure that the CPO’s records and financial statements are in agreement with those of the administrator’s records and financial statements.
Reference: 9074 – NFA COMPLIANCE RULE 2-9: CPO INTERNAL CONTROLS SYSTEM
Incorrect
The particulars of a CPO’s internal controls system vary based on the Member’s size and complexity of operations. With that said, it can’t be one-size-fits-all. Also, the internal controls system should always make sure that no single employee is allowed to carry out two phases of a transaction or an operation. CPOs may prepare shadow books to ensure that the CPO’s records and financial statements are in agreement with those of the administrator’s records and financial statements.
Reference: 9074 – NFA COMPLIANCE RULE 2-9: CPO INTERNAL CONTROLS SYSTEM
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Question 13 of 30
13. Question
Which of the following scenario best describes the random allocation in bunched orders for multiple accounts?
Correct
One of the allocation methodologies used by NFA in performing examinations is the random allocation wherein a computer-generated random order of accounts are prepared daily. The allocation of the best price goes to the first one and the worst for the last one. Other methodologies commonly used by NFA are:
ROTATION OF ACCOUNTS.
HIGHEST PRICES TO THE HIGHEST ACCOUNT NUMBERS
AVERAGE PRICEReference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
Incorrect
One of the allocation methodologies used by NFA in performing examinations is the random allocation wherein a computer-generated random order of accounts are prepared daily. The allocation of the best price goes to the first one and the worst for the last one. Other methodologies commonly used by NFA are:
ROTATION OF ACCOUNTS.
HIGHEST PRICES TO THE HIGHEST ACCOUNT NUMBERS
AVERAGE PRICEReference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
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Question 14 of 30
14. Question
Which of the following is an issue/are issues involving allocation instructions for trades made through bunch orders for multiple accounts?
I. In the allocation of split or partial fills, bunched order of contracts for multiple accounts is filled at different prices in a market order.
II. Allocation methodologies remain constant but the instructions are changed daily.
III. The total number of contracts should be allocated to the various accounts in the bunched order.
IV. Different prices or the contracts in a partial fill should be allocated among the accounts included in the block order.Correct
In the allocation of bunched order for multiple accounts, there are principles followed such as the instructions of the allocation should be non-preferential and should be fair and equitable over time.
Reference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
Incorrect
In the allocation of bunched order for multiple accounts, there are principles followed such as the instructions of the allocation should be non-preferential and should be fair and equitable over time.
Reference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
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Question 15 of 30
15. Question
Which of the following principles govern the procedures used in handling issues in the allocation instructions for trades?
I. It must be timely, in that the Eligible Account Manager must provide the allocation information to the FCMs that execute or clear the trade as soon as practicable after the order is filled.
II. It must be non-preferential and are fair and equitable over time, such that no account receives constant favorable/unfavorable treatment.
III. It is objective and specific to permit independent verification of the fairness of allocations over time.
IV. It should not identify one or an ultimate customer before the end of the trading day to ensure that all orders received fair treatment.Correct
In any event, sufficiently before the end of the trading day, the Eligible Account Manager should ensure that clearing records must identify the ultimate customer for each trade.
Reference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
Incorrect
In any event, sufficiently before the end of the trading day, the Eligible Account Manager should ensure that clearing records must identify the ultimate customer for each trade.
Reference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
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Question 16 of 30
16. Question
Which of the following is the critical element in the evaluation of trading programs?
Correct
The critical element in the evaluation of trading programs is its allocation fairness over time and not trade-by-trade.
Reference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
Incorrect
The critical element in the evaluation of trading programs is its allocation fairness over time and not trade-by-trade.
Reference: 9029 – NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
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Question 17 of 30
17. Question
Which of the following should the number of usual pages be for a disclosure document for complex pools and principal-protected pools?
Correct
Disclosure Documents should comply with Compliance Rule 2-35 wherein, it should be concise and clear. In order to do achieve that, for single-advisor pools, the page should be 30 or less. For more complex, multi-advisor pools or principal-protected pools, it should not usually exceed 40 pages.
Reference: 9035 – RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS
Incorrect
Disclosure Documents should comply with Compliance Rule 2-35 wherein, it should be concise and clear. In order to do achieve that, for single-advisor pools, the page should be 30 or less. For more complex, multi-advisor pools or principal-protected pools, it should not usually exceed 40 pages.
Reference: 9035 – RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS
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Question 18 of 30
18. Question
Which of the following is the responsibility/are responsibilities of a Member and its Associates to a customer with regard to trading foreign exchange diclosure?
I. Forex Dealer Members and Associates should only provide what the customer wants to learn or know as this is in accordance to transparency.
II. Members and Associates introducing managing accounts should know what information has been provided.
III. Members and Associates should disclose how the Member will be compensated for the services it will provide to the customer.
IV. Forex Dealer Members should provide both the bid and the offer when the customer enters an order.Correct
Forex Dealer Members and Associates should provide the customer with sufficient information concerning the characteristics and particular risks of entering into forex transactions.
Reference: 9053 – FOREX TRANSACTIONS
Incorrect
Forex Dealer Members and Associates should provide the customer with sufficient information concerning the characteristics and particular risks of entering into forex transactions.
Reference: 9053 – FOREX TRANSACTIONS
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Question 19 of 30
19. Question
Which of the following does not fall under the definition of promotional material through Websites, social media and electronic communications?
Correct
For third-party maintained websites, social media, and electronic devices, a Member is not responsible for the other contents that are posted in it and does not fall under promotional material subject to the requirements of NFA.
Reference: 9037 – NFA COMPLIANCE RULES 2-9, 2-10, 2-29, 2-36 and 2-39: GUIDANCE ON THE USE AND SUPERVISION OF WEBSITES, SOCIAL MEDIA AND OTHER ELECTRONIC COMMUNICATIONS
Incorrect
For third-party maintained websites, social media, and electronic devices, a Member is not responsible for the other contents that are posted in it and does not fall under promotional material subject to the requirements of NFA.
Reference: 9037 – NFA COMPLIANCE RULES 2-9, 2-10, 2-29, 2-36 and 2-39: GUIDANCE ON THE USE AND SUPERVISION OF WEBSITES, SOCIAL MEDIA AND OTHER ELECTRONIC COMMUNICATIONS
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Question 20 of 30
20. Question
Which of the following is not included in a Member’s supervisory procedures with respect to electronic communications?
Correct
Employees and Associates who have a disciplinary history involving problems with customers or were employed by or associated with a firm that has been disciplined for fraud or sales practice violations may be subject to a review on conduct. However, personal messages are not a scoope of the supervisory procedures for promotional materials.
Reference: 9037 – NFA COMPLIANCE RULES 2-9, 2-10, 2-29, 2-36 and 2-39: GUIDANCE ON THE USE AND SUPERVISION OF WEBSITES, SOCIAL MEDIA AND OTHER ELECTRONIC COMMUNICATIONS
Incorrect
Employees and Associates who have a disciplinary history involving problems with customers or were employed by or associated with a firm that has been disciplined for fraud or sales practice violations may be subject to a review on conduct. However, personal messages are not a scoope of the supervisory procedures for promotional materials.
Reference: 9037 – NFA COMPLIANCE RULES 2-9, 2-10, 2-29, 2-36 and 2-39: GUIDANCE ON THE USE AND SUPERVISION OF WEBSITES, SOCIAL MEDIA AND OTHER ELECTRONIC COMMUNICATIONS
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Question 21 of 30
21. Question
Which of the following is NOT an element of CIP (Customer Identification Program)?
Correct
Government List Procedures are not enough as a sole element in customer identification but they should be used to compare procedures.
Reference: 9045 – NFA COMPLIANCE RULE 2-9: FCM AND IB ANTI-MONEY LAUNDERING PROGRAM
Incorrect
Government List Procedures are not enough as a sole element in customer identification but they should be used to compare procedures.
Reference: 9045 – NFA COMPLIANCE RULE 2-9: FCM AND IB ANTI-MONEY LAUNDERING PROGRAM
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Question 22 of 30
22. Question
Which of the following is a financial requirement for Introducing Brokers (IB)?
Correct
For Member IBs with less than $1,000,000 in Adjusted Net Capital, $3,000 for each AP sponsored by the IB
Reference: SECTION 5. INTRODUCING BROKER FINANCIAL REQUIREMENTS.
Incorrect
For Member IBs with less than $1,000,000 in Adjusted Net Capital, $3,000 for each AP sponsored by the IB
Reference: SECTION 5. INTRODUCING BROKER FINANCIAL REQUIREMENTS.
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Question 23 of 30
23. Question
Which of the following constitute/s the electronic filing of the Member IB’s financial report?
I. A representation that the person electronically filing the financial report is duly specified in CFTC Regulation 1.10 (d)(4).
II. An attestation that the person electronically filing the financial report is duly authorized to bind the Member IB submitting the financial report.
III. An acknowledgement that it is understood that all required items and statements are integral parts of the financial report.
IV. An acknowledgement that it is further understood that any misreports or omission of facts constitute Federal Criminal Violations.Correct
Electronic filing of the Member IB’s report, in summary, shall always be accurate and true and that intentional violations of these can be a Federal Criminal Violation.
Reference: SECTION 5. INTRODUCING BROKER FINANCIAL REQUIREMENTS
Incorrect
Electronic filing of the Member IB’s report, in summary, shall always be accurate and true and that intentional violations of these can be a Federal Criminal Violation.
Reference: SECTION 5. INTRODUCING BROKER FINANCIAL REQUIREMENTS
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Question 24 of 30
24. Question
Which of the following constitutes the application process for registration as an IB?
I. Pay the fee required by Rule 203a
II. File an Acknowledgement of Conditioned Registration executed by the sponsor if the applicant is subject to a Commission
III. File a Form 7-R, completed and filed in accordance with all pertinent instructions
IV. File and complete the registration in accordance with CFTC regulation 4.13Correct
Each application for registration as an FCM or an IB must be completed and filed in accordance with CFTC Regulation 1.10 also known as “Financial reports of futures commission merchants and introducing brokers”.
Reference: RULE 204. REGISTRATION OF FUTURES COMMISSION MERCHANTS, NOTICE FUTURES COMMISSION MERCHANTS, RETAIL FOREIGN EXCHANGE DEALERS, FLOOR TRADER FIRMS, INTRODUCING BROKERS, NOTICE INTRODUCING BROKERS, COMMODITY POOL OPERATORS, COMMODITY TRADING ADVISORS AND LEVERAGE TRANSACTION MERCHANTS AND CONFIRMATION OF EXEMPTION FROM REGISTRATION PURSUANT TO COMMISSION REGULATION 30.5.
Incorrect
Each application for registration as an FCM or an IB must be completed and filed in accordance with CFTC Regulation 1.10 also known as “Financial reports of futures commission merchants and introducing brokers”.
Reference: RULE 204. REGISTRATION OF FUTURES COMMISSION MERCHANTS, NOTICE FUTURES COMMISSION MERCHANTS, RETAIL FOREIGN EXCHANGE DEALERS, FLOOR TRADER FIRMS, INTRODUCING BROKERS, NOTICE INTRODUCING BROKERS, COMMODITY POOL OPERATORS, COMMODITY TRADING ADVISORS AND LEVERAGE TRANSACTION MERCHANTS AND CONFIRMATION OF EXEMPTION FROM REGISTRATION PURSUANT TO COMMISSION REGULATION 30.5.
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Question 25 of 30
25. Question
Which of the following is not true in the presentation of break-even analysis?
Correct
In a break-even analysis, as required by Compliance Rule 2-13, every fee and expense must be included and presented with correct computations. If a redemption fee is charged at the end of the first year of investment, it must be considered part of the total cost and reflected in the break-even analysis.
Reference: 9023 – COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
Incorrect
In a break-even analysis, as required by Compliance Rule 2-13, every fee and expense must be included and presented with correct computations. If a redemption fee is charged at the end of the first year of investment, it must be considered part of the total cost and reflected in the break-even analysis.
Reference: 9023 – COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
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Question 26 of 30
26. Question
Based on the sample of a break-even presentation below, if the General Partner charges a 20% quarterly incentive fee based on New Net High Profits, how much does he get as an incentive fee?
Minimum Initial Investment $100,000
Upfront Syndication and Selling Expense 1,500
Initial Organizational Expenses 200
General Partner’s Management Fee 985
Fund Operating Expenses 1,034
Trading Advisor’s
Management Fees 1,773
Trading Advisor’s
Incentive Fees on Trading Profits 439
The General Partner’s Incentive Fees on Trading Profits (_______)
Brokerage Commissions and Trading Fees 1,724
Less Interest Income (1,231)
Amount of Trading Profits Required for
a Participant’s Capital Account
(Redemption Value) at the End of
One Year to Equal Its Initial Investment $6,424
Percentage of Minimum Initial Investment 6.42%Correct
If the General Partner charges a 20% quarterly incentive fee based upon New Net High Profits, the General Partner will receive $0. Based on the definition of New Net High Profits (net of all management fees, brokerage, commissions and operating expenses), the General Partner does not receive incentive fee until the fund generates trading income sufficient to offset the expenses.
Reference: 9023 – COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
Incorrect
If the General Partner charges a 20% quarterly incentive fee based upon New Net High Profits, the General Partner will receive $0. Based on the definition of New Net High Profits (net of all management fees, brokerage, commissions and operating expenses), the General Partner does not receive incentive fee until the fund generates trading income sufficient to offset the expenses.
Reference: 9023 – COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
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Question 27 of 30
27. Question
Based on the sample break-even presentation below, what is the percentage of the incentive fee that the Trading Advisor received?
Minimum Initial Investment $100,000
Upfront Syndication and Selling Expense 1,500
Initial Organizational Expenses 200
General Partner’s Management Fee 985
Fund Operating Expenses 1,034
Trading Advisor’s
Management Fees 1,773
Trading Advisor’s
Incentive Fees on Trading Profits 439
The General Partner’s Incentive Fees on Trading Profits (–)
Brokerage Commissions and Trading Fees 1,724
Less Interest Income (1,231)
Amount of Trading Profits Required for
a Participant’s Capital Account
(Redemption Value) at the End of
One Year to Equal Its Initial Investment $6,424
Percentage of Minimum Initial Investment 6.42%Correct
The Trading Advisor receives a 15% incentive of Trading Profits exclusive of interest income. The 15% comes from the net of total trading income of $6,424, minus $1,724 of brokerage commissions and traading fees, and $1,773 of Trading Advisor management fees.
Reference: 9023 – COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
Incorrect
The Trading Advisor receives a 15% incentive of Trading Profits exclusive of interest income. The 15% comes from the net of total trading income of $6,424, minus $1,724 of brokerage commissions and traading fees, and $1,773 of Trading Advisor management fees.
Reference: 9023 – COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
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Question 28 of 30
28. Question
Which of the following should CTAs provide clients with partially-funded accounts (if the clients are not QEPs)?
I. A statement that partial funding decreases leverage and may result in less frequent and smaller margin calls
II. A statement that partial funding increases the fees and commissions as a percentage of actual funds but does not increase the dollar amount of those fees
III. A statement of how management fees will be computed relative to the nominal account size
IV. A description, by example or formula, of the effect of partial funding on rate of return and draw-down percentagesCorrect
Additional Disclosures are provided for partially-funded accounts especially if the clients are not QEPs. One of these disclosures is a statement that partial funding increases leverage and may result in more frequent and larger margin calls, not the other way around.
Reference: Part 2 – Rules Governing the Business Conduct of Members Registered with the Commission (RULE 2-34. CTA PERFORMANCE REPORTING AND DISCLOSURES)
Incorrect
Additional Disclosures are provided for partially-funded accounts especially if the clients are not QEPs. One of these disclosures is a statement that partial funding increases leverage and may result in more frequent and larger margin calls, not the other way around.
Reference: Part 2 – Rules Governing the Business Conduct of Members Registered with the Commission (RULE 2-34. CTA PERFORMANCE REPORTING AND DISCLOSURES)
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Question 29 of 30
29. Question
Which of the following is an exception/are exceptions for the use of extracted performance in promotional materials?
I. A CPO/CTA’s previous disclosure documents designated the percentage of assets that would be committed toward that particular component of the overall trading program.
II. Promotional materials directed exclusively to QEPs
III. Written documents along with oral representations are provided to customers.
IV. A previous disclosure document allows the extraction of its performance for presentation.Correct
The Board of Directors also believes that hindsight analysis may be misleading as applied to the presentation of extracted performance in which an FCM, IB, CPO or CTA Member or Associate selects one component of its overall past trading results to highlight to customers. The use of extracted performance is permitted only when a PO or CTA’s previous disclosure documents designated the precentage of assets that would be committed toward that particular component of the overall trading program. Written and oral representations are not sufficient.
Members presenting extracted performance in promotional material directed exclusively to QEPs are not required to satisfy the requirements of this paragraph, provided that such performance information is clearly identified and accompanied by disclosure of material assumptions that were made in preparing the extracted performance that differ from the disclosed features of the offered trading program.Reference: 9025 – COMPLIANCE RULE 2-29: USE OF PROMOTIONAL MATERIAL CONTAINING HYPOTHETICAL PERFORMANCE RESULTS
Incorrect
The Board of Directors also believes that hindsight analysis may be misleading as applied to the presentation of extracted performance in which an FCM, IB, CPO or CTA Member or Associate selects one component of its overall past trading results to highlight to customers. The use of extracted performance is permitted only when a PO or CTA’s previous disclosure documents designated the precentage of assets that would be committed toward that particular component of the overall trading program. Written and oral representations are not sufficient.
Members presenting extracted performance in promotional material directed exclusively to QEPs are not required to satisfy the requirements of this paragraph, provided that such performance information is clearly identified and accompanied by disclosure of material assumptions that were made in preparing the extracted performance that differ from the disclosed features of the offered trading program.Reference: 9025 – COMPLIANCE RULE 2-29: USE OF PROMOTIONAL MATERIAL CONTAINING HYPOTHETICAL PERFORMANCE RESULTS
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Question 30 of 30
30. Question
Which of the following is an example/are examples of deceptive advertising?
I. Members enticing prospective investors by claiming that their customers have made dramtic profits but only relying on a few isolated trades.
II. Members claiming that customers can gain huge profits based on the current market but the Members has not achieved such things in the past.
III. Members have presented performance results for a trading program that have been adjusted using an arbitrary leverage factor (e.g., depicting returns that are based on a partially funded investment).
IV. Members have referenced or highlighted the performance of a third-party index representative of the Member’s trading program or performance results.Correct
There are lots of conducts that may be deemed deceptive and misleading. What makes them misleading or deceptive is that the presented scenario is not backed by facts and first-hand experience.
Reference: 9033 – NFA COMPLIANCE RULE 2-29: DECEPTIVE ADVERTISING
Incorrect
There are lots of conducts that may be deemed deceptive and misleading. What makes them misleading or deceptive is that the presented scenario is not backed by facts and first-hand experience.
Reference: 9033 – NFA COMPLIANCE RULE 2-29: DECEPTIVE ADVERTISING