65 midterm missed Qs

Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules B) customer permission was obtained prior to entering into the contract C) permission was obtained from the Administrator and custody was not prohibited by that state's rules D) the IA maintained adequate net worth or a surety bond

A It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if the Administrator, by rule, prohibits custody; or in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers.

An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments? A) Common stock B) Direct participation programs (DPPs) C) Treasury notes D) Municipal bonds

A The internal rate of return (IRR) is the discount rate that makes the future value of an investment equal to its present value. Because this computation involves the time value of money, in order to reasonably compute present value, there must be either a maturity date or some other kind of ending date, such as that which is usually projected in a DPP. Common stock has nothing comparable to that. U10LO1

Which of the following firm's earnings are likely to exhibit the greatest degree of sensitivity to the business cycle? A) Entertainment producer B) Furniture producer C) Food and beverage producer D) Telecommunications provider

B Consumers buy fewer durable goods, such as furniture, during recessions and buy more during expansions. As a result, producers of these goods tend to have cyclical demand, revenues, and earnings. People do not decide to go to a movie (or rent one) based on the economy. Food and beverages is the stereotypical defensive industry and people use their phones regardless of the economic cycle. U8LO2

The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is I. a broker-dealer II. an insurance company III. an investment company IV. a person receiving impersonal advice for which the annual fee is less than $500

III and IV There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year.

Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? A) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements B) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers C) Rent-free use of unused space in the broker-dealer's office D) Clearance and settlement services provided by the broker-dealer

Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service. U7LO1

Centripetal Investment Advisers (CIA) has it principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT A) CIA's advisory contract calls for the automatic deduction of advisory fees B) checks made out to 3rd parties are forwarded within 3 business days C) checks made out to CIA are deposited within 3 business days D) CIA has a power of attorney granting authority to withdraw funds from the custodian

B When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody. U7LO2

A corporate executive decides it is in the company's best interest to purchase a yacht. Over the years, the company has built up substantial retained earnings and will use accumulated funds to make the purchase. An analyst interested in how this purchase will affect the company's debt to asset ratio would examine A) the statement of cash flows B) the balance sheet C) the seaworthiness of the ship D) the income statement

B Where do we find a company's assets, liabilities, and retained earnings? On the balance sheet.

After an investigation, the Administrator wishes to have the registration of an investment adviser revoked. In order to do so, all of the following are true EXCEPT A) an appeal may be filed within 60 days of the final order B) the investment adviser has a right to a hearing C) the Administrator must be able to point to specific facts of law violated by the investment adviser D) the investment adviser may elect to withdraw its registration

D Withdrawal is a form of non-punitive termination and cannot be employed once an investigation has begun. U5LO2

An investment adviser who has custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must do which of the following? Notify the Administrator by the close of business on the day after discovery File a report of its financial condition with the Administrator no later than the close of business on the day after notification Cease doing business A) I and III B) I, II, and III C) I and II D) II and III

I and II When an investment adviser fails to meet its minimum financial requirements, it must notify the Administrator by the end of business on the day after discovery and then must file a report of its financial condition by the end of the next business day. Included in the report must be the number of client accounts. U1LO5

An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following? A) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. B) Registration is required only if an offer is directed, accepted, and paid for in that state. C) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly. D) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities.

A Both the broker-dealer and the agent must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g., they have no place of business in the state and their only clients are institutions). At the time the broker-dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents.

Which of the following statements is CORRECT regarding an unsolicited trade in an unregistered nonexempt security? A) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. B) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. C) It is only an exempt transaction if it is an order to buy; orders to sell an unregistered, nonexempt security would not be an exempt transaction. D) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period.

A The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgment of unsolicited orders be recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another. U4LO3

Which of the following persons is required to register with the SEC as a federal covered adviser? A) An adviser that manages assets of $90 million or more B) An adviser that gives advice to registered investment companies only C) An adviser who gives advice only related to U.S. government securities D) A publisher that gives incidental investment advice only

B Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. Don't be tricked by the $90 million. Only those with at least $110 million under management (using AUM as the deciding factor) are required to register with the SEC. Once that level has been reached, the IA may remain SEC registered as long as its AUM does not drop below $90 million. U1LO5

MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation C) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation D) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price

B Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, (that is their underwriting compensation), and market makers buy at the bid and sell at the ask earning the spread.

An investment adviser may borrow from all of the following clients EXCEPT A) a commercial bank in conjunction with a mortgage on the office building from which the advisory operates B) a mortgage broker who helped the adviser negotiate mortgage terms for its office building C) a savings and loan association that has offered to finance new computers for the adviser's office D) a broker-dealer in conjunction with a margin account

B Mortgage brokers are not in the business of lending money; they help parties negotiate terms of a loan, which is why they are called brokers. The bank, brokerage, and savings and loan association are in the normal business of lending. Investment advisers generally may borrow funds from clients that are in the normal business of lending. U7LO4

Whippet Bus Lines, Inc., serving most of the country, has just been informed by the Surface Transportation Board of the United States that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in Whippet's net income. If one was an investor in Whippet Bus Lines, Inc., this would be an example of A) market risk B) business risk C) country risk D) regulatory risk

B When an action by a regulatory agency, such as the STB, leads to increased costs and lower income, we call that regulatory risk.

A broker-dealer (BD) registered in multiple states must meet the record retention requirements of A) the state where the BD is incorporated B) the state where the principal office of the BD is located C) the SEC D) the state with the most stringent requirement

C One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located. U3LO5

XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wished to examine certain financial records of XYZ's, the Administrator would be able to do all of the following EXCEPT A) do so during normal business hours without prior notice B) ask the State C Administrator to perform the examination C) examine those records located in State U D) ask FINRA to perform the examination

C This broker-dealer does not have a place of business in State U so there are no records located there. How can an Administrator examine records that don't exist. All records are kept in the principal office and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator. U5LO2

Anyone who represents an issuer in effecting transactions between the underwriter and the issuer A) must be registered as an investment adviser B) must be registered as an agent C) is excluded from the definition of agent under the Uniform Securities Act D) must be registered as an Administrator

C Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the act. U3LO4

Which of the following corporate actions would have an effect on the company's working capital? A) Declaring a 15% stock dividend B) Paying a utility bill C) Calling in a portion of a 20-year bond at par D) Borrowing money from the bank on a 90-date note

C Working capital is the difference between the corporation's current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash. U10LO7

Seven years ago, Sarah Smith was convicted of possession of a controlled substance in a state where that violation is considered a felony. Sarah has just filed an application for registration as an agent with Kapco Securities, a registered broker-dealer in a state where that violation is only considered a misdemeanor. When viewing this agent's application, the Administrator will A) treat the crime as a nonfinancial misdemeanor B) treat the crime as a financial misdemeanor C) censure the broker-dealer for even thinking of employing this individual D) treat the crime as any felony

D Even though the crime is a misdemeanor in the state where registration is being sought, the applicant's record shows a felony conviction and, therefore, this individual would be subject to statutory disqualification. U5LO2

Federal covered securities, as defined under the Uniform Securities Act, A) must be registered in the state before they can be offered within the state B) would not include securities senior to a common stock listed on the NYSE C) must be registered with the SEC before they can be offered in the state D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940

D It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered.

A consent to service of process allows the Administrator to A) verify the accuracy and completeness of registration without obtaining the registrant's prior approval B) terminate a registrant's application C) ensure that the legal appeal process is expedited as a result of the Administrator's access to information D) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant, or the registrant's successor

D The consent to service of process provides the Administrator with power of attorney to accept legal papers on behalf of registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process. U3LO5

The consumer price index is best described as A) the inflation rate for a given period of time B) an unbiased estimate of changes in the cost of living C) usually a year D) a weighted average cost for a basket of goods and services E) a measure of transactions between a country and the rest of the world over a period of time,

D The consumer price index (CPI) is the average cost of a basket of goods and services, weighted to represent the purchases of a typical household and indexed to a reference base period. The inflation rate is a percentage change in a price index such as the CPI. The balance of payments tracks transactions between a country and the rest of the world over a period of time, usually a year. U8LO3

When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT A) all other states in which the security is to be registered B) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering C) the amount of securities to be offered in the state D) the effective date of the offering

D The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering. U4LO3

The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only An adviser with a place of business in the state whose total fee income in the state amounts to $150 An adviser with no place of business in a state who only provides advice on fixed annuities An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940

I and II Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable. U1LO5