Joe Treader is the owner of a small, state-registered investment advisory firm that is on the verge of becoming insolvent. One of his clients who has become like a mother to him is aware of his financial difficulties and has offered to sell off some of the assets that he manages for her and loan him the money to get him through this period of economic uncertainty until he is able to get on his feet again.
Can Joe take her up on her offer?
Answer : C
No, Joe cannot take his clients offer of a loan because it could lead to a conflict of interest-
-if not today, perhaps in the future--and as a fiduciary Joe will be expected to put this clients welfare ahead of his own. If it takes him a lot longer than expected to get on his feet again, he may be tempted to act in his own best interest.
Which of the following scenarios describes activities that are disallowed under the NASAA
I. Broker-dealer Anon observes that a client placed a stop loss order to sell her 1,500 shares of Amazon.com stock for $131 when the stock was selling for $134. Anon sold the stock for $133 when it started to fall during the day and credited the clients account with
$131 per share when stock dropped further to $129 a share.
II. Penny is an agent with Broker-dealer Anon. She recently recommended that a client buy a stock that Penny thought would do well. As it turned out, Penny was wrong, and she offers to refund the commission that the client paid her.
III. Broker-dealer Anon is part of the selling group of a hot new IPO. As such, the firm purchases 50% of the shares for its own portfolio and sells the remainder to the public.
Answer : D
Selections I, II, and III are all disallowed under the NASAA Model Rules. In Selection I,
Broker-dealer Anon has made an unauthorized transaction and has also stolen from his client. The stop order indicated that the clients Amazon.com order should be effected only if the stock dropped to $131 a share or less. Anon jumped the gun and sold it for $133, but only gave the client the specified price of $131 a share. In the scenario described in
Selection II, Pennys intentions might have been good, but an agent is not allowed to refund commissions. Anon is also in violation in Selection IIIs scenario. A member of the selling group is expected to make bona fide public offerings of the securities allotted him.
To purchase some of the securities for itself is prohibited.
In which of the following scenarios is an investment adviser representative required to disclose the fact that someone other than the representative performed the research on which his advice to the client is based?
I. The investment adviser representative recommends the same asset allocation for his client that a buddy of his did after his buddy had done some research for a client with similar characteristics.
II. The investment adviser representative provides a recommendation for his client based on research provided by a broker-dealer that provides the investment adviser with its analysts recommendations in return for trades that the investment adviser executes using the services of the broker-dealer, as well as a couple of other research sources he finds on the internet.
III. The investment adviser representative submitted his clients information to a data base that provided a recommendation for the asset allocation of the clients investment monies that the adviser deemed was sound and, therefore, recommended it to his client.
Answer : D
An investment adviser representative is required to disclose the fact that someone else performed the research on which advice to the client is based in scenarios described in I and III only. If the representative provides a recommendation to the client based solely on the recommendations provided by others to whom he provided the data, he must disclose this. However, if the adviser representative has based his recommendations on his own assessment of analysts reports and recommendations, as is suggested in Selection II, then there is no disclosure requirement.
An investment adviser may not -
Answer : D
An investment adviser may not recommend a stock to the client that the adviser holds without disclosing to the client that it owns the stock. They are permitted to also be registered as a broker-dealer in the state and to accept certain types of soft dollars as compensation from brokers. And they can have positions in securities that their clients have positions in-just as long as this is disclosed.
In which of the following cases is an investment adviser allowed to be compensated with a share of the capital gains of the clients portfolio?
I. The client is a mutual fund.
II. The client is a credit union.
III. The client is a private client whose minimum net worth is $1 million or more.
IV. The client is a private client who has at least $750,000 invested through the investment adviser.
Answer : C
Selections I, II, and IV are correct. An investment adviser is permitted to be compensated with a share of the capital gains of the clients portfolio if the client is a mutual fund, a credit union, or a private client with at least $750,000 invested through the investment adviser.
More generally, the adviser can charge a fee based on the capital appreciation of the portfolio if the client is an institutional investor, a private client with a net worth of at least
$1.5 million, or a private client with at least $750,000 invested with the investment adviser.
Iggy recently started his own company. He soon discovered it required more cash to keep it going than he had anticipated. He ran an ad in the local paper for investors and got a response. He found a template for a promissory note on the internet, filled in the requisite information specific to the agreement he and the investor had worked out, and printed it out. On it, he promised to make monthly interest payments of 2% on the loan and to repay the principal amount at the end of 18 months. A few months after the arrangement, Iggy read an article in a small business publication that indicated that promissory notes had to be registered with the state unless they were sold in an exempt transaction, such as one enacted with a financial institution, prior to being offered for sale. The article indicated that a seller who had sold an unregistered note in error could remedy the situation by sending the buyer a formal offer to buy the security back, with interest. Iggy turned to the computer once again, found a form that could be used for a formal offer of rescission, filled it out, and sent it to the investor. Having done this,
Answer : A
Since Iggy realized the promissory note he had sold to the investor required state registration and sent a formal offer of rescission to the investor, he cannot be sued for civil damages if the investor has not responded to the offer within 30 days. The investor has 30 days to accept or reject the offer. If he either rejects it or fails to accept it by not responding to the offer at all, the investor has lost the right to sue for damages.
Mr. Bigwig, CEO of HiGrowth Corporation, meets with the president of BigFee Investment
Bankers and arranges for BigFee to underwrite an Initial Public Offering (IPO) for the firm.
When the IPO comes to market, GetErDone Broker-Dealers is part of the selling group, which handles the sale of the stock to the public.
In this scenario, which party is acting as a dealer?
Answer : C
BigFee Investment Bankers is acting as a dealer. In underwriting the securities, the firm is purchasing them from HiGrowth and selling the securities to the public. If the securities dont sell for the amount that BigFee thinks they can, BigFee takes the loss as owner of the securities.
Penny Swyne, an agent employed by Bear Broker-Dealers, has received a written complaint via e-mail from Mr. Wolf regarding her performance as his agent.
What are Ms. Swynes legitimate options?
Answer : D
Ms. Swyne must provide Bear Broker-Dealers with a copy of the complaint sent by Mr.
Wolf. Bear Broker-Dealers is required to respond to this complaint in writing and keep a record of it. E-mails are treated the same as snail-mails.
Sam Shyster had his day in court-and lost. His license to do business as an investment adviser in the state has been revoked. What legitimate options does Sam have available to him now?
Answer : D
Sam has the legitimate option of filing an appeal of the decision in a court of law within 60 days. He will not be able to register as an investment adviser with the SEC or with another state. His application will be denied when it is discovered that Sam has had his license revoked by one state.
BigCash Broker-Dealers is registered in the state and is in the process of purchasing a smaller broker-dealer, Target Investments, as a subsidiary. Target Investments is also registered in the state.
After completing the purchase, what actions must BigCash take regarding registration of its new subsidiary?
Answer : B
After completing the purchase, BigCash will have to file a new registration application for its new subsidiary, but BigCash can utilize the remainder of any annual filing fees that Target
Investments had paid for the year. Although registration applications are never transferable, annual filing fees are.
Elizabeth is the owner of Lizbeth Investment Advisers, a small, state-registered investment advisory firm. She has decided that her firm needs a niche and has learned that a consulting group is coming to the area and offering a 3-day seminar on asset allocation for senior citizens offered by Advantage for Retirement Persons (ARP). The seminar will cost
$1,000 per individual, but after attending the seminar, each attendee will receive a certificate verifying their involvement in the program. Elizabeth decides this is the niche she has been looking for and signs up herself and her three investment adviser representatives for the program. After attending the seminar and receiving their certificates, Elizabeth and her team can
Answer : D
After attending the ARP seminars on asset allocation for senior citizens, Elizabeth and her team cannot represent themselves as certified senior citizen investment advisers, print
Senior-Citizen Investment Specialists on their business cards, or indicate that they are certified by the ARP program. Under the NASAA model rules, their attendance does not entitle them to say they are in any way especially certified to serve senior citizens. The attendance certification they received does not have any competency requirements attached.
In accordance with the National Securities Markets Improvement Act of 1996, which of the following is a federal covered adviser and, therefore, exempt from registering with the state
I. An adviser who does business in 26 states.
II. An adviser who manages the portfolio of a mutual fund that is registered with the SEC.
III. An adviser with $35 million in assets under management
Answer : C
The advisers described in Selections II and III are federal covered advisers and, therefore, exempt from registering with the state Administrator. An adviser who advises a registered investment company, as in Selection II, and an adviser with over $30 million in assets under management, as in Selection III are exempt. In order to be exempt from registration, the adviser in Selection I would have to be doing business in more than 30 states.
Federal covered securities were defined and exempted from state registration requirements by the:
Answer : A
The National Securities Markets Improvement Act of 1996 defined federal covered securities and exempted them from state registration requirements. The Gramm-Leach-
Bliley Act focused on financial institutions and provided for their registration as broker- dealers under certain conditions. The National Conference of Commissioners on Uniform
State Laws (NCCUSL) is the organization that drafted the Uniform Securities Act, which is not comprised of actual laws itself, but is, instead, just a guideline for each state to use when formulating its own securities laws.
Which of the following would not be found in a tombstone advertisement?
Answer : A
The price at which the security will be offered will not be found in a tombstone advertisement. A tombstone advertisement is not an offer to sell the security and, in any case, it is unlikely that the final offer price will have even been decided on at this point.
Which of the following would be considered an “issuer” transaction?
Answer : B
When Maria purchases shares of Dodge and Coxs International Fund, it is an issuer transaction. Shares of mutual funds are bought and sold through the fund itself, so the money she pays for the shares is received by Dodge and Cox, the issuer of the shares.
Jacobs purchase of Hasbro stock and Kims sale of her AT&T bond are non-issuer transactions. Neither Hasbro nor AT&T receive the proceeds from these transactions. In
Jacobs case, another investor receives the cash; and in Kims cash, she receives the cash.
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