Mid Term S 66
A broker-dealer (BD) registered in multiple states must meet the record retention requirements of A) the SEC B) the state where the principal office of the BD is located C) the state where the BD is incorporated D) the state with the most stringent requirement
A) the SEC One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located.
An investment adviser reviewing the past performance of a portfolio observes that annual returns have been +6%, +11%, -5%, +8%, +14%, +1%, and +7%. From this information, the adviser would determine that the median value was A) 6.0% B) 7.0% C) 7.4% D) 19.0%
B) 7.0% The median of a set of numbers is the one in the middle. That is, the number with an equal number of values above and below. It is easiest to compute if the numbers are presented in ascending values. In this question, we have -5, +1, +6, +7, +8, +11, and +14. This way, it is plain to see that 7 has 3 values below and 3 values above.
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? A) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers B) Clearance and settlement services provided by the broker-dealer C) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements D) Rent-free use of unused space in the broker-dealer's office
B) Clearance and settlement services provided by the broker-dealer Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.
Seven years ago, Sarah Smith was convicted of possession of a controlled substance in a state where that violation is considered a felony. Sarah has just filed an application for registration as an agent with Kapco Securities, a registered broker-dealer in a state where that violation is only considered a misdemeanor. When viewing this agent's application, the Administrator will A) treat the crime as a financial misdemeanor B) treat the crime as any felony C) censure the broker-dealer for even thinking of employing this individual D) treat the crime as a nonfinancial misdemeanor
B) treat the crime as any felony Even though the crime is a misdemeanor in the state where registration is being sought, the applicant's record shows a felony conviction and, therefore, this individual would be subject to statutory disqualification.
A stock traded on the Nasdaq Stock Market has a beta of 1.20. One could expect the stock's volatility compared to the S&P 500 would be A) 20% less volatile B) negatively correlated to the S&P C) 20% more volatile D) too variable to tell
C) 20% more volatile Beta is a measurement of a security's volatility when compared to the overall market, best measure by the S&P 500. The "market" is assigned a beta of 1.00, so when the beta is higher than 1.00, the stock has greater volatility, and when lower than 1.00, the volatility is less.
Under the Investment Advisers Act of 1940, which of the following would NOT meet the criteria of persons associated with an investment adviser? A) The individuals responsible for bringing new clients to an advisory firm B) An individual whose only connection to the firm is a position on the board of directors C) An individual whose only function is posting trades to client accounts D) A manager in an investment advisory firm who supervises 5 investment adviser representatives
C) An individual whose only function is posting trades to client accounts Persons associated with an investment adviser include members of the board of directors, officers, partners, or managers of an investment advisory firm. Sales representatives and other employees whose duties are not limited to clerical or ministerial functions are included as well. In most, but not all, cases, associated persons are required to register as investment adviser representatives.
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only An adviser with a place of business in the state whose total fee income in the state amounts to $150 An adviser with no place of business in a state who only provides advice on fixed annuities An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940 A) I, II, and IV B) I only C) I and II D) I, II, and III
C) I and II Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable.
A consent to service of process allows the Administrator to A) terminate a registrant's application B) verify the accuracy and completeness of registration without obtaining the registrant's prior approval C) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant, or the registrant's successor D) ensure that the legal appeal process is expedited as a result of the Administrator's access to information
C) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant, or the registrant's successor The consent to service of process provides the Administrator with power of attorney to accept legal papers on behalf of registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process.
Which of the following persons is required to register with the SEC as a federal covered adviser? A) A publisher that gives incidental investment advice only B) An adviser that manages assets of $90 million or more C) An adviser who gives advice only related to U.S. government securities D) An adviser that gives advice to registered investment companies only
D) An adviser that gives advice to registered investment companies only Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. Don't be tricked by the $90 million. Only those with at least $110 million under management (using AUM as the deciding factor) are required to register with the SEC. Once that level has been reached, the IA may remain SEC registered as long as its AUM does not drop below $90 million.
Which of the following corporate actions would have an effect on the company's working capital? A) Borrowing money from the bank on a 90-date note B) Paying a utility bill C) Declaring a 15% stock dividend D) Calling in a portion of a 20-year bond at par
D) Calling in a portion of a 20-year bond at par Working capital is the difference between the corporation's current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash.
The Investment Advisers Act of 1940 provides for an exemption from registration to investment advisers whose clients are residents of the state in which the adviser has its principal office and only place of business and who do not give advice dealing with securities listed on any national exchange (e.g., New York Stock Exchange). This exemption is denied to any investment adviser meeting all of the requirements, but having as a client A) a bank. B) an insurance company. C) an accredited investor. D) a private fund.
D) a private fund. The intrastate exemption offered under the Investment Advisers Act of 1940 does not apply to an investment adviser with even a single private fund as a client. What about the insurance company exemption? First of all, that only applies when all of the IA's clients are insurance companies. Secondly, the question is asking about the intrastate exemption not exemptions in general. Another point is that, although there are cases where an investment adviser without a place of business in a state whose only clients are institutions like banks and insurance companies qualifies for an exemption under state law, this question deals with federal law. In addition, the question points out that this particular exemption (intrastate) applies only when the client resides in the same state as the IA's principal office.
Anyone who represents an issuer in effecting transactions between the underwriter and the issuer A) must be registered as an agent B) must be registered as an Administrator C) must be registered as an investment adviser D) is excluded from the definition of agent under the Uniform Securities Act
D) is excluded from the definition of agent under the Uniform Securities Act Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the act.
An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm, A) the agent must register as an investment adviser because the research is being done after hours B) the broker-dealer must register as an investment adviser and the agent as an investment adviser representative C) the agent must register as an investment adviser representative D) neither the agent nor his employing broker-dealer need register as an investment adviser
D) neither the agent nor his employing broker-dealer need register as an investment adviser The exclusion from the definition of investment adviser is lost only when an agent (or broker-dealer) receives special compensation for rendering investment advice. In this case, the agent is only receiving commissions when the clients make a trade. If there are no trades, there is no compensation for the advice. It is only when the compensation is not transaction-based that it becomes special.
The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents includes prohibitions against certain practices designed to manipulate market prices of securities. An activity that would fall within the spectrum of the prohibitions would be A) guaranteeing customers against loss B) front running C) churning customer accounts D) wash trades
D) wash trades Performing wash trades involves the simultaneous or near-simultaneous selling and repurchase of the same security for the purpose of generating the appearance of trading activity and increasing the price. This is one of the most common forms of market manipulation. Churning, front running, and guaranteeing customers against loss, although prohibited practices, are not considered market manipulation.
Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules B) the IA maintained adequate net worth or a surety bond C) customer permission was obtained prior to entering into the contract D) permission was obtained from the Administrator and custody was not prohibited by that state's rules
A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if the Administrator, by rule, prohibits custody; or in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers.
An investment adviser who has custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must do which of the following? Notify the Administrator by the close of business on the day after discovery File a report of its financial condition with the Administrator no later than the close of business on the day after notification Cease doing business A) I and III B) I and II C) I, II, and III D) II and III
B) I and II When an investment adviser fails to meet its minimum financial requirements, it must notify the Administrator by the end of business on the day after discovery and then must file a report of its financial condition by the end of the next business day. Included in the report must be the number of client accounts.
ABC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities would not be defined as a broker-dealer in State N under the Uniform Securities Act if it had no offices in State N and its only clients were insurance companies it had contact with fewer than 6 State N residents in any 12-month period its only solicitation of State N residents was through radio advertisements originating in State M but received in State N it occasionally engaged in firm commitment underwriting with issuers based in State N A) II and III B) I and IV C) I and II D) III and IV
B) I and IV A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state.
The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is a broker-dealer an insurance company an investment company a person receiving impersonal advice for which the annual fee is less than $500 A) I and II B) III and IV C) I, II, and III D) I, II, III and, IV
B) III and IV There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year.
An investment adviser may borrow from all of the following clients EXCEPT A) a savings and loan association that has offered to finance new computers for the adviser's office B) a mortgage broker who helped the adviser negotiate mortgage terms for its office building C) a broker-dealer in conjunction with a margin account D) a commercial bank in conjunction with a mortgage on the office building from which the advisory operates
B) a mortgage broker who helped the adviser negotiate mortgage terms for its office building Mortgage brokers are not in the business of lending money; they help parties negotiate terms of a loan, which is why they are called brokers. The bank, brokerage, and savings and loan association are in the normal business of lending. Investment advisers generally may borrow funds from clients that are in the normal business of lending.
When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT A) the amount of securities to be offered in the state B) the effective date of the offering C) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering D) all other states in which the security is to be registered
B) the effective date of the offering The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering.
MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation B) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price C) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation D) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price
C) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, (that is their underwriting compensation), and market makers buy at the bid and sell at the ask earning the spread.
An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments? A) Treasury notes B) Municipal bonds C) Common stock D) Direct participation programs (DPPs)
C) Common stock The internal rate of return (IRR) is the discount rate that makes the future value of an investment equal to its present value. Because this computation involves the time value of money, in order to reasonably compute present value, there must be either a maturity date or some other kind of ending date, such as that which is usually projected in a DPP. Common stock has nothing comparable to that.
A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should A) accept the order because her broker-dealer is registered in all 50 states B) accept the order because it is unsolicited C) reject the order because she is not registered in State B D) accept the order because she received it in State A
C) reject the order because she is not registered in State B Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.
Federal covered securities, as defined under the Uniform Securities Act, A) would not include securities senior to a common stock listed on the NYSE B) must be registered in the state before they can be offered within the state C) must be registered with the SEC before they can be offered in the state D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940
D It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered.
Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT A) CIA has a power of attorney granting authority to withdraw funds from the custodian B) checks made out to CIA are deposited within 3 business days C) CIA's advisory contract calls for the automatic deduction of advisory fees D) checks made out to 3rd parties are forwarded within 3 business days
D) checks made out to 3rd parties are forwarded within 3 business days When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody.
The Uniform Securities Act requires that broker-dealers and investment advisers maintain certain records relating to their business operations. If the firm wished to upgrade to a modern system, such as disk storage, A) it must keep its records in paper form B) the most modern form currently permitted is microfilm or microfiche C) it must obtain approval from the Administrator prior to determining its method of record retention D) it could do so if the system met certain requirements, including that the information on the disk could not be altered
D) it could do so if the system met certain requirements, including that the information on the disk could not be altered Computer disk storage is acceptable provided a printed copy can be readily obtained and the information on the disk cannot be overwritten.
Whippet Bus Lines, Inc., serving most of the country, has just been informed by the Surface Transportation Board of the United States that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in Whippet's net income. If one was an investor in Whippet Bus Lines, Inc., this would be an example of A) market risk B) business risk C) country risk D) regulatory risk
D) regulatory risk When an action by a regulatory agency, such as the STB, leads to increased costs and lower income, we call that regulatory risk.
An investment adviser structured as a partnership lends money to a customer to buy recommended securities. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this activity is A) acceptable, provided the securities are used as collateral for the loan B) acceptable, provided the securities are used as collateral for the loan and the loan conforms to the provisions of Regulation T C) acceptable, provided the loan is made under the provisions of Regulation T of the Federal Reserve D) unethical
D) unethical An investment adviser cannot lend money to a customer unless the loan is made through a regulated lender such as an affiliated broker-dealer or an affiliated bank.
