Series 63 - Business Practices || A Verified A+ Pass.
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Series 63 - Business Practices
Institution
Series 63 - Business Practices
Advisory Contracts Can correct answers Under Uniform State law, advisory contracts can:
only be in writing
allow for prepayment of advisory fees - it is typical to pay 3-6 months of advisory fees in advance
allow the adviser to take custody, as long as this is not prohibited by the Administrat...
Series 63 - Business Practices || A Verified A+ Pass.
Advisory Contracts Can correct answers Under Uniform State law, advisory contracts can:
only be in writing
allow for prepayment of advisory fees - it is typical to pay 3-6 months of advisory fees in
advance
allow the adviser to take custody, as long as this is not prohibited by the Administrator
give the adviser discretion over the account
Advisory Contracts cannot correct answers be assigned to another adviser unless the customer
consents
allow for compensation based on gains in the account, unless the customer is a "qualified
investor" (meaning rich)
allow for a liquidated damages provision, because this is the same as a guarantee against loss
Custody of Client Funds correct answers Advisory contracts, which must be in writing (not oral),
cannot contain fees based on capital appreciation in the account. The only exception to this rule
is if the customer is wealthy ($1,000,000 of assets invested with the adviser or a $2,000,000 net
worth).
If an adviser wishes to take custody of customer funds, it must notify the Administrator that it
has done so, or intends to do so.
Accepting prepaid advisory fees of $500 or more, 6 months or more in advance of rendering
services, is considered to be taking custody under State law.
Advisers can be paid fees by direct deduction from client accounts, but this is considered to be
custody.
Advisory contracts cannot be assigned to another adviser without customer consent.
Changes in the management of an adviser formed as a partnership must be disclosed to the
adviser's customers.
Mandatory Information needed to open an account correct answers To open a new account for a
customer, 4 "critical" pieces of information must be obtained:
Customer Name
Customer Address
Date of Birth
Social Security Number
This information must be used to independently verify the customer's identity promptly after the
account is opened
, Margin Account correct answers If a customer wishes to open a margin account, then the
customer must sign the margin (hypothecation) agreement, where the customer legally pledges
the securities in the account as collateral for the loan from broker to customer
NASAA wording states that the signed margin agreement must be obtained promptly after the
first transaction in account.
In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement
of the first transaction in the account.
Customer Attorney Rule correct answers No one can trade a customer's account unless the
customer has given trading authorization in writing.
A customer's attorney does NOT have an implicit power of attorney over the account. For an
attorney to trade a customer's account, the customer must give written trading authorization.
Exception from written POA rule correct answers Investment advisers are given a more liberal
interpretation for exercising discretion over a customer's account than that given to broker-
dealers.
While a broker-dealer needs a written power of attorney, signed by the customer, in advance of
exercising discretion under FINRA rules, NASAA rules differ for investment advisers that are
NOT broker-dealers.
NASAA rules permit investment advisers to accept verbal discretion from a customer, as long as
the adviser gets a written power of attorney from the customer within 10 business days of the
adviser beginning to exercise discretion.
Suitability correct answers Before recommending a security to a customer, the agent must first
determine that the investment is "suitable" for the customer. Actions that violate the "suitability
rule" include:
failure to inquire as to a customer's financial situation, needs, and investment objective.
recommending securities without regard to the customer's financial situation or objective.
recommending a security without having a reasonable basis for the recommendation.
Margin Account Rule - Non Payment correct answers The Federal Reserve sets the rules for
payment of customer securities purchases in both cash and margin accounts. Payment is required
"promptly," but no later than the 5th business day past trade date.
If payment is not received, the unpaid position must be sold and the account must be frozen for
90 days.
Margin Prohibiton correct answers customer cannot buy a security without intending to pay by
settlement - either by making full payment in a cash account or by depositing the required
margin in a margin account
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