66 1
Which of the following are true regarding universal variable life insurance? I. It is funded through the general account II. It is funded through a separate account III. This type of insurance must be purchased through a series of payments IV. This type of insurance carries less risk to the insured than universal life insurance A. I and II B. I and IV C. II and III D. II and IV
A. Universal variable life provides a fixed rate component (funded through the insurance company's general account) and a variable component funded through a separate account. Universal variable life may be purchased with one premium payment, as long as the growth of that premium is sufficient to cover all future internal charges for insurance. Universal variable transfers more risk to the insured than universal life only, which is a form of fixed life insurance
At the time a broker/dealer becomes registered, which of the following is true regarding current officers, directors and partners in the firm? A. If they are to act in an agent capacity, they must each complete the normal agent registration process B. If they act in the capacity of an agent, they automatically become registered as agents at this time C. They must also obtain a principal's license at that time D. They are automatically registered as agents regardless of the capacity in which they serve
B. At the time a broker/dealer is registered, the current officers, directors and partners are automatically registered as agents if they are to serve in a sales capacity.
Which of the following securities is subject to the Uniform Securities Act? A. Debenture of a company listed on the NYSE B. Nonprofit organization issues C. Interests in limited partnerships D. U.S. Treasury bills
C. The Act defines limited partnership interest as a security; therefore, they are exempt
Long the stock. Sell a call. The call is exercised. The seller will receive the dividend if the call is exercised after the A. Payment date B. Record date C. X-dividend date D. Settlement date
C. The covered call writer is long the stock and entitled to the dividend if ownership continues up through the x-dividend date. Exercise would call the stock away.
An indexed annuity is a type of A. Hybrid annuity B. Guaranteed annuity C. Variable annuity D. Fixed annuity
D. An indexed annuity is a fixed annuity because contract owners are not subject to investment loss. Although they have upside potential, they are guaranteed no risk to principal
An Investment Adviser Representative gets a margin call on his personal brokerage account. To satisfy the margin call he temporarily transfers securities into his account from a client's account while he tries to raise the funds to cover the margin call. All of the statements are correct EXCEPT A. Both the IA and the IAR could be held liable for this violation B. This is commingling which is a violation of USA and FINRA rules C. This is a prohibited use of customer funds D. This is permissible if the client signed a hypothecation agreement and the representative notifies the client of the transfer
D. Transferring assets from a client's account without express written consent is prohibited. Combining client and IAR assets is commingling which is a violation of FINRA rules and USA which both the IAR and IA could potentially be held liable
Tom was speaking with a client at his office one day when Phyllis from the state administrator's office came by to perform a securities audit. Which of the following is true concerning this process? A. Phyllis will need to wait until Tom has completed his appointment with the client and schedule a time to conduct the audit that is mutually convenient for her and Tom B. Tom has the right to refuse the audit at this time since he is with a client and Phyllis failed to schedule the audit prior to visiting Tom's office C. Under these circumstances, Phyllis may only perform a limited audit, which will not require any additional support from Tom or his staff D. Tom will be required to support Phyllis and her ability to conduct the audit since auditors have the right to perform audits without prior notice and can charge a fee for the service
D. All required records of registered broker/dealers and investment advisers are subject, without prior notice, to periodic or special examination by representatives of the administrator. The administrator may charge a nominal fee for conducting the audit
The cost basis in a tax-qualified retirement plan includes A. Contributions, but not growth B. Growth but not contributions C. Both contributions and growth D. Neither contributions nor growth
D. Cost basis only exists when after-tax dollars are contributed to a plan. Since the employee has not been taxed on employer contributions or on his own pre-tax contributions, the cost basis is zero
Which of the following individuals is required to be registered as an agent under the Uniform Securities Act? A. An employee of an issuer who oversees the processing of contributions into the investment accounts of the issuer's employees defined contribution plan B. An employee of an issuer who solicits institutional investors for funds to finance new manufacturing facilities C. A municipal employee processing underwriting bids from investment bankers for a municipal bond offering that will be sold to both retail and institutional investors D. None of the above
D. None of these employees of issuers are required to register as agents because they are not entering into securities transactions with the public
Notice filing applies to which of the following? A. Investment advisers that do not meet federal net capital requirements B. Broker/dealers with custody of customer assets in excess of $100 million C. Investment advisers registered at the state level D. Federal covered investment advisers
D. State administrators may require notice filing for federal covered investment advisers. Broker/dealers or investment advisers with under $100 million AUM register at the state level
An investment adviser is prohibited from doing all of the following EXCEPT A. Charging commissions on effected trades for the customer B. Transferring an advisory contract without the customer's permission C. Sharing a proportionately in the gains and losses in a customer account D. Charging a retainer fee
D. There are no restrictions on an investment adviser charging a retainer fee. They cannot share in the gains and losses in an account or charge a commission on the trades since they are compensated on the total assets under management
For a person holding a mutual fund investment, Total Return I. Forms the basis for that investor's tax obligation each year II. Measures the total growth of the investment for a given period including reinvested distributions and changes in NAV III. Includes the effect of inflation for the period but not the effect of income taxes IV. Does not correspond to an investor's account value if that investor is receiving distributions in cash A. I and III B. I and IV C. II and III D. II and IV
D. Total return includes the compounding effect of reinvested distributions and any increase in NAV for the reporting period. If no shares are redeemed, only the distributions are taxable in a given year. Reported total return is not adjusted for inflation
A security sale to an insurance company is exempt under the Act. This is referred to as a A. Sophisticated investor exemption or accredited investor exemption B. Glass-Steagall exemption C. Non-issuer exemption D. Exempt security
A. Since a transaction of this type does not involve the general public, the sophisticated investor exemption applies because these entices are in a position to take care of themselves and do not require protection under the Act
In a divorce settlement, your client received half of the marital assets and alimony payments of $2,500 per month. What tax/taxes is your client required to pay? A. Capital gains tax on the marital assets and income tax on the alimony payments B. Income tax on the alimony payments C. Nothing; neither alimony nor the marital assets are taxable D. Income tax on the marital assets and the alimony payments
B. Alimony is taxable as ordinary income
The Investment Company Act of 1940 states that a certain percentage of a mutual fund's board of directors be unaffiliated with the fund. This minimum percentage of unaffiliated members must be at least A. 30% B. 40% C. 50% D. 60%
B. The board of directors is elected by fund shareholders and 40% of these board members must be unaffiliated with the fund. The remaining 60% may be employees, underwriters or advisers of the fund
Which of the following is required in order for a plan to be "qualified"? A. The plan's contribution formula is allowed do discriminate in favor of officers of the company B. The plan must be formally written and communicated to the employees C. The plan must not be permanent D. The plan must be for the exclusive benefit of the employer
B. The plan must be for the exclusive benefit of the employees and their beneficiaries, formally written and communicated to the employees, and the plan's benefit or contribution formula cannot discriminate in favor of the so-called "prohibited group": officers, stockholders, or highly paid employees. Participation in a plan may not be geared exclusively to the prohibited group. The plan must be permanent
Which of the following considers the opportunity cost of foregoing investment in a very safe investment? A. Internal rate of return B. Sharpe ratio C. Hurdle rate D. Net present value
B. The risk-free rate of return is a factor in the Sharpe ratio formula, along with expected return and standard deviation
An investment adviser is prohibited from doing all of the following EXCEPT A. Sharing proportionately in the gains and losses in a customer account B. Charging a retainer fee C. Charging commissions on effected trades for the customer D. Transferring an advisory contract without the customer's permission
B. There are no restrictions on an investment adviser charging a retainer fee. They cannot share in the gains and losses in an account or charge a commission on the trades since they are compensated on the total assets under management
To calculate taxes due on mutual fund shares being sold using the average cost basis for the shares, what must the investor account for? A. Only the capital gains received in cash during the holding period B. The taxes paid on dividend and capital gain reinvestments made for additional shares C. Any cash dividends paid out to the investor during the holding period D. All dividend and capital gains paid out to the investor in cash after the shares were purchased
B. To be calculated correctly, investors must also take into account all taxes previously paid on shares that have been purchased through dividend or capital gains reinvestment programs
An investor learns that he inherited a mutual fund that had a NAV of $50 per share on the date of the owner's death. Thirty days after the death of the owner, the NAV is $55. It is now 2 months since the owner died and the NAV is $60. The owner's cost basis was $20. What is the cost basis for the beneficiary? A. $20 B. $50 C. $55 D. $60
B. When a security is inherited, the beneficiary's cost basis is the fair market value (in this case, the NAV) of the security on the day of the deceased's death. This called a "stepped up" basis
An investor wants to help give her daughter all of the shares in her growth mutual fund. Since the initial purchase, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the cost basis of the daughter's shares will be A. The NAV of the shares on the day they are "gifted" to her B. The same cost basis that the investor had for the shares C. The difference between the initial purchase price for the shares and the current NAV of the shares D. The initial NAV price the investor paid for the shares originally
B. When a security is received as a gift, the cost basis depends on the relationship of the market value of the securities to the donor's cost basis. If the market value is higher than the donor's basis, the recipient's cost basis is equal to the donor's. If the market value is lower than the donor's cost basis, the recipient's basis is equal to the market value of the securities at the time of the gift
A DMM on the NYSE I. Is charged with maintaining a fair and orderly auction market in a security II. Deals in only one specific security III. Is an employee of the NYSE IV. Is employed by a member firm of the NYSE A. II and IV B. I and II C. I and IV D. II and III
C. A DMM is an employee of a member firm. There is only one DMM designated for a given stock, but a dealer may be a DMM for several stocks
Which characteristics are associated with a "buy and hold" investment strategy? I. Higher portfolio turnover II. Lower management costs III. Less demanding research IV. Different investments than an active trading style A. I and II B. I and IV C. II and III D. II and IV
C. A buy and hold investment style involves selecting and holding investments long term, which results in lower turnover, less demanding research and lower costs. Given the same investment objective, a buy and hold strategy uses the same investments as an active trading investment style
Which of the following is a broker/dealer? A. An issuer B. A broker/dealer with no office in a particular state, and only conducts business within that state with other broker/dealers C. A brokerage firm soliciting business in a state D. An agent
C. Agents and issuers are not considered broker dealers. Also, a broker/dealer with no place of business within a state that only transacts business in that state with broker/dealers, insurance companies, or financial institutions is not considered a broker/dealer
An Emerging Market Currency ETN may be an appropriate investment for which of the following persons? A. An experienced investor who is building a long-term portfolio of debt securities B. A sophisticated investor seeking current income C. An experienced investor looking for a simple way to gain exposure to a portfolio of emerging market currencies. D. A sophisticated investor seeking to invest in a portfolio of emerging market equities
C. An Emerging Market Currency ETN may be a simple and cost-effective way for this investor to gain exposure to a basket of emerging market currencies
Which of the following does NOT describe a defined benefit plan? A. Employer is responsible for providing promised benefits B. It is a qualified plan C. Contributions are tied to the company profits D. Contributions are made in specified amounts
C. Defined benefit plans are not tied to the employing company's profits; however, the employer is obligated to provide a certain, specified retirement benefit to an employee. The benefit is based upon a percent of salary multiplied by the number of years of service
Which of the following is not defined as an agent? A. A person representing a broker/dealer in the sale of Government bonds B. A person representing an issuer in a transaction with the public C. A registered representative of a broker/dealer D. A person representing an issuer in a transaction with an underwriter
D. A person that represents an issuer in the sale of exempt securities, or a person who only transacts business with underwriters and financial institutions, does not fall under the definition of an agent under the Act
When an investment advisory contract has provisions that allow for early termination, contract assignment, or discretionary trading authority, such provisions must be A. Endorsed by the client and the adviser and filed with the State Administrator B. Endorsed in a separate document and attached to the original contract C. Stated in clear terms that the client can understand D. Individually approved by the State Administrator prior to going into effect
C. If an advisory contract has a provision for early termination, contract assignment, or discretionary trading authority, such provisions must be stated in clear terms that the client can understand
Section 12b-1 of the Investment Company Act of 1940 discusses how the investment company can recover which of the following? A. A portion of its expenses for distributing annual and semi-annual reports to its shareholders B. The updated prospectus for existing shareholders C. Some of the retail communication expenses associated with the distribution of their offering D. Some of its expenses incurred for dispersing proxies to its shareholders
C. Section 12b-1 of the ICA of 1940 allows the investment company to recoup a portion of its retail communication costs as long as the agreement is in writing; the agreement must be approved initially, and then approved annually to continue the plan
An issuer may use which registration method if the same offering is registered simultaneously with the SEC under the Securities Act of 1933? A. Registration by coordination B. Registration by qualification C. Registration by filing D. Registration by notification
A. An issuer may submit a registration by coordination if the same offering is registered simultaneously with the SEC under the Act
Marge has been a secretary for the CEO of a broker/dealer firm for the past 13 years. Which of the following is true concerning licensing requirements for Marge? A. She is excluded from the definition of an agent if she does not effect any trades B. She must renew her agent license annually C. She can make all trades under the CEO's license for a limited number of her personal clients D. She can only perform clerical functions and cannot be licensed as an agent
A. Employees of brokerage firms who perform only clerical or ministerial functions and do not affect trades are excluded from the definition of an agent
An investment adviser may share in the profits and losses of a client's account, provided that A. Under no circumstances B. A written contract exists between the client and adviser C. Any advisory fees are deducted from any profits gained D. Both of the above must occur
A. Investment advisers and broker/dealers are never permitted to share in the profits and losses of a customer's account
Which of the following statements is NOT correct with regard to the use of material facts in effecting transactions? A. Material funds must be disclosed only if they would have a negative impact on the security's value B. The agent is responsible for deciding which facts are material when presenting a security C. The omission of material facts is a fraudulent practice D. Material facts are to be disclosed when making either an offer to buy or sell
A. Material facts must be disclosed regardless if they have a positive or negative effect on the transaction
A federal registered investment adviser is in the process of filing the financial reports required by the Administrator. Which of the following is true concerning the reports? A. The reports that are filed under the federal acts can be filed with the state as well B. There is no requirement to file financial reports with FINRA, so the adviser will only file a report with his state administrator C. The adviser will need to file the reports only with FINRA since he is a federal registered adviser D. The adviser must file both the state specific and federal reports forms with the appropriate agencies every 2 years
A. Registered broker/dealers and investment advisers must file financial reports with the administrator. If the investment adviser is federal registered, the reports that are filed under the federal acts may also be filed with the state to satisfy this requirement
What registration method is mot likely used when securities are issued on an intrastate basis? A. Qualification B. Notification C. Coordination D. Filing
A. Securities issued in only one state can only be registered under qualification
Adjusting a portfolio to adapt to a seasonal market trend is an example of A. Tactical management B. Contrarian management C. Risk-adjusted management D. Strategic management
A. Tactical allocation involves market timing, identifying and reacting to current market trends, and focusing on short term results
An individual wants a mutual fund that will provide exposure to both stocks and bonds. Which of the following funds does NOT meet that requirement? A. Income fund B. Balanced fund C. Blended fund D. Asset allocation fund
C. A blended fund contains only stocks; it is a blend of growth and value stocks. A balanced fund holds both stocks and bonds. An asset allocation fund's portfolio is allocated among all asset classes: stocks, bonds, and money market instruments. An income fund invests primarily in bonds (it may or may not contain preferred stocks or dividend-paying stocks.
When an agent terminates employment with a broker/dealer, which of the following is/are true? I. The agent's registration is no longer effective II. The registration remains effective as long as the agent associates with another firm within 2 years III. The individual is not an agent until registering with another firm IV. The agent must register directly with the Administrator until such time as he or she associates with another firm A. I and II B. I and III C. II and III D. II and IV
B. An agent's registration is in effect only while the agent is associated with a registered broker/dealer. To be an agent again, the individual must make a new application for registration through a registered broker/dealer firm
If representatives of a federal covered adviser terminate their employment, who is required to inform that state administrator? A. The federal covered adviser B. The adviser representatives C. Neither the adviser nor the representatives because the representatives are employed by a federal covered advisre D. Both the adviser and the representatives
B. Because the adviser is federal covered, the adviser has not obligation to inform the state administrator. The representatives, however, are required to inform the administrator
The best definition of Consent to Service of Process is A. An agreement that gives Agents or Investment Advisers discretion in a client's account B. An agreement that gives the Administrator the power to receive and process legal papers on behalf of registrant in noncriminal proceedings C. An agreement whereby the registrant agrees to be bound by the decisions of the Administrator in any arbitration proceedings D. An agreement which allows the Administrator unlimited access to the Firm's records
B. In the event of an action against a registrant who may live out of state, for example, service of process to the Administrator is the equivalent of service directly to that registrant
The tax advantage of qualified plans to employers is A. Taxable contributions B. Tax-deductible contributions C. Tax-free earnings D. Lump sum payments are not required
B. Qualified plans have these tax advantages: Employer contributions are tax-deductible and are not taxed as income to the employee; the earnings in the plan accumulate tax deferred; lump sum distributions to employees are eligible for favorable tax treatment.
Which process allows for simultaneous registration of a security under federal and state requirements? A. Qualification B. Coordination C. Filing D. Notification
B. Simultaneous registration at federal and state level is permitted under coordination
An investor with no other position writes one ABC July 80 call for a premium of 10 and buys 100 shares of ABC stock for $85 per share. What is the client's breakeven point? A. 70 B. 75 C. 90 D. 95
B. Since the investor purchased 100 shares of stock for $85 a share and has sold a call option for a premium of 10, the client is actually out only $75 per share
Ted is 39 years old and has been investing in mutual funds for his retirement since college. Ted is reviewing the performance of the equity funds in his investment portfolio. He is frustrated because the funds' investment advisers don't seem to consistently achieve the returns that Ted sees forecast in the monthly business reports he follows. Which of the following actions would you recommend to Ted? A. Consider diversifying into limited partnerships B. Consider index funds C. Liquidate his equity funds and purchase bond funds D. Dollar cost average to achieve a lower cost
B. The client's concern that a portfolio manager cannot consistently match or outperform market returns can be eliminated by investing in index funds. An index fund will consistently mirror the performance of a given market index. Bond funds are not the most suitable choice for this client, since has has a long-term goal (retirement). Dollar cost averaging does not eliminate the risk of portfolio manager performance. Limited partnerships are suitable for tax relief on passive income, not retirement savings
Which of the following are true concerning debt and the "time value" of money? I. When money is loaned there is an opportunity loss to the creditor II. Money in hand today is worth no more than the same amount in the future III. The payment of interest helps to offset the creditor's risk of inflation and default. IV. In periods of zero inflation, there would be no opportunity loss, only default risk A. I and II B. I and III C. II and III D. II and IV
B. When money is loaned, there is always opportunity loss because the creditor no longer has the use of that money. The payment of interest is intended to compensate for inflation and default risk as well as opportunity loss. Money today is worth more than the same amount in the future
An investor is long 100 shares XYZ and sells a call. The investor is A. Bearish B. Conservative C. Mildly aggressive D. Neutral
B. When writing a long stock, this is a covered call, and is considered a conservative strategy
The definition of an investment adviser representative includes I. Employees of an investment adviser who solely perform clerical duties. II. An individual associated with an investment adviser who only manages accounts for others III. Employees of investment advisers who only perform administrative duties IV. Investment adviser employees who supervise activities of IA representatives A. I and III B. II and III C. II and IV D. I and II
C. Employees of investment advisers who solely perform clerical or administrative duties are excluded from the definition of an investment adviser representative
Which of the following are two key elements of effective diversification? A. Among fundamental and speculative investments B. Of both aggressive equities and conservative equities C. Among asset categories and within asset categories D. In indexed and non-indexed funds
C. To be properly diversified, a portfolio should be diversified on two levels: among asset categories and within asset categories. The goal is to not only cover the spectrum of investment, thereby lowering overall market risk, but also to diversify sector risk by owning multiple investments with each sector. For example, the energy sector could be further diversified by energy storage, energy transportation and energy manufacturing
All of the following investment advisory contract hedge clauses would be a violation of NASAA policy rules and the Investment Adviser Act of 1940 EXCEPT A. It is agreed that the adviser will not be held liable for violations of the federal and state laws that it was unaware of B. It is agreed that the adviser will not be held liable for any fraudulent acts of its representatives C. It is agreed that the adviser is under no obligation to disclose any of its commission sharing arrangements with the broker/dealers that execute clients' trades D. It is agreed that the adviser will not be held liable for a client's financial losses that are due unsolicited transactions made at the request of the client
D. Advisory contracts cannot include any "condition, stipulation, or provisions binding any person to waive compliance with any provision of this Act of the Investment Advisers Act of 1940". Stating that an adviser will not be liable for transactions requested by the client would not violate state or federal laws.
What additional documentation is required for an agent to enter into an arrangement to share profits and losses in a margin account with a spouse? A. Written consent from the spouse and the broker/dealer B. A limited power of attorney granting trading discretion to the agent C. A copy of their marriage license D. None
D. Agents are permitted to share profits and losses with immediate family. So no additional documentation is required beyond what is normally required for a margin account
Meredith is withdrawing money from her variable life insurance policy. Meredith's withdrawal will be treated on a A. Exclusion ratio assumption B. Weighted average assumption C. LIFO basis D. FIFO basis
D. Unlike annuities, dollars distributed from a life insurance policy prior to death are withdrawn assuming FIFO.
An Investment Policy Statement (IPS) associated with an employer sponsored plan I. Must be provided for each investment company security (mutual fund) offered as a plan option II. Is a requirement under section 404(c) of ERISA III. Helps to document the sponsor's compliance with section 404(c) IV. Defines how investment options are selected, monitored and evaluated A. I and II B. I and IV C. II and IV D. III and IV
D. While not a requirement, an IPS helps to document good faith compliance with section 404(c). It describes policies and procedures for evaluating, selecting and monitoring the various investment options offered in a plan
