66-Final 2
Annual audited reports are required to be sent by investment advisers to their clients if the adviser: I holds customer fundsII has discretionary control under a full power of attorney over customer accountsIII has solicited the customer for advisory businessIV has a conflict of interest that has been disclosed to the customer A. I and II B. III and IV C. I, II, III D. I, II, III, IV
The best answer is A. If an investment adviser takes custody of customer funds or securities, it must be audited annually and provide a copy of the audit opinion to its customers. The definition of "custody" also includes "any arrangement, including a general power of attorney under which the adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian." Under this definition, an adviser that has discretion under a full power of attorney (which allows withdrawal of funds) would come under the custody rule requirements. Customers who are solicited for advisory business must be provided with a copy of the "brochure" (Form ADV Part 2A), not an audited financial statement of the adviser. All material adviser conflicts of interest must also be disclosed in Form ADV Part 2A. question # 1-3-255-4Uniform Securities Act: Business Practices: Advisory Contract and Anti-Fraud Rules: Custody of Client Funds: Annual Surprise Audit Results Filing with AdministratorCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved
Under the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain all of the following information EXCEPT: A. name of market where trade was executed B. person who placed the order C. name of account for which order was enteredD. person connected with the Investment Adviser who recommended the transaction to the client
The best answer is A. Order ticket information required for investment advisers is different than that required for broker-dealers. The IA writes an order and sends it to a broker-dealer or bank for execution. The IA must keep a record of the order as it was sent; the IA does not keep the record of the actual execution of the order - this is the responsibility of the executing broker-dealer. The record must contain the terms and conditions of the order; name of the person at the IA who recommended the transaction; name of the person who placed the order; date of order entry; name of account for which order was entered; name of broker-dealer or bank to which the order was sent for execution; and whether the order was discretionary.
Your client of many years is age 65 and has just been diagnosed with a short-term terminal illness. He is well-off and has 2 adult children, ages 30 and 35. His investment portfolio is overweighted in small dollar low cost stocks. You should talk to the client about: A. gifting the low cost basis stock to the adult children B. selling the low cost basis stock immediately C. rebalancing the portfolio to reduce the overweighting of small dollar stocks D. selling the low cost basis stock and investing the proceeds in Treasury securities
The best answer is A. We would actually talk to the client about whether his or her affairs were in order (Is there a will? Where are the life insurance policies (if any)? Who is the executor? etc.) - however - that's not a choice! Based on the limited information given, selling the stock is not a great choice, because tax is due on any capital gains. Rebalancing the portfolio makes sense, but to do so requires selling the low cost basis stock and paying capital gains tax. The only choice that does not result in an immediate tax bill is Choice A - if the low cost basis securities are gifted to the kids, they transfer at the donor's cost basis and holding period and no tax is due on the appreciation until the kids sell them- which could be years in the future. But, the IRS has a rule about a "gift made in anticipation of death" - where it "claws back" that gift and includes it in the taxable estate (for gifts given in the 3 years prior to death). So, what will happen if the stock is given as a gift "in anticipation of death" is that it will be included in the deceased customer's estate and will be valued at fair market value in the estate. As long as the estate is under the $11,400,000 exclusion (in 2019), no estate tax is due. As an inheritance, the shares go to the adult children at a stepped-up cost basis equal to fair market value (so the kids do not have to pay tax on the appreciation to date) and any gain or loss when those shares are sold by the adult children would be long-term.
The risk adjusted rate of return of an investment is most closely correlated to the investment's: A. alpha coefficient B. beta coefficient C. delta coefficient D. gamma coefficient
The best answer is A."Alpha" measures the portion of an investment's return arising from "stock specific" risk - that is, the portion of the return that is not variable with the market as a whole. It takes the risk level assumed by that investment for the return achieved and compares it to the benchmark index return, which is "beta-adjusted" to the same risk level. If the portfolio manager achieved an excess return, this is a "positive" alpha and the portfolio manager added value. If the portfolio achieved a lower return, this is a "negative alpha" and the portfolio manager produced an inferior return as compared to the beta-adjusted benchmark return.
An investor in a limited partnership generating passive losses can offset these against: A. income generated from direct investments in real estate B. dividends received from blue chip corporationsC. capital gains generated from the sale of partnership units D. income generated from investments in municipal bonds
The best answer is A.Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests. Note that any capital gain on the sale of a partnership unit is "portfolio income;" not passive income.
A client of an investment adviser brings his father to a consultation with his investment adviser representative to discuss investment alternatives for the father. The meeting is concluded. Two weeks later, the parent telephones the investment adviser representative, inquiring about the tax status of the client. The investment adviser representative should: A. refuse to disclose any information about the client B. disclose the requested information but communicate the father's request and the response given in a written communication to the client C. disclose the requested information but communicate the father's request and the response given to the investment adviser D. disclose the information
The best answer is A.Customer account privacy rules require that customer information not be disclosed to others unless the customer so authorizes. It makes no difference that the person requesting the information is the father of the customer. In order to give out the information to the father, the customer must approve.
Under the Uniform Securities Act, all of the following are allowed forms of investment adviser compensation, provided it is disclosed to customers, EXCEPT: A. a flat fee assessed only if the portfolio increases in value B. an hourly rate which includes the time it takes to get to the client's office and back C. a varying fee based upon a fixed percentage of assets under management D. a flat fee per year regardless of the portfolio size
The best answer is A.Fees based upon a percentage of assets under management and flat fees (including hourly and annual fees) are permitted as long as the details are fully disclosed to customers. Performance fees are prohibited.
If a State-registered investment adviser accepts $500 or more of advisory fees, 6 months or more in advance of rendering services: A. it is considered to have taken custody of client funds B. it is considered to have discretion over client accounts C. it has committed a fraudulent and unethical act D. it must give the customer the right to a full refund within 30 days of contract signing
The best answer is A.If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers). When a customer signs an advisory contract at the same time as receiving the brochure, the customer is given 5 days to rescind the deal - not 30 days.
To open a new account for a non-revocable trust, which statement is true? A. The tax identification number of the trust must be obtained B. The tax identification number of the trustee must be obtained C. The tax identification of the trust beneficiary must be obtained D. There is no requirement to obtain a tax identification number when opening a trust account
The best answer is A.Non-revocable trusts are legal entities that are taxed under the Internal Revenue Code, thus they have their own tax identification numbers.
Two young professionals each make $50,000 per year. They are getting married and meet with an Investment Adviser Representative for advice about how their tax status will change once they "tie the knot." The IAR should inform them that they will likely: A. pay higher taxes B. pay lower taxes C. reduce future estate taxes D. increase future estate taxes
The best answer is A.The "marriage penalty" is a term that is often used to describe the situation where 2 people earning about the same income get married. Under the tax code, they wind up paying more in tax than when they were unmarried and filing separately. This occurs because tax rates increase as reported income increases (a progressive tax structure).
All of the following are defined as investment advisers who have been compensated under SEC Release IA-1092 EXCEPT a(n): A. estate planner receives a fee for setting up an investment trust for a client B. financial planner who receives a fee for providing a master financial plan without rendering specific investment advice C. insurance agent who receives a commission for selling life insurance that was part of an overall financial plan for which there was no charge to the clientD. investment newsletter that charges a subscription fee for reports issued on specific securities
The best answer is A.The SEC views subscription investment newsletters as "investment advisers" that must register with the SEC. It does not view these as "general circulation" media, such as financial magazines, that are excluded from the definition. The insurance agent that prepares a no-fee plan, but who takes commissions on recommended insurance purchases arising from that plan, is "compensated" by those commissions and comes under the definition of an "investment adviser." Creators of master financial plans that do not render specific investment advice also come under the SEC's interpretation of an "investment adviser." An estate planner who charges a fee for setting up a trust is not charging for "investment advice" and does not come under the definition of an "investment adviser."
An elderly customer has a stroke and is hospitalized, where he falls into a coma. The customer's adult son calls the agent and tells him that he wants to sell some securities out of his father's account to pay for the ongoing hospital bills. The representative should: A. do nothing B. go to the hospital and get the father's signed permission to sell the securities C. follow the son's instructions but remit the proceeds of the sale directly to the hospital to pay the medical bills D. follow the son's instructions as given
The best answer is A.The customer is in a coma and cannot give directions over the account. The question does not mention whether the son has a signed durable power of attorney granted by the father, so we cannot assume that this is the case. The agent can do nothing. Note that if the agent had a signed durable power of attorney on file from the customer giving a power of attorney to the son, then the agent would have been able to follow the son's instructions.
A customer wishes to make an investment that provides liquidity, marketability and current income. The BEST recommendation is: A. Treasury Note B. Bank CDC. Preferred Stock D. Growth stock
The best answer is A.This customer is looking for current income, so growth stocks are inappropriate. This customer is looking for ready marketability and CDs are not very marketable - they are typically held to maturity. Both preferred stock and Treasury notes provide current income, but Treasuries are more marketable and more liquid. This is the best of the choices offered.
To register an issue by filing, the issuer must be: I in business for the past 3 yearsII profitable for 2 of the past 3 yearsIII in business for the past 5 yearsIV profitable for 2 of the past 5 years A. I and II B. I and IV C. II and III D. III and IV
The best answer is A.To qualify for registration by filing, an issuer must have been in business continuously for the past 3 years, and must have net earnings for 2 of the past 3 years.
Which statements are TRUE about the use of testimonials in advertising? I Testimonials are permitted in broker-dealer advertisingII Testimonials are prohibited in broker-dealer advertisingIII Testimonials are permitted in investment adviser advertisingIV Testimonials are prohibited in investment adviser advertising A. I and IIIB. I and IV C. II and III D. II and IV
The best answer is B. Broker-dealers are permitted to use testimonials in their advertising. If they are used, it must be disclosed if the maker of the testimonial was paid; and if the maker of the testimonial is presented as an "expert," the maker's qualifications must be stated. Regarding testimonials by investment advisers in advertising, the Investment Advisers Act of 1940 prohibits their use- period. Because of federal supremacy, this prohibition applies at the State level.
An investor has a long-term investment time horizon, no liquidity needs and is very risk averse. Your main concern when making a recommendation to this client is: A. preservation of capitalB. safety of principal C. continuing income D. adequate yield
The best answer is B. This client has no liquidity needs, so Choices C and D - continuing income and adequate yield, are not concerns. So it comes down to whether the main concern is preservation of capital or safety of principal. Preservation of capital is a concern for client who has no buffer if investment values decline. Such a client cannot afford to lose any money and should only be recommended CDs and money market funds as an investment. Because this client has "no liquidity needs," he or she is not in this situation. Safety of principal is the better answer as a "concern." This type of client doesn't want his or her principal put at risk - he or she is just averse to taking on risk, but can afford to do so. Such a client could be recommended CDs, money market funds, short term bonds and laddered bond portfolios.
An application to register securities may be filed by all of the following EXCEPT a(n): A. Broker-DealerB. Investment Adviser C. IssuerD. Person on whose behalf the offering is to be made
The best answer is B.Applications to register a security in a State cannot be filed by agents; nor can they be filed by investment advisers. They may only be filed by the issuer; or a broker-dealer acting for an issuer; or the person on whose behalf the offering is being made (for example, an officer of a company effecting a secondary distribution of a large block of shares that he or she holds can file a registration application).
Which of the following statements is (are) TRUE about registration as an agent for a broker-dealer? I An unregistered agent can solicit business in a State once the agent's broker-dealer has been registered in that StateII A registered agent can only sell securities that are registered in that State or that are exempt from registrationIII If an agent is not registered in a State, the agent may sell exempt securities in that State A. I onlyB. II only C. II and III D. I, II, III
The best answer is B.As an agent, one cannot solicit business in a State unless both the agent and the broker-dealer are registered in the State. This is true, even if the agent wishes to sell exempt securities - the agent must still be registered, though the security is not. Thus, Choices I and III are incorrect. Choice II is true - an agent is only permitted to sell securities that are registered in a State; or that are exempt from registration. It is prohibited for an agent to sell unregistered non-exempt securities.
Adding an asset class of foreign securities to a portfolio's structure: A. increases riskB. decreases risk C. has no effect on risk D. is a prohibited practice
The best answer is B.Diversification across differing asset classes and investment vehicles, including using foreign securities, reduces risk of a portfolio.
Duration is a measure of a bond's: A. income yieldB. price volatility C. credit quality D. risk of early redemption
The best answer is B.Duration is a measure of bond price volatility. Bonds with low coupons have large duration numbers; as do bonds with long maturities. These are the bonds that exhibit the greatest price volatility in response to market interest rate movements.
A bank in a State is making an offering of its own securities, which are exempt, to the public. Which of the following would NOT be required to be registered as an agent in the State? A. An employee of a broker-dealer who is offering the securities to the publicB. An employee of the bank who is offering the securities to the publicC. An employee of a broker-dealer who is offering the securities only to institutional investors D. All of the choices above are not required to be registered
The best answer is B.Even though the securities are exempt, an employee of a broker-dealer that offers the securities to the public must be registered in the State. An employee of an issuer (as opposed to an employee of a broker-dealer) is exempt from registration if the employee is selling specified exempt securities, which include bank securities. As illustrations for this exclusion, consider the following:An individual who represents Wells Fargo Bank (the issuer), selling certificates of deposit (an exempt issue) to the public, is not required to be State registered.An individual who represents Cowen and Co. (a broker-dealer), selling commercial paper to the public (an exempt issue), must be registered in the State (unless another exemption is available).
A principal difference between a forward contract and a futures contract is that: A. futures contracts may not be offset without permissionB. forward contracts may not be offset without permission C. short positions cannot be taken with a futures contract D. short positions cannot be taken with a forward contract
The best answer is B.Futures contracts are negotiable - they trade in the market and can be offset at any time by doing a closing trade. In contrast, forward contracts are custom contracts between buyer and seller that do not trade. They can only be closed (offset) if both parties agree. Any contract has 2 parties - the buyer (long) and seller (short). Thus, parties to both futures contracts and forward contracts can take either long or short positions.
A Registered Investment Adviser that is formed as a partnership has been in business for 15 years. They decide to merge with another investment adviser, in which they will have a 50% ownership interest. The RIA must: A. pay a new filing fee to the StateB. have its existing clients sign an acknowledgment of the change of ownership C. liquidate its customer accounts and complete a new account application for each customer D. notify its customers of the change
The best answer is B.If the adviser is a partnership, any changes in the composition of the partnership must be told to customers; and if there is a change in the majority of the partners, the customer must sign a new advisory contract (since a majority change in a partnership is deemed to create a new business entity).
Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customerB. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year
The best answer is B.If the adviser is prohibited from taking custody of client funds or securities by the State Administrator, the adviser can trade the customer account under a limited power of attorney - this is normal practice. So Choice B is the correct answer. The adviser cannot buy securities for a customer and then delay delivery of the securities to the client - this is an unethical practice. If an adviser is prohibited from taking custody, it cannot hold customer funds and securities, making Choice C incorrect. There is nothing precluding an adviser from taking a prepaid advisory fee, but if the adviser accepts $500 or more of prepaid fees, 6 months or more in advance of rendering services, this is defined as "taking custody" under NASAA rules.
An IAR is preparing a financial plan for a young married couple with 2 small children. They both work and have sufficient income to pay their current bills, including the large mortgage on their house. They have a small emergency reserve and, after paying expenses, have an extra $500 per month that they can put towards investments. They currently have no life insurance, and if one dies, the remaining spouse would not have enough income to meet monthly expenses. The IAR recognizes that they need to buy insurance as part of the plan, but the IAR is not a licensed insurance agent in the State. Which statement is TRUE? A. The IAR is not permitted to tell the customers about any aspect of insurance because she is not a licensed insurance agent in the StateB. The IAR cannot prepare a financial plan that includes life insurance needs unless another IAR licensed as an insurance agent in the State co-authors the plan C. The IAR must follow the "Don't Ask Don't Tell" rule in this situation; if the clients don't ask about life insurance coverage, she can't talk about it or include it in the plan D. The IAR can prepare a plan that includes life insurance, since life insurance is a security
The best answer is B.Life insurance coverage is an important part of any financial plan. Since the IAR is not licensed to sell life insurance in the State, she is not qualified to make the appropriate recommendation. She must consult with a properly licensed insurance agent in the State to make an insurance recommendation (and only the licensed insurance agent can sell the couple the policy!).
Under the provisions of the Uniform Securities Act, required records for broker-dealers must be kept in accordance with the provisions of the: A. Securities Act of 1933B. Securities Exchange Act of 1934 C. Investment Advisers Act of 1940 D. Uniform Securities Act as adopted in that State
The best answer is B.Part of NSMIA is that federal law has supremacy over state law when it comes to recordkeeping rules, capital requirements and custody rules. Since the SEC sets broker-dealer recordkeeping rules under the Securities Exchange Act of 1934, the State can only have a rule requiring that records be kept in conformity with the Act of 1934's requirements
Which of the following is defined as sales literature? A. ProspectusB. Password-Protected Website C. Letter to a Client D. Internet Chat Room
The best answer is B.Password protected websites are seen by a specific audience, so they are defined as sales literature. In contrast, a non-password-protected website is defined as advertising, because it is seen by the general public. A letter to a client is correspondence. A Prospectus is neither advertising nor sales literature, because it is a lawyer-prepared disclosure document. Internet chat room participation is "public forum" - an unscripted spontaneous appearance.
A private fund adviser with less than $150 million of assets under management: A. must register with the SECB. must report to the SEC C. must register with, and report to, the SEC D. is neither required to register with, nor report to, the SEC
The best answer is B.Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing.
If an individual sells the shares of a stock included in the Standard and Poor's 500 Index and uses the proceeds to buy SPDRs, then the individual has: A. increased business riskB. decreased business risk C. increased regulatory risk D. decreased regulatory risk
The best answer is B.Since this customer is liquidating a single stock position, and investing the proceeds in an index ETF (which is diversified), the customer is reducing the unsystematic risk or business risk inherent in a single stock position.
1-year Treasury investments yield 4%; while a "high tech" common stock investment yields 25%. The "risk free" rate of return is: A. 0%B. 4%C. 21% D. 25%
The best answer is B.The "risk free" rate of return is simply that return provided by a "riskless" investment. Treasuries are viewed as a "risk free" investment, since they are backed by the U.S. Government and have shown minimal variability of return over the last 50 years. Thus, the risk free rate of return is the rate given by 1-year Treasuries, which is 4% in this example.
Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are a fixed percentage of incomeII If the corporation has an unprofitable year, the contribution may be omittedIII The annual benefit varies dependent on the number of years that the employee is includedIV This type of plan is not subject to ERISA requirements A. I and IIB. I and III C. II, III, IV D. I, II, III, IV
The best answer is B.Under a defined contribution plan, a fixed percentage of income is contributed annually for each year that the employee is included in the plan. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements.
Under NASAA recordkeeping rules for investment advisers, any advertisement, circular or other communication: I must be retained if it is circulated to 2 or more personsII must be retained if it is circulated to 5 or more personsIII cannot recommend the purchase or sale of a specific securityIV can recommend the purchase or sale of a specific security and if it does not state the reasons for the recommendation, a memo must be retained indicating the reasons for the recommendation A. I and IIIB. I and IV C. II and III D. II and IV
The best answer is B.Under the NASAA model rule, advertisements, circulars, bulletins or other communications circulated by the adviser to 2 or more persons must be retained for 5 years. Such communications can recommend the purchase or sale of a specific security and if the communication does not state the reasons for the recommendation, a memo must be retained indicating the reasons for the recommendation.
When can a divorced wife receive social security benefits based on her ex-spouse's earnings record? I If the marriage lasted at least 5 yearsII If the marriage lasted at least 10 yearsIII If the ex-wife is currently singleIV If the ex-wife is currently single or remarried A. I and III B. I and IVC. II and III D. II and IV
The best answer is C. A divorced individual can collect social security benefits based on his or her ex-spouse's earnings record if certain tests are met. This covers a situation such as one where a wife gave up work to raise the kids, and then the couple divorced when the kids were grown. If the marriage lasted 10 years; the ex-wife is currently single; and the ex-wife is at least age 62; she can claim social security benefits based on her ex-husband's earnings record (typically she will get a benefit equal to 50% of his).
Each sole proprietor that applies for initial registration in a State as either a broker-dealer or investment adviser must file: A. an annual personal income statement B. copies of federal tax returns for the prior 3 yearsC. a statement of financial condition D. proof of the sole proprietor's identity
The best answer is C. A sole proprietorship is an unincorporated business that consists of 1 person. Sole proprietors can register in a State as a broker-dealer or as an investment adviser. Each applicant for initial registration that is a sole proprietor must file an original statement of financial condition (a balance sheet) with the Administrator, along with an oath or affirmation made by the sole proprietor that the financial statement is true and current. Note that there is no requirement for an income statement or copies of the applicant's tax returns.
Which statements are TRUE when comparing arithmetic mean return to geometric mean return? I Arithmetic mean return considers compoundingII Arithmetic mean return does not consider compoundingIII Geometric mean return considers compoundingIV Geometric mean return does not consider compounding A. I and III B. I and IVC. II and III D. II and IV
The best answer is C. Arithmetic mean return is simply the average annual return of an investment over its time horizon. For example, if an investment has a 3-year life, one would take each year's return, add them together and divide the total by 3 to get the arithmetic annual return. In contrast, the geometric rate of return is the compound annual rate of return produced by that investment. For example, a 3 year investment that returns +20% in the first year; -10% in the second year; and +20% in the third year has an arithmetic mean return of 10% (+20-10+20 = 30/3 = 10%) However, in this example, $1 invested will equal $1.20 after year 1 (+20%); $1.08 after year 2 (-10%); and $1.296 after year 3 (+20%). This is the same as a compound annual return of 9% and this is the geometric rate of return.
Which statement is TRUE about a joint account held as "Tenants in Common"? A. Tenants in Common joint account ownership only provides for equal account ownership for each tenant and is typical for a married couple B. If an owner of an account held as Tenants in Common dies, the deceased individual's ownership interest becomes the property of the remaining tenant(s), bypassing the deceased individual's estate and probateC. Each individual's ownership interest in a Tenants in Common account is freely transferable to another person D. The death of an individual owner in a Tenants in Common account terminates the joint account agreement and the remaining tenant(s) must sign a new joint account agreement to keep the account open
The best answer is C. In a joint account held as tenants in common, each individual owner has a specified percentage. There is no requirement that each party own an equal percentage. This is typical for unrelated parties, such as business partners. If one owner dies, his or her percentage goes to his estate - so the estate becomes the partial owner of the account. Furthermore, anyone can contest an asset transfer that goes through an estate, so the ownership interest must go through probate before it can leave the estate and be inherited by another party. The true statement is Choice C - each owner can transfer his or her ownership interest to someone else while he or she is still alive. This is not the case with an account owned as JTWROS - Joint Tenants with Rights of Survivorship - which is typical for a husband and wife. In a JTWROS account, each person 100% owns the account. If one dies, the other 100% owns the account, with the asset transfer bypassing the estate and bypassing probate.
What is the maximum amount that a married couple can earn before 85% of social security benefits will be taxed? A. $24,000B. $34,000C. $44,000 D. $54,000
The best answer is C. Social security benefits are taxable. However, a portion of the benefit is excluded from tax. If a married couple has a combined income between $32,000 and $44,000, then 50% of the benefit is taxable. If their combined income is more than $44,000, then 85% of the benefit is taxable. In contrast, for an individual, if that person's combined income is between $25,000 and $34,000, 50% of the benefit is taxable. If that individual's combined income is more than $34,000, then 85% of the benefit is taxable.
An investment of $100,000 is worth $105,000 after 3 months. If the investment keeps growing at the current rate, at the end of one year, the annualized rate of return will be: A. 5.00% B. 20.00%C. 21.55% D. 25.00%
The best answer is C. This investment grew at a 5% rate over 3 months, from $100,000 to $105,000. If this growth rate continues over the next 3 quarters, the investment will be worth: 2nd Quarter:$105,000.00x 1.05 = $110,250.003rd Quarter:$110,250.00x 1.05 = $115,762.504th Quarter:$115,762.50x 1.05 = $121,550.63 Thus, an original $100,000 investment is worth $121,551 at the end of the year, for a growth rate of 21.55%.
Under the Investment Advisers Act of 1940, after receiving an investment adviser application, the SEC must grant a registration to an investment adviser; or start a proceeding denying registration, within how many days? A. 5 B. 20 C. 30D. 45
The best answer is D.Investment adviser registration applications filed with the Securities and Exchange Commission must be granted; or a proceeding started to deny registration; within 45 days of filing.
When considering investing in a DRIP, the benchmark rate of return that should be used for comparison is the: A. 1 Year T-Bill rate B. Long-Term Treasury Bond RateC. S&P 500 Index D. S&P 500 Bond Index
The best answer is C.A DRIP is a Dividend Re-Investment Plan, where a corporate shareholder can elect to have dividend payments automatically reinvested by the company in additional common shares of that company. A shareholder should be earning a rate of return on these reinvestments that at least equals, or is better than, the return of other corporate investments. The best proxy for this is the S&P 500 Index. It consists of the 500 largest companies headquartered in the U.S., based on market capitalization. The S&P 500 Bond Index is a market cap weighted index of the bonds of the companies in the S&P 500 Index. This is not a relevant benchmark to stock investing.
A whole life insurance policy is in force for: A. a predetermined length of time B. the duration of the beneficiary's lifetimeC. the life span of the insured D. a period certain as stated in the policy
The best answer is C.A whole life insurance policy remains "in force" as long as the premiums are paid. It is "in force" for the entire life span of the insured individual. When that individual dies, the insurance benefit will be paid to the policy beneficiary. The lifespan of the beneficiary has nothing to do with the time that the insurance policy is "in force."
Which of the following statements are TRUE regarding an investment adviser rendering advice solely to an investment company? The investment adviser: I must register with the StateII is exempt from registering with the StateIII must register with the SECIV is exempt from registering with the SEC A. I and IIIB. I and IVC. II and III D. II and IV
The best answer is C.Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. An investment adviser to an investment company (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.
The annual renewal filed with the SEC by an investment adviser is an amendment to: A. Form ADV Part 1 onlyB. Form ADV Part 2 onlyC. Form ADV Part 1 and Part 2 if there are any changes to the brochure D. Form ADV-W
The best answer is C.Form ADV Parts 1 and 2 (the "Brochure" - Part 2A - and "Brochure Supplement" - Part 2B) are filed for an investment adviser's initial registration with the SEC. The annual renewal registration is accomplished by filing an electronic amendment to Form ADV Part 1 and also Part 2 (the Brochure) if there are any changes. Form ADV-W is filed to withdraw from registration.
If a representative that transacts business in a State terminates employment with a federal covered adviser, notice must be given to the Administrator by the: I federal covered adviserII officer or director of the federal covered adviserIII investment adviser representative A. I and III B. II and IIIC. III only D. I, II, III
The best answer is C.If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.
Under the provisions of the Investment Advisers Act of 1940, if an adviser takes custody of customer funds or securities, account statements MUST be sent to the customer: A. upon written requestB. monthlyC. quarterly D. semi-annually
The best answer is C.The Investment Advisers Act of 1940 requires that if an adviser takes custody of customer funds or securities; account statements must be sent to the customer by the adviser at least quarterly.
Which of the following records of an investment adviser that takes custody of customer funds are required to be retained under the provisions of the Investment Advisers Act of 1940? I Cash receipts and disbursements journalII Statement of financial positionIII Customer account statementsIV Beneficiary designations for each customer account A. I and III B. I and IVC. I, II, III D. I, II, III, IV
The best answer is C.The records required to be retained by an investment adviser that takes custody include:Cash receipts and disbursements ledger and general ledgerSecurities received and delivered ledgerPurchase and sales ledger (trade ledger)Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position)Confirmation copies of all customer tradesCustomer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account Note that there is no requirement for beneficiary designations to be retained for customer accounts - in most cases, the beneficiary is named in the will when a customer dies.
The use of customer names by an investment adviser to promote the sale of the firm's advisory services is: A. prohibited in all circumstances B. permitted if the adviser notifies each client of its intentionsC. permitted if the adviser notifies each client of its intentions and the clients consent to such disclosure D. permitted if the adviser notifies the State Administrator that the client names will be used
The best answer is C.The use of customer names by an investment adviser to promote the sale of the firm's advisory services is prohibited, unless the customer consents to such disclosure. The only disclosure of customer information that may be made without customer consent is required disclosures to governmental bodies such as the IRS.
13G reports are filed with all of the following EXCEPT: A. Securities and Exchange Commission B. Company that is the subject of the report C. Exchange where company tradesD. Financial Industry Regulatory Authority
The best answer is D.13G reports are filed by "passive" investors that purchase 5% or more of a company's stock without the intention to exercise control (a 13d report is filed if the purchaser intends to exercise control). The 13G report is filed within 45 calendar days of year-end. A copy of the form is filed with the SEC; the exchange where the company trades; and the issuing corporation.
Investments in 529 college savings plans are: I FDIC insuredII not FDIC insuredIII guaranteed by the StateIV not guaranteed by the State A. I and III B. I and IV C. II and IIID. II and IV
The best answer is D.Investments in 529 college savings plans are not FDIC insured, nor are the investment results guaranteed by the issuer. Investment performance depends on the performance of the underlying mutual fund shares.
A blue chip corporation is making a bond offering that is rated AAA. During the issue's first year of trading, what is the greatest potential risk that a bondholder assumes? A. Inflation riskB. Liquidity risk C. Marketability riskD. Interest rate risk
The best answer is D.Because this is a bond offering that is rated AAA, it will be highly marketable. The bond will be easy to sell, so marketability risk is minimal. Liquidity risk is closely aligned with marketability risk. It is the risk that selling will incur high transaction costs, which is typical of illiquid investments. That is not the case with a AAA-rated bond. So we are left with either inflation risk or interest rate risk as the correct answer. Most corporate bond issues are 30-year bonds. If this is the bond's first year of trading, it probably has 29 years of life left. If market interest rates rise (which is typical in an expanding economy), long-term bonds are impacted more than short term bonds, and their price will fall dramatically. This is the greatest potential risk. The risk of inflation is also very real because it leads to higher interest rates, but this is generally a slower moving phenomenon than rising interest rate levels in an improving economy.
In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed in writing EXCEPT: A. that the fee arrangement may create an incentive for the adviser to make investments that are riskier B. that the fee arrangement is based on both unrealized appreciation and realized capital gains C. the nature and significance of any index used as a comparative measure and the reason why the adviser believes that any comparative index used is appropriateD. that the fee computation can be based on periods ending no earlier than the last day of each calendar quarter
The best answer is D.Before entering into an advisory contract that charges a performance fee, the adviser must disclose in writing: that the fee arrangement may create an incentive for the adviser to make investments that are riskier; that the investment adviser will get compensation based on both unrealized appreciation and realized capital gains; the basis for valuing any illiquid investments used in computing unrealized appreciation; the periods that will be used to measure performance and their significance to the computation of the fee; and the nature of any index used as a comparison of investment performance, the significance of the index, and the reason why the adviser believes the index is appropriate. Any fee calculation must cover minimum periods of 1 year; the fee cannot be computed and charged quarterly.
All of the following may be required by the Administrator to maintain registration EXCEPT the filing of: A. financial reports with the Administrator B. renewal fees with the Administrator C. sales literature with the AdministratorD. a renewal consent to service of process with the Administrator
The best answer is D.Consent to service of process is only filed with initial registration applications; it is not required for renewals. The Administrator can require the filing of financial reports, advertising and sales literature, and the payment of renewal fees.
Which statements are TRUE regarding hedge funds? I They not only invest in securities, but also in pools of other assets such as commodities and currenciesII They engage in aggressive trading tactics and are highly leveragedIII Adviser compensation is typically based on a percentage of capital appreciationIV The adviser typically makes a significant personal investment in the hedge fund A. I and II only B. III and IV only C. I, II, IIID. I, II, III, IV
The best answer is D.Hedge funds are set up as private placements, open only to accredited investors. They are illiquid, since money can only be withdrawn once per year (and usually only with general partner approval). They use sophisticated aggressive investment strategies that are high-risk (but these can also be high-reward), including short selling, using large amounts of leverage, and speculating in futures, commodities, and foreign currency markets. Because of this, they are only suitable for sophisticated, wealthy investors that are able to bear risk. Hedge fund managers often invest a large chunk of their personal wealth in the fund, so the investor knows that the manager has a true personal interest in achieving good investment results. Unlike regulated mutual funds, which can only compensate the adviser based on a percentage of assets under management, hedge fund managers typically take both a percentage of assets under management (say 2%) plus a percentage of capital gains in the fund (say 20%). Needless to say, this can result in very rich compensation for successful hedge fund managers.
An agent recommends that a customer buy shares of ZIZI Mutual Fund. The fund has a sales charge of 7%. The first breakpoint occurs at the $10,000 level, where the sales charge is reduced to 5%. The fund offers a letter of intent provision. The customer gives the agent a check for $9,500 to invest in the fund, which the agent forwards promptly for investment in ZIZI shares. Which statement is TRUE? A. The agent has acted properly by forwarding the customer's check promptly B. The agent has acted properly because he does not have a fiduciary obligation to the customerC. The agent has acted unethically because he did not make the client aware of the upcoming breakpointD. The agent has acted unethically because he did not make the client aware of the upcoming breakpoint and the letter of intent provision
The best answer is D.If a customer is getting "close" to the purchase amount needed to qualify for a breakpoint, it is unethical under NASAA rules not to make the customer aware of the relevant sales charge discount on the purchase of shares in dollar amounts at or above the breakpoint. Thus, the agent was supposed to tell the customer that if he or she put in another $500, the sales charge would be reduced. If the customer does not have the extra $500 right now, the agent must tell the customer about the letter of intent feature, which gives the customer up to 13 months to deposit the extra $500 and obtain the lower sales charge on the entire $10,000 invested. Thus, Choice D is the better answer than Choice C.
If an agent does not obey a subpoena to testify in court, as required by the Administrator, the court may do all of the following EXCEPT: A. hold the agent in contempt of courtB. order the agent to appear before the Administrator C. grant injunctive relief restricting the sale or offer of securitiesD. incarcerate the agent for up to 60 days to compel attendance
The best answer is D.If an agent does not obey a subpoena (which is issued by a court of law at the request of the Administrator), then the court can issue an order compelling the agent to appear (otherwise the agent could be arrested); can grant injunctive relief restricting or stopping the sale or offer of securities by the agent; and can hold the agent in contempt of court. The court will not throw the agent into jail for 60 days!
Under the NASAA Statement of Policy on unethical practices, investment advisers must do all the following EXCEPT: A. determine the suitability of recommendations to all customers B. act in a fiduciary capacity for all customers C. disclose conflicts of interest to all customersD. send quarterly account statements to all customers
The best answer is D.Quarterly account statements must be sent by investment advisers that take custody of client funds or securities; there is no such requirement for advisers that do not take custody. Investment advisers must make suitable recommendations to all customers; must disclose conflicts of interest to customers; and must act in a fiduciary capacity for all customers.
If a broker-dealer's net capital falls below the minimum requirement for registration in a State, the Administrator has the power to: A. liquidate the assets of the firm and distribute the proceeds to the firm's customers B. petition a court of law to appoint SIPC as the trustee managing the distribution of the firm's assetsC. freeze the assets of the firmD. make a proper showing to a court of law to appoint a receiver over the firm's assets
The best answer is D.The Uniform Securities Act gives the Administrator the power to bring an action in a court of law to enforce compliance with the Act. A broker-dealer that does not maintain minimum net capital is not in compliance. The Administrator must make a showing to a court of law (that is, make the case in front of a judge) that the firm is in violation of State law and petition the court to appoint a receiver in the bankruptcy of the broker-dealer
An agent of a broker-dealer recommends a specific stock to a customer and says that the stock will most likely increase substantially in value within the next couple of months. The customer invests in the stock and its market price plummets. The customer is upset about the decline in value and wants all of his original commission refunded. Which statement is TRUE? A. The agent is allowed to refund all of the commission originally received from the transaction with the specific authorization of the agent's broker-dealer B. The agent is only allowed to refund a portion of the commission originally received from the transaction with the specific authorization of the agent's broker-dealer C. The agent is allowed to discount the commission based on a formula set forth by the State AdministratorD. The agent cannot refund the commission
The best answer is D.When an agent recommends the purchase of a stock, he or she is only allowed to accept the normal commission for the transaction. The agent cannot rebate any commission if the stock decreases in value; nor can the agent accept any larger commission based on an increase in value of the recommended stock. The only time that a refund would be made is if there was an error made by the agent or the firm, which is not the case here. The recommendation was made in good faith by the representative. question # 1-3-210-2Uniform Securities Act: Business Practices: Charges to Customers: Commission Charges to CustomersCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved
What is the difference between safety of principal and preservation of capital?
This client has no liquidity needs, so Choices C and D - continuing income and adequate yield, are not concerns. So it comes down to whether the main concern is preservation of capital or safety of principal. Preservation of capital is a concern for client who has no buffer if investment values decline. Such a client cannot afford to lose any money and should only be recommended CDs and money market funds as an investment. Because this client has "no liquidity needs," he or she is not in this situation. Safety of principal is the better answer as a "concern." This type of client doesn't want his or her principal put at risk - he or she is just averse to taking on risk, but can afford to do so. Such a client could be recommended CDs, money market funds, short term bonds and laddered bond portfolios.