Question 1

The state of Massachusetts has issued a general obligation (G.O.) bond that pays 3% interest. As an agent selling this bond, you can legitimately tell the investor that

Accepted Answer

An agent selling a Massachusetts general obligation bond can legitimately tell the investor that the interest income he receives from the bond will be free from federal taxation. It is not, however, a risk-free investment. States may default on their bond issues, and bonds issued by states are not guaranteed by the federal government.

Question 2

Jack and Jill are a newly married couple in their mid-20s. They are determined to retire by the time they are 50 and have arranged a meeting with a representative of Professional Investment Advisers to structure a financial plan that will allow them to achieve this goal.
The representative, Mr. Hill, advises them to invest at least 60% of their money in bond funds to minimize the risk of loss on the way to their goal. Mr. Hill has

Accepted Answer

Mr. Hill has made an unsuitable recommendation in recommending a 60% investment in bonds to clients in their mid-20s with an investment goal of early retirement, and his license can be suspended or revoked because of this. Bonds do not generate the returns that stocks do, and Jack and Jill are unlikely to be able to retire by the time they are 50 with such a high percentage invested in bonds. Given their investment time horizon, they can invest in growth and aggressive growth stocks, which offer significantly higher returns and will advance them toward their goal, since they can ride the waves of the up and down markets. This, of course, assumes that they are risk-tolerant enough to do so. There has been no fraud since a couple in their mid-20s can retire by the time they turn 50 if they have reasonably well-paying jobs, are frugal, and invest wisely.

Question 3

Finn Nance has recently passed his CFP exam and is now a certified financial planner. He has new business cards printed that have the words "Certified Financial Planner" printed under his picture. In doing so,

Accepted Answer

Finn has not violated any laws or engaged in any prohibited practices in using the words "Certified Financial Planner" on his business cards. Had he indicated he had been certified or approved by the state, he would have been in violation, but he is allowed to indicate a certification with a professional organization in any advertising literature.

Question 4

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

Accepted Answer

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.

Question 5

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. Swyne's legitimate options?

Accepted Answer

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.

Question 6

You are employed as an agent with CanDo Broker-Dealers. Your brother is software engineer with VideoMagic. When you were talking to him on the phone the other day, he told you that he overheard a conversation by some of the firm's executives that indicated that VideoMagic was about to take over another software company. Which of the following would violate insider trading rules?
I. The next day, you get an unsolicited call from a client requesting that you sell his shares in Video Magic, and you execute the trade.
II. You buy stock in Video Magic's target firm in anticipation that its stock price will rise when the information becomes public.
III. You recommend the stock of Video Magic's target firm to investors based on the fact that, on average, the stock price of target firms increases.

Accepted Answer

Only selections II and III are violations of insider trading rules. If you receive an unsolicited call from a client requesting a sale (or purchase) of that firm's stock, it is not considered to be an insider transaction. If you have insider information from you brother about the merger of VideoMagic with another firm, you cannot buy stock yourself in the target firm in anticipation of a rise in price, nor
can you recommend the stock to customers based on your expectation of a stock price increase.

Question 7

Teche is an agent with broker-dealer CanDo, and his only compensation is the commissions he earns on trades he executes. He has applied for and been granted an adjunct teaching position with a local university that will allow him to earn money while he is establishing himself. Which of the following statements are true?

Accepted Answer

Both statements A and B are true. As an agent for broker-dealer CanDo, Mr. Teche is required to inform CanDo in writing before accepting any outside position that will provide him with additional compensation, and CanDo has the right to deny Mr. Teche the permission to accept this position.

Question 8

Which of the following would be an unsuitable recommendation for your 68-year-old client?

Accepted Answer

A deferred annuity would be an unsuitable recommendation for your 68-year-old client. These annuities charge significant penalties for early withdrawals-and "early" can mean before 10 years, or even longer. A 68-year-old client may have the need to withdraw his money early to make medical payments.

Question 9

Which of the following is an example of commingling?

Accepted Answer

When Sly has his client pay for a stock purchase by making the check out to Sly himself, he has engaged in the prohibited practice of commingling. Ms. Fox is also engaged in a prohibited practice, but she is engaged in making unauthorized transactions. Mr. Hawk is doing nothing wrong. It is typical for clients to leave securities on deposit with their broker-dealers in what is called "street name." This makes it easier for the client to sell the securities later on since he physically will not have to deliver the securities to the broker, for one thing.

Question 10

You are an agent with a broker-dealer and have learned of limited partnership interests being sold by a small company that is planning to come out with a product that you think is going to "wow" the market. You would like to get in on the action, but the minimum investment needed is $10,000, and you don't have that kind of dough lying around. You talk to your brother, who is also one of your clients, and get him interested in investing in the firm, too. The two of you decide to pull your money together, each putting in $5,000, and you agree to split any profits or losses. Is this permitted?

Accepted Answer

It may be permissible for you and your brother to open a joint account to invest in this partnership since he is a family member, but it will require the written consent of both your brother and your firm, and your firm is under no obligation to give its consent.

Question 11

Your next-door neighbor's brother works for a large pharmaceutical company and confided in her that one of the company's chemists has just discovered a compound that will cure baldness and that the firm plans to make the discovery public later in the week. Your next-door neighbor passes this information on to you over a cup of coffee the next morning. You immediately call your broker and place an order to buy shares of the company's stock. Has any illegal insider trading taken place?

Accepted Answer

Yes. You are guilty of illegal insider trading because you traded on information that was not yet public. Your neighbor and her brother did not execute any trades based on the information, so they're innocent, as is the agent who executed your purchase order, who had no way of knowing that you had insider knowledge when you placed the order.

Question 12

You are an investment adviser representative. Your client, Mr. I. M. Pulse, calls you with what he thinks is exciting news. He just passed a restaurant and saw Microsoft's Bill Gates having lunch with a local entrepreneur who owns a small firm in the computer software industry that trades on the OTC pink sheets. He is sure that this means Microsoft is negotiating a purchase of the smaller company and instructs you to take the cash balance in his account and buy shares of the local company. You should

Accepted Answer

If Mr. Pulse wants you to place an order to buy a firm that he thinks will become a target of Microsoft based on seeing Bill Gates and the owner of the firm dining together, you should, as his adviser, inform him that he may be jumping the gun and drawing a false conclusion, but you should place the order if he continues to insist. It is a legitimate order, and you are obligated to follow his instructions. It does not constitute illegal insider trading because Mr. Pulse has no way of knowing what the two men were talking about. They may just be old high school buddies catching up on the news.

Question 13

Mina is a new agent with SecureMoney Broker-Dealers and is struggling to make ends meet. She gets a job as a receptionist at a fitness club on the weekends to generate more income. Which of the following is true?

Accepted Answer

Mina should have notified SecureMoney in writing before taking on the job at the fitness club. Regardless of whether the job has anything to do with finance, an agent must notify her broker-dealer in writing prior to engaging in any extracurricular activity for which she gets paid. She is not required to send any notice to the Administrator, however.

Question 14

Which of the following would not appear on an order ticket?

Accepted Answer

The agent's commission does not appear on an order ticket. It does appear on the trade confirmation, however, which the client receives.

Question 15

Rich Quick is a broker-dealer registered in the state of Massachusetts. He occasionally trades on abnormalities he observes in bond yield spreads for his own account, short selling a bond that appears to be overpriced based on its yield and buying a bond that is identical in almost every respect except for the price, which is less than that of the other bond. He has been able to earn arbitrage profits 95% of the time when he does this. Rich Quick

Accepted Answer

If Rich Quick is able to earn profits 95% of the time by trading on abnormalities he observes in bond yield spreads, he is skilled. There is nothing illegal in what he is doing. Arbitrageurs attempt to earn profits when they observe what they believe to be mispriced securities, and this is an accepted activity. Rich is not using insider information; bond yields are publicly available information.

Question 16

Which of the following would not appear on a trade confirmation?

Accepted Answer

All of the items listed appear on a trade confirmation-the client's account number, the commission, and the settlement date-as well as a lot of additional information.

Question 17

The trade confirmation must be received by the customer no later than

Accepted Answer

Trade confirmations must be received by the customer no later than the settlement date.

Question 18

The settlement date refers to

Accepted Answer

The settlement date is the date that the buyer must pay for the securities purchased. For stocks and bonds other than U.S. Treasury securities, this date is the third business day after the trade. For U.S. Treasuries and options that sell on exchanges, the settlement date is the next business day.

Question 19

Alice Wonder called her broker on Tuesday, August 10^th, with a market order to buy 10 calls on the stock of Abbott Laboratories. Under normal conditions, Alice will have to pay for the calls on

Accepted Answer

If Alice places a market order to buy call options on Tuesday, August 10^th, she will have to pay for them on Wednesday, August 11^th, the next business day. Options and U.S. government bonds settle on the day after the trade date, or T + 1.

Question 20

Your client calls you with a market order to purchase 500 shares of the stock of Oracle and asks when payment will be due. If today is Wednesday, September 15^th, you inform the client that payment is due on

Accepted Answer

If your client places an order to purchase 500 shares of Oracle on the open market on Wednesday, September 15^th, payment will be due on Monday, September 20^th. The settlement date for stock transactions is T + 3, which means the third business day after the trade. Saturday is not a business day.

Quiz 4: Uniform Securities Act USA and State Registration Requirements