Question 1
Multiple ChoiceUnder the NASAA Statement of Policy on Dishonest or Unethical Business Practices, which action by an agent would not be considered a prohibited practice?
Explanation
Agents are generally required to record all client transactions on the employing broker-dealer’s books and records, regardless of the transaction’s size. Properly recording the transactions is not a prohibited practice.
Borrowing money from a client is generally prohibited unless the client is regularly engaged in the business of lending money. Sharing in a client’s profits and losses requires written authorization from both the client and the employing broker-dealer. An agent must also disclose material risks and ensure that recommendations are suitable for the client.
Question 2
Multiple ChoiceTwo individuals want to divide the commission earned from the sale of a variable annuity. Under applicable licensing requirements, when is this arrangement permitted?
Explanation
A variable annuity is both an insurance product and a security. Anyone who sells the product or shares in the commission must be properly licensed for both insurance and securities. In addition, commissions from securities transactions may be shared only by registered agents of the same or affiliated broker-dealers.
Why the Other Answers Are Incorrect
Being registered as an agent is not sufficient without the required insurance license. Client consent does not replace licensing and broker-dealer affiliation requirements. Working from the same branch office is not the legal standard for sharing commissions.
Question 3
Multiple ChoiceA broker-dealer discovers that one of its agents has recommended the same technology stock to nearly 80% of the agent’s customers, even though the customers have different investment objectives, financial situations, and risk tolerances. This activity may indicate
Explanation
Recommending the same security to a large percentage of customers with different investment profiles may indicate a blanket recommendation. Each recommendation must be based on the individual customer’s objectives, financial circumstances, needs, and risk tolerance.
Why the Other Answers Are Incorrect
Commingling involves improperly combining customer assets with the assets of the firm or an associated person. Excessive trading designed to generate commissions is churning. Improper use of material nonpublic information would require evidence that the agent traded based on inside information.
Question 4
Multiple ChoiceA broker-dealer is distributing shares of a highly anticipated initial public offering that is expected to be oversubscribed. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices, the broker-dealer should
Explanation
When demand for a new issue exceeds the number of available shares, the broker-dealer must make a fair allocation among customers who expressed a willingness to purchase the shares. The firm may not improperly withhold shares for itself, its employees, or favored customers.
Why the Other Answers Are Incorrect
Reserving shares for broker-dealer employees or preferred customers would create an unfair allocation. A broker-dealer is not required to hold shares for a cooling-off period merely because the offering is highly anticipated.
Question 5
Multiple ChoiceUnder the NASAA Statement of Policy on Dishonest or Unethical Business Practices, which of the following actions by an agent are prohibited?
I. Guaranteeing that a customer will not suffer a loss on a recommended security
II. Completing a customer’s initial margin transaction and obtaining the signed margin agreement promptly afterward
III. Executing a customer transaction at a price that is not reasonably related to the security’s current market price
IV. Personally holding a customer’s securities for safekeeping
Explanation
An agent may not guarantee a customer against loss, execute a transaction at a price unrelated to the current market, or personally take custody of a customer’s securities.
An initial transaction may be completed in a margin account before the written margin agreement is obtained, provided the signed agreement is secured promptly afterward.
Why the Other Answers Are Incorrect
Any answer containing statement II is incorrect because promptly obtaining the written margin agreement after the initial margin transaction is permitted. The answer containing only statements I and III omits the prohibited practice of an agent personally holding customer securities.
Question 6
Multiple ChoiceWhich situation is an example of commingling under securities industry rules?
Explanation
Commingling occurs when a broker-dealer’s or associated person’s funds or securities are improperly mixed with customer funds or securities. Customer assets must be kept separate from the firm’s assets.
Why the Other Answers Are Incorrect
Borrowing money from a customer may be prohibited, but it is not commingling merely because the funds are deposited into a personal account. Holding different types of investments in one customer account is permitted. A properly established common trust fund does not improperly mix customer assets with the broker-dealer’s assets.
Question 7
Multiple ChoiceUnder the NASAA Statement of Policy on Dishonest or Unethical Business Practices, which action by an agent is prohibited?
Explanation
An agent may share in the profits and losses of a customer’s account only after obtaining written authorization from both the customer and the employing broker-dealer. Verbal approval is not sufficient.
Why the Other Answers Are Incorrect
Buying in one market and selling in another to benefit from a price difference is permitted arbitrage. An agent may exercise discretion after receiving proper written authority. Refusing to lend money to a customer is not prohibited because agents generally may not lend money to customers, even when the customer is an immediate family member.
Question 8
Multiple ChoiceUnder the NASAA Statement of Policy on Dishonest or Unethical Business Practices, which action by an agent is permitted?
Explanation
An agent is required to report customer complaints to the employing broker-dealer. Doing so is not a prohibited practice.
Why the Other Answers Are Incorrect
Buying securities ahead of a large customer order is front running. Ignoring a customer’s instructions is unethical, even when the agent believes another action would benefit the customer. An agent may not guarantee a customer against loss.
Question 9
Multiple ChoiceAn agent creates a promotional brochure for a new securities offering. Although the brochure accurately describes the issuer’s growth prospects, it excludes a significant pending lawsuit disclosed in the prospectus. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices, the agent’s conduct is
Explanation
Advertising and marketing materials may not omit material facts when doing so makes the communication misleading. The pending lawsuit could affect an investor’s decision, so excluding it is a deceptive advertising practice.
Why the Other Answers Are Incorrect
Referring investors to the prospectus does not excuse the omission of a material fact. Accurate statements can still be misleading when important information is excluded. Agents may use promotional materials, provided the materials are fair, accurate, and complete.
Question 10
Multiple ChoiceUnder the Uniform Securities Act, which action by an agent is permitted?
Explanation
An agent may use material information when making recommendations once that information has been publicly disclosed. Public information is available to the investing public and may be considered when evaluating a security.
Why the Other Answers Are Incorrect
Frequently trading an account to generate commissions is churning. Making a recommendation without reasonable grounds for suitability is prohibited. Using material nonpublic information to make securities recommendations is also prohibited.