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NEW QUESTION: 1
Constance is an investment adviser representative. She told one of her clients that he should put at least
15% of his investment monies in a U.S. government bond mutual fund.
She explained that she believed that he required this percentage to meet his liquidity needs, and U.S.
government bond funds are risk-free. A few months later, the client needed to sell some of his fund shares in order to pay some medical bills and was surprised to discover that he lost money on the sale because the net asset value of the fund had dropped.
Was Constance guilty of any securities violations?
A. Yes. Constance is guilty of fraud. She misled the client into thinking he couldn't lose any money if he invested the money in a U.S. government bond mutual fund.
B. It depends. If Constance realized that the client could lose money in a U.S. government bond fund, then she is guilty of fraud, but if she did not herself realize that, then she is merely misinformed.
C. Yes. Constance should never recommend that a client invest such a high percentage of his investment monies in a U.S. government bond mutual fund.
D. No. U.S. government bonds are often referred to as risk-free investments, so Constance made no misstatement of fact in telling her client this.
Answer: A
Explanation:
Explanation/Reference:
Explanation: Yes. Constance is guilty of fraud. She misled her client into thinking he couldn't lose money if he invested the money in a U.S. government bond fund. Although U.S. government bonds are referred to as risk-free, this just means they are considered free from default risk. The value of the bonds-and, therefore, the U.S. government bond funds-will change with changes in interest rates. As an investment adviser representative, Constance should know this. Regardless of whether or not she does, she is guilty of fraud simply by providing the misleading information. If she knew it and deliberately misled the client, she is guilty of criminal fraud.

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Answer: C

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