Law & Product Quizzes 9/2/18
Which of the following is (are) advantages of irrevocable insurance trusts? Provide estate liquidity. Insurance proceeds are removed from the estate of the insured for tax purposes. The insured has the flexibility to alter the trust arrangements. Once set up, no changes may be made. A) I and II. B) I and III. C) III and IV. D) II and IV.
A) I and II. As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate thereby saving estate taxes. The trust is irrevocable - no changes can be made, and this is one of the few disadvantages.
Under the Investment Advisers Act of 1940, it is legal for an investment adviser to: reduce a client's fee by any commissions earned on mutual fund sales to that client. rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice. keep the commission on a mutual fund sale when the client who purchased the shares has paid for investment advice. A) I and III. B) II and III. C) I, II and III. D) I and II.
A) I and III. Rebating commissions on mutual fund sales is prohibited, but the adviser may reduce the client's fee or keep the commission; mutual funds, being new issues, are sold with a sales commission stated in the prospectus. This charge is the same for all purchasers and the law permits an adviser to state in the advisory agreement that any commissions earned on fixed price securities may be used to offset fees.
Under the Uniform Securities Act, in order for the Administrator to suspend an agent's registration notice must be given of the proposed action and hearing notification must be given to the employing broker-dealer of the final order the agent must be presented with an opportunity for a hearing no notice or hearing is required to issue a suspension
A) I, II and III The Administrator may by order summarily postpone or suspend registration pending final determination of any proceeding under the USA. Upon the entry of the order, the Administrator shall promptly notify the applicant or registrant, as well as the employer or prospective employer if the applicant or registrant is an agent or investment adviser representative, that it has been entered and of the reasons therefor and that within fifteen days after the receipt of a written request, the matter will be set down for hearing. Since the law states that the employer will be notified once the action commences, it should be obvious that once the suspension order becomes final, the employer will be notified.
William and Kat, a married couple, are advisory clients of yours. Each of them is employed and covered by a qualified plan. Which of the following statements are CORRECT? Employees covered by a qualified plan are not eligible to open Roth IRAs. Employees covered by a qualified plan are eligible to open Roth IRAs. Distributions from a qualified plan may be rolled over into a Roth IRA. Distributions from a qualified plan may not be rolled over into a Roth IRA.
A) II and III. Eligibility for a Roth IRA is not affected by participation in a qualified plan, and effective January 2008, distributions may be rolled over into a Roth.
Variable annuities: A) may have 20 or more subaccount investment options. B) generally provide more security of principal than fixed annuities. C) provide a guaranteed minimum annuity payout. D) may invest only in money market mutual funds.
A) may have 20 or more subaccount investment options. Some variable annuity separate accounts have 50 or more subaccounts to choose from. There are no guarantees as far as the amount of payout.
Martha Mae Dixon passed away recently at the age of 87. Among the assets in her estate was an IRA with a value of $150,000. Mrs. Dixon's son, Jerome, a successful 52-year-old surgeon and a client of yours, was named as the beneficiary of the IRA. From a tax standpoint, which of the following options would you recommend to Mr. Dixon? A) Mr. Dixon should take the cash now and use a Section 1035 exchange into an annuity. B) A separate inherited IRA should be opened in Mrs. Dixon's name for the benefit of Jerome. C) Mr. Dixon should take the cash now and use the money fund a new IRA. D) Mr. Dixon should use the 5-year cash-out option.
B) A separate inherited IRA should be opened in Mrs. Dixon's name for the benefit of Jerome. When an IRA is inherited by a nonspouse, there are several different options available. From a tax standpoint, it is generally agreed that the most efficient choice is to create an inherited IRA in the name of the deceased for the benefit of the beneficiary. In this way, the beneficiary (Jerome) will be required to take RMDs using his life expectancy. That will result in much less tax (at least currently) than taking the money now or even over 5 years. One can assume that a successful surgeon is in a relatively high tax bracket. The Section 1035 exchange right does not apply when moving funds from an IRA, and inherited money is not considered earned income for purposes of funding an IAR.
Which of the following are federal covered securities? A security quoted on the Nasdaq Stock Market Shares of an investment company registered under the Investment Company Act of 1940 An offering in a security exempt from registration under the Securities Act of 1933. A security that has a federally imposed exemption from state securities registration. A) I and III. B) I, II, III and IV. C) III and IV. D) I and II.
B) I, II, III and IV. Any Nasdaq security, shares of a registered investment company, an offering in a security exempt from registration under the Securities Act of 1933, a security that has a federally imposed exemption from state securities registration, and a security traded on a regulated exchange are all federal covered securities.
The USA considers certain transactions to be exempt from the requirements to register and the filing of advertising material. Included in that group are all of the following EXCEPT: A) any transaction by an executor, administrator, sheriff, marshal, or guardian. B) any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000. C) any transaction executed by a bona fide pledgee without any purpose of evading the act. D) an isolated nonissuer transaction effected through a broker-dealer.
B) any offer or sale to a pension or profit-sharing trust as long as the plan has assets of no less than $750,000. In general, the USA does not consider a transaction with an employee benefit plan to be exempt unless the plan has assets of at least $1 million.
Among the reasons to consider investing in a variable annuity would be all of the following EXCEPT A) basically, no limit on the amount that can be contributed B) capital gains treatment on any realized gains upon withdrawal C) a guaranteed death benefit for death prior to annuitization D) avoiding probate upon the death of the investor
B) capital gains treatment on any realized gains upon withdrawal In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity. Some insurance companies will place a limit on the amount that may be invested, especially for older clients, but, unlike IRS rules on retirement plans, this is strictly a company-by-company decision, not a law. Variable annuities are generally sold with a death benefit provision guaranteeing that the beneficiary will receive the higher of the amount invested or the current value of the account. Because there is a specifically named beneficiary, annuities do not go through the probate process.
The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following EXCEPT A) Social Security number B) current employment status C) date of birth D) a physical address
B) current employment status The 4 primary requirements of the CIP are the individual client's name, physical address, DOB, and SSN. Although current employment status would be asked as part of opening a new account, that is not a CIP requirement.
One of your clients has told you that his employer has just instituted a Roth 401(k) plan. If they wish to make matching contributions: A) current tax law does not permit matching contributions to be made on behalf of any employee participating in a Roth 401(k) plan. B) they may contribute a specified percentage of his pay to a regular 401(k). C) he may choose as to whether he wants the matching contribution made to the Roth 401(k) or a regular 401(k). D) they may contribute a specified percentage of his pay to the Roth 401(k).
B) they may contribute a specified percentage of his pay to a regular 401(k). In order to have matching contributions, participants in a Roth 401(k) plan must actually have two accounts - the Roth and a regular 401(k). The employer contributions are made on a tax deductible basis to the regular 401(k) and are fully taxable upon withdrawal.
An investor owns a common stock that has been paying a $2.00 annual dividend. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is: A) 4%. B) 5%. C) 20%. D) 12%.
C) 20%. Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $.50 (one quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for three months - one quarter. Multiply that by 4 to get the annual rate.
The wife of a customer calls an agent to sell $25,000 worth of securities for a down payment on a house. Although the account is in her husband's name, she says her husband told her to sell the securities. To comply with NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents, the agent should: A) tell the couple that the purchase of a house is a bad investment. B) sell as instructed. C) call the husband immediately and confirm the order. D) get permission from his principal.
C) call the husband immediately and confirm the order. An agent may not accept an order from the wife of the customer unless the customer has granted written trading authorization to her. An agent may not accept an order from a spouse, or anyone else for that matter, unless that person has written third party trading authority.
Some analysts use the discounted cash flow to determine the theoretical value of a debt security. Under DCF, the bond price can be summarized as the sum of the A) present value of the par value repaid at maturity plus the future value of the coupon payments B) future value of the par value repaid at maturity plus the present value of the coupon payments C) present value of the par value repaid at maturity plus the present value of the coupon payments D) future value of the par value repaid at maturity plus the future value of the coupon payments
C) present value of the par value repaid at maturity plus the present value of the coupon payments A bond's price can be calculated using the present value approach. As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate. Therefore, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate. The two choices using future value of the par value at maturity make no sense because we already know that is $1,000 (or whatever the par value might happen to be).
A client needs emergency cash for 30 days. All of the following are acceptable sources EXCEPT: A) using credit card access checks. B) taking a premature distribution from an IRA. C) term life insurance. D) margin loan from a broker-dealer.
C) term life insurance. Term life insurance has no cash value. Withdrawals from an IRA incur no tax or penalty if 100% of the funds are replaced within 60 days.
Which of the following would be an agent under the terms of the Uniform Securities Act? A sales representative of a licensed broker-dealer who sells secondary securities to the general public. An assistant to the president of a broker-dealer who, for administrative purposes, accepts orders on behalf of senior partners. A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public. An issuer of nonexempt securities that are registered in the state and sold to the general public.
D) I and II. Under the USA, only an individual can be an agent (a person who sells securities for a broker-dealer). An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if that individual takes securities orders from the public. Corporate entities, broker-dealers, and issuers are all excluded from the definition of an agent.
Under what circumstances may an Administrator cancel the registration of an agent? Inability to get in contact with the agent for a reasonable amount of time. Death of the agent. The agent is deemed mentally incompetent. Failure to follow provisions of the act.
D) I, II and III. Cancellation is a form of non-punitive termination. If an agent dies, is declared mentally incompetent, or mail is returned with no forwarding address, registration will be canceled.
Which of the following are examples of the prohibited business practice known as front running? An investment adviser publishes a strong buy recommendation for XYZ common stock and then purchases a large block for the firm's own account several days later. An investment adviser publishes a strong buy recommendation for ABC common stock several days after purchasing a large block for the firm's own account. An analyst informs an IAR that he is going to discuss the fact that he has changed a recent buy recommendation to a sell when he appears on cable TV later that afternoon. The IAR immediately establishes a large short position in that stock. An IAR purchases 10,000 shares of DEF 6% preferred stock for 4 of her income-oriented clients. It takes several separate trades to fill the entire order, and the prices range from $24.25 to $24.33. The IAR allocates the shares, giving price preference to clients taking the largest positions.
D) II and III. Front running is the prohibited practice of placing an order to benefit from news not yet released or orders that will impact the market. An adviser acquiring stock and then publishing a buy recommendation or an IAR benefiting from an analyst's news before public release are examples of this type of wrongdoing. Although allocation based on client positions is a prohibited practice, it is not front running.
A registered investment adviser representative is instrumental in bringing a new account to the investment adviser. Although the IAR has not become registered as an agent, the adviser intends to pay the representative commissions for those securities transactions routed through their affiliated broker-dealer. Which of the following statements best describes the regulatory aspects of this situation? A) The adviser may pay commissions to the IAR because he is properly registered to bring in advisory accounts. B) Advisers are prohibited from paying commissions to solicitors. C) The adviser may pay a commission to the investment adviser representative for opening the account, presuming the individual is properly registered as an investment adviser representative and that appropriate disclosure of compensation to the representative has occurred. D) The adviser may not pay commissions to the investment adviser representative because he is not an agent.
D) The adviser may not pay commissions to the investment adviser representative because he is not an agent. Commissions on securities transactions paid to investment adviser representatives (solicitors) are permitted when the IAR is properly registered as an investment adviser representative and an agent of a broker-dealer.
A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A) going short soybean futures B) going long soybean forwards C) going long soybean futures D) going short soybean forwards
D) going short soybean forwards A big crop means more supply and lower prices when the crop is harvested. Hedging involves taking an opposite position (benefitting if prices fall). If the farmer is correct, selling short at today's price will enable delivery in the future at that higher price. Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.
Jesse Liverless is the trustee of the Short Circuit Electric Corporation 401(k) plan. Jesse would be able to reduce his ERISA fiduciary exposure if A) loans to participants were permitted B) the plan provided for account reports no less frequently than annually C) the firm provided educational sessions to participants covering the basics of investing D) the plan offered a broad index fund, a medium term government bond fund and a cash equivalent fund
D) the plan offered a broad index fund, a medium term government bond fund and a cash equivalent fund ERISA Section 404 (c) describes a safe harbor for 401(k) plan fiduciaries. Among the requirements is to provide at least three different investment alternatives with a range of risk and provide account access no less frequently than quarterly.
An Administrator may deny or revoke a security's exemption: A) if the Administrator determines that an exemption applicable to federal covered securities is inconsistent with state securities law. B) if the Administrator, in a court of competent jurisdiction, proves that a security does not qualify for an exemption. C) for a federal covered security if its issuer is in violation of state law. D) without a hearing if the issuer is given an opportunity for a hearing after the revocation.
D) without a hearing if the issuer is given an opportunity for a hearing after the revocation. An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.
