Final Exam 8
An adviser would meet the business standard portion of the three-pronged test pursuant to SEC Release 1092 if: A) Advice was given on a regular periodic basis B) The adviser devoted at least 25% of its time to providing advice C) The advisory firm had at least three offices in a particular state D) The adviser received compensation based on the appreciation of the account
A) Advice was given on a regular periodic basis **According to SEC Release 1092, an adviser would meet the business standard test if advice was provided regularly. There is no particular percentage of time that must be devoted to giving advice.**
Which of the following activities are considered illegal or fraudulent rather than simply being unethical? I) An investment adviser representative describes himself to clients as an expert in senior citizen retirement planning and, although no such designation exists, he displays a certificate in his office from a fictitious institution conferring the designation. II) An agent intentionally solicits sales in securities that are non-exempt and the issuer has not filed a registration statement in the state. III) An IAR fails time notify his superior of a letter that he received from a client which alleges fraudulent activity on the part of the IAR. IV) An agent of a B/D knowingly provides material public information to her largest client, with the client ultimately acting on the info. A) I & II only B) I,II, & III only C) I & IV only D) II & IV only
A) I & II only ** Fraud offenses always include some sort of false statement, misrepresentation, or decietful content deceit is defined as willful or reckless misrepresentation or concealment of material facts with the intent to mislead. For choice I, the intentional misrepresentation of a registered persons qualification with the intent to deceive constitutes fraud. For choice II, an agent soliciting trades in securities that are non-exempt and unregistered is an illegal activity. For choice III, the failure to notify a superior of a written complaint is an unethical business practice, rather than an illegal activity. Thai is true despite the fact that the allegation in the complaint is an illegal activity. And lastly for choice IV, the action by the agent of the B/D who provided the material, public info to a client is not considered to be insider trading g since the material information was public**
ll of the following choices are maintained for five years by an IA, EXCEPT: I) Partnership agreements II) Articles of incorporation III) A copy of audited financial statements IV) Written complaints V) A copy of a solicitor's written disclosure documents A) I and II only B) I and V only C) III and IV only D) II, III, and IV only
A) I and II only **Partnership agreements, articles of incorporation, minute books from board meetings, and stock certificate books are preserved for the life of the firm and for at least three years after termination of the firm. All other records are retained for five years.**
As the result of a legislative change, municipal bonds have increased in value. Which of the following BEST describes the reason for this occurrence? A) Income tax rates have increased B) The number of corporate IPOs has increased C) There is a general increase in interest rates D) S&P has slightly downgraded the rating of all municipalities
A) Income tax rates have increased **Legislative risk is the risk that changes in legislation will materially impact investment returns. When income tax rates increase, investors are required to pay taxes at a higher rate. If this happens, investors will seek investments that provide tax-free returns (e.g., municipal bonds). Therefore, as the demand for municipal bonds increases, so too will the value of these investments.**
Which of the following would NOT be considered an income strategy? A) One that always excludes covered call writing B) One that sacrifices growth C) One that includes mostly bonds and preferred stocks in a portfolio D) One that minimizes risk while seeking steady income
A) One that always excludes covered call writing **Eliminating covered call writing would not be appropriate for an income strategy. Writing covered calls is a conservative method of generating additional income in a portfolio. All of the other choices are consistent with an income strategy.**
An investment adviser manages the portfolio of a mutual fund and is considered to have custody of the assets. Based on this information, the adviser is subject to an annual audit and is required to maintain copies of which of the following records for a minimum of five years? A) The fund's audited financial statements B) The fund's bank records C) The day-to-day status of the securities in the fund's portfolio D) The minutes of the fund's board of directors
A) The fund's audited financial statements **Generally, investment advisers are required to maintain records for five years. In this question, the adviser must retain the mutual fund's audited financial statements for five years. Since this adviser is maintaining custody of a mutual fund's assets, it is also required to schedule an annual audit to be conducted by an independent accountant.**
The Department of Labor requires that employer-sponsored plans adhere to the following guidelines, EXCEPT: A) The plan must offer a fixed number of investment options B) A separate account is maintained for each participant C) Participants have the right to give instructions to the plan fiduciary D) Participants must be able to choose from at least three core investment alternatives
A) The plan must offer a fixed number of investment options **Under Section 404(c) of ERISA, an employee sponsored plan has no maximum limitation as to the number of investment options that are available to the participants, but must have a minimum of three. The plan must maintain a separate account for each participant and participants must have the right to forward any requests to the fiduciary of the plan. **
Under the Investment Advisers Act, all of the following statements are TRUE concerning agency cross transactions, EXCEPT: A) The transaction must be conducted on an exchange B) The client must give written consent and such consent can be withdrawn at any time C) A written confirmation may be sent no later than the completion of the transaction D) The adviser may not recommend the transaction to both buyer and seller
A) The transaction must be conducted on an exchange **An agency cross transaction is one in which the adviser acts as broker for both sides of the trade. All of the statements listed are true except the statement which indicates that they must be conducted on an exchange. **
While examining a client's investment profile, an IAR determines that the client is able to tolerate a high degree of risk and does not anticipate the need to access invested funds for the next 25 years. What would be the best investment allocation for the client's portfolio? A) 40% debt, 50% equities, and 10% money-market instruments B) 95% equities and 5% money-market instruments C) 25% bonds, 25% equities, 25% money-market instruments, and 25% real estate D) 65% bonds and 35% equities
B) 95% equities and 5% money-market instruments **An investor who has a long time horizon and is willing to tolerate high levels of risk may allocate a large percentage of her portfolio to stocks (equities). The only answer that has a more than 50% of the portfolio allocated to equities is the one that suggest 95% equities and 5% money-market instruments.**
Under the Investment Advisers Act of 1940, which of the following entities providing advisory services would be considered an investment adviser? A) A bank B) A bank holding company, which is an investment company C) An accounting company D) A publishing company
B) A bank holding company, which is an investment company **Under the Investment Advisers Act, the following persons are exempt from the definition of investment adviser. A bank or any bank holding company that is not an investment company Any lawyer, engineer, accountant, or teacher whose advice is incidental to her profession Any broker-dealer whose advisory services are incidental to its business as a broker or dealer Any bona fide publisher Any person whose advice is limited to securities that are direct obligations of the U.S. government or guaranteed by the government A bank holding company that is an investment company is not exempt from the definition of an investment adviser.**
A court has appointed a person to be the guardian for an incompetent individual. To open a guardianship account with a broker-dealer, which of the following court-issued documents is required? A) A guardianship agreement B) A certificate of incumbency C) A durable power of attorney D) A power of attorney
B) A certificate of incumbency **A certificate of incumbency is a court-issued document that provides the legal authority of a court-appointed guardian to act on behalf of another person. The certificate serves as evidence that the listed person is authorized to act as a fiduciary for another person (the account holder) or any unincorporated entity (i.e., business, club, association, or organization). On the other hand, a durable power of attorney authorizes a person to manage the affairs of an individual who is in good health and remains in force if the individual is declared incompetent or becomes incapacitated. It is important to note that a power attorney is not issued by a court; instead, it is issued by one person to another person.**
If an IA or any advisory affiliate pleads nolo contendere to a felony that was committed in a foreign jurisdiction, this action is: A) Disclosed to clients on Form ADV Part 1 B) Disclosed to clients on Form ADV Part 2 C) Disclosed to clients on Form ADV-NR D) Not required to be disclosed since the action occurred in a foreign jurisdiction
B) Disclosed to clients on Form ADV Part 2 **An investment adviser is required to provide clients with disclosure of certain disciplinary events on Form ADV Part 2 and then must complete a Disclosure Reporting Page (DRP) to provide details regarding the event. DRPs are sections of three different regulatory forms that are used in the financial industry to provide information to the public and/or to regulators about specific criminal, regulatory, and civil actions. Any felony or misdemeanor charges or convictions against an IA must be reported on a Criminal Action DRP. For any actions that are taken by the SEC, state, or a foreign financial regulatory authority, reporting is done on a Regulatory Action DRP. For proceedings in a civil court, reporting is done on a Civil Judicial DRP.**
Which TWO of the following statements are NOT TRUE regarding TIPS? I) During a period of inflation, the interest rate is adjusted upward. II) During a period of deflation, the principal is adjusted downward. III) During a period of inflation, the principal is adjusted upward. IV) During a period of deflation, the interest rate is adjusted downward. A) I and III B) I and IV C) II and III D) II and IV
B) I and IV **Treasury Inflation-Protected Securities (TIPS) pay a fixed rate of interest, based on inflation-adjusted principal. During an inflationary period, the principal of the TIPS increases. During a deflationary period, the principal decreases. When the security matures, the amount paid will be the greater of the original principal or the adjusted principal.**
A client is in the 35% tax bracket. She has three children, ages 8, 12, and 16 and would like to invest in a 529 plan for the two oldest children. The client has $20,000 that she can invest in each account. If she anticipates her children will enter college at age 19, and will need $75,000 each for their college expenses over four years, an adviser would determine the future value of each account by inputting all of the following factors, EXCEPT the: A) Principal amount invested B) Rate of inflation C) Number of compounding periods D) Expected rate of interest
B) Rate of inflation **The inflation rate is not a factor in the calculation of the future value of an investment. Future value calculation: Pn = P0(1 + r)n Pn = Future Value n = Number of compounding periods r = Rate of Interest P0 = Original Principal**
A client deposits $20,000 and has expectations of an investment's future value including both income and expenses. What rate will the client's IAR use to calculate a net present value of zero? A) The expected rate of return B) The internal rate of return C) The holding period rate of return D) The risk-adjusted rate of return
B) The internal rate of return **This question is asking about an investment for which the client knows the present value ($20,000) as well as the future value. Although the future value is not given directly, the question states that the investor "has expectations" about the investment's future income and expenses. Therefore, the only number that is not provided is the rate of return for the investment. The internal rate of return on an investment is the rate of return that makes the future value of an investment equal to its present value. Another way to think about the IRR is that it will make the net present value equal to zero (i.e., NPV = FV - PV).**
When considering estate planning needs, what can be said regarding Section 529 plans? A) The plan participant gives up ownership of the account B) The plan participant maintains control of how the funds are distributed C) The beneficiary will pay federal gift taxes on any distributions D) Assets in the plan will be considered as part of the owner's estate for federal estate tax purposes
B) The plan participant maintains control of how the funds are distributed **One of the advantages of a Section 529 plan is that the plan participant, the parent, etc. is the account owner and maintains control of how the funds in the plan are distributed and to whom. The beneficiary does not have to pay federal taxes on qualified withdrawals and the assets in the plan are generally not considered part of the participant's estate for federal estate tax purposes.**
Which of the following is considered to be part of an investment adviser's fiduciary duty? A) To ensure that disputes are settled through arbitration B) To ensure that all investment advice is impartial and disinterested C) To ensure that client accounts are managed in an identical manner D) To ensure that orders are separated by client
B) To ensure that all investment advice is impartial and disinterested **Fiduciaries are obligated to put their clients' interests and needs ahead of their own and to offer impartial advice that is tailored to each client's specific goals. Since each client has her own objective, it is a violation of an IA's fiduciary duty to manage all accounts in the same way. Although many IAs separate client orders and require the clients to enter into arbitration, these are not part of their fiduciary duty.**
Which of the following statements is FALSE? A) For inherited securities, the recipient's cost basis is the market value at the time of death. B) When securities are gifted, the donor may claim a deduction that is equal to his original cost basis. C) For gifted securities that have appreciated, the recipient's cost basis is the donor's original purchase price. D) For gifted securities that have depreciated, the recipient's cost basis is the market value at the time of the gift.
B) When securities are gifted, the donor may claim a deduction that is equal to his original cost basis. **When securities are gifted, the deduction that a donor may claim is equal to the market value of the securities at the time of the gift. The donor will benefit if the stock price has risen, since he will avoid paying capital gains tax. If the shares are gifted to an individual, the recipient's cost basis is the original purchase price or the current market price, whichever is less. On the other hand, if shares are inherited by an individual, the beneficiary's cost basis is the market value of the shares on the date of the decedent's death. **
The trustee is responsible for reporting all income,gains and losses of a trust to the IRS on form: A) 1040 B) 1065 C) 1041 D) 1040 EZ
C) 1041 **On an annual basis, a trustee must report the trust's income, gains, and losses to the IRS on Form 1041. Regarding the other forms, Form 1040 is used for personal tax returns, Form 1065 is an informational return that is filed by partnerships, and Form 1040EZ is used by single person or those who are married, filing jointly with less than $100,000 of taxable income.**
Schedule 13D is required to be filed with the SEC by any person, or those acting together, who acquire more than 5% of the voting stock of a public corporation. Which of the following statements is NOT TRUE regarding Schedule 13D? A) It must be filed within 10 days of acquisition of the stock B) It must be filed with the SEC, the issuer, and the appropriate exchange C) A copy must be given to the current shareholders D) It must disclose the purchaser's purpose for acquiring the stock
C) A copy must be given to the current shareholders **All of the choices are true except the statement that a copy must be given to the shareholders.**
When a client purchases mutual fund shares from a broker-dealer, she receives a summary prospectus. When will the broker-dealer send the client a statutory (final) prospectus? A) Within seven days of the settlement date B) The day following settlement C) After the purchase has been completed, if requested D) Prior to confirmation of the purchase
C) After the purchase has been completed, if requested **According to the Investment Company Act of 1940, a client who purchases mutual fund shares must receive a statutory prospectus after the purchase has been completed. Therefore, if a summary prospectus is delivered first, a client must receive or be given access to the statutory prospectus, if requested.**
An investor is evaluating two different bonds-one that matures in three years and another that matures in 25 years. Both bonds have a high credit rating. The 3-year bond has a 4% coupon and the 25-year bond has a 7% coupon. If interest rates are expected to decrease, how will the bonds' prices be affected? A) Both bonds will lose value. B) The bonds will not lose or gain value since they have already been issued. C) Both bonds will gain value. D) The short-term bond will increase significantly more than the long-term bond.
C) Both bonds will gain value. **The movement of existing bond prices is inversely related to the changes in market interest rates. Since interest rates are expected to fall, prices will then rise. In this case, both bonds will gain value. However, long-term bonds are more volatile and will fluctuate more than short-term bonds.**
A publicly traded corporation has 20,000,000 shares of common stock outstanding and an investor buys 1,400,000 of the shares in the open market. Which of the following forms is the investor required to file with the SEC? A) None, since the client has not purchased more than 10% of the shares. B) Form 13F C) Form 13D D) Form 144
C) Form 13D **Any investor that acquires more than 5% of the common stock of a reporting company is required to file Form 13D with the SEC. Since the client has acquired 7% of the 20,000,000 outstanding common shares ($1.4 million ÷ $20 million), he is subject to the filing requirement. Form 13F is filed by institutional investment managers that exercise investment discretion over $100 million or more in equity securities. Form 144 is filed when an investor intends to sell restricted (private placement) stock or when an insider intends to sell control stock.**
According to the Uniform Securities Act, an entity can avoid meeting the definition of a broker-dealer if it: I) Has no office in the state II) Only deals with institutional clients III) Does not hold customer funds or securities A) I only B) II only C) I and II only D) II and III only
C) I and II only **If a broker-dealer has no office in a state and effects transactions only with institutional clients, it would be exempt from the definition of a broker-dealer. An institutional broker-dealer cannot qualify for this exemption if it has an office in the state, even if it avoids holding customer funds and securities.**
For an investment adviser, which TWO of the following situations are considered conflicts of interest? I) The adviser purchases the same securities for its own account that it currently holds in several client accounts II) The adviser sells securities from its own account to an advisory client III) The adviser is short a stock that it is currently recommending for its clients to purchase IV) The adviser has a position in securities that it is not recommending to its clients A) I and III B) I and IV C) II and III D) II and IV
C) II and III **If an investment adviser enters into a principal transaction (sells securities from its own account to an advisory client), it is considered a conflict of interest since the adviser is on the other side of the transaction. This conflict must be disclosed to the client and the client must consent to the principal transaction prior to each transaction. In addition, when an adviser takes a position that is inconsistent with the recommendations that it makes to its clients, this conflict must be disclosed to its clients.**
All of the following statements are TRUE of the death benefit of a variable life insurance policy, EXCEPT: A) It is included in the estate of the deceased B) It is not taxable to the beneficiary C) It may be reduced to zero by poor performance of the separate account D) The beneficiary may elect to receive the death benefit as an annuity
C) It may be reduced to zero by poor performance of the separate account **Although the death benefit of a variable life policy may increase or decrease due to the performance of the separate account, it will not decrease below a minimum guaranteed amount (the face value of the policy). **
A B/D advertises on a radio program that is broadcast from a bank. Which of the following would be prohibited by the administrator? A) Mentioning that the B/D that sponsored the show is affiliated with the bank B) Mentioning the advantages of investing in mutual funds without sending a prospectus C) Omitting the name of the B/D in any of the 30 second ads during the show. D) Omitting the name of the bank during any of the 30-second ads during the show
C) Omitting the name of the B/D in any of the 30 second ads during the show. ** B/Ds & agents are not allowed to publish a blind ad unless it is a recruiting advertisement for a new hire. The name of the B/D that approved the ad is generally required on all advertisements. B/D are allowed to mention that they are affiliated with subsidiaries of banks. They must make the distinction that the products they offer and neither deposits nor are they guaranteed.**
A federal covered investment adviser has an office in State A. The adviser also has five clients in State B and five clients in State C. A client files a complaint against the adviser, accusing the adviser of unsuitability, excessive trading, and misappropriation of funds. The Administrator(s) of which of the following states have/has the authority to take action against the adviser? A) State A B) States A and B C) States A, B, and C D) All 50 states
C) States A, B, and C **The Administrators of States A, B, and C would have the authority to take action against the adviser because no one is exempt from the antifraud provisions of the USA. **
If an adviser is using a sector rotation strategy, which of the following asset classes would they rotate into when the economy appears to be ready for recovery? A) Utilities B) Consumer staples C) Technology D) Healthcare
C) Technology **During recovery, the sectors that perform the best are technology, industrial, and cyclicals. During a recession, the sectors that perform the best are consumer staples, utilities, service, and financial industries.**
ABC Farms, a regional farm, is seeking to expand its product line through the acquisition of another regional farm and has targeted XYZ Farm, which is listed on Nasdaq. XYZ Farms has established a powerful West Coast presence over the last two decades. ABC Farms has not yet contacted XYZ Farms and is in the process of formulating an initial price range for its offer. What methodology is ABC Farms most likely use to formulate its bid? A) Efficient market hypothesis B) Duration analysis C) Future value calculation D) Discounted cash flow analysis
D) Discounted cash flow analysis **Discounted cash flow analysis is used to determine a company's value based on its projected future cash flows. Duration measures a bond's price sensitivity to changes in interest rates. The future value formula determines the amount of money that a specific dollar amount being invested today will be worth in the future based on a given the number of compounding periods and an internal rate of return. The efficient market hypothesis is a theory which states that market prices reflect all relevant information and that investors cannot beat the market.**
Zack is employed at Indiana Trust Company, a federally chartered bank. The CFO of the company asks Zack to help sell the bank's securities to some potential institutional clients as well as some select few retail investors who do not have accounts with the bank. Under the USA, Zack: A) Does not meet the definition of an agent if he sells the securities only to institutional investors B) Meets the definition of an agent if he sells the securities to any retail investors C) Meets the definition of an agent since he is selling the bank's securities to individuals who do not have an account with the bank D) Does not meet the definition of an agent under any circumstances
D) Does not meet the definition of an agent under any circumstances **Zack is not considered an agent under any circumstances since he is representing an issuer and is selling securities that are exempt from registration (bank-issued securities). Regardless of whether the securities are being sold to institutional and/or retail investors, Zack does not meet the definition of agent**
Mary & John are both investment advisor representatives with Everyman Investment Advisors. Mary leaves Everyman to join another firm and her accounts are reassigned to John. What is Everyman required to do under the investment advisors act? A) Everyman must send a negative consent letter to all of Mary's clients and seek their approval to reassign their contracts B) Everyman must immediately cease & desist from initiating any contact with Mary's clients C) Everyman must notify all of Mary's clients and seek their approval to reassign their accounts D) Everyman does not need to do anything
D) Everyman does not need to do anything. **Everyman does not need to do anything in this situation. According to the Investment Advisors Act, an advisory contract may not be unilaterally assigned to another investment advisor without the clients consent. However, the contract is between the client and the investment advisory firm (Everyman in this case), not the individual investment advisor representative. If management or control of Everyman changed hands, such as if it were bought out by another firm, then Everyman would need to notify its clients and seek their consent to have their contracts reassigned**
Under the Uniform Securities Act, registration by coordination becomes effective: I) If no stop order is in effect II) At the same time that the SEC registration becomes effective provided the registration statement has been filed with the III) Administrator for at least 10 days IV) Provided a prospectus has been filed with the Administrator A) I and II only B) I and III only C) II and III only D) I, II, and III
D) I, II, and III **When a security is in registration with the SEC under the Securities Act of 1933, that registration can be coordinated with the Administrator for state registration. A registration under coordination will automatically become effective at the same time the federal registration becomes effective, provided that no stop order is in effect, the registration statement has been on file with the Administrator for at least 10 days, and a statement of the minimum and maximum proposed offering prices and underwriting discounts has been on file for two business days. A prospectus meeting the requirements of the Securities Act of 1933 must also be filed with the Administrator.**
Under the Uniform Securities Act, which of the following individuals is required to register as an agent? I) Anna, the CEO of Future Plastics Inc., who sells commercial paper with an 11-month maturity to the general public II) A life insurance salesperson who only sells general account products III) Eric, a New York-based salesperson, who sells debt obligations for the city of Dresden, Germany IV) An administrative assistant at Stock-Mart Brokerage who only accepts unsolicited orders when her boss is unavailable A) I and II only B) I and III only C) II and IV only D) I, III, and IV only
D) I, III, and IV only **An employee of an issuer who sells exempt securities to the public is NOT considered an agent. Commercial paper may be an exempt security, but only if its maturity does not exceed nine months. Since the commercial paper in choice (II) has an 11-month maturity, it is a non-exempt security and Anna is required to register as an agent; therefore, he is not required to register. According to the USA, only the securities of national foreign governments (with the exception of those issued by Canadian political subdivisions) are exempt. In choice (III), Dresden is a city in Germany, not a country. If the securities had been issued by the German National government, they would be exempt. Lastly, since the administrative assistant is representing a broker-dealer and has been authorized to accept unsolicited orders, registration as an agent is required.**
An adviser is permitted to store records on: A) A hard drive that can be easily accessed B) Electronic format only C) Disk, provided it is password-protected D) Microfilm or microfiche
D) Microfilm or microfiche **Books and records must be maintained in an easily accessible place for five years. During the first two years, the records must be maintained in an appropriate office of the investment adviser. Records may be preserved on microfilm, microfiche, or any similar media. They may, but are not required to, be kept on various electronic storage media such as CD-ROMs, provided the disks are tamper-evident, i.e., the information cannot be easily altered. This means that any attempt to alter the records would be easily determined upon examining them. These files do not need to be password-protected, but the adviser must be able to limit access to the records to authorized personnel and the regulators. **
With a simple trust, the trust: A) Allows only for a single beneficiary B) Is only allowed to invest in a single asset class C) Has a predetermined asset allocation D) Must distribute its annual investment earnings
D) Must distribute its annual investment earnings **A simple trust is required to distribute all its income to beneficiaries in the year received. The body (corpus or principal) of the trust may not be distributed by the trustee. The term simple has nothing to do with the number of beneficiaries in the trust or the investment profile of the assets contained therein. **
Which of the following metrics represents the basic measure of risk in Modern Portfolio Theory (MPT)? A) Alpha B) Beta C) Correlation coefficient D) Standard deviation
D) Standard deviation **In MPT, the standard deviation of an investment's expected return is used as the basic measure of risk. Standard deviation measures the degree of dispersion or variability of returns from the mean return. The greater the standard deviation a portfolio has, the greater the risk it will have. **
When creating a portfolio for a client, an investment adviser first determines the client's investment objectives and risk tolerance. Based on this information, the adviser then constructs a portfolio containing specific percentages of uncorrelated investments. On a periodic basis thereafter, the adviser readjusts the portfolio to maintain the original investment mix. This approach is best described as: A) The prudent investor method B) Diversifying to manage risk C) Tactical asset allocation D) Strategic asset allocation
D) Strategic asset allocation **The allocation of assets into an optimal portfolio based on a client's risk tolerance and investment objectives is called strategic asset allocation. In theory, it is the best mix of assets, given the client's goals and level of risk aversion. Most strategic asset allocators also periodically rebalance the portfolio to restore the original asset mix. **
Under the Investment Advisers Act of 1940, if an individual wants to create her own investment advisory firm, with which authority would she need to file the application? A) The Administrator B) The North American Securities Administrators Association (NASAA) C) The Financial Industry Regulatory Authority (FINRA) D) The Securities and Exchange Commission (SEC)
D) The Securities and Exchange Commission (SEC) **An investment adviser registering under the Investment Advisers Act of 1940 would register with the SEC. In this question, if the advisory firm is required to register in a state, it would do so with an Administrator under the provisions of the Uniform Securities Act.**
An agent receives a letter from an irate client. The letter is the fifth in the last six months and the language is abusive. The agent decides against a reply and discards the letter. According to the Uniform Securities Act, which of the following statements is TRUE? A) The agent is entitled to decide how to handle such situations B) The Administrator may, by rule, dictate how this should be handled C) All material complaints must be forwarded to the Administrator D) The agent must forward all written complaints to an immediate supervisor
D) The agent must forward all written complaints to an immediate supervisor **When an agent receives a complaint in writing, it must be forwarded to her immediate supervisor. The complaint must be kept on file along with any action taken to remedy the complaint. The fact that the complaint was the fifth in the last six months and the language was abusive has no bearing on how the agent should have handled the complaint. By discarding the letter, the agent acted in a prohibited and improper manner.**
A client, age 61, has invested $200,000 in after-tax dollars in a variable annuity. His annuity is currently worth $380,000. The client decides to draw down $50,000 from the contract. How will the distribution be taxed? A) The distribution will be 25% tax-free and 75% taxable at long-term capital gains rates B) The distribution will be 25% tax-free and 75% taxable at Pete's statutory income rate C) The entire distribution is tax-free since Pete is older than 59 1/2 D) The entire distribution will be taxable at ordinary income rates
D) The entire distribution will be taxable at ordinary income rates **This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains. **
A company's market capitalization or size can be measured by using which of the following calculations? A) The book value of the stock plus the book value of the bonds B) The present value of the stock plus the present value of the bonds C) The sum of the future values of the bonds and stocks in the market D) The number of common shares outstanding multiplied by the market value of the stock
D) The number of common shares outstanding multiplied by the market value of the stock **When calculating the market capital (market cap) of a company, simply multiply the number of common shares outstanding by the current market price of the stock. Companies are referred to as small-cap, mid-cap, or large-cap. **
Nick is a client of Nora, who represents Whiteglove Securities. Nora's recommendations have made Nick a lot of money over the last two years. Nick is so pleased that he decides Nora can keep 5% of any gains in his account from now on, in addition to the commissions that he usually pays. Which of the following statements is TRUE? A) This is acceptable as long as Whiteglove and Nick agree in writing B) This is acceptable only if Whiteglove is registered as an investment adviser C) This is not acceptable unless Whiteglove foregoes its usual commission charges D) This is not acceptable as it is considered sharing in the client's profits
D) This is not acceptable as it is considered sharing in the client's profits **Sharing in the profits and/or losses in a client's account is generally not permitted. There is an exception if the client and the agent have a joint account, the client and the broker-dealer consent to the arrangement in writing, and profits and losses are shared in proportion to the capital that each contributed to the account.**
An asset management company would like to add a new method to calculate the fees it will charge to certain clients. The new fee would be performance-based and would be calculated over a period of time. Which of the following statements is TRUE? A) This would be allowed if the SEC approved the method of calculating the fee prior to any contracts being signed B) This type of fee arrangement is not permitted and would be a violation C) This type of fee arrangement is not permitted for registered investment companies D) This type of fee arrangement is permitted for qualified clients
D) This type of fee arrangement is permitted for qualified clients **Under the Investment Advisers Act of 1940, performance fees are generally prohibited. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser or who have a net worth in excess of $2,100,000. They would be defined as qualified clients. Registered investment companies, clients that are not U.S. residents, and certain employees of the adviser may also be charged performance-based fees. The SEC does not need to approve the method used to calculate the fee, but it must be disclosed to clients.**
