Practice Exam
Rank the following bonds in order of shortest to longest duration. ABC 8s of 2035. DEF 9s of 2034. GHI 5s of 2036. JKL zeros of 2033. A) II, I, III, IV. B) III, I, II, IV. C) IV, II, I, III. D) IV, III, I, II.
A) II, I, III, IV. There is an inverse relationship between a bond's coupon rate and its duration. A higher coupon will pay the investor back through cash flow at a faster rate. Therefore, a zero-coupon bond with no cash flow has a duration equal to its maturity.
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) Tangible assets B) Preferred stock C) Annuities D) AAA bonds
A) Tangible assets Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed-dollar investments do not.
An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is: A) income. B) capital appreciation. C) preservation of principal. D) growth with income.
A) income. 85% of this portfolio is generating income. The only appreciation or growth is coming from the small cap stocks, but they are too small a percentage to be significant. However, with 50% of the portfolio in equities (20% preferred, 15% utilities and 15% small caps) one could not expect preservation of capital to be primary.
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly permit immediate vesting of employer contributions. A) II and III B) I and III C) I and IV D) II and IV
B) I and III The safe harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbor 401(k), which is one that is safe from top-heavy testing.
Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file A) a Form ADV-E. B) a Form 13F. C) a Form 112. D) a Form 13D.
B) a Form 13F Those certain securities are 13(f) securities and the form used is 13F. Form ADV-E is used for the independent examination of an IA who maintains custody. Form 13D is not tested and deals with changes to holdings of corporate insiders. Form 112 is the FinCEN form for reporting large cash transactions.
Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) An executor liquidates the estate's portfolio. B) The sale of an unregistered nonexempt security to an individual client at that client's request. C) An agent sells U.S. treasury bonds to an individual client. D) The sale of ABCD common stock, listed on the OTC Bulletin Board, to an insurance company.
C) An agent sells U.S. treasury bonds to an individual client. Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.
Adnan is an investment adviser representative associated with a state-registered investment adviser. He is registered in several states. To be in compliance with the Uniform Securities Act, Adnan A) must meet the financial requirements of the state with the most stringent requirements. B) must meet the financial requirements of all of the states in which he does business. C) has no financial requirements with regard to a minimum net worth. D) must meet the financial requirements of the state in which the investment adviser's principal office is located.
C) has no financial requirements with regard to a minimum net worth. There are no financial requirements placed on IARs, only the IA. Investment advisers must meet the financial requirements of the state where the firm's principal office is located.
Form ADV-E A) is used to claim an exemption from registration B) is only used by those advisers not subject to an annual surprise examination C) must be completed by investment advisers that have custody of client funds or securities D) may be used to amend any information included in an investment adviser's registration statement (e.g., business address)
C) must be completed by investment advisers that have custody of client funds or securities Form ADV-E is the form used by advisers for advisers that have custody of client funds or securities in order to be in compliance with SEC rule 206(4)-2 or similar state rules.
The management style that is most similar to buy and hold is: A) contrarian. B) tactical management. C) strategic management. D) active management.
C) strategic management. A strategic management style, sometimes referred to as passive, is less apt to have a high degree of portfolio turnover than active or tactical management. Contrarian style generally involves taking positions that are currently out of favor in the market place, but would incur somewhat frequent activity.
Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940? No registered investment company may commence a public offering with less than $1 million of capital. No investment company may own more than 3% of the voting stock of another registered investment company. No investment company may purchase portfolio securities on margin. A) I and II B) I, II, and III C) I and III D) II and III
D) II and III Investment companies are restricted from owning more than 3% of the voting stock of another registered investment company. Unless an exception is stated, no margin purchases may take place for the fund's portfolio. The act requires an investment company to have a minimum of $100,000 in initial capital, not $1 million.
If the Administrator were examining the actions of a particular agent to determine whether the agent engaged in churning a client's account, focus would be placed upon the: A) amount of profits generated in the client's account. B) length of time the account had been opened. C) number of complaints received relating to that agent. D) client's objectives, financial resources, and the character of the account.
D) client's objectives, financial resources, and the character of the account. Churning is the practice of generating commissions through excessive trading in a client's account. To determine what is excessive, the regulators will look at the client's investment objectives, financial resources, and the character of the account.
Special tax treatment is afforded to REITs if they A) agree to flow-through losses to their investors B) receive at least 90% of their income from real estate C) distribute at least 75% of their taxable income to their investors D) distribute at least 90% of their taxable income to their investors
D) distribute at least 90% of their taxable income to their investors The IRS requires REITs to distribute at least 90% of the taxable income to investors and receive at least 75% of their income from real estate. Losses do not flow through.
Without prior authorization from the client, an investment adviser could release information relating to the client's account: in order to comply with the brochure delivery requirements of the USA. when requested by the IRS. for the purpose of furnishing information for a statistical survey being compiled by the Administrator. upon the receipt of a subpoena from a court of competent jurisdiction. A) II and III. B) II and IV. C) I, II, III, and IV. D) I, III, and IV.
B) II and IV Without the prior consent of the client, an IA may disclose information relating to specific accounts only when requested by the IRS or by court order.
If the administrator of a corporate 401(k) plan ensures that a wide variety of investment alternatives are available to employees along with the ability for the employees to monitor their accounts and make frequent changes as needed, ERISA: A) removes the requirement for the plan to provide employees with quarterly reports. B) shifts the responsibility for account performance to the employee. C) might find the administrator to be shirking his fiduciary responsibility. D) removes the requirement for "top-heavy" testing.
B) shifts the responsibility for account performance to the employee. Under Section 404(c) of ERISA, when the employees have adequate control of their own investments and sufficient alternatives, the responsibility for account performance is shifted from the administrator to the employee.
An individual is currently registered as an agent with a broker-dealer. The firm recently began offering wrap fee programs to select clients. If the agent would like to offer these wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the agent would now come under a greater fiduciary responsibility B) the agent would have to become registered as an investment adviser C) the broker-dealer would have to be registered as an investment adviser D) the agent would have to become registered as an investment adviser representative
B) the agent would have to become registered as an investment adviser Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. In order to offer these programs to clients, the agent would now have to become an IAR of the advisory firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.
The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of A) 4%. B) 2%. C) 7.5%. D) 11%.
C) 7.5%. The midrange of any group of numbers occurs between the highest and lowest in the group. In this example, the highest number is 13% and the lowest is 2%. The number in the middle of those two is 7.5%. That is slightly higher than the mean (the average of the returns).
A client invests $100,000 in a commercial real estate venture taking a 10% interest as a limited partner. Unfortunately, the demand for new office space deteriorates and the partnership is unable to meet the mortgage payments. The end result is foreclosure with a net loss of $2 million. This would have the effect of: A) a potential claim against the agent who sold the client this program. B) giving the client a passive loss of $200,000. C) giving the client a passive loss of $100,000. D) requiring the client to pay his share of the loss to the creditors.
C) giving the client a passive loss of $100,000. The most the client can lose is the amount of the investment, in this example, $100,000. Because DPPs are considered passive investments, the loss may only be deducted against passive income. As a limited partner, the loss is "limited" to the original investment. Sure, the client could always make a claim against the agent, but nothing in this question indicates that the agent did anything wrong so that would not be the "best" answer.
Under which of the following asset allocation programs is it most likely that commission expense will have a significant impact on portfolio performance? A) Buy and hold B) Strategic C) Rebalancing D) Tactical
D) Tactical Tactical asset allocation, also known as active asset allocation, attempts to time the market. As such, there is a relatively high amount of in and out trading, causing commission expense to be a significant factor.
According to standard terminology used in the securities industry, when a person sells securities out of inventory, that person is acting in the capacity of a (an): A) investor. B) broker. C) agent. D) principal.
D) principal. In any transaction, there are two principals - the buyer and the seller. When a person sells securities out of inventory, they are acting in a principal capacity.
A technical analyst who wishes to smooth out the fluctuations of stock market prices would probably chart A) the short interest B) the 100-day moving average C) the support and resistance levels D) the trendlines
B) the 100-day moving average A major benefit of charting moving averages is that it takes short-term market fluctuations and smooths them out.
Among the major stock averages and indexes, only one is price-weighted. That would be A) the Standard and Poor's 500 Composite Index. B) the Dow Jones Industrial Average. C) the Russell 2000 Index. D) the Wilshire 5000 Total Market Index.
B) the Dow Jones Industrial Average. The Dow Jones is a price-weighted average, while the others are weighted based on market capitalization.
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of the Securities Exchange Act of 1934 the Investment Company Act of 1940 the Investment Advisers Act of 1940 the Uniform Securities Act A) I and III B) II, III, and IV C) I, II, and III D) II and IV
D) II and IV The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients.
NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents states that it is unethical for an agent registered with a broker-dealer to personally lend money to the broker-dealer firm with which the agent is registered. personally lend money to a bank that is a client of the broker-dealer firm with which the agent is registered. split commissions with an agent registered with a broker-dealer that is under common control. borrow money from a mortgage broker who is a client of the agent. A) I and III. B) I and IV. C) II and III. D) II and IV.
D) II and IV. An agent would not be permitted to lend money to a client that is a bank because loans may only be made by entities in the lending business, (agents are not). Agents may only borrow from clients who are lending entities and a mortgage broker does not lend money; the broker arranges the loan, but does not act as a principal. However, there is no problem with an agent lending money to the broker-dealer with which one is affiliated and splitting commissions with properly registered personnel of the same or affiliated broker-dealers is permitted.
One of your customers has inherited $100,000 of Kemach Farm Products, Inc. (KFPI), guaranteed bonds. Being wary of the term guaranteed, you are asked for its meaning in this context. You would explain A) bondholders may redeem their bonds at the face value at any time prior to maturity. B) the interest and final principal payment on this bond are guaranteed by someone other than the issuer. C) the interest payments on this bond are guaranteed to increase to keep pace with inflation. D) the interest and final principal payment on this bond are guaranteed by KFPI.
B) the interest and final principal payment on this bond are guaranteed by someone other than the issuer. The Uniform Securities Act defines a guaranteed security as one whose interest and principal (if a debt security) and dividends (if an equity security) are guaranteed by someone other than the issuer. Bondholders do not redeem their bonds prior to maturity—they sell them at the current market price. The principal guaranteed is only when held to maturity.
All of the following are characteristics of exchange-traded funds except A) they are generally tax efficient. B) they usually trade at or near their net asset value. C) large investors known as authorized participants buy or sell shares on an in-kind basis. D) they may not be sold short.
D) they may not be sold short. ETFs trade like stock and can be sold short. They are tax efficient compared to mutual funds, and large investors conduct trades by making in-kind exchanges, whereby they give or receive shares of stock that are in the fund. Perhaps you did not know that fact, but this is an example of the exam throwing in something very technical where the correct answer is quite simple. ETFs generally trade near net asset value (NAV), if not at NAV.
All of the following are requirements to be a salesman of variable products EXCEPT A) affiliation with a registered investment adviser B) possession of a valid FINRA registration C) affiliation with a registered broker-dealer D) possession of a valid life insurance license
A) affiliation with a registered investment adviser Because variable contracts are securities as well as insurance products, it is necessary to have a life insurance license as well as a FINRA registration. There is no requirement to be affiliated with an investment adviser, but obviously one can't have a FINRA registration without being affiliated with a broker-dealer.
As defined in the Uniform Securities Act, in which of the following cases would an investment adviser NOT be considered to be maintaining custody? A) The investment adviser has indirect control over the client's securities B) The investment adviser receives a check made payable to the IA and returns it within 3 business days C) The investment adviser keeps client securities in street name D) The investment adviser has direct control over the client's securities
B) The investment adviser receives a check made payable to the IA and returns it within 3 business days Please remember the following: There are 3 cases that would not be custody revolving around the 3-business-day rule. They are as follows: Receiving a check made payable to a 3rd party and forwarding that to the 3rd party within 3 business days Receiving a check made payable to the IA and returning it within 3 business days Receiving securities from a client and returning them within 3 business days If the IA has direct or indirect control over any client assets, that would be custody. Holding securities in street name is direct control. Discretion is not custody because the IA doesn't have any physical control, only the ability to make buy-and-sell decisions in the account.
Registration with the state as an investment adviser would be required for a person with an office in this state who: A) only gives advice on securities issued by or guaranteed by the government of the United States. B) manages $13 million in assets for 4 clients. C) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets. D) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million.
B) manages $13 million in assets for 4 clients. Under the NSMIA, as amended by Dodd-Frank, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with more than $200 million in assets, the person has the option of registering with the SEC or the states. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) ensure that full disclosure has been made in the adviser's brochure B) verify that the investment adviser still qualifies for SEC registration C) provide updated information on those associated persons who are in charge of giving investment advice D) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian
B) verify that the investment adviser still qualifies for SEC registration In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm? A) Donating a maximum of $350 to the campaign B) Donating a maximum of $150 to the campaign C) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign D) Donating a maximum of $250 to the campaign
A) Donating a maximum of $350 to the campaign Wynifred's solicitation activities define her as a covered employee. The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state in which Wynifred can vote, the upper limit applies.
The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice: relates solely to municipal issues. relates solely to issues issued by or guaranteed by the U.S. Treasury. is solely incidental to their professional practice as an aeronautical engineer. is limited to insurance companies only. A) II and III. B) I, II, and IV. C) III and IV. D) I, II, III, and IV.
A) II and III. Among the exclusions from the definition of" investment adviser "under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government issued or guaranteed issues. Advice to solely insurance companies qualifies one for an exemption from registration, but does not exclude the person from the definition of IA.
Which of the following actions is a form of market manipulation? A) Matched orders B) Wash sales C) Arbitrage D) Front running
A) Matched orders Only matched orders, the practice of simultaneously entering identical (or nearly identical) buy and sell orders for a security to create the appearance of active trading in that security, is market manipulation. Wash trades, not wash sales, are also market manipulation. Front running is an unethical practice, but is not market manipulation. Arbitrage is the legal activity of trading to take advantage of price disparities in the market place.
Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) State licensing fee B) Renewal notice to the SEC C) Consent to service of process D) Form U-4
A) State licensing fee All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.
In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940 this activity requires written: A) disclosure to the client and consent prior to completion of the transaction. B) consent of the client. C) consent of and the disclosure to the client prior to execution of the transaction. D) disclosure to the client.
A) disclosure to the client and consent prior to completion of the transaction. Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA-1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.
Section 401(b) of the Uniform Securities Act defines an agent as an individual who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. However, the term agent would not include an individual: A) employed by an issuer to research industry trends. B) employed by a broker-dealer selling securities on behalf of an issuer. C) employed by the investment banking firm engaged to underwrite a new issue of nonexempt securities. D) representing a non-exempt issuer in the sale of the issuer's securities in a non-exempt transaction.
A) employed by an issuer to research industry trends. Employees of issuers who are not involved with the sale or purchase of their employer's securities are never agents. When individuals represent an issuer in the sale of its securities, they are agents, unless it is one of a small group of exempt securities (e.g. US and Canadian government or municipal securities), or the transaction is exempt. On the other hand, there is almost no case where an individual active in the securities business of a broker-dealer is not an agent.
A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) for 3 years after the termination of the enterprise. B) for 3 years after the end of the fiscal year in which the most recent entry was made. C) for 5 years after the end of the fiscal year in which the most recent entry was made. D) easily accessible for 2 years in the firm's principal office.
A) for 3 years after the termination of the enterprise. NASAA's Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.
Both state and federal law will permit an investment adviser to engage in agency cross transactions provided the advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses all of the following except A) there is a potential conflict of interest because of the division of loyalties to both sides. B) on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. C) no transaction is effected in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser. D) the adviser will be receiving commissions from both sides of the trade.
B) on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. The untrue statement here is the biennial statement. The law requires the statements at least annually, not every two years.
The assumptions underlying the efficient market hypothesis (EMH) lead its proponents to believe that stock market prices react rapidly to newly released information and, therefore, limit the ability of the investor to achieve abnormal gains. Which of the forms of EMH concludes that an investor cannot achieve abnormal gains using fundamental analysis? A) Spring form B) Strong form C) Semi-strong form D) Weak form
C) Semi-strong form The semi-strong form of the EMH holds that security prices rapidly adjust to the arrival of all new public information. As such, current security prices fully reflect all publicly available information. The semi-strong form says security prices include all security market (price, volume) and non-market (financial statements) information to the public.
Under federal law, all of the following investment advisers are exempt from registration EXCEPT A) advisers solely to venture capital funds B) advisers solely to private funds with less than $150 million in assets under management in the United States C) advisers whose only clients are banks whose deposits are insured by the FDIC D) foreign private advisers meeting several requirements such as having no place of business in the United States and less than $25 million in assets under management
C) advisers whose only clients are banks whose deposits are insured by the FDIC What confuses many students is that federal law exempts investment advisers whose only clients are insurance companies but not banks. Why banks are not included in the list is anyone's guess, but they are not. The other three choices all refer to different categories of the private fund exemption.
The antifraud provisions of the Uniform Securities Act would apply to all of the following except A) persons availing themselves of the de minimis exemption. B) newsletter publishers who do not give advice to subscribers on the subscriber's specific investment situation. C) a broker-dealer registered pursuant to the limited registration option available to Canadian broker-dealers and their agents. D) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts.
D) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. The Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security. Even if one is exempt from registration due to meeting the de minimis exemption, or is excluded from the definition of investment adviser under the publisher's exclusion, the antifraud provisions still apply. The same is true for those Canadian securities professionals who do business in the United States by using the limited registration option available to them.
Serendipity Asset Planning (SAP) is a covered investment adviser doing business in 48 states. Alicia Adams is an IAR with SAP and splits her time between an office in state X and state Z. Adams has retail clients as follows: 10 clients in state W 30 clients in state X 65 clients in state Y 4 clients in state Z Adams would have to register as an IAR in A) states W, X, and Y. B) states W and Z. C) states X and Y. D) states X and Z.
D) states X and Z. In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis exemption would not apply to state Z because the IAR has a place of business there).
