Chapter 7 Answers and Explanations

1. C – The fees associated with an account. The fees associated with an account would be very material to the decision-making process for a customer and must be included. While holding an additional, non-mandatory designation such as the CFP or having worked in the industry for many years may be advantageous for a professional to mention, they are not required since they’d be unlikely to cause a potential client to find someone else. Lawsuits against professionals not working with a client’s account would not be considered material and would not need to be disclosed.

2. A – Submission. The concept of omission, or leaving out material facts, not submission relates to disclosure. Material facts are those which a client would consider important in making the decision to use a certain professional or purchase a security, thus making it a requirement for the professional or firm to disclose them. Misrepresentation means bending the truth surrounding a material fact in order to lessen the negative effects or increase the positive effects of that fact, and is prohibited. Affiliation has to do with how a professional or firm is related to other professionals, firms, or issuers, and must be disclosed when it causes a potential conflict of interest.

3. A – I and II. Research prepared by a third party must be accurately represented as such and should not be passed off as the research of an investment adviser or investment adviser representative. Securities that are new offerings must be disclosed as such and purchasers must be provided with a prospectus by the confirmation due date. Previously working for a securities issuer and filing a personal bankruptcy would