66 Incorrect Questions 8/22/24
Under the Uniform Securities Act, the term guaranteed, when used to describe a security, refers to all of these except A) principal. B) interest. C) capital gains. D) dividends.
C) capital gains. When a security is guaranteed, that means that someone other than the issuer has guaranteed timely payment of interest and principal on a debt security, or the payment of dividends on an equity security. No one ever guarantees that the investor will have a capital gain.
According to standard terminology used in the securities industry, when a person sells securities out of inventory, that person is acting in the capacity of a (an): A) broker. B) agent. C) principal. D) investor.
C) principal. In any transaction, there are two principals - the buyer and the seller. When a person sells securities out of inventory, they are acting in a principal capacity.
From the standpoint of diversification, which of the following would be considered the most conservative? A) A balanced fund B) An income fund C) A growth fund D) A sector fund
A) A balanced fund Balanced funds invest in a variety of investment vehicles; therefore, they have more diversification. Because of the diversification, they are better protected against downturns in the financial markets and are more conservative than the other choices listed.
There are occasions when an investment adviser plays a role in a securities transaction with or for an advisory customer. In which of these situations is prior written consent of the customer required? A) Agency cross transactions B) A transaction directed to a broker-dealer of the adviser's choosing C) A transaction where the investment adviser sells from its own inventory D) A transaction where the investment adviser buys for its own inventory
A) Agency cross transactions It is only in the case of the agency cross transaction where the written consent is required in advance. When the IA acts in the capacity of a principal (buying for or selling from inventory), consent (written or oral) must be obtained not later than completion of the transaction. If the investment adviser directs execution of transactions to selected broker-dealers, the IA must disclose the arrangement, but no specific consent is needed.
On retirement, if your customer who is a corporate executive will receive retirement income equaling a percentage of the average of his last 5 years of compensation, this is which type of plan? A) Defined benefit B) Keogh C) TSA D) Defined contribution
A) Defined benefit In a defined benefit plan, the retiree receives a specified amount, with the sponsor bearing the investment risk. Keogh plans are not corporate plans. In a defined contribution plan, the employee contributes a defined amount each period, bears the investment risk, and does not receive a defined amount upon retirement. TSAs (tax-sheltered annuity plans, a common name for 403(b) plans) are defined contribution plans, not defined benefit plans.
In which of the following situations has the investment adviser not violated the antifraud provisions of the Investment Advisers Act of 1940? A) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. B) George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client. D) Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known.
A) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as agents of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own accounts only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice.
Under the Investment Company Act of 1940, which of the following statements is true about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? A) The contract between the investment company and the investment adviser must be in writing. B) The investment adviser must be under common control with the investment company. C) The contract must provide for a minimum notice of at least two weeks if the contract is to be terminated. D) The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares.
A) The contract between the investment company and the investment adviser must be in writing. One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open- or closed-end) must be in writing. The initial contract must be approved by a majority vote of the outstanding shares and the noninterested members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties. If the adviser and investment company had to be under common control, then there would be no way to engage an outside adviser. The contract must call for a maximum 60-day termination clause; there is no minimum.
In general, a broker-dealer will disclose any changes to its fee schedule A) by notifying clients of the change in advance. B) to the Administrator and then to the clients. C) within 30 days following the change. D) when requested by the client.
A) by notifying clients of the change in advance. Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator.
Delta Advisers is registered in Alabama, Mississippi, and Louisiana. Billy Joe works for Delta Advisers rendering investment advice to individual clients. He works out of Delta's Jackson, MS office and has 3 clients in Mississippi, 6 clients in Alabama and 4 in Louisiana. Billy's friend, Bobby Ray, works for Biloxi Investments, a federal covered adviser with offices in several cities in Mississippi. Bobby Ray works out of the Tupelo, MS office and has 45 retail clients in Tennessee, 4 in Georgia, and 6 in Alabama. With regards to registration as an IAR, which of the following statements is TRUE? A) Billy Joe must register in MS and AL and Bobby Ray must register in MS, TN, and AL. B) Billy Joe must register in MS and AL and Bobby Ray must register in MS. C) Billy Joe and Bobby Ray must register in MS only. D) Billy Joe must register in AL and Bobby Ray must register in MS, TN, and AL.
B) Billy Joe must register in MS and AL and Bobby Ray must register in MS. Working for a state registered investment adviser, Billy Joe must register in the state in which he maintains a place of business (MS) and any other state in which his clients exceed the de minimis limit of 5 (AL in this case). Working for a federal covered investment adviser, Bobby Ray needs to only register in those states in which he maintains a place of business, regardless of the number of clients. That means he is only required to register in MS.
Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to do which of these? Fail to make prompt delivery of certificates when requested by the customer. Fail to obtain written authorization for a discretionary account prior to the first trade in that account. Accept an order from a client's spouse without written trading authorization prior to receiving the order. Share commissions with another agent registered with Garden City Securities. A) I, II, and III B) II and III C) I and IV D) III and IV
B) II and III This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.
Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? Sole proprietorship Single-member LLC Multiple-member LLC electing to be treated as a corporation S corporation A) I and IV B) III and IV C) I and II D) II, III, and IV
B) III and IV For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.
When does a deliberate omission of a fact in a securities sale constitute fraud? A) Only if the information was known to be true B) If a reasonable person would base an investment decision on the omitted information C) Only when a new issue of securities is being offered D) Anytime the information is known by more than 15 people
B) If a reasonable person would base an investment decision on the omitted information. Deliberate omission of a fact constitutes fraud if the omitted information is material in nature (i.e., if a reasonable investor would use the information in making an investment decision). This is true whether the information is made in connection with a primary offering or a secondary market transaction.
Social networking sites typically contain both static and interactive content. The difference between these two is that static content A) need not be approved before use, while interactive content needs the approval of a designated supervisor. B) remains posted until it is changed by the poster, while interactive content contains real-time communication. C) is only visible to a limited number of website visitors, while all can access interactive content. D) is always provided by the broker-dealer, while interactive content is the domain of the firm's agents.
B) remains posted until it is changed by the poster, while interactive content contains real-time communication. Static is defined as something that doesn't change, so those communications will only change when the person who posted it removes it or makes a change. Interactive is live and constantly changing. Under FINRA rules, static must have approval prior to use, while interactive does not.
When preparing an asset allocation program, all of these would be considered asset classes except A) equity securities B) debt securities C) Brady bonds D) cash or cash equivalents
C) Brady bonds When describing an asset class, we are not looking at a specific security. IBM common stock is considered as an equity security—it is not an asset class by itself. Brady bonds are considered a debt security, but not an asset class. Brady bonds are issued by a developing country as a result of a restructuring of its defaulted bank debt. They are government obligations issued after the debtor nation negotiates with the creditor banks' advisory committee to restructure loans that are no longer performing. The creditor banks exchange the nonperforming loans for various Brady bonds offered by the debtor government.
Where would you be most likely to find an IPS? A) SPD B) IRA C) Defined benefit plan D) GRAT
C) Defined benefit plan The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.
Disclosure to customers of an investment adviser's control relationships is required in which of these? Agency transactions Principal transactions Exempt transactions A) II only B) I and III C) I, II, and III D) I and II
C) I, II, and III The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.
Which of the following statements regarding a unit investment trust is not true? A) It is considered an investment company. B) It invests according to stated objectives. C) Overall responsibility for the fund rests with the board of directors. D) It charges no management fee.
C) Overall responsibility for the fund rests with the board of directors. A unit investment trust (UIT) has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.
Which of the following is not true regarding the antifraud provisions of the Securities Exchange Act of 1934? A) The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading. B) The act prohibits the spread of false rumors to induce others to trade. C) The act bars the use of arbitrage by broker-dealers. D) The act proscribes the use of wash trades.
C) The act bars the use of arbitrage by broker-dealers. Arbitrage is a legal activity, usually performed by traders at broker-dealers, which takes advantage of momentary discrepancies in the price of a security in different markets. The act prohibits any form of manipulation of securities prices or any practices that would influence the market price of a security. This includes wash trades, which are simultaneous purchases and sales that create the appearance of trading activity, and the use of rumors to induce others to trade.
Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the act. Excluded from the listing would be A) bonds issued by the District of Columbia. B) bonds issued by a Canadian province. C) corporate debentures. D) securities issued by a credit union authorized to do business in the state.
C) corporate debentures. Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.
One of your clients dies. You could legally take instructions regarding the individual's estate from A) a person with durable power of attorney. B) the spouse of the deceased. C) the administrator in intestacy. D) a CPA who prepared the deceased's tax return.
C) the administrator in intestacy. If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.
The yield to maturity is A) the annualized return of a bond if it is held to call date. B) set at issuance and printed on the face of the bond. C) the annualized return of a bond if it is held to maturity. D) determined by dividing the coupon rate by the current market price of the bond.
C) the annualized return of a bond if it is held to maturity. The yield to maturity reflects the annualized return of a bond if it is held to its maturity. The computation reflects the internal rate of return and is frequently referred to as the market required rate of return for a debt security. The rate set at issuance and printed on the face of the bond is the nominal or coupon rate. Dividing the coupon rate by the current market price of the bond provides the current yield. The return of a bond if it is held to the call date is the yield to call.
A state-registered investment adviser with discretionary authority over client accounts discovered on Monday that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than A) the close of business Monday and close of business Friday. B) the close of business Monday and close of business Wednesday. C) the close of business Tuesday and close of business Wednesday. D) the close of business Tuesday and close of business Friday.
C) the close of business Tuesday and close of business Wednesday. Unless otherwise exempted, every investment adviser registered or required to be registered under the act shall, by the close of business on the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition.
Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA's principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC's pay-to-play rule, WCA A) could be subject to disciplinary action. B) could continue with business as usual, as the contribution is within the de minimis limitation because their principal office is located in State L. C) would be prohibited from receiving compensation for advisory services rendered to any agency of State L for two years. D) would be prohibited from rendering any advisory services to any agency of State L for two years.
C) would be prohibited from receiving compensation for advisory services rendered to any agency of State L for two years. The SEC's pay-to-play rule prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision) for two years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. Please note that the advisory relationship can continue, just without any compensation. The de minimis exemption of $350 applies to an individual, as long as that person is eligible to vote for the candidate ($150 if he is not), but it never applies to the firm.
An individual works for an accounting firm that does offer a retirement plan. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $18,000 B) $34,000 C) $0 D) $16,000
D) $16,000 Contributions to a Keogh must be based solely on self-employment income; the salary at the accounting firm is not considered self employment.
John is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. He is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over John's advisory activities is the responsibility of A) the SEC. B) MAS's CCO. C) John. D) SSC's CCO.
D) SSC's CCO. It is common for independent financial planners to establish their own business entity and "hang" their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm's CCO in the same way that in-house IARs are.
If you were describing an investment that trades on an exchange with a price set by supply and demand, rather than its underlying value, it would be A) a forward contract. B) an open-end fund. C) a hedge fund. D) a closed-end fund.
D) a closed-end fund. The stock of closed-end investment management companies trades on exchanges and, like any other exchange security, is priced based on supply and demand. Although closed-end funds compute their NAV, market forces determine price.
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must send a copy of its brochure, or a summary of the changes, to A) a client within 7 days of receiving a request. B) all clients within 60 days of the end of its fiscal year. C) all clients within 90 days of the end of its fiscal year. D) all clients within 120 days of the end of its fiscal year.
D) all clients within 120 days of the end of its fiscal year. Whether the firm is a state-registered or federal covered investment adviser (IA), if there have been material changes, a copy of the IA's brochure or a summary of the changes must be sent to all clients no later than 120 days after the close of the IA's fiscal year. Don't confuse this with the annual updating amendment to the ADV that must be filed with the appropriate regulator within 90 days of the end of the adviser's fiscal year.
The purpose of the Investment Advisers Act of 1940 is to provide A) minimum standards of performance for those registered as investment advisers. B) standards among the various states for the regulation of investment advisers. C) regulation for investment companies and their operations. D) standards at the federal level for the regulation of investment advisers.
D) standards at the federal level for the regulation of investment advisers. The purpose of the Investment Advisers Act of 1940 is to provide federal standards for the regulation of investment advisers. Providing standards among the various states for the regulation of investment advisers is the purpose of the Uniform Securities Act. Providing regulation for investment companies and their operations is the purpose of the Investment Company Act of 1940.
The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is A) the right of rescission. B) the right of retribution. C) the agreement to actionable offenses. D) the consent to service of process.
D) the consent to service of process. Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.
