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Home arrow Law arrow EXAM REVIEW 2015

ANALYSIS

Even though the clients who purchased WSIA based on Mr. Jones's recommendation made a significant profit, Mr. Jones has still committed a violation because he recommended it to all of his clients. Mr. Jones's clients have a wide variety of investment objectives, and the risk or income potential associated with an investment in WSIA would not be suitable for every client. Even if an investment is profitable for the client it does not mean it was suitable for the client. Blanket recommendations are never suitable.

An investment adviser who has discretion over client accounts may in certain circumstances be found to have made unsuitable blanket recommendations if the adviser purchases a significant amount of an illiquid security for a large number of client accounts. This action could also be deemed to be market manipulation.

SELLING DIVIDENDS

Selling dividends is a violation that occurs when advisers use a pending dividend payment as the sole basis of their recommendation to purchase a stock or mutual fund. Additionally, using the pending dividend as a means to create urgency on the part of the investor to purchase the stock is a prime example of this type of violation. If the investor purchased the shares just prior to the ex dividend date simply to receive the dividend, the investor in many cases would end up worse off. The dividend in this case would actually be a return of the money that the investor used to purchase the stock, and then the investor would have a tax liability upon receipt of the dividend.

MISREPRESENTATIONS

An adviser may not knowingly make any misrepresentations regarding:

• A client's account status

• The representative

• The firm

TAKENOTE!

• An investment

• Fees to be charged

OMITTING MATERIAL FACTS

A representative may not omit any material fact, either good or bad, when recommending a security. A material fact is one that an investor would need to know in order to make a well-informed investment decision. The adviser may, however, omit an immaterial fact.

GUARANTEES

No representative, broker dealer, or investment adviser may make any guarantees of any kind. A profit may not be guaranteed, and a promise of no loss may not be made.

RECOMMENDING MUTUAL FUNDS

An adviser recommending a mutual fund should ensure that the mutual fund's investment objective meets the customer's investment objective. If the mutual fund company or broker dealer distributes advertising or sales literature regarding the mutual fund, the following should be disclosed:

• The highest sales charge charged by the fund.

• The fund's current yield based on dividends only.

• A graph of the performance of the fund versus a broad-based index.

• The performance of the fund for 10 years or the life of the fund, whichever is less.

• No implication that a mutual fund is safer than other investments.

• The sources of graphs and charts.

 
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