Practice Test 1
An investment adviser's advertising is permitted to state that: A) we are offering our monthly stock market report free of charge for the next 6 months to the first 100 people who email us their name and address. B) we have developed a charting system for timing the market that makes investing simple for anyone. C) the Administrator has approved of the adviser's qualifications. D) all of our employees who render advice are RIAs.
A. If, in fact, the offer is free, this is a permitted statement. The initials RIA are prohibited as is making any kind of statement relating to approval of qualifications by the Administrator. Any advertisement mentioning a chart or formula must always describe the limitations and difficulties of using that chart or formula.
You have a client who wishes to invest $100 per month into something that will give him the opportunity to share in the long-term growth prospects of the overall economy. Which of the following would probably be the most cost efficient investment vehicle? A) Class A shares of a large-cap growth fund. B) A no-load index mutual fund that mimics the S&P 500. C) An exchange traded fund (ETF) that mimics the S&P 500. D) A fund of hedge funds.
B. Although there is possible room to argue, we'll go with what the exam would choose. The only other logical choice is the ETF, but, since each purchase involves a commission and, on $100 purchases investors don't get any real break, most experts agree that ETFs are not suitable for dollar cost averaging plans (unless the periodic investments were substantial).
An investment adviser would be exempt from registration under the Uniform Securities Act if it had no place of business in this state and its only clients were: banks. insurance companies. registered investment companies. other investment advisers. A) III and IV. B) I and II. C) I, II, III and IV. D) I, II and III.
C. As long as the investment adviser does not maintain a presence in this state and its only clients are broker-dealers, other investment advisers, or institutional clients, it is exempt from registration in this state.
If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn? A) 18 months. B) Only at the administrator's discretion. C) 12 months. D) 6 months.
C. Registration statements are usually effective for a period of 1 year from the effective date and may not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding.
Which of the following statements is NOT true of interest rates? A) The real rate of interest is the actual rate of interest a bank charges. B) Interest rates can reflect investors' expectations about future prices or inflation. C) Interest rates measure the cost of borrowing money. D) The stated, or coupon rate, is the nominal rate of interest for a bond trading at par.
A. The real rate of interest is the nominal rate minus the inflation rate. Banks charge a nominal rate rather than a real interest rate. The nominal rate of interest measures the time value of money plus investors' expectations about future prices or inflation. The best known use of the term "nominal rate" is a bond's coupon rate. When an issuer borrows money, the rate is determined by these factors plus the issuer's credit rating.
Under the Uniform Securities Act, a security that is exempt from the registration requirements is also exempt from the: I. requirements for filing of advertising and sales literature. II. antifraud provisions. III. civil liabilities provisions. A) I, II and III. B) I only. C) I and III. D) II and III.
B. An exempt security is only exempt from the registration requirements and the requirements for filing of advertising and sales literature. There are no exemptions from the antifraud provisions. Civil liability arises anytime a security is sold or advice is rendered in violation of the act, regardless of whether any security involved was registered or exempt.
The Uniform Securities Act contains a number of security exemptions. The Act empowers the Administrator to revoke the exemption for which of the following? I. Any security listed or approved for listing upon notice of issuance on the Nasdaq Stock Market; any other security of the same issuer which is of senior or substantially equal rank; any security called for by subscription rights or warrants so listed or approved; or any warrant or right to purchase or subscribe to any of the foregoing. II. Any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association III. Any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing thirty days before the inception of the plan. IV. Any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. A) I and II B) II and III C) I and IV D) III and IV
B. Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security's exemption, the only two where the Administrator has to power to do so are those issued by non-profit organizations and in connection with an employee benefit plan.
A federal covered investment adviser is one who: I. has $110 million or more in securities assets under management. II. manages an investment company registered under the Investment Company Act of 1940. III. limits advice to securities listed on the NYSE. IV. is affiliated with a federally chartered bank. A) III and IV. B) II and III. C) I and II. D) I and III.
C. Federal registration is required of any investment adviser managing at least $110 million in assets. It is optional at $100 million, and anything less requires state registration. The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that any investment adviser under contract to a registered investment company registered under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Banks and their representatives are always excluded from the definition of an investment adviser, federal covered or not.
An issuer is planning to offer securities for sale in State A and several other states. Which of the following statements regarding registration in State A under the Uniform Securities Act is NOT true? A) The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator. B) The Administrator may by order permit omission of items of information or documents from a registration statement. C) The Administrator may not, as a condition of registration by qualification or coordination, require the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount. D) Every registration must specify the total amount of securities to be offered in State A, the states in which offering is to be made, and any adverse order or judgment by a regulatory authority.
C. The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may by order permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator.
Which of the following is guaranteed by a variable life policy? A) Policy loans after the policy has been in effect for at least 24 months. B) Minimum separate account performance. C) Cash value. D) Minimum death benefit.
D. A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts and policy loans are required after the policy has been in effect for at least 3 years (36 months).
Current IRS regulations permit an unlimited contribution to which of the following tax-deferred plans? A) 401(k) B) Roth IRA C) SEP-IRA D) Annuity
D. Nonqualified annuities offer tax deferral similar to that of qualified retirement plans. However, unlike qualified plans and IRAs, the IRS places no limitation on the amount that may be contributed.
The management style that is most similar to buy and hold is: A) contrarian. B) active management. C) tactical management. D) strategic management.
D. 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.
Over which of the following would the investment adviser representative have discretionary authority? A) An account in which a trustee has power of attorney over another individual's account. B) An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative. C) An account in which a customer has power of attorney over another individual's account. D) An account in which the investment adviser representative chooses portfolio securities on behalf of the client.
D. An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.
Regarding performance-based fees charged by covered investment advisers, all of the following statements are correct EXCEPT A) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark B) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE C) performance-based fees are generally prohibited D) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods
D. Covered advisers are those under federal jurisdiction rather than state. The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure.
