66-Final 7
A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offeringII 20 days following the effective date for an initial public offeringIII 3 days following the effective date for a secondary offeringIV 5 days following the effective date for a secondary offering A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.
An investment adviser representative (IAR) has an oral agreement with a customer to provide advisory services and has given the new customer a glossy brochure describing the adviser's services, but has forgotten to give the customer Part 2 of Form ADV. Which statement is TRUE? A. The customer must receive the Form ADV Part 2 and then has 2 days to sign the agreement B. The customer must be given the Form ADV Part 2 at the time of signing the agreement C. The oral agreement is binding because the customer received the glossy brochure D. The customer must receive the Form ADV Part 2 and then has 5 days to sign the agreement
The best answer is A. Under NASAA rules, customers must receive Part 2 of Form ADV (the "Brochure" and "Brochure Supplement") at least 2 business days prior to the completion of an oral or written contract to provide advisory services. As an alternate to this "2 day free look," the customer can be given the brochure at the time the contract is signed; but must have the right to rescind the contract within the next 5 days after examining the brochure. Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!
Exchange rate risk exists when making an investment in a: A. foreign security when the U.S. dollar strengthensB. foreign security when the U.S. dollar weakens C. U.S. security when the U.S. dollar strengthens D. U.S. security when the U.S. dollar weakens
The best answer is A. When an investment is made outside the U.S. that is denominated in a foreign currency, the investor assumes exchange rate risk. This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening). For example, assume that an investment is made in $100,000 of bonds denominated in Japanese Yen when the Yen is trading at 100 to the U.S. dollar. Thus, $100,000 x 100 Yen per U.S. dollar = 1,000,000 Yen being spent. Also assume that each bond costs 10,000 Yen, so 100 bonds are purchased at $100 each. Now assume that the bonds do not move in price, but the Yen weakens to 200 Yen to the U.S. dollar (each U.S. dollar now "buys" 200 Yen instead of 100 Yen). This means that 100 bonds are still priced at 10,000 Yen each in Japan. However, because each U.S. dollar is worth 200 Yen, the bonds are now worth 10,000 Yen / 200 Yen per U.S. dollar = $50 each. Thus, the bonds are now worth 1/2 of what was paid for them, solely due to the movement in currency exchange rates.
A company offers a salary reduction defined contribution plan to its employees that adheres to ERISA Rule 404(c). It is administered by the firm's Human Resources (HR) department. The individual in HR who oversees enrollment of employees in the plan receives a bonus for any employees that purchase the company's stock in the plan. This employee is: A. defined as an agent who must register in the State B. defined as an issuer who must register in the StateC. not defined as an agent and is not required to register in the State D. not defined as an issuer and is not required to register in the State
The best answer is A.An agent represents either a broker-dealer or an issuer in effecting securities transactions. The key here is that this individual gets a bonus when employees buy that company's shares in the 401(k) plan. If he or she was not compensated with the bonus, then this individual is excluded from the definition of an agent. Since the bonus is being paid, this does not apply and the individual must register as an agent in the State. (ERISA Rule 404(c) is actually irrelevant to this question. It gives employers who offer self-directed 401(k) plans relief from potential liability for bad-performing investments. To get this relief, the plan must give employees investment options, that when combined, tend to provide diversification and reduce risk. Also, it must allow the employees to change their investment allocations at least every 3 months.)
The CEO of ABC company is the trustee of that company's pension plan. The CEO calls the IAR that manages the plan assets and wants to sell shares from the plan assets to take out a loan. The loan proceeds will be used to pay for services rendered to the plan. What should the IAR do? A. The IAR should not sell the shares because the IAR is a fiduciary to the plan B. The IAR should wait until the loan is approved before taking any action C. The IAR should sell the shares because the CEO is the plan trustee D. The IAR should sell the shares because the proceeds of the loan will be used to pay for plan services
The best answer is A.ERISA prohibits certain transactions between qualified plans and "interested persons" (trustees, fiduciaries, plan service providers, officers and directors of the company that sponsor the plan, etc.). These prohibited transactions include the: sale or lease of property to the plan; lending of money; furnishing of goods and services to the plan. The CEO cannot borrow money from the plan - the transaction is prohibited. Also note that if the CEO were a plan participant, the CEO could borrow money from his or her 401(k) on the same terms and conditions as any other plan participant - but this is not what the question is about!
The Net Present Value of an investment is greater than "0." This means that the: A. rate of return from the investment is greater than the discount rate used in the computation B. rate of return from the investment is lower than the discount rate used in the computationC. investment will produce a return that is greater than the rate of inflation D. investment will produce a return that is lower than the rate of inflation
The best answer is A.Net Present Value takes all the cash flows that will be generated by an investment and discounts them back to their "present value." The rate of interest used to discount the cash flows to be received is the current market rate of interest. If the computation results in an NPV of "0," then the rate of return of the investment equals the discount rate used. If the computation results in an NPV of more than "0," then the rate of return of the investment exceeds the discount rate used. If the computation results in an NPV of less than "0," then the rate of return of the investment is lower than the discount rate used. The computation has nothing to do with the inflation rate.
A retired individual invests $75,000 in a 5-year bank Certificate of Deposit. This investor will be susceptible to: A. unsystematic risk and interest rate riskB. purchasing power risk and reinvestment risk C. market risk and business risk D. opportunity cost risk and credit risk
The best answer is B. Purchasing power risk is the risk of inflation. At the CD's maturity, the customer will get back his or her principal, plus interest, but there is no growth in investment value to compensate for inflation. In addition, if interest rates have dropped over the 5 year investment time horizon, when the CD matures, the proceeds would be reinvested at a lower rate - this isa version of reinvestment risk. Unsystematic risk is the risk of an undiversified portfolio. Diversification eliminates this risk. Interest rate risk is the risk that the value of a fixed income security declines in the market as market interest rates rise. This is the same as market risk for a fixed income security. Traditional bank CDs are not traded in the market - the holder can get back his or her principal amount at any time (but there could be an interest penalty). Business risk is the same thing as credit risk for a fixed income security -the risk of default. Bank CDs are covered by FDIC insurance for up to $250,000 per individual, so they are protected against this risk within the dollar limitation. Opportunity cost risk is the risk that another investment of a similar risk profile offers a better return than this one - so the investor has lost the "opportunity" to get a better return with no additional risk taken on. This is a possible risk, but since it is coupled with credit risk as a choice, it cannot be the correct answer.
Under the Investment Advisers Act of 1940, which statement is TRUE about the requirements for a family office exclusion from registration? A. The family office can provide advice to multiple familiesB. The family office must be wholly owned by family clients C. The family office can advertise itself as an investment adviser D. The family office must have less than $100 million of assets under management
The best answer is B. The Investment Advisers Act of 1940 excludes "family offices" from the definition of an investment adviser, so they are not required to register. Regarding the "family office" exclusion, extremely wealthy persons often set up a "family" office to manage the finances of family members (think of very wealthy persons like Bill Gates or Jeff Bezos, where the family office would manage the assets of their spouses, children, parents, etc.). As part of its work, the family office often gives investment advice, and the employees of the family office are compensated, so they would fall into the "dragnet" of Investment Adviser registration. Because these are wealthy, "sophisticated," individuals, they are not in need of the "protection" given by SEC IA registration. The Investment Advisers Act includes a rule that details when these "family offices" will be excluded from the definition of an Investment Adviser, so no SEC registration is required. Under SEC Rule 202(a)(11)(G)-1 (the "Family Office Rule"), there are 3 basic requirements that must be met for the exclusion: The family office must only provide investment advice to clients who are part of that family. The family office must be wholly owned by family clients and exclusively controlled by family members or entities - it cannot be owned or controlled by the key employees (though key employees can make investments). The family office cannot hold itself out as an investment adviser - thus it cannot advertise or market itself to non-family clients. Note that there is no asset size test for this exclusion.
Collecting and verifying information provided by a customer at account opening is part of the company's policies and procedures covering: A. Privacy of Customer InformationB. Anti-Money Laundering C. Cybersecurity D. Business Continuity
The best answer is B. When a customer account is opened, the customer must provide identifying information that must be verified promptly after account opening. The 4 critical pieces of information that must be verified are: Name, Street Address, Date of Birth and Social Security number. This is part of the "Know Your Customer" requirement. This is done to stop "bad actors" such as terrorists from opening accounts from which they can wire money to co-conspirators either within or outside the United States. Privacy of customer information is covered under Regulation SP. Customer account information is considered to be "private" and cannot be divulged to others unless the customer consents. A copy of the firm's privacy policy must be given to the customer at account opening and annually thereafter. Cybersecurity covers policies and procedures to stop the theft of customer account information. This includes protecting against unauthorized access and requiring strong customer password protection. Business continuity covers the procedures that the firm would follow to maintain customer access to accounts if there is a significant business disruption or if key personnel were compromised.
All of the following statements concerning a whole life insurance policy are correct EXCEPT: A. premium payments are level and fixed for the insured's lifetimeB. the cash value increases based on equity investmentsC. the death benefit is fixed and guaranteed for the insured's entire life D. policy loans will reduce the amount paid at death
The best answer is B. Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" that can be borrowed. Any borrowed funds reduce the benefit payment upon death. Variable life invests premiums in a separate account and typically invests in equities, whereas both whole life and universal life invest premiums in the general account, which must be heavily invested in fixed income securities.
A wealthy married couple with 3 adult children have a large estate. They intend to leave their estate to their children, but they both have a life expectancy of at least 15+ years. They are interested in establishing a trust that will minimize estate taxes upon death. The best recommendation would be a(n): A. revocable trustB. irrevocable trust C. testamentary trust D. blind trust
The best answer is B.A revocable trust or living trust allows the grantor to change the terms of the trust at any time and can even revoke the trust. Because the grantor has control over the assets in the trust, these are considered to be assets of the grantor's estate upon death.In contrast, an irrevocable trust, once established, cannot be changed or terminated by the grantor. Because the grantor no longer has control over the assets in the trust, these are removed from the grantor's estate. Note, however, that trust, once created, is its own taxable entity - and it must pay tax on income in the trust each year. Both revocable and irrevocable trusts are created during the grantor's lifetime. In contrast, a testamentary trust is created upon death. These are called "will trusts" because the assets that go into the trust are set in the person's will and there can be multiple trusts established that will be administered by a trustee upon the grantor's death. A will trust would be used when the decedent wants to make sure that the assets are not completely distributed to beneficiaries upon death (for example, the decedent might have an adult child that is a "bum" and he or she wants to make sure that the money is "doled out" to this person over the years and not in a lump sum that he or she might blow immediately!) A blind trust is used to remove assets from a grantor's control to avoid potential conflicts of interest. These are often used by wealthy politicians who do not want to be accused of making decisions that will favor the investments that they own.
Which of the following orders would be performed in a discretionary account? A. A customer places an order to sell 100 shares of KO at the marketB. A customer places an order to buy as much of GE at $40 as possible during this trading day C. A customer places an order to buy 100 shares of IBM at $125 D. A customer places an order to sell 100 shares of GE when it gets to a certain level or lower
The best answer is B.If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." If the agent chooses any more than price or time - that is, the size of the trade or the security to be traded - a power of attorney is required.
If Congress decides to lower income tax rates, municipal bond yields will: A. fallB. rise C. be unaffected D. become volatile
The best answer is B.Municipal bond interest income is exempt from Federal income taxes, while the interest income from other bonds (Treasuries, Agencies and Corporates) is subject to Federal income tax. Because of this exemption, municipal bonds trade at lower "tax-free" yields than other bonds that offer taxable yields. If Congress lowers Federal tax rates, then municipal yields must rise, since the value of the Federal tax exemption is diminished. This will cause municipal bond prices to fall.
At the point where a variable annuity separate account interest is "annuitized," the holder of the contract receives a: A. fixed number of annuity units based on the number of accumulation unitsB. fixed number of annuity units based on the value of the accumulation units C. fixed value for the annuity units as set forth in the original contract D. lump sum payment equal to the value of the units
The best answer is B.When a variable annuity separate account interest is "annuitized," the value of the separate account interest is divided by an "annuity unit factor" to arrive at the number of annuity units. The number of units is now fixed, but unit values fluctuate with the changes in value of the separate account securities funding the annuity units. question # 3-3-39-5
Under the Uniform Securities Act, which statement is TRUE regarding a broker-dealer that has its sole office in one State and wishes to conduct business in another State? A. No registration of the broker-dealer is necessary if the firm's activities in the neighboring State are limited to exempt securities B. No registration of the broker-dealer is necessary if the firm does not accept commissions on trades performed for customers in the neighboring StateC. No registration is necessary if the firm deals solely with insurance companies in the neighboring State D. No registration of the broker-dealer's agents is required if solicitations in the neighboring State are limited to exempt securities
The best answer is C. A firm is not required to register as a broker-dealer if it does not fall under the definition of a "broker-dealer." A firm that has no office in the State that deals solely with issuers, other broker-dealers, or financial institutions is excluded from the definition and does not have to register. The intent of the rule is to protect the general public - not sophisticated institutional investors. (Also note that if such a firm had an office in the State, it would be required to register in that State regardless of whether the firm's clients were the general public or institutions.) Otherwise, the firm must register if it directs offers of securities into any State where it does not have an office. It makes no difference whether the securities involved are exempt (such as municipals) or non-exempt (such as corporates).
A father and mother established a 529 plan for their son when he was age 12. The son has just turned 18 and is entering college. The father gets the first tuition and boarding bill from the college for $22,000. Since the son will be commuting home every other weekend, the father withdraws $25,000 from the 529 plan to pay for the college bill and the commuting expenses. Which statement is TRUE? A. There is no tax consequence to the $25,000 withdrawal B. $3,000 of the distribution is subject to regular income taxC. $3,000 of the distribution is subject to both regular income tax and a penalty tax D. The entire distribution is subject to regular income tax
The best answer is C.529 plan distributions can only be used to pay for "qualifying" higher education expenses - tuition, books, and room and board, in the amount that would be paid under tuition assistance plans. So the $22,000 tuition and boarding bill from the college is "qualified," and is not taxable. However, the extra $3,000 withdrawn to pay for commuting is not qualified and is taxable and, in addition, is subject to penalty tax.
The holder of a variable annuity contract elects the settlement option of Life Annuity - 10 Year Period Certain. This individual annuitizes at age 66 and recently died at age 78. Which statement is TRUE? A. Annuity payments to this individual would have stopped at age 76 B. Annuity payments to this individual will continue to be made to the individual's beneficiaryC. Annuity payments to this individual will stop D. Annuity payments to this individual will continue for another 2 years
The best answer is C.A life annuity with a 10 year period certain guarantees to make payments for life, but if that individual dies prior to the "10 year period certain," then payments will continue to a beneficiary until a minimum of 10 years' payments have been made. Since this individual has received payments for 12 years at the time of his death, no more payments will be made.
An investment adviser providing advice solely about municipal securities is subject to: I state registrationII federal registrationIII state advertising filing requirements A. I only B. II onlyC. I or II D. I, II, III
The best answer is C.An investment adviser who provides advice solely about municipal securities is subject to either Federal or State registration, depending on the amount of assets the adviser has under management (note that this is not the case for an adviser that gives advice only about U.S. Government securities, where there is an exemption from Federal registration but not from State registration). There are no advertising filing requirements in a State for securities or transactions that are exempt; or for federal covered securities. Since municipals are exempt securities, the Administrator cannot impose an advertising filing requirement on offerings of these securities.
Diversification among multiple asset classes reduces the: I market risk of the portfolioII marketability risk of the portfolioIII standard deviation of portfolio returns A. I only B. II and IIIC. I and III D. I, II, III
The best answer is C.Diversification of a portfolio reduces market risk; and also reduces the variability of investment returns. It does not affect marketability risk - that is, how difficult is it to liquidate given position in the portfolio.
Which of the following are covered under the Securities Exchange Act of 1934? I Registration of broker-dealersII Registration of investment advisersIII Registration of insidersIV Registration of securities information processors A. I and II only B. III and IV onlyC. I, III, IV D. I, II, III, IV
The best answer is C.Federal registration of investment advisers comes under the Investment Advisers Act of 1940. The Securities Exchange Act of 1934 requires the registration of exchanges, member firms, salespersons, transfer agents, clearing organizations, securities depositories and securities information processors. It also requires that "insiders" (officers, directors and holders of 10% or more of a publicly held company) file notices with the SEC.
When comparing a fixed annuity to a variable annuity, a variable annuity has: A. a guaranteed income stream B. no allocation of funds among subaccountsC. no fixed rate of return D. no investment risk
The best answer is C.Fixed annuities have a guaranteed fixed income stream, while the payments from a variable annuity are based on the performance of the mutual fund held in the separate account (also called a subaccount). Fixed annuity premiums are invested in the insurance company's general account while variable annuity premiums are invested in a separate account (aka subaccount) that holds a specific mutual fund. Fixed annuities give a fixed rate of return while variable annuity returns will vary depending on the performance of the mutual fund held in the subaccount. Variable annuities have investment risk - payments will go down if the mutual fund held in the subaccount underperforms, while fixed annuities do not have investment risk because the insurance company guarantees to pay a fixed rate of return.
Which statement is TRUE about trust taxation? A. A Form 1025 must be filed reporting income, gain and loss B. A Form 1040 must be filed reporting income, gain and lossC. A Form 1041 must be filed reporting income, gain and loss D. A Form 1065 must be filed reporting income, gain and loss
The best answer is C.To form a trust, a tax identification number for the trust must be obtained and an annual tax filing on Form 1041 is required. (Remember that the 1040 is the personal income tax return; and the 1065 is a partnership tax return.) There is no such thing as a Form 1025.
Which statements are TRUE? I Traditional 401(k) plans require mandatory annual employer matching contributionsII Safe harbor 401(k) plans require mandatory annual employer matching contributionsIII Traditional 401(k) plans require 100% vesting of employer-paid benefitsIV Safe harbor 401(k) plans require 100% vesting of employer-paid benefits A. I and III B. I and IV C. II and IIID. II and IV
The best answer is D.A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a traditional 401(k), the employer must complete an annual "top heavy" benefits test.
Regulation SP applies to customer information that is: I Obtained from non-public sourcesII Obtained directly from the customerIII Obtained through examination of the customerIV Obtained through observation of the customer A. I only B. II only C. II, III, IVD. I, II, III, IV
The best answer is D.Regulation SP (Statement of Privacy) requires that non-public customer information cannot be divulged to third parties unless the customer approves. This privacy rule applies to information obtained about a customer from the customer himself; from examination of the customer; or from observation of the customer. These are deemed to be "non-public" sources of information. It does not apply to information about a customer obtained from public sources, such as from a telephone directory.
What is NOT a statistical measure? A. Arithmetic average B. Sharpe ratio C. Correlation coefficientD. Quick ratio
The best answer is D.The Quick Ratio is a measure of corporate solvency. It takes a corporation's current assets that can be quickly converted to cash (basically cash and accounts receivable) and divides them by that company's current liabilities. Arithmetic average (mean) is a statistic. The Sharpe ratio is the ratio of incremental return earned per unit of risk assumed (as measured by standard deviation). Standard deviation is a statistical measure, therefore, the Sharpe ratio is also a statistical measure. Beta is a correlation coefficient - it correlates a stock's price movements with the movement of the overall market. This is another statistical measure.
