Simulated 6
Under the UTMA, which of the following statements is not true? A) An UTMA account may have only one custodian for only one minor. B) The maximum amount of money an adult can give to a minor in any one year is $17,000 C) Only an adult can make a gift to a minor. D) Once a gift is given to a minor, it cannot be reclaimed.
B) The maximum amount of money an adult can give to a minor in any one year is $17,000 Any adult can give a gift to a minor in a custodial account. There is no limitation on the size of the gift. However, any gift in excess of $17,000 (or such higher number as indexing provides for) will possibly subject the donor to a gift tax liability.
An Administrator may suspend the registration of a broker-dealer if the broker-dealer has: 1. liabilities that exceed assets. 2. an officer who has been recently convicted of committing fraud. 3. terminated all agents without cause. A) II and III. B) I, II and III. C) I and III. D) I and II.
D) I and II. If an investigation determines that a firm is insolvent or an officer or partner has been convicted of a felony, the Administrator may suspend or revoke the firm's registration. Termination of agents is a decision in the hands of the employer.
In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have A) FDIC insurance coverage. B) a place in the portfolio of conservative investors. C) moderate liquidity. D) some form of embedded derivatives.
D) some form of embedded derivatives. It is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor.
An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,020.25. B) $102.25. C) $1,027.81. D) $1,022.50.
C) $1,027.81. Treasury notes are quoted in 32nds, where each 32nd equals $0.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81, bringing the total to $1,027.81.
Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except A) changes to the fee schedule may be shown on the firm's website. B) it must be up-to-date. C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. D) changes to the fee schedule must be announced in advance.
C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date, and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees—the firm's website is one of them.
What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) The return cannot be determined without knowing current interest rates B) 5.00% C) 5.26% plus the implied coupon rate D) 5.26%
D) 5.26% To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond.
Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? 1. There are a limited number of outstanding shares. 2. They are traded on registered stock exchanges. 3. They trade at prices that are not dependent upon but are close to their net asset value. 4. Investors pay commissions to purchase and liquidate their positions. A) I and IV B) I and III C) II and III D) II and IV
D) II and IV Both exchange-traded funds (ETFs) and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from the NAV.
An agent is registered in New York and Vermont. While working in his New York office, he places a call to the cell phone of one of his New York clients and learns that the client happens to be on vacation in Ohio. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Indiana. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, Administrators of which states do not have jurisdiction? A) Indiana and Illinois B) Ohio and Indiana C) Illinois and Ohio D) New York and Indiana
C) Illinois and Ohio The Administrator has jurisdiction from the state in which the offer originated (New York) and was accepted (Indiana). Mailing of the certificate is of no consequence. Ohio does not have jurisdiction because the client was merely traveling and the call was directed to the New York number. When the Uniform Securities Act (USA) was written in 1956, obviously, there were no cell phones, but there was a situation similar to this. The USA addresses the issue of forwarded mail and rules that the original address is what counts, not the state to which the mail is forwarded. NASAA applies that logic when an agent contacts a client on a cell phone. It is the home location of the owner of the phone that counts, not where the call is received. That changes when the client actively participates in the transaction from another state—in this case, Indiana.
An individual has served with the local police force for 15 years. The plan is to remain on the force for another five years to be able to earn a nice pension benefit. Instead of simply retiring, the individual wishes to pursue a B.A. in accounting and then work in corporate tax. The individual approaches you for suggestions on the best way to save for the upcoming college expenses. You would probably suggest opening A) an UTMA account. B) a Coverdell ESA. C) a Section 529 plan. D) an options account.
C) a Section 529 plan. Because the Section 529 plan has no age limit, it would be the most appropriate recommendation. Contributions to an ESA end at the 18th birthday of the beneficiary, and UTMA accounts end at the age of majority or an older age specified by the state (generally not older than 21). Nothing in the question indicates that the individual is a suitable candidate for options, and that is not the type of strategy one would employ for targeted savings, such as educational expenses.
In general, a broker-dealer will disclose any changes to its fee schedule A) when requested by the client. B) within 30 days following the change. C) by notifying clients of the change in advance. D) to the Administrator and then to the clients.
C) by notifying clients of the change in advance. Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator.
The formula for calculating working capital is A) total assets − total liabilities B) current assets − inventory C) current assets − current liabilities D) only the cash and equivalents − current liabilities
C) current assets − current liabilities Current means cash or assets that would be exchanged for cash in the ordinary course of business in the current year. In the case of liabilities, current means maturing or falling due within the current year. The net of current assets less the current liabilities implies the company has cash availability of the remainder with which to work. Working capital uses all of the current assets; cash and equivalents leaves out the inventory.
An agent wants to sell a highly valuable, unregistered, nonexempt security to a customer. The agent has the client sign a waiver indicating that the security is not registered, so the security may be sold legally per the Uniform Securities Act. This sale of the security is A) perfectly legal with disclosure and waiver on registration. B) appropriate, provided the client does not request a rescission of the sale. C) illegal because provisions of the Uniform Securities Act cannot be waived. D) perfectly legal because unregistered, nonexempt securities need not be registered.
C) illegal because provisions of the Uniform Securities Act cannot be waived. The agent's sale of the security is illegal because provisions of the Uniform Securities Act cannot be waived.
Jane and Malka are discussing the possible form of efficient markets. Jane states that, "A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data." Malka retorts that she is not sure of Jane's thoughts and says, "If markets are weak form efficient, we cannot consistently outperform the market based on technical analysis." A) Both Jane and Malka are correct. B) Jane is correct, but Malka is incorrect. C) Both are incorrect. D) Malka is correct, but Jane is incorrect.
A) Both Jane and Malka are correct. A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data. Therefore, successive future share prices should move independently of this past data in a random fashion, thereby nullifying any perceived informational advantage from adopting technical analysis to analyze trends.
Common stock of KAPCO, Inc., trades on the NYSE. Which of the following securities would not be exempt from registration under the Uniform Securities Act? A) Limited partnership interests in a shopping center with KAPCO, Inc., as the general partner B) KAPCO, Inc., subordinated debentures, traded on the OTC Pink Market C) Stock rights to acquire KAPCO common stock D) KAPCO noncumulative preferred stock
A) Limited partnership interests in a shopping center with KAPCO, Inc., as the general partner When an issuer's stock is listed on the NYSE, any security it issues that is equal to or senior to that stock is a federal covered security and exempt from registration with any state. Remember that any debenture is senior to the issuer's stock. When that issuer acts as a general partner in a real estate offering, it is not its security that is being sold, so the exemption does not apply.
Which of the following is not included in Form ADV Part 2A? A) States in which the investment adviser is registered or intends to register B) Types of investments made by the adviser C) A description of how the adviser is compensated D) Investment policy of the adviser
A) States in which the investment adviser is registered or intends to register Form ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered are not contained in Form ADV Part 2A. If the investment adviser is registering with the SEC, on Part 1A, it lists only the largest five offices (in terms of numbers of employees). If state-registered, it lists each state it will be registering in or is already registered in.
Which of the following best describes net present value? A) The difference between the sum of the discounted cash flows that are expected from an investment and its current market price B) The discount rate that results in a return of zero for a series of future cash flows C) The amount of money that must be invested today at some specified rate of return to equal a targeted value in a specified number of years D) It is the true interest yield expected from an investment expressed as a percentage
A) The difference between the sum of the discounted cash flows that are expected from an investment and its current market price Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.
Under the Uniform Securities Act, a person who is in the business of providing advice on trading futures contracts and advising clients on securities issued or guaranteed by the U.S. government is A) not required to be a registered investment adviser in the state. B) required to be a registered investment adviser representative in the state. C) required to be a registered agent in the state. D) required to be a registered investment adviser in the state.
A) not required to be a registered investment adviser in the state. The Uniform Securities Act excludes futures contracts from the definition of security. To be defined as an investment adviser, the advice must be on securities. That brings us to the U.S. government securities. A person whose securities advice is limited to those issued or guaranteed by the U.S. government is included in the definition of a federal covered adviser. Federal covered advisers are included in the list of persons who are not deemed to be investment advisers under the USA. Therefore, this person is not considered an investment adviser in a state and is not required to register as one.
A federal covered investment adviser (IA) has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be disclosed A) promptly only to those customers who will be affected by the change through an amended brochure. B) promptly to all customers by amending the brochure. C) in the summary of material changes in the annual updating amendment to the SEC. D) promptly to the Administrator of the state where the IA maintains its principal office.
A) promptly only to those customers who will be affected by the change through an amended brochure. Because this will only affect new clients, the brochure (or Part 2A of Form ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.
A customer of an investment adviser (IA) inadvertently mails some stock certificates to the IA. The IA does not maintain custody of customer assets. If the certificates were received on a Monday, NASAA rules would require that the certificates be A) returned no later than Thursday. B) returned the same day. C) forwarded to the broker-dealer promptly. D) returned no later than Tuesday.
A) returned no later than Thursday. NASAA's custody rules require that an investment adviser who does not maintain custody return certificates that are mistakenly sent within three business days. When it comes to checks, it depends on how the check is drawn. If made out to the investment adviser, it must be returned; if made out to a third party (usually the executing broker-dealer), it must be forwarded to that third party. In either case, the time limit is three business days (might be shown as 72 hours on the exam).
What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) Instruct the client to send the certificate to the transfer agent because you cannot accept it. B) Accept the certificate and give the customer a receipt. C) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000. D) Accept the certificate and send the customer a receipt within 24 hours of the delivery.
B) Accept the certificate and give the customer a receipt. When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers.
Which of the following statements regarding discretionary accounts is true? A) The rules regarding churning of accounts do not apply to discretionary accounts. B) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary. C) A branch manager must approve discretionary orders before entry. D) A principal must approve discretionary orders before entry.
B) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent An order is discretionary only if an agent selects the size of the trade, the security, or whether to buy or sell. Selecting only price and/or time does not constitute discretion. Churning rules apply to discretionary accounts, and a principal must approve order tickets after the trades, not before.
One of your clients has recently turned 73 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, 1. the RMD from each IRA is computed and may be made from one or both of them 2. the RMD from each IRA is computed and must be paid from that IRA 3. both 401(k)s are combined to compute the required distribution, which may be made from one or both of them 4. the RMD from each 401(k) is computed and must be paid from that 401(k) A) II and III B) I and IV C) I and III D) II and IV
B) I and IV For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has an RMD that can only be paid from that account.
Which of the following transactions are prohibited? 1. Borrowing money or securities from a high-net-worth customer 2. Selling speculative or hot issues to a retired couple of modest means on a fixed income 3. Failing to follow a customer's orders to prevent investment in a security not adequately covered by well-known securities analysts 4. Backdating confirmations for the benefit of the client's tax reporting A) I, II, and III B) I, II, III, and IV C) I and II D) II and III
B) I, II, III, and IV An agent may not borrow money or securities from a customer unless that customer is a bank or broker-dealer in the business of lending money and/or securities. Selling speculative or hot issues to a retired couple of modest means is an unsuitable transaction because it is not consistent with the client's objectives. An agent must follow legal orders of the customer, even if the agent believes the order is unwise. An agent may not backdate confirmations for the benefit of the client.
Among the differences between C corporations and S corporations is 1. the liability assumed by the shareholders 2. the number of allowable shareholders 3. the tax treatment of the corporation's earnings 4. residency requirements of shareholders A) I, II, III, and IV B) II, III, and IV C) I and IV D) II and III
B) II, III, and IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.
Angelo lives and votes in State W. He winters in State C, splitting his time 60/40 between the two states. Angelo has a brokerage account with Sunset Investment Securities (SIS) and trades with an agent housed in SIS's State W office. SIS is also registered in States M and I but, having no place of business there, is not registered in State C. In order for Angelo's agent to handle the account, registration as an agent is required A) in State C. B) in State W. C) solely with FINRA. D) in State W and State C.
B) in State W. By not having a place of business in State C and only having a client who is temporarily in the state, SIS (and those functioning as its agents) qualifies for the snowbird exemption.
First Growth Securities, Inc., a member of the Financial Industry Regulatory Authority (FINRA), has its main office in Illinois and is therefore A) a registered investment adviser licensed to sell securities in Illinois. B) required to register as a broker-dealer in the state of Illinois. C) registered by FINRA to sell securities in Illinois. D) automatically registered as a securities agent in Illinois.
B) required to register as a broker-dealer in the state of Illinois. Securities firms that are members of FINRA must register as broker-dealers in the states in which they conduct business. Under the USA, broker-dealers are firms engaged in the business of effecting security transactions in customer or proprietary accounts. A broker-dealer is not a registered investment adviser, although many broker-dealers own separate legal subsidiaries that are investment advisers. FINRA does not license its members to conduct business in the states; the state securities licensing agent is the state securities Administrator. Also, a broker-dealer is not an agent; an agent is a person who is employed by a broker-dealer to conduct securities transactions as a representative of the broker-dealer.
A client is interested in investing in a mutual fund that will provide current income without the risk of large swings in the portfolio's value. The client is in a high-income tax bracket and has a moderate risk tolerance. Which of the following funds is most appropriate for this client? A) Money market fund B) High-yield bond fund C) Intermediate-term municipal bond fund D) Long-term municipal bond fund
C) Intermediate-term municipal bond fund When the question states a high-income tax bracket, the answer will almost always be municipal bonds. An intermediate-term municipal bond fund will experience less price fluctuations when interest rates change than would a long-term municipal bond fund due to its shorter duration. Even if the high-yield bond fund might produce a greater yield after taxes, it would not be suitable for an investor with a moderate risk tolerance. Money market funds will provide safety from large swings, but even if it is a municipal money market fund where the income would be tax-exempt, the current income would be too low to be attractive to this investor.
Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax? A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 B) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000 C) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 D) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000
C) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 These are the current numbers used by the IRS to determine if Social Security benefits are taxable. It is interesting that the computation of provisional or combined income indirectly can cause tax-exempt interest to become taxable. Once the couple's income under this computation exceeds $44,000, 85% of it is taxable. If the question dealt with a single person, the limit would be $25,000 rather than $32,000.
