NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
An agent of a broker-dealer is preparing to send a research report on a specific stock to 10 existing clients and 5 prospective clients. The report was prepared by the broker-dealer's research department and includes a disclosure that the firm makes a market in the security. Under the Uniform Securities Act (USA), what is the agent's primary responsibility regarding this communication?
- ATo ensure the report is filed with the State Administrator prior to its first use.
- BTo ensure the report is not misleading and accurately reflects the firm's research.
- CTo verify that the report is distributed only to clients who have expressed interest in the specific stock.
- DTo obtain prior written consent from all clients and prospective clients before sending the report.
Show answer & explanationAnswer & explanation
Correct answer: B. To ensure the report is not misleading and accurately reflects the firm's research.
Agents and broker-dealers have a fundamental responsibility to ensure that all communications with clients and prospective clients are fair, balanced, and not misleading. This includes research reports, which must accurately reflect the firm's findings and disclose any potential conflicts of interest, such as market-making activities.
Why the other options are wrong
- A. While some advertising and sales literature may require filing, research reports are generally not required to be filed with the State Administrator prior to use, especially if they are internal firm communications or for a limited audience.
- C. While suitability is important for recommendations, simply distributing a research report does not necessarily require that clients have expressed prior interest, as long as the report itself is fair and not misleading.
- D. Prior written consent is not typically required for sending a research report, as long as it is not an unsolicited recommendation that leads to a transaction without suitability considerations.
Agent Communication Standards
Agents of broker-dealers must ensure all communications with clients and prospective clients are fair, balanced, truthful, and not misleading, and must include all material disclosures.
- Must be fair and balanced
- Must not be misleading or omit material facts
- Required disclosures (e.g., conflicts of interest) must be included
Memory trick: Truthful Talk, Clear Disclosure, Safe Client.