Quiz 6
If a client requests an unaudited financial statement from an IA, it must be made available within how many days?
7 days
According to the Uniform Securities Act, if the Administrator wishes to revoke a firm's registration, which of the following statements is/are TRUE? I. Revocation may not be started until the firm has had a hearing with the Administrator and the State's Ethics and Procedures Panel (SEPP). II. The firm may request a hearing with the Administrator within 15 days of the revocation. III. The firm may apply for judicial review of the Administrator's actions within 60 days. IV. All employees of the firm must requalify by examination. I only I and IV only II and III only I, III, and IV only
II and III only The Administrator may revoke a registration without providing the opportunity for a prior hearing but, if requested, the Administrator will grant a hearing within 15 days. The firm has 60 days to apply for legal (judicial) review of the Administrator's action. Registrations of all persons associated with the firm will become inactive during this period, but they will not need to requalify solely because their employer's registration has been revoked.
An advantage of a Coverdell Education Savings Account versus a 529 plan is: a. More money may be invested b. A custodian has greater control over the investments c. There are lower tax rates d. There is a longer holding period
b. A custodian has greater control over the investments
Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? a. CAPM b. Efficient frontier c. Duration d. Alpha
b. Efficient frontier
A client of an IA has over 20% of his assets invested in a coal mining company's stock. The IA recommends greater diversification and indicates that stocks in this sector have been continually declining in value over the last 10 years. The client believes that the stock will eventually recover and refuses to sell it. The client's behavior may be described as: a.Regret aversion b.Anchoring c.Conservationism d.Overconfidence
b.Anchoring This is an example of anchoring. Anchoring involves a client being attached to the belief in an investment's potential upside despite indications to the contrary.
ABC Investment Adviser is a federal covered adviser and requires its IARs to have an MBA degree before they are able to provide advice to its clients. For any of the firm's IARs who provides advice, in what document(s) must their education be disclosed? I. ADV Part 1 II. ADV Part 2 III. Schedule E IV. The adviser's brochure a.I only b.I and II only c.II and III only d.II and IV only
d. II and IV only If an investment adviser requires a specific level of education or business experience for its IARs to be able to provide advice, it must be disclosed in its ADV Part 2, which may also be used as the adviser's brochure.
Under the Uniform Securities Act, which of the following would NOT be considered a broker- dealer? An issuer A lawyer An accountant An engineer
An issuer Under the Uniform Securities Act, agents, issuers, and banks are excluded from the broker-dealer definition. An exclusion is also available to broker-dealers who have no place of business in a state and only deal with institutional investors in that state. Although professionals who provide incidental advice, such as lawyers, accountants, teachers, and engineers, are specifically excluded from the definition of an investment adviser, these same professionals are not given the same exclusion from the broker-dealer definition.
Based on the past performance of XYZ stock, an investment adviser has determined that there is a 25% chance that in a bull market, XYZ stock will return 20%. In a flat market (50% probability), the return should be 5%. The likelihood of a bear market is 25%, and expected returns would be a loss of 10%. What is the expected return for XYZ stock? a. 5% b. 10% c. 15% d. 20%
a. 5% .2 X 25 = 5 .05 X 50 + 2.5 (.10) X 25 = (2.5) Expected return = 5% (5% + 2.5% - 2.5%)
If FINRA issues an order against a broker-dealer, what actions may be taken by the Administrator according to the Uniform Securities Act? a. The Administrator may not take action against the firm since it has not been convicted b. The Administrator must suspend the broker-dealer c. The Administrator may only take action if a law in its state has been violated d. The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action
d. The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action. The Administrator may suspend a broker-dealer's registration if it has violated a law, is about to violate a law, or if the firm is subject to a FINRA order. The Administrator is not required to take action, but will instead decide on the appropriate course on a case-by-case basis
A bank customer deposits $9,000 in cash into his checking account. On the same day, he deposits $6,000 in cash into his savings account. The bank is required to file: a.A Currency Transaction Report (CTR) b.A Currency and Monetary Instrument Report (CMIR) c.A Suspicious Activity Report (SAR) d.Nothing since each deposit was less than $10,000
a. A Currency Transaction Report (CTR) This is an example of layering or structuring which involves a customer attempting to avoid the reporting of cash transactions that exceed $10,000 on the same day. These types of transactions must be reported on the CTR
Under the Uniform Securities Act, what information would NOT need to be disclosed when filing a registration by qualification? a. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors b. The capitalization and long-term debt of the issuer and any significant subsidiary c. The general character and location of the issuer's business and a statement of the general competitive conditions within the industry or business in which it operates d. The estimated cash proceeds to be received by the issuer from the offering
a. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors.
Which of the following statements is TRUE regarding Roth IRAs and Coverdell Education Savings Accounts? a.Both are permitted only for individuals whose income is below a certain amount b.Both allow tax-deductible contributions c.Both allow a catch-up provision if the contribution is made by a person who is over a certain age d.Both have the same annual contribution limit
a. Both are permitted only for individuals whose income is below a certain amount. Contributions to both a Roth IRA and Coverdell Education Savings Account (ESA) are only permitted for persons whose income is below a certain level. Both allow for tax-free growth if certain conditions are met, but the contributions are made in after-tax dollars. A Roth IRA allows a catch-up contribution if the person is age 50 or over. A Roth IRA allows for a maximum annual contribution of $5,500 and the annual amount for a Coverdell ESA is $2,000.
Zemo, a new company engaged in green technologies, has announced its IPO will trade on the NYSE. Frank, an adviser with Einstein Advisory Services, plans to purchase a large block of the stock and allocate shares only to his largest discretionary clients. One regulatory concern would be: a. Breach of fiduciary duty b. Liquidity c. Diversification d. Front-running
a. Breach of fiduciary duty A primary issue is hard to obtain in certain cases. Many clients desire IPOs that are greatly anticipated by the market. Providing only the largest clients with an allocation is unfair to smaller clients and represents a breach of the adviser's fiduciary duty to those clients. Liquidity is not a major issue as the stock will be listed on the NYSE. Plus, the additional stock allotment to clients would further diversify their investments. Since the shares purchased by Frank were reallocated to his clients, he is not front-running
An adviser is considering a recommendation that a customer sell uncovered options. The recommendation would NOT be suitable if the adviser: a. Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks b. Failed to receive written approval to make the recommendation by the firm's registered options principal c. Failed to receive written approval to make the recommendation by his branch manager d. All of the above
a. Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks . The recommendation would not be a suitable one if the adviser failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks. Written approval from the firm's registered options principal or branch manager is required to open an account. There is no requirement to receive written approval prior to making a recommendation to a client.
Which of the following statements are TRUE regarding a limited partnership? I. There must be only one general partner. II. There must be more than one limited partner. III. There is undivided interest in equity that does not pay income taxes. IV. It is a form of ownership that passes its profits and losses through to its participants. a. III and IV only b.I, II, and III only c.I, II, and IV only d.II, III, and IV only
a. III and IV only Limited partnerships provide a form of ownership in which there is undivided interest in equity that does not pay income taxes and passes its profits and losses through to its participants. There are no rules that limit the number of general partners or limited partners in a limited partnership however, there must be at least one of each
According to NASAA's Recordkeeping Requirements For Investment Advisers Model Rule, investment advisers must maintain books and records that include which of the following? a.A copy of each advertisement, investment letter and newspaper article that is sent to 2 or more persons b.A copy of all stock certificates owned by clients c.A record of each client s profits and losses d.A record of the names and addresses of recipients of any advertising that is sent to 10 or more persons
a.A copy of each advertisement, investment letter and newspaper article that is sent to 2 or more persons. According to NASAA's Model Rule regarding recordkeeping, an investment adviser must keep a file containing each advertisement, investment letter, newspaper article, or other communication distributed to 2 or more persons. Advisers are not required to keep a copy of client's stock certificates, nor a record of each client s profits and losses. If advertisements are sent to 10 or more persons, the adviser is not required to maintain a record of the names and addresses of the recipients. Under the Investment Advisers Act of 1940, the adviser is required to maintain a copy of any advertising sent to 10 or more persons.
Mammoth Investments is a federal covered investment adviser with offices in 42 states. Which of the following statements concerning the firm's registration is TRUE? a.Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required b.Mammoth must also register as an adviser in each state in which it has an office c.Mammoth must maintain dual federal and state registrations in all states in which it does business d.Mammoth must maintain both federal and state registrations in all states in which it does business with noninstitutional customers
a.Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required. The federal government and the states have divided the responsibility for regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management. If an investment adviser has $110 million or more under management, registration with the SEC as a federal covered adviser is mandatory. Smaller advisers generally register with one or more states. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.)
According to the Uniform Securities Act, sales literature is required to be filed with the Administrator if it relates to: a.Variable annuities b.A transaction that is exempt from registration c.An NYSE-listed stock d.Fixed annuities
a.Variable annuities Sales literature that relates to exempt securities, exempt transactions, and federal covered securities (e.g., an exchange-listed security) is NOT subject to the filing requirements of the USA. In this question, only the sales literature that relates to variable annuities (considered a security under the USA) is subject to filing requirements under the Act. Since fixed annuities (choice d) are not securities, they are not covered under the USA.
The Uniform Securities Act outlines when an investment adviser must obtain its clients' permission before it may assign the clients' contracts. In which of the following circumstances is an investment adviser required to obtain its clients' permission before assigning their contracts? a.When the sole proprietor of an advisory firm decides to take on seven partners, but retains a 30% ownership stake b.When the owner of 80% of an advisory firm pledges his home as collateral for a loan he makes to the firm c.When an owner of 40% of an advisory firm dies d.When an owner of 25% of an advisory firm leaves to start another firm as a sole proprietorship
a.When the sole proprietor of an advisory firm decides to take on seven partners, but retains a 30% ownership stake. Under the Uniform Securities Act, assignment is considered the direct or indirect transfer of an advisory contract by the adviser or the transfer of a controlling block of the investment adviser's outstanding voting securities by a security holder of the advisory firm. If an adviser is a corporation, the acquisition of a controlling block (majority) of the adviser's shares by another entity is considered a change of control which would require client consent. Also, if an adviser is organized as a partnership, the death or resignation of a majority of the partners is considered a change of control and client consent is required. For choice (a), a sole proprietor owns 100% of the business, but then takes on partners which changes 70% of the ownership. For that reason, client consent is required. Choices (c) and (d) each indicate a minority change of ownership and do not constitute assignment. Since choice (b) does not relate to client contracts, there is no assignment.
Ralph has purchased 4.0% TIPS with an original principal amount of $1,000. If the adjusted principal amount is $1,020, how much interest will Ralph receive on his next payment? a. $20.00 b. $20.40 c. $40.00 d. $40.80
b. $20.40
Which of the following securities would likely have the highest beta coefficient? a. An electric utility company's common stock b. A biotechnology company's common stock c. A zero-coupon, 30-year U.S. Treasury bond d. A zero-coupon, 10-year U.S. Treasury bond
b. A biotechnology company's common stock Beta is a measurement of a security's volatility as compared to an index such as the S&P 500 Stock Index. A high beta (greater than one) indicates that a company is more volatile than the benchmark index. Utilities and other defensive industry stocks tend to have low betas.
Which of the following investments would qualify to pass through both income and losses? a. A real estate investment trust b. A hedge fund c. A regulated investment company d. A company that is subject to SEC Section 12 reporting requirements
b. A hedge fund Most hedge funds are structured as limited partnerships and raise capital by selling units or interests in the partnership to investors. A limited partnership is permitted to pass through both income and losses to investors. A REIT and a regulated investment company (for example, a mutual fund) must pass through a minimum percentage (90%) of their income but are NOT permitted to pass through losses. A company that is subject to SEC Section 12 reporting requirements refers to a company that, due to the number of its shareholders and value of its securities outstanding, is required to file reports with the SEC. This type of company would distribute cash dividends to shareholders and would not be permitted to pass through losses
An investor is interested in finding a pass-through investment in which the investors are able to take an active role in the company as members and the company is able to raise an unlimited amount of capital. What investment would meet these requirements? a.A real estate investment trust b.A limited liability company c.A Subchapter S corporation d.A master limited partnership
b. A limited liability company A limited liability company is a pass-through investment that is similar to the structure of a limited partnership. A limited liability company is able to raise an unlimited amount of capital and the capital is provided by members who may take an active role.
Which of the following choices describes a hedge fund? a. An investment trust formed to buy, develop, and manage real estate b. A limited partnership whose primary objective is an absolute positive performance c. A popular subaccount investment option in a variable annuity d. A registered investment company that employs short selling
b. A limited partnership whose primary objective is an absolute positive performance There is no uniform definition of a hedge fund. However, most hedge funds are formed as limited liability companies or limited partnerships, and they typically seek absolute investment performance. This means they set a definite performance goal (such as 8%) instead of measuring their performance against an index
According to the Uniform Securities Act, all the following transactions would be considered exempt, EXCEPT: a. A transaction that is executed by a bona fide pledge that is not intended to evade the USA b. A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board c. A nonissuer transaction of a security that is quoted on Nasdaq d. A transaction executed by a guardian appointed by a state court
b. A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board . A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board would not qualify as an exempt transaction. The OTCBB does not have specific listing criteria, whereas national exchanges such as the NYSE and Nasdaq have minimum standards to which issuers must adhere. All the other choices are specifically defined under the USA as exempt transactions.
Under the Uniform Securities Act, all of the following individuals meet the definition of an agent, EXCEPT: a. A person selling stocks that are listed on the NYSE b. A person advising clients about securities for compensation c. A person effecting securities transactions and not receiving commissions d. A person representing an insurance company in the sale of variable annuities
b. A person advising clients about securities for compensation An agent is an individual who represents a broker-dealer or an issuer in effecting securities transactions. The person in choice (b) is not an agent since she is providing advice and not effecting securities transactions. It is important to note that the type or amount of compensation received is not a factor in determining whether a person is an agent. (
Which of the following descriptions BEST exemplifies using diversification to lower risk in a portfolio? a. A representative buys equity securities in large-cap companies within the same market sector b. A representative buys equity securities in both U.S. and foreign markets c. A representative buys municipal, corporate, and U.S. government bonds d. A representative buys securities issued by federal, state, and local governments
b. A representative buys equity securities in both U.S. and foreign markets Diversification is best exemplified by purchasing investments in both U.S. and foreign markets. While all of the other choices would provide some diversification to a portfolio, buying securities from different countries would protect against the widest variety of risks.
All of the following would be considered an investment adviser representative under the Uniform Securities Act, EXCEPT a(n): a. Portfolio manager for Winners Asset Management Co b. Broker-dealer offering wrap accounts to its clients c. A partner of Winners Asset Management Co. who supervises investment adviser reps d. An accountant who works for Winners Asset Management Co., who provides financial plans for clients
b. Broker-dealer offering wrap accounts to its clients An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the sale of advisory services, or supervises persons engaged in these activities. A broker-dealer offering wrap accounts would be considered an investment adviser, not an investment adviser representative.
Which TWO of the following choices are not considered an asset class? I. Annuities II. Stocks III. Cash IV. The S&P 500 Index V. Real estate a. I and III b. I and IV c. III and V d. II and V
b. I and IV Asset classes include stocks, bonds, cash (money-market instruments), commodities, and real estate, but not annuities or indexes.
An adviser is discussing the possibility of investing in limited partnerships with a client. The client has no experience with limited partnerships. Which of the following points would NOT be considered an advantage of limited partnerships? I. Flow-through of losses and gains to the limited partners II. Continuity of life III. Ease of transferability IV. Tax benefits to individual investors a. I and III only b. II and III only c. I, II, and IV only d. I, II, III, and IV
b. II and III only Limited partnerships are not subject to taxation as with corporations. Limited partnerships pass through gains and losses to the partners who bear the tax liabilities. Unlike corporations, limited partnerships have a predetermined life, which means that at some point they will be dissolved and all monies will be returned to the partners. Limited partnerships typically are illiquid and require prior approval of the general partner before any sales.
Your client has decided that he is ready to make some speculative moves with a small portion of his portfolio. His suitability profile supports this move. Which of the following recommendations could you make to meet his new goal? I. Purchase an asset allocation fund with a growth objective II. Buy a biotechnology fund III. Buy calls and puts IV. Invest in utility stocks a. I and II only b. II and III only c. II, III, and IV only d. I, II, III, and IV
b. II and III only When evaluating choices (I) and (IV), the key point to focus on is the word speculative. Speculation involves a high degree of risk and volatility. Options clearly have both. A biotechnology fund would also fit in this category. Typically, any sort of sector play would be considered speculative. An asset allocation fund with a growth objective is not speculative. Growth and speculation are two different investment objectives. Utility stocks are purchased for their dividends and, therefore, are not considered speculative.
Bryce Dunne is long 300 shares of YYZ, a company specializing in radio broadcasting. Bryce also is long 3 YYZ Aug calls. What is the purpose of this strategy? a. Mitigation of risk b. Speculation c. Protection against a downside move d. Generation of income
b. Speculation Bryce is making a very speculative trade with YYZ stock and YYZ call options. He is extremely bullish on the stock. This is demonstrated by the fact that he purchased both the stock and the call options. If the stock's price appreciates, he will make money on both trades. Conversely, if the stock's price goes down, he will lose money on the stock trade and the call options will expire worthless, which will mean a complete loss of the premiums paid when he purchased them
In a soft-dollar arrangement between an adviser and a broker-dealer, the broker-dealer would be permitted to pay: a. The cost of a coach flight for a portfolio manager to attend a conference b. The cost of a conference concerning the future of the computer software industry c. The cost of computer terminals used to deliver market data services d. A percentage of the salaries of the adviser's internal research staff
b. The cost of a conference concerning the future of the computer software industry An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.
Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation? a. The gain would be taxed as a capital gain at the corporate level and shareholders would receive a tax-free distribution b. The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain c. The gain would be exempt from corporate taxes, but would be taxable to the individual as ordinary income d. The gain would be taxable to both the corporation and individual as a capital gain
b. The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain. A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder's tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder's net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.
Trading in WXYZ has been particularly heavy and the stock's price has been fluctuating wildly. A customer calls her agent and asks for the current price, since she is considering selling her position in WXYZ. The agent has been extremely busy and last saw a price of 44 on the stock 20 minutes ago. The agent tells the customer, "Last price I have for it is 44." The agent then takes another phone call. Which of the following statements is TRUE regarding the price provided by the agent? a. There is nothing wrong with this statement since it is true b. This statement is misleading since the rep did not indicate how old the price was and, in a volatile market, it could now be quite different c. This statement would be considered misleading only if the customer subsequently sold the stock based on the information d. Information about stock prices is not guaranteed and, therefore, customers must interpret this information at their own risk
b. This statement is misleading since the rep did not indicate how old the price was and, in a volatile market, it could now be quite different . When making statements to clients, agents must consider how their words will be interpreted by clients in the context in which they are stated. The customer in this example would naturally assume that the price given is current. If it is not, the agent should make this clear. In a volatile market, a price that is 20 minutes old could be very inaccurate.
David is the owner of a private company and his firm needs to raise capital in order to expand its e-commerce business. David's company will issue debt securities and has decided to avoid hiring an investment bank. Under the USA, in which situation will David's salespersons be exempt from registration as agents? a.If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in two years b.If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in four months c.If the company wants to raise capital and issues debt in minimum denominations of $25,000 that matures in 270 days d.If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in less than one year
b.If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in four months Under the Uniform Securities Act, agent is defined as any individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. However, if an individual represents an issuer in effecting transactions in certain exempt securities or represents an issuer in exempt transactions, the individual is not considered an agent (and need not register). An individual who represents an issuer is not considered an agent if the sale involves short-term debt instruments (i.e., commercial paper). For this provision to apply, the debt securities must have a maximum maturity of nine months, must be issued in minimum denominations of $50,000, and be rated in one of the three highest rating categories of a nationally recognized statistical rating organization (NRSRO
According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning a private placement offering? a.The offer may not be made to more than 10 retail investors in the state during any 12-month period. b.The offer may not be made to more than 35 retail investors in the state during any 12-month period. c.The offer may be made to an unlimited number of institutional investors during any 12-month period. d.Commissions may not be paid if the buyers are non-institutional investors.
b.The offer may not be made to more than 35 retail investors in the state during any 12-month period. Under the Uniform Securities Act, a private placement offering is one that involves no more than 10 retail investors; however, there may be an unlimited number of institutional investors. The offering is considered an exempt transaction if the following conditions are met: • The seller believes that all of the retail (non-institutional) buyers are purchasing for investment purposes only and, • No commission or other remuneration is being paid for soliciting retail (non-institutional) buyers Choice (b) refers to a condition for private placements under Regulation D of the Securities Act of 1933, which is a federal regulation.
An Administrator receives a written notice indicating that an IA has just violated the net capital rule and is currently below the minimum requirement. Which of the following reports would the Administrator demand? I. A current balance sheet II. Contact information for the qualified custodian that handles the clients' funds III. A client ledger IV. A list of all client-owned securities and nonsegregated funds a. I and II only b. I, II, and III only c. I, III, and IV only d. I, II, III, and IV
c. I, III, and IV only According to NASAA rules, if an IA violates the net capital rule, the Administrator may require the adviser to provide its balance sheet, client ledger, and a list of all customer-owned securities and nonsegregated funds. However, the Administrator would not require the qualified custodian's name since that information is already disclosed in the investment adviser's Form ADV.
A wealthy, married couple, who are both in their 40s, have money that they would like to invest. If their objective is long-term growth with minimum tax liability upon liquidation in 25 years, which of the following investments is the most appropriate? a. Municipal bonds b. A variable annuity c. Individual equity securities d. An equity-indexed annuity
c. Individual equity securities Of the given choices, investing in individual equities is likely the most appropriate. If the equities rise in value and are then, years later, are liquidated, the gains will be taxed at the long-term capital gains rate. Historically, the long-term capital gains tax rate is lower than the highest rate at which ordinary income is taxed. Municipal bonds (choice a) provide tax-free income, but they offer limited growth potential. A variable annuity (choice b) and an equity-indexed annuity (choice d) may provide growth potential, but that growth is taxed as ordinary income when it is withdrawn from the annuity.
Frank, Sarah, and Peter are the founders of a broker-dealer that is registered in all 50 states. Frank and Peter are responsible for running the day-to-day sales operation. Sarah has been the CFO for the last two years, but she has no securities or sales supervision responsibilities. The firm has increased in size and Sarah has been offered the opportunity to assist Frank and Peter with the day-to-day sales operations. To take on this added responsibility, Sarah must: a.Do nothing since she was automatically registered as an agent at the time her firm filed its initial registration application. b.Do nothing since her firm is federally covered and she is exempt from registration c.Register as an agent since she will be involved in sales activities d.Register as an agent because she will be providing investment advice
c.Register as an agent since she will be involved in sales activities When the broker-dealer was originally formed, Frank and Peter automatically registered as agents since their responsibilities include for running the firm's day-to-day sales operations. However, since Sarah was not initially involved in the securities aspect of the business, she was not automatically registered as an agent. If Sarah takes on the added responsibility of sales operations, she is required to register as an agent. Choices (b) and (d) make reference to concepts that are associated with investment advisory activities.
A brokerage client buys stock worth $40,000 and sells it three years later for $60,000. If his long-term capital gains rate is 10%, what is his after-tax total return? a. 30% b. 33% c. 40% d. 45%
d. 45% Calculating after-tax total return starts with determining the capital gain, which is $20,000 ($60,000 - $40,000). If capital gains are taxed at a rate of 10%, then the tax is $2,000 ($20,000 x 10%). The after-tax gain is $18,000 ($20,000 - $2,000). Therefore, the after-tax total return is 45% ($18,000 after-tax gain / $40,000 original investment).
Which of the following transactions requires the registration of securities according to the Uniform Securities Act? a. An unsolicited transaction of an exchange-traded stock where the customer normally purchases only investment-grade bonds b. An offer to sell out-of-state municipal bonds to a bank c. An agent of a broker-dealer selling a private placement to five retail investors d. A purchase of securities offered for sale in an out-of-state newspaper
d. A purchase of securities offered for sale in an out-of-state newspaper Although an offer to sell securities appearing in a newspaper published outside a state is not considered an offer in that state, securities sold in a state are subject to registration. Choice (a) may not be suitable for the investor, but an unsolicited transaction in the secondary market is an exempt transaction. A private placement to a maximum of 10 retail investors within a state is also an exempt transaction
A client is primarily concerned with having enough money to retire in 20 years. All of the following are considerations when making recommendations to the client, EXCEPT: a.The approximate inflation rate b.The current amount of available funds c.The expected return on the client's investments d.Current interest rates
d. Current interest rates Of the available choices, current interest rates is not a factor when making recommendations to a client with a long-term investment objective. Important considerations include the current amount of available funds and the expected return on the client's investments. Additionally, the approximate rate of inflation is a factor in determining how much the client will need based on the cost of living
When an investor buys a call option, she is considered: I. To have a leveraged position II. To be protected if she is currently short the underlying stock III. To have limited risk IV. To be bullish a. I and II only b. I, II, and IV only c. I, III, and IV only d. I, II, III, and IV
d. I, II, III, and IV When an investor buys a call option (derivative), she has a leveraged position since, for a relatively low cost, the contract allows her to buy 100 shares of stock at a specific price. This ability to buy stock at a preset price makes her bullish (i.e., she wants the stock to rise). If the investor has a short stock position, the purchase of a call option provides her with protection. The protection comes from the fact that she may exercise her call option and use the stock that she receives to cover the short stock position. Since buyers of options cannot lose more than the cost of the option, they have limited liability
Which of the following are characteristics of zero-coupon bonds? I. They can be purchased at a deep discount II. There is no reinvestment risk III.Tax consequences occur only at maturity IV. The investor is taxed annually a.I and III only b.I and II only c.I, II, and III only d.I, II, and IV only
d. I, II, and IV only Zero-coupon bonds are issued at a deep discount and mature at par value; therefore, they require a minimal capital outlay. Also, due to the fact that zeros do not pay interest on a semiannual basis, they have no reinvestment risk (there is nothing to reinvest). For tax purposes, the IRS requires zero coupon investors to accrete (upwardly adjust) their basis. The result of accretion is that each year a portion of the discount is reported as taxable interest income.
Which of the following features are characteristics of variable life insurance policies? I. Minimum guaranteed death benefits II. Guaranteed separate accounts III. Exposure of policyholders to investment risk IV. Nonguaranteed surrender value a. I and III only b. II and III only c. III and IV only d. I, III, and IV only
d. I, III, and IV only Variable life policies have a separate account into which premiums are invested. The performance of the separate account is not guaranteed. A variable life policy will pay the beneficiary the greater of the minimum guaranteed death benefit or the value of the separate account.
Which of the following risks would have the greatest impact on a U.S. Treasury zero-coupon bond with an 18-year maturity? a. Liquidity risk b. Market risk c. Reinvestment risk d. Inflationary risk
d. Inflationary risk Since a bond's return may not keep pace with the rate of inflation, Treasury securities with long maturities are subject to inflationary risk. This may cause the real rate of return to be less than anticipated over a long period. The Treasury market is very liquid and stable. Zero-coupon bonds protect investors from reinvestment risk, since they do not provide interest payments. Reinvestment risk is defined as the risk that a bond's future coupons will not be reinvested at the same interest rate as when the bond was initially purchased.
While meeting with a client, an investment adviser representative (IAR) is asked if she is registered. The client also questions the IAR as to whether being registered indicates that she is qualified to be an IAR. According to the Uniform Securities Act, how should the IAR respond? a. The IAR should tell the client that only qualified representatives may use the IAR designation b. The IAR should tell the client that if she was unqualified the state would have revoked her registration c. The IAR should tell the client that she will always act in an ethical and honest manner because she is an IAR d. The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR
d. The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR. Being registered does not signify that an individual has all of the necessary skills to be an effective agent or investment adviser representative (IAR). The Administrator has no qualification requirements and being registered does not guarantee that an individual will act ethically.
Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution? a.The distribution is taxed as a short-term capital gain since he has owned the shares for less than one year b.The distribution is not taxed since it represents a return of the investor's capital c.The capital gain distribution is taxed in the same manner as dividend distributions d.The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year
d. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year. When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT the shareholder's holding period. The question indicates that the distribution was a long-term capital gain; therefore, it is both reported and taxed as a long-term capital gain.
A client of an investment adviser is willing to speculate in order to achieve higher-than-average returns on his portfolio. The adviser wants to enter into transactions that are not permitted under the Investment Advisers Act of 1940. This is acceptable: a. Provided the transactions are approved in writing by the client prior to being entered b. Provided the transactions are disclosed to the client in writing prior to the settlement date c. Provided the securities and/or transactions are exempt from registration d. Under no circumstances
d. Under no circumstances Any investment advisory contract that attempts to bind any person to transactions that are not permitted under the Act is null and void. Even if the client signs the contract, and the transactions are disclosed, the contract is void.
What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance? a. There are no fees assessed against a universal life insurance policy b. Universal life insurance dividends may be reinvested to buy more insurance coverage c. Universal life insurance policies allow policyholders to lock in short-term rates of return d. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise
d. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease.
Paul works as a registered representative for Broker-Dealer X and also works as a financial planner under Broker-Dealer X's control. Paul's only source of compensation are commissions for trades that are executed. According to the Investment Advisers Act: a.Paul must be registered as an investment adviser b.Broker-Dealer X must be registered as an investment adviser c.Paul does not need to be registered as an investment adviser d.Neither Paul nor Broker-Dealer X are required to registration as an investment adviser
d.Neither Paul nor Broker-Dealer X are required to registration as an investment adviser According to SEC Release 1092, broker-dealers are not required to register as investment advisers if their advisory service is solely incidental to the conduct of their business as broker-dealers and if they do not receive any special compensation for their advice. This exclusion is also available to a registered representative who acts as a financial planner under the knowledge and control of his broker-dealer.
An adviser who manages $140 million in assets is recommending the sale of Nasdaq-listed securities to a client. Which of the following statements is TRUE? a.The adviser is a federal covered adviser and subject to registration with the state Administrator, while the securities are nonexempt and subject to registration with the state Administrator b.The adviser is a federal covered adviser and required to file a notice filing with the SEC, while the securities are exempt from registration with the SEC c.The adviser is a non-federal covered adviser and is exempt from SEC registration, while the securities are federal covered and exempt from registration with the SEC d.The adviser is a federal covered adviser and exempt from state registration, and the securities are federal covered securities and exempt from state registration
d.The adviser is a federal covered adviser and exempt from state registration, and the securities are federal covered securities and exempt from state registration. Advisers who manage $110 million or more in assets must register with the SEC, not the state Administrator. Those registered with the SEC are federal covered advisers and exempt from state registration, though subject to Notice Filing. Securities listed on an exchange or Nasdaq, are federal covered securities and are exempt from state registration.
According to the Uniform Securities Act, is an agent of a broker-dealer required to provide its clients with disclosure of a material public fact about an issuer? a.No, since the fact has already been made public and is in the news b.No, since the agent's broker-dealer must check the fact first and preapprove any disclosure c.Yes, firms must provide clients with a written disclosure of all facts for decision-making purposes d.Yes, as the disclosure of material facts is necessary for the client to make an informed investment decision, although the information may be public
d.Yes, as the disclosure of material facts is necessary for the client to make an informed investment decision, although the information may be public. Material facts are the facts that investors need in order to make informed investment decisions. Agents should make a good faith effort to fully and fairly disclose all material facts during sales presentations. While it may not be possible to disclose every fact, omitting a material fact in order to make an investment appear more attractive is a violation.
