Final Exam 3
An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss? A) $500 loss B) $500 profit C) $900 loss D) $900 profit
A) $500 loss **If the stock is put to the writer, he would be required to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600).**
An investment adviser is registered in State A and transacts business through a broker-dealer that is registered in State A and with the SEC. What may the Administrator in State A require the broker- dealer to file with its office? A) Copies of all financial statements that are required by the SEC B) Its personal financial statements if it is owned as a sole proprietorship C) Copies of all of its tax returns for the past six years D) Its personal tax return for the past year if it is owned as a sole proprietorship
A) Copies of all financial statements that are required by the SEC **State Administrators may not require broker-dealers to provide more documentation than what is required under federal (SEC) guidelines.**
What type of risk does NOT apply to the holder of a zero-coupon bond? A) Reinvestment risk B) Credit risk C) Purchasing-power risk D) Market risk
A) Reinvestment risk **Zero-coupon bonds are issued at a discounted price and do not pay semiannual interest. Since there are no interest payments to reinvest, the bond has no reinvestment risk. When investing in fixed-income securities, one of the uncertainties is whether interest rates will allow the investor to realize the total return that was calculated at the time of the investment (i.e., the yield-to-maturity). Although zero-coupon bonds do not have reinvestment risk, but they do have credit risk, market risk, and extreme interest-rate risk since the bond's duration will equal its years to maturity.**
If a company registers its offering with a state Administrator using coordination, it would also file a registration statement under which federal act? A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Investment Company Act of 1940 D) The Investment Advisers Act of 1940
A) The Securities Act of 1933 **Under the Uniform Securities Act, registration by coordination is generally used for initial public offerings (IPOs). New issues, including IPOs, are required to register with the SEC under the Securities Act of 1933.**
When determining the risk premium on an investment, an investor would analyze the difference between: A) The total return and the risk-free rate of return B) The mean return and dollar-weighted return C) The total return and annualized rate of return D) The coupon rate of a bond and current interest rates
A) The total return and the risk-free rate of return **Total return - risk-free rate of return = risk premium. The risk premium is the amount of return earned in excess of the risk-free rate of return (i.e., the return on a T-bill).**
One element in preparing a financial plan for a client is to determine the appropriate type and amount of life insurance. If a client is conservative, 30 years old, and married with 2 young children, whose income is unpredictable, the IA may recommend what type of life insurance policy? A) Universal life insurance B) Whole life insurance C) Term life insurance D) Variable life insurance
A) Universal life insurance **Since the client is conservative, with unpredictable income, universal life may be more suitable, since the premiums can be increased, decreased, or skipped, by using the cash value to fund the policy. The insurance company guarantees a minimum return on the cash value, which can be used to increase the death benefit. With whole life or term life, any premiums not paid may result in a lapse of the policy. Variable life would not be suitable for a conservative client, as the cash value may increase or decline based on the performance of the separate account. If a client is single with no dependents, life insurance may not be a concern for the client when creating the plan. **
Which of the following choices would be considered a prohibited transaction under ERISA? A) The purchase of an over-the-counter stock B) A loan to the plan's trustee from the plan C) An investment in derivatives securities D) A delegation of investment authority by plan fiduciaries
B) A loan to the plan's trustee from the plan **A trustee is clearly a fiduciary. ERISA prohibits plan fiduciaries and parties of interest from engaging in certain transactions with retirement plans. These prohibited transactions include: the sale, exchange, or lease of property, lending money or extending credit, furnishing goods, services, or facilities, and transferring or using plan assets for plan fiduciaries' own benefit. ERISA does not place a per se prohibition on any particular type of investment for retirement plans. A fiduciary may appoint an investment manager to oversee the investment of the plan's assets**
A close relative of an advisory client was a resident of Canada, who died six months ago. The client expects to receive an inheritance of a large sum of money. What is a potential risk and how can it be reduced? A) Estate tax risk -- invest the money in the money-market fund B) Currency risk -- buy put options on the Canadian dollar C) Regulatory risk -- buy Canadian government bonds D) Opportunity cost -- buy Canadian dollars and sell U.S. dollars in the spot market
B) Currency risk -- buy put options on the Canadian dollar **One risk factor is currency risk, since the proceeds from liquidating the estate will be paid in Canadian dollars. If the value of the U.S. dollar is greater than the Canadian dollar upon settlement of the estate, the client will receive fewer U.S. dollars upon conversion of the Canadian dollar. This currency risk can be reduced by buying put options on the Canadian dollar, since the puts will increase in value as the Canadian dollar declines. **
Under the Uniform Securities Act, which TWO of the following transactions would be considered a sale? The exercise of an option I) A gift of assessable stock II) A stock dividend III) Lending stock to short sellers A) I only B) I and II only C) I and III only D) II and IV only
B) I and II only **Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend. If an option is exercised, one party to the contract is selling the underlying securities.**
The Dow Jones Industrial Average is considered an index of: A) Value stocks B) Growth stocks C) Large-capitalized stocks D) NYSE stocks only
C) Large-capitalized stocks **The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.**
If a new investment advisory firm is created and registered with the SEC, which of the following statements would be TRUE? A) It may not register unless it has $100 million or more under management B) It must register with both the SEC and the Administrator C) It may not register with the SEC until it has been in business for one year D) It may register with the SEC at any time without restriction under the Investment Advisers Act of 1940
A) It may not register unless it has $100 million or more under management **Under the Investment Advisers Act of 1940, advisers that manage assets of $100 million or more generally register with the SEC and are referred to as federal covered advisers. IAs are not required to register with both the state and federal regulators and there is no one-year business requirement. The SEC has created a buffer for investment advisers with assets under management (AUM) between $90 million and $110 million and clarifies with whom they should be registered. An adviser may register with the SEC once it reaches AUM of $100 million. However, an adviser must register with the SEC if it has AUM of $110 million or more. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. This means that a mid-sized adviser that is currently registered with the SEC may remain registered with the SEC if it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level.**
Joe and Emma just received a small inheritance of $30,000 and would like to invest it to pay off their mortgage in the future. They ask their investment adviser representative how much of the inheritance they must invest at an estimated rate of return of 7% annually to be able to pay off their mortgage balance in 15 years. The adviser tells them $18,122. This amount would be called the payoff amount's: A) Present value B) Future value C) Internal rate of return D) Expected return
A) Present value **The amount that must be invested at r% over n periods to produce a sum of money, Pn, is called the present value of Pn. It is found by the following formula. P0 = Pn / (1 + r)^n In this example, P0 = Pn / (1 + r)n = $50,000 / (1 + .07)^15 = $50,000 / 2.759 = $18,122 If Joe and Emma invest $18,122 today at a 7% annual return, they would have $50,000 in 15 years.**
Which of the following investments would qualify to pass through both income and losses? A) A real estate investment trust B) A hedge fund C) A regulated investment company D) A company that is subject to SEC Section 12 reporting requirements
B) A hedge fund **Most hedge funds are structured as limited partnerships and raise capital by selling units or interests in the partnership to investors. A limited partnership is permitted to pass through both income and losses to investors. A REIT and a regulated investment company (for example, a mutual fund) must pass through a minimum percentage (90%) of their income but are NOT permitted to pass through losses. A company that is subject to SEC Section 12 reporting requirements refers to a company that, due to the number of its shareholders and value of its securities outstanding, is required to file reports with the SEC. This type of company would distribute cash dividends to shareholders and would not be permitted to pass through losses.**
Under the Uniform Securities Act, all of the following persons are considered agents, EXCEPT: A) A person who represents a broker-dealer and offers unregistered, exempt securities to accredited investors B) A person who is hired to sell an issuer's securities to existing employees, but does not receive compensation that specifically relates to this activity C) A person who represents an issuer and receives no commissions, but does receive a quarterly bonus based on the amount of money raised D) A person who is employed by a broker-dealer in a ministerial function and receives no commissions, but is authorized to accept client orders
B) A person who is hired to sell an issuer's securities to existing employees, but does not receive compensation that specifically relates to this activity **A person who represents a broker-dealer in effecting securities transactions is defined as an agent, even if the transactions involve exempt securities. On the other hand, if an employee of a broker-dealer performs only ministerial or clerical functions, she is not considered an agent and is not required to register. An important note is that any person who is employed by a broker-dealer and authorized to accept client orders is considered an agent and must be registered (even if employed in a ministerial function). According to the Uniform Securities Act, if a person represents an issuer and executes transactions with existing employees, partners, officers, or directors of an issuer and does not receive commissions or other payment that is directly or indirectly related to soliciting the order in that state, the person is not considered an agent and consequently is not required to register. **
In order to clarify items in the balance sheet or income statement, a corporation may include them as: A) An addendum B) Footnotes C) A supplement D) A correcting amendment
B) Footnotes **Footnotes on a financial statement are used to provide additional information or to clarify information, i.e., methods of depreciation used, inventory valuation methods, reserves for future events, etc.**
One of the main differences between futures contracts and forward contracts is that: A) Forward contracts do not involve commodities B) Forward contracts may not be offset without permission C) Futures contracts are always used to speculate D) An investor may not be short a futures contract
B) Forward contracts may not be offset without permission **One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold. **
An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order to comply with the law, the investor must: A) Be an accredited investor B) Have assets under management of at least $1 million or a net worth of more than $2.1 million C) Have an existing brokerage account with an affiliated firm D) Be identified as an institutional investor
B) Have assets under management of at least $1 million or a net worth of more than $2.1 million **Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that has $1 million of assets under management with the adviser or a net worth of more than $2.1 million. It is important to recognize that being considered an accredited investor does not satisfy the levels necessary to be considered a qualified client. Under Regulation D of the Securities Act of 1933, an accredited investor is a person with annual income of at least $200,000 or a net worth of at least $1 million. For qualified clients, the $1 million is the assets under management requirement; however, for accredited investors, the $1 million is the net worth requirement. Also note, the net worth does not include the person's primary residence or any associated mortgage.**
Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state? I) Foresight limits its practice to wealthy individual investors with $1 million or more in net assets who are domiciled in New Mexico. II) Foresight only advises government entities. III) Foresight solicits its services to eight retail customers in New Mexico. IV) Foresight has assets of $103.4 million under management. A) I and II only B) I and III only C) III and IV only D) I, III, and IV only
B) I and III only **Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration.**
Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I) ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk II) ETFs may be sold short and ETNs may not III) ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV) ETNs have a maturity date and ETFs do not A) I and III B) I and IV C) II and III D) II and IV
B) I and IV **ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.**
According to SEC Release 1092, an attorney is excluded from the definition of an investment adviser in all the following circumstances, EXCEPT: The attorney charges a separate fee for investment advice and offers these services only to existing legal clients The attorney's website indicates that he is available to offer investment advice on any judgments that his clients win The investment advice being offered by the attorney is incidental to his law practice The income that the attorney generates from providing investment advice is less than 1% of his gross income A) I and II only B) I, II, and IV only C) III only D) III and IV only
B) I, II, and IV only **According to SEC Release 1092, lawyers, accountants, teachers, and engineers are excluded from the investment adviser definition, as long as the advice being provided is incidental to their professional activities (Choice III). The advice being provided by the professionals is not considered to be incidental if they charge a separate fee for the investment advice (Choice I) or advertise publicly that they provide investment advisory services (Choice II). Choice (IV) indicates the attorney derives less than 1% of his gross income from investment advice, but there is no dollar amount or percentage of income that is identified as incidental service. If an attorney is involved in the activities that are referenced by choices I, II and IV, he is required to register his business as an investment adviser.**
According to the USA, if an investment adviser wants to charge a fee based on the average value of a client's portfolio, the fee: A) Is prohibited unless permitted by the Administrator B) Is permitted unless prohibited by the Administrator C) Is always permitted D) Is always prohibited
B) Is permitted unless prohibited by the Administrator **Asset-based fees are one of the most common methods that investment advisers use to charge their clients. Under the Uniform Securities Act, these types of fees are allowed provided they have stated time periods. Since Administrators may create rules prohibiting any type of fee, it would be incorrect to state that they are always permitted.**
Under the Uniform Securities Act, the Administrator is NOT authorized to: A) Issue subpoenas on behalf of other Administrators B) Issue injunctions C) Issue orders to deny, suspend, or revoke a registration without prior notice, the opportunity for a hearing, and written findings of fact or law D) Compel the presentation of books and records
B) Issue injunctions **The Administrator is not able to issue injunctions. Only a court of competent jurisdiction may issue an injunction. The Administrator may subpoena books, records, testimony, and work in conjunction with other regulators to help them enforce the laws within their states.**
The Uniform Securities Act authorizes the Administrator to waive the surety bond requirement for a broker-dealer if the firm: A) Has no disciplinary actions for the preceding 10 years B) Maintains a sufficient level of net capital C) Is also a registered as an investment adviser D) Is registered with the Securities and Exchange Commission
B) Maintains a sufficient level of net capital **The Administrator may waive a surety bond requirement if a broker-dealer maintains a sufficient dollar amount of net capital.**
If FINRA disqualifies a broker-dealer or agent, may the Administrator overrule FINRA? A) Yes, upon proper presentation of evidence B) No, not under any circumstances C) No, unless it can be proven that doing so is in the best interests of the clients of the broker-dealer or agent D) Yes, if the disqualification is based on both a FINRA rule and provisions under the Uniform Securities Act
B) No, not under any circumstances **The Administrator has no jurisdiction beyond enforcing state securities laws.**
Precision Investment Partners is a broker-dealer registered in Tennessee. A recent restructuring at the firm caused a significant portion of the information on the firm's last application filed with the Administrator to no longer be valid. What action must the firm take to be in compliance under the USA? A) Precision must cease doing business until a new application is filed and approved by the Administrator B) Precision must file an amendment to its application promptly C) Precision should call the Administrator, but is not required to update its application until the firm's annual licensing renewal date D) Since Precision is already registered in Tennessee, it has a 90-day grace period to amend its application, provided the firm is in compliance with all current state securities laws
B) Precision must file an amendment to its application promptly **According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.**
Which of the following statements is a disadvantage of investing in a C Corporation? A) Shareholders claim the company's losses on their own tax returns B) Shareholders pay tax on income that was already taxed to the company C) Shareholders have personal responsibility for the company's debts D) Shareholders have no personal responsibility for the company's debts
B) Shareholders pay tax on income that was already taxed to the company **A disadvantage of investing in a C Corporation is the double taxation of income that's paid to shareholders in the form of a cash dividend. Since a C Corporation is a taxable entity, the income was first taxed at to the corporation. Thereafter, the shareholders must also pay income tax on the portion they receive as a cash dividend. For individuals, the maximum tax rate on this double-taxed income is usually 20%. C Corporations do offer limited liability to their shareholders, but it is an advantage rather than a disadvantage.**
An investment adviser typically charges its clients $500 for an initial meeting, which includes a needs assessment. In order to attract more clients, the adviser decides to advertise a special deal. Free of charge for new clients who pay the $500 fee, the adviser will reimburse clients for the costs associated with preparing their state and federal tax returns. Under which of the following circumstances would this advertisement be acceptable? A) The adviser states that this is a limited time offer and discloses when it ends B) The adviser removes the word free since the client must pay $500 for this service C) The adviser files the advertisement with the SEC and receives approval D) The adviser offers this free service to all advisory clients
B) The adviser removes the word free since the client must pay $500 for this service **In order to advertise a service as free, it must have no strings or fees attached. In this instance, individuals are required to pay $500 to receive the reimbursement for the costs associated with preparing their state and federal tax returns. This is considered a deceptive advertising practice.**
Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation? A) The gain would be taxed as a capital gain at the corporate level and shareholders would receive a tax-free distribution B) The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain C) The gain would be exempt from corporate taxes, but would be taxable to the individual as ordinary income D) The gain would be taxable to both the corporation and individual as a capital gain
B) The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain **A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder's tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder's net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.**
Over the past 10 years, the annual percentage returns for a mutual fund have been 7%, 8%, -9%, 8%, -4%, 5%, 6%, 8%, 10%, and 12%. What is the arithmetic mean? A) 8% B) 7.5% C) 5.1% D) 9 to 12%
C) 5.1% **The arithmetic mean (or average) is found by calculating the sum of a given set of data and dividing by the size of the data set. In this example, the sum of the data is 51 and the size of the data set is 10. Therefore, 51 ÷ 10 = 5.1%.**
The benefit of creating an irrevocable trust is that: A) The donor maintains control over the assets B) The donor loses control over the assets C) Assets will be excluded from the donor's estate D) Assets will remain in the donor's estate
C) Assets will be excluded from the donor's estate **In an irrevocable trust, the donor typically gives up all claims to assets that are placed in the trust. Also, assets in this type of trust are typically not included in the donor's estate. This reduction of assets will reduce any potential estate taxes that are payable by the donor's estate. Losing control of the assets is not a benefit to the donor, it is a drawback.**
According to the NASAA Recordkeeping Rule, which of the following documents must be retained in a file by an investment adviser? I) Correspondence II) Photos of all employees III) The registration applications of its IARs IV) Employment applications A) I only B) II only C) I and III only D) III and IV only
C) I and III only **NASAA's Recordkeeping Requirements for investment advisers include the retention of all documents that are filed with either the state or federal regulators regarding the adviser and its representatives. Some of the required documents are registration applications, amendments, renewal filings, and correspondence. However, there is no retention requirement for employee photos and employment applications.**
Under the Uniform Securities Act, which of the following choices would fall under the definition of an agent? I) A trust company, bank, or savings institution II) A sales assistant authorized to accept client orders III) Any person other than a broker-dealer who acts on behalf of a broker-dealer or issuer in effecting sales or purchases of securities A) II only B) III only C) II and III only D) I, II, and III
C) II and III only **Anyone transacting securities business (i.e., accepting orders) on behalf of a broker-dealer or issuer is generally considered an agent. This would include sales assistants who take client orders, as well as registered representatives. A trust company, bank, or savings institution would not be included.**
A 35-year-old individual recently changed jobs and doesn't want to pay taxes on the distribution she's due to receive from her former employer's 401(k) plan. She can accomplish this goal by rolling the money over into: I) A Roth IRA II) A traditional IRA III) Another 401(k) plan A) I only B) I and II only C) II and III only D) I, II, and III
C) II and III only **The individual may roll the distribution over into a traditional IRA or another employer's 401(k) plan and continue to defer taxes. A distribution from a 401(k) or another qualified retirement plan [e.g., a 403(b) or 457 plan] may also be rolled over into a Roth IRA, but she's required to pay taxes in the year the distribution is made if she chooses this option.**
An agent would like to leave his firm, create his own broker-dealer, and do business as a sole proprietor. This would be allowed: A) Without registering as a broker-dealer as long as the agent hires a qualified custodian to hold client assets B) Without registering as a broker-dealer as long as he limits his clients to qualified institutional investors or family members C) If the agent registers with the SEC as a broker-dealer, passes a principal's exam, and posts a $100,000 surety bond with his state Administrator D) If the agent registers with the Administrator as a broker-dealer and fulfills any additional requirements imposed by the USA
C) If the agent registers with the SEC as a broker-dealer, passes a principal's exam, and posts a $100,000 surety bond with his state Administrator **Individuals are not allowed to simply leave their firm and begin transacting business independently as a broker-dealer. They must be affiliated with a broker-dealer or issuer. In this case, the agent must first create and register as a broker-dealer and fulfill whatever conditions are required in his state. The firm may also be required to register with the SEC and join FINRA. The agent would also need to become a registered principal. However, a surety bond might not be required. **
Under the Uniform Securities Act, which of the following statements is TRUE regarding the posting of a surety bond by a broker-dealer? A) It is used for the same purpose as a fidelity bond that is required by the SEC. B) It is required of all broker-dealers that are registered in a state. C) It is used to cover the costs of possible legal actions. D) An Administrator may accept cash, securities, or real property in lieu of a bond.
C) It is used to cover the costs of possible legal actions. **A bond may be required by an Administrator to cover possible legal costs that arise from violations of the Uniform Securities Act. The Administrator may accept cash or securities in lieu of a bond; however, property may not be accepted. A surety bond is not required of all broker-dealers; it is only required for those that have custody of or discretionary authority over client funds and securities and do not meet the minimum financial requirements.**
A broker-dealer has offices in States X and Y. One of its agents is registered in State X where the agent's primary office is located. The agent often travels to State Y and uses the broker-dealer's office there to meet with clients. The agent: A) Is exempt from registration in State Y as long as the agent does not have more than five clients who are residents of State Y B) Is exempt from registration in State Y, since the agent is only using the office temporarily C) Must register in State Y, since the agent uses an office there DMust register in every state in which the broker maintains an office
C) Must register in State Y, since the agent uses an office there **The agent must register in State Y since the agent has a place of business (office) in State Y.**
A U.S. computer manufacturer repurchased one million shares of its outstanding common stock between January 2000 and September 2001. The company will be required to take which of the following actions if it intends to distribute these shares in the form of a stock dividend? A) The shares must be registered with the SEC B) The distribution of shares qualifies as a private placement offering under Regulation D C) No special action is required by the company D) The company must register new shares of common stock, since the repurchased shares have been cancelled and are no longer valid for reissue
C) No special action is required by the company **When a company repurchases shares in the secondary market, it is called treasury stock. SEC registration of securities does not expire, provided the company remains current on its filings. The distribution of treasury stock to existing shareholders does not require the shares to be registered again with the SEC, since the stock dividend would not constitute the issuance of new shares.**
Carrie has been a client of an investment adviser that is established as a partnership for four years and is happy with the performance of her account. If she wants to renew her contract with the firm, which of the following provisions is NOT required in the contract? A) Notification if a managing partner, who does not manage any of Carrie's assets, retires from the firm B) Notification if a managing partner, who does not manage any of Carrie's assets, leaves to start a new advisory firm C) Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm D) Notification if a minority partner leaves the firm
C) Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm **One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change in the partnership (ownership) within a reasonable period. Whether a partner who leaves or dies is responsible for managing a client's assets is irrelevant to the notification provision. If the IAR that manages Carrie's account leaves to start a new advisory firm, notification is not required since the IAR is not a partner of the firm. However, it is certainly a good practice for the advisory firm to notify Carrie that her IAR has left the firm.**
According to the Uniform Securities Act, which of the following securities are exempt from registration? A) Stock issued by a FINRA member firm B) Debentures issued by a Canadian bank C) Stock issued by a state-regulated railroad company D) Preferred stock sold to investors in the same state in which the firm is incorporated
C) Stock issued by a state-regulated railroad company **Common carriers, such as railroads and shipping companies, are exempt from registration under the Uniform Securities Act. While securities issued in the same state in which the firm is incorporated may be exempt from the Securities Act of 1933, they are usually required to register with the state. Agencies of the Canadian government and domestic U.S. banks are also exempt from registration, but securities issued by Canadian banks receive no such exemption.**
An investment adviser has begun to experience difficulties in collecting fees from the accounts of clients that do not elect to have the fees deducted directly from their accounts. As a result, the firm has decided to raise its fees and require a larger up-front deposit from all new accounts for the upcoming year. However, to reward its current clients, the adviser has decided to waive the fee increase and will not change the terms of their contracts. For this situation, what is the adviser required to do? A) The IA must update its Form ADV Part 2 and any customer disclosure documents within 90 days of its year-end B) The IA must make necessary changes to all of its disclosure documents and receive written consent from all of its current clients within 30 days C) The IA must make all of the necessary changes and promptly file amendments to its Form ADV D) The IA must notify all of its current clients of the new fees and update its Form ADV Part 2 within 60 days
C) The IA must make all of the necessary changes and promptly file amendments to its Form ADV **In this question, since the contracts of the current clients are not being changed, the adviser is not required to provide them with written notification or obtain their consent. However, changing the fee structure for new clients is considered a material change to the adviser's business and the adviser is required update and promptly file the amended Form ADV. For any change that is considered to be routine, the adviser may be file an amended Form ADV within 90 days of the adviser's fiscal year. **
A broker-dealer is registered in every state, but its only office is located in State X. The Administrator in State X sends a notice to the broker-dealer's compliance department indicating that it is going to audit the books and records of the firm. Does the Administrator in State X have the authority to audit the firm? A) No, broker-dealers may only be audited by the SEC B) Yes, because the Administrator has authority over every broker-dealer C) Yes, because the broker-dealer is registered in State X D) No, because the broker-dealer has no place of business in State X
C) Yes, because the broker-dealer is registered in State X **Administrators have jurisdiction or authority over all securities professionals who are registered in their state or who offer, sell, or hold themselves out to potential clients in their state. Since the broker dealer is registered in State X, the Administrator in State X has the ability to audit and subpoena its books and records and to compel testimony. **
Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)? A) A QDRO is a court order that divides all jointly held property in the event of a divorce B) A QDRO is a court order that requires one person involved in a divorce to provide for the payment of alimony or child support C) A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a non-qualified retirement plan D) A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan
D) A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan **A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.**
The owner of a sole proprietorship is responsible for which of the following activities? A) Filing K-1 Forms with the SEC B) Reporting quarterly performance to stockholders C) The hiring of a chief financial officer D) Accurately maintaining all of the necessary business records
D) Accurately maintaining all of the necessary business records **A sole proprietorship does not have stockholders, federal reporting requirements, or a chief financial officer. Partnerships and S Corporations file Form K-1, not sole proprietorships. The owner is required to maintain all necessary books and records in the event of an audit by the IRS or State Department of Revenue.**
An investor wants to invest in a fixed-income security for her portfolio. She understands there is a tradeoff between risk and return; however, she prefers to avoid speculative-grade investments. Which of the following bonds is MOST suitable for her portfolio? A) AAA-rated corporate bond, present value = $1,265, market price = $1,334 B) Baa debenture, present value = $1,128, market price = $1,250 C) BB mortgage bond, present value = $1,355, market price = $1,111 D) BBB collateral trust certificate, present value = $1,251, market price = $1,148
D) BBB collateral trust certificate, present value = $1,251, market price = $1,148 **In order to answer this question, each bond's current market value must be compared to its present value. The present value of each bond has been calculated by discounting the cash flows from each coupon payment and determining the present value of the principal repayment, using the investor's desired rate of return. When comparing the present value of a bond to its current market value, an investor can determine if the bond is fairly valued, undervalued, or overvalued. The bonds in the choices where the current market value is greater than the present value are trading at a premium to their present value, which means the investor would receive a lower return than desired. The bonds in the choices where the current market value is less than their present value are trading at a discount to their present value and the investor would receive a higher return than desired. Since the investor also wants to avoid speculative-grade investments (BB and below), the best choice is the BBB-rated collateral trust certificate. **
Which of the following advisory fees is prohibited? A) A $5,000 fee for creating a financial plan B) Charging a 1% flat fee for assets under management C) Charging a client an hourly rate for managing the account D) Charging the client a flat fee regardless of how much management has been provided
D) Charging the client a flat fee regardless of how much management has been provided **Advisory fees must be appropriate for the service being provided. Charging a flat fee, regardless of how much management has been provided, is prohibited. Investment advisers are allowed to charge flat fees for creating financial plans, as well as hourly fees or fees that are based on assets under management, provided they're not excessive for the service being provided. Charging a 1% fee based on assets under management is roughly the industry average and acceptable**
According to the Uniform Securities Act, investment advisers are required to maintain their books and records for: A) Three years with the most recent two years in an appropriate office B) Three years with the most recent two years easily accessible C) Five years with the most recent three years in an appropriate office D) Five years with the most recent two years in an appropriate office
D) Five years with the most recent two years in an appropriate office **According to the Uniform Securities Act, investment advisory firms are required to maintain their books and records for a minimum of five years with the most recent two years in an appropriate office of the investment adviser.**
The advantages of a variable annuity, as compared to a fixed annuity, would include which TWO of the following choices? I) The guarantee of a specific rate of return II) Absence of investment risk III) Protection against inflation IV) The ability to vote regarding changes in investment policy A) I and II B) I and III C) II and IV D) III and IV
D) III and IV **Over time, stocks usually keep pace with inflation as their dividends rise. The separate account of a variable annuity may be invested in equities and other types of securities through various subaccounts. Though riskier than fixed annuities, variable annuities have higher returns in the long run. In a variable annuity, the contract holders own the separate account, vote on changes in the investment policy, and elect the investment managers.**
The Big Brain Inc. Defined Benefit Retirement Plan maintains a written statement for the plan's fiduciaries that provides them with information concerning various categories of investments and guidance concerning investment decisions. The common name for this document is the: A) Plan administration protocol B) Fiduciary guidelines statement C) Statement of investment guidelines D) Investment policy statement
D) Investment policy statement **Every retirement plan must maintain a written statement of investment policy. This document provides the fiduciaries with guidelines concerning various categories of investment management decisions. Two of the main issues addressed in the statement are proxies and the activities of the investment manager.**
Investors who subscribe to the Efficient Market theory, may invest in various indices. Which of the following indices is a small-cap benchmark? A) Nifty 50 B) NASDAQ 1000 C) DJIA D) Russell 2000
D) Russell 2000 **The Russell 2000 Index is comprised of 2,000 small- to mid-cap companies. The Nifty 50 and NASDAQ 1000 are not indices. The DJIA (Dow Jones Industrial Average) is a large-cap index that includes 30 of the largest publicly traded companies.**
According to the Uniform Securities Act, which of the following conditions constitutes completion of the registration application process? A) The application has been sent to the Administrator B) All required documents are received by the Administrator C) The adviser is approved by the Administrator D) The application, any other documents, and fees have been received by the Administrator
D) The application, any other documents, and fees have been received by the Administrator **An application for initial or renewal registration is not considered filed until the Administrator has received all of the required fees and documents. Remember, state Administrators receive, process, and grant registration; however, they do not approve these items**
A trustee would most likely NOT consider which of the following factors when managing a trust's assets? A) The value of the assets B) The general condition of the economy and the stock market C) The current rate of inflation D) The beneficiaries' normal trading practices in their own brokerage accounts
D) The beneficiaries' normal trading practices in their own brokerage accounts **A trustee has a fiduciary responsibility to manage assets in a way that is reasonable. Before investing, a reasonable person would consider the general conditions of the economy, the strength of financial markets, and the current effect of inflation on the markets. How one beneficiary invests in her personal brokerage account has little to do with the needs of the other beneficiaries of the trust.**
Which of the following statements is TRUE regarding the grantor of a trust? A) The grantor may not be the trustee of a trust B) The grantor may not be the beneficiary of a trust C) The grantor may not be both the trustee and the beneficiary of a trust D) The grantor may be the trustee and/or the beneficiary of a trust if desired
D) The grantor may be the trustee and/or the beneficiary of a trust if desired **The grantor of a trust may be the trustee and/or the beneficiary of a trust.**
