66 test

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that any fee arrangement based on capital gains or portfolio appreciation may only be used if which of the following disclosures is made in writing? a. That the arrangement may cause the adviser to recommend strategies that encourage a client to take greater-than-normal risks b. That the arrangement always leads to lower fees over a long period c. That the arrangement never results in excessive fees d. The adviser must abstain from any such arrangement because the conflict of interest is too great

a As opposed to other fee arrangements, performance-based fees are more likely to encourage an adviser to take greater risks with a client's money in order to generate more fees. While performance-based fees are generally prohibited under the Uniform Securities Act, some state Administrators make exceptions. (67684)

The ABC Growth Fund charges a 12b-1 fee. This fee is based on: a.The sales charge assessed when shares are redeemed b.The fund's average annual NAV c.The fund's POP as of the close of business on the date of purchase d.The sales charge that the client pays when shares are purchased

b A 12b-1 fee is assessed against the average annual NAV of a mutual fund and is used to cover the costs associated with promotion, distribution, and the trailing commissions (trailers) that are paid to registered personnel. The 12b-1 fee is a part of the operating expense ratio of a mutual fund and the fee is ultimately paid by the shareholders

When investing in a variable annuity, investors would be MOST concerned with which of the following risks? a. Legislative risk b. Investment risk c. Interest-rate risk d. Mortality risk

b In a variable annuity contract, an investor's principal is invested in a separate account. The separate account contains a pool of securities that will fluctuate over time. A variable annuity client would be most concerned with the fact that the value of his investment will fluctuate due to changes in the overall market

The Administrator of the state of Wisconsin has designated the Investment Adviser Registration Depository (IARD) as the approved method for filing registration applications in that state. All filings must be done electronically through the IARD. Under which TWO conditions would an investment adviser requesting an application in Wisconsin NOT need to file electronically with the IARD? I. The IARD is not able to recognize the form that is filed. II. The application is not filed during normal business hours. III. The investment adviser claims a hardship exemption from filing. IV. The firm has not previously filed a Form ADV. a. I and II b. I and III c. II and IV d. III and IV

b In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by the IARD and for hardships incurred through unexpected technical difficulties in filing. In such cases the investment adviser may file a manual application.

Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive Vice President. Under the Uniform Securities Act, Susan is: a.An agent since all officers of a securities firm are considered agents b.Not considered an agent since she is not involved in sales or trading c.Considered an agent but would not need to pass a qualifying exam d.Not an agent but could accept unsolicited orders

b Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it depends on their particular job function. (79474)

If an investment adviser uses a social media site as a form of advertising, all records of its use must be maintained for at least: a.Two years b.Three years c.Five years d.The life of the firm, plus three years

c According to NASAA's recordkeeping requirements, any notice, circular, or advertisement, including any communications through social media, must be maintained for five years

What is the benefit of discounting the cash flows of a fixed-income security? a. It will measure the degree of price volatility that a bond will exhibit if interest rates increase b. An adviser can focus on a company's long-term growth potential and its ability to repay the bond's principal at maturity c. It provides the most accurate measurement of interest-rate fluctuations and volatility for bonds having maturities of 10 years or more d. It compares the price of a bond against the sum of the present values of the bond's future payouts

d A discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determines the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client.

When selecting a value stock, an agent would look for which of the following characteristics? I. High earnings per share II. Low price/earnings ratio III. Low price to book value IV. High dividend yield a.I and II only b.I and III only c.I, II, and III only d.I, II, III, and IV

d A value stock is one that tends to trade at a lower price relative to its fundamentals (i.e., dividend yield, earnings per share, sales, price/earnings ratio, market price to book value) and is, therefore, considered undervalued by a value investor. These companies tend to have the following characteristics: high dividend yield, low price-to-book ratio, and/or low price-to-earnings ratio

Which of the following choices is an asset class? a. An S&P Index Fund b. Diamonds c. Baseball cards d. Real estate

d An S&P Index Fund, diamonds, baseball cards, and real estate are all assets; however, real estate is the only one that represents an asset class. For example, a baseball card is an asset but the asset class to which it belongs is collectibles

An agent is terminated by his broker-dealer. Who must notify the Administrator and when? a. The agent, promptly b. The broker-dealer within 30 days c. The agent, within 30 days d. Both the agent and broker-dealer, promptly

d Upon termination, both the agent and the broker-dealer must notify the Administrator, promptly. If the agent is subsequently employed by another broker-dealer, both the employer and the agent must also notify the Administrator promptly. All registered persons are considered in violation if they do not report a termination to the Administrator within 30 days.

Which of the following statements about barbell strategies is NOT TRUE? a. The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included b. The short-term bonds will provide for quick cash to purchase new bonds upon maturity c. A barbell strategy is used to take advantage of potential interest-rate changes d. Gains from the short-term maturities will offset losses in the long-term maturities

d barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell

Which of the following statements best describes why an individual may choose to create a general partnership rather than a limited partnership? a. All of the investors want to manage or operate the business b. The owners of the business want to make sure it dissolves after a certain date c. In a general partnership, income is only taxed once d. The owners want to protect themselves from liability

a A business owner may create a general partnership because it allows all of the investors to manage or work in the business. The other items listed are not valid reasons to create a general partnership since both limited and general partnerships are taxed in the same manner, and general partners have more liability than limited partners

When sharing in the profits of a customer's account, whose approval is required? a. The client's b. The SEC's c. The Administrator's d. This practice is prohibited and unethical

a The client and the broker-dealer carrying the account are required to approve any account in which both the agent and the customer share in the profits and losses. The sharing must be proportionate to the capital at risk. Of the choices given, the client is the only correct answer

Which of the following securities is NOT considered exempt under the Uniform Securities Act? a. Securities issued by an automobile company b. Securities issued by a Canadian Province c. Savings and loan association securities d. Railroad trust certificates

a Under the Uniform Securities Act, any security issued by Canada or a Canadian Province, or savings and loan association, or any railroad company is considered an exempt security. There is an exemption under the Act for common carriers but an automobile company does not qualify for this exemption

Which TWO of the following statements are TRUE regarding the contributions that are made to public charities and private foundations? I. Contributions that are made to public charities are tax-deductible II. Contributions that are made to public charities are non-deductible III. Contributions that are made to private foundations are tax-deductible IV. Contributions that are made to private foundations are non-deductible a.I and III b.I and IV c.II and III d.II and IV

a According to IRS rules, contributions that are made to either public charities or private foundations are tax-deductible (pre-tax).

Under IRS rules, which of the following items are exempt from the definition of earned income? I. Unemployment benefits II. Alimony III. Child support IV. Income received from investments in property V. Net earnings from self-employment a. I, II, and III only b. I, II, III, and IV only c. II, III, IV, and V only d. I, II, IV, and V only

b The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income. • Wages, salaries, and tips • Union strike benefits • Long-term disability benefits received prior to minimum retirement age • Net earnings from self-employment Unemployment, alimony, and child support are not considered earned income. Income received from investments in property are defined as passive income, which is different from earned income, and treated separately by the IRS. (62748)

Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation? a. Systematic risk b. Opportunity cost c. Interest-rate risk d. Reinvestment risk

b The best choice here is opportunity cost. Opportunity cost is a term used in a variety of ways in economics. For purposes of the question, the focus here is on investment choices. Opportunity cost is the difference in return between an investment made and one that is not made. In this case, Barry invested in a Treasury and it returned 2% over the year. Barry gave up the opportunity of his old portfolio which returned 8%. In this situation, his opportunity costs are 6% (8% - 2%).

Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse? a.Tenants in common b.A qualified domestic partnership order c.Tenancy by the entirety d.Joint tenants with right of survivorship

c Tenancy by the entirety, which is only available to married couples, allows spouses to own property as a single legal entity. With this form of ownership, a creditor of one spouse is unable to make a claim to the account's assets. However, if the creditor has a claim against both spouses, it may make a claim to the assets

An Administrator in State Y who receives a complaint regarding an advertisement that originated in State X will take which of the following actions? a. Request the Administrator of State X to issue a cease-and-desist order b. Enjoin the advertiser from further advertising c. Investigate the complaint d. Issue a subpoena for the advertiser to appear before the Administrator

c The Administrator would first investigate the complaint before taking any action.

The difference between a corporation's current assets and its current liabilities is called: a. Cash flow b. Current ratio c. Working capital d. Liquid assets

c Working capital is defined as current assets minus current liabilities. The current ratio, choice (b), is current assets divided by current liabilities. Current assets and current liabilities are found on the balance sheet.

Advisory affiliates would include: a. Nonclerical employees of the adviser b. Officers, partners, or directors of the adviser c. All persons directly or indirectly contracted by the adviser d. All of the above

d All are considered affiliates of the adviser

A broker-dealer is required to have in place a business continuity plan that addresses all the following issues, EXCEPT: I. How the firm will communicate with regulators II. Mission-critical systems III. That the firm may not deviate from the plan IV. That the plan must be reviewed by the firm annually a.I only b.II and III only c.III and IV only d.III only

d All of these issues are addressed in the firm's business continuity plan, except choice (III). The firm may deviate from the plan as events dictate.

Which of the following statements is TRUE regarding a 403(b) plan? a. Distributions from the plan will be taxed as long-term capital gains b. All distributions in excess of contributions will be taxable at ordinary income tax rates c. Only earnings will be taxed at ordinary income tax rates d. Distributions from the plan will be subject to taxation at ordinary income tax rates because of the zero cost basis

d Contributions to a 403(b) plan are made on a pretax basis, resulting in a zero cost basis. Therefore, all distributions are taxed as ordinary income.

Which of the following elements are required for an investment contract to be considered a security? I. An investment of money II. An expectation of profits III. A common enterprise IV. Efforts made by a third party a. I and II only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV

d The test of whether an investment meets the definition of a security was established by a Supreme Court case (referred to as the Howey Test). All of the four choices listed are required parts of the test.

Ed and Stephan want to start a Web site design business. They are trying to decide what the best way is to organize the business. They want to protect their personal assets from any debts that the business incurs, but they also want to avoid being double-taxed on their profits. Based on these objectives, the BEST organizational structure for them to adopt would be a: a.Limited partnership b.General partnership c.C Corporation d.Limited liability company

d The two main advantages of a limited liability company are that the owners cannot be held personally liable for the company's debts, and the IRS treats limited liability companies the same way as partnerships for tax purposes. Ed and Stephan can limit their liability but they can also avoid paying both corporate and personal income taxes on their profits, as they would otherwise need to do if they formed a C Corporation. A general partnership would not protect them from liability since all general partners are responsible for the partnership's debts. A limited partnership must have both a general partner and a limited partner, so only the limited partner would be protected from liability.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D? a.The securities may only be offered to accredited investors. b.The securities may only be sold to no more than 35 non-accredited investors. c.General advertising is prohibited. d.General advertising is permitted, but all investors must be accredited

d Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors.

Tony had two children, Susan and Mark, who each had three children of their own. Susan passed away at an early age. What is the result if Tony dies before Mark and his grandchildren and his will called for a per capita distribution? a.Mark receives 100%. b.Mark receives 50%, while the remaining 50% goes to Tony's estate. c.Mark receives 50%, while the remaining 50% is equally split among Susan's children. d.Mark receives 25%, while Susan's surviving children will each receive 25%.

d With a per capital (by head) distribution, all surviving members are entitled to an equal share, regardless of how close or distant the relationship. In this question, the four heads being counted are Mark (Tony's surviving child) and Susan's three children. Therefore, Mark receives 25%, while Susan's children will evenly split the remaining 75%. Choice (c) is the process used for a per stirpes distribution.

Which of the following should NOT be considered by an investment adviser that is managing the assets of a trust? a. How inflation may impact the value of the trust's investments b. The general condition of the stock and bond markets c. The grantor's tax situation d. The beneficiary's investment needs and other financial resources

c The trustee has a fiduciary duty to manage the assets in a reasonable manner and to act in the best interest of the beneficiaries. The grantor endows the trust and, unless he is a beneficiary, is not considered a client. Therefore, the trustee would not consider the grantor's tax needs.

Rather than utilizing a custodian, an investment adviser chooses to maintain custody of customer assets. According to the Investment Advisers Act of 1940, the adviser is required to: a. Verify client funds and submit to an unannounced annual audit by a CPA b. Submit to an unannounced annual audit by the SEC c. File Form ADV-E with the SEC d. Have a qualified custodian verify the clients' funds and securities

a If an IA acts as a qualified custodian and holds customer cash and securities, the assets must be subject to an unannounced annual audit by a CPA. At the completion of the audit, the CPA (not the IA) must file Form ADV-E. Choice (b) is incorrect because the SEC lacks sufficient resources to audit every IA on an annual basis

Those investors, who believe markets are not perfectly efficient, may use an active strategy in which the asset mix of a portfolio is altered in anticipation of economic events. This market timing approach is known as: a. Tactical Asset Allocation b. Strategic Asset Allocation c. Rebalancing d. Indexing

a Tactical Asset Allocation is used to identify and buy into sectors that are anticipated to outperform the market. Strategic asset allocation is used to assemble an investment portfolio based on the client's risk tolerance and objectives. As the assets change in value, the portfolio may then be rebalanced frequently. Indexing is a passive investment approach

An investor writes an uncovered RST May 25 put for a premium of 4. What is the maximum profit that the investor could realize? a. $400 b. $2,100 c. $2,500 d. An unlimited amount

a The writer received the $400 premium. If the option expired, he would have no obligation, recognizing the entire premium as a profit. The premium represents the most that the writer could profit.

Under the Uniform Prudent Investor Act, which choice BEST explains the level of care a trustee must exercise when managing a trust? a. Trustees are not required to comply with the Uniform Prudent Investor Act since it only applies to investment advisers b. The objectives of the trust as a whole should be taken into consideration when making investment decisions c. Investment and management responsibilities may be outsourced to an individual who is licensed as a CPA d. Trustees are obligated to adhere to the objectives of the beneficiaries with no consideration given to the trust's objectives

b Since they are considered a fiduciary, trustees must adhere to the provisions stated in the Uniform Prudent Investor Act. The trustee must not only consider the investment objectives of the entire trust, he must also pay attention to the beneficiaries' total assets.

Who would NOT be exempt from the definition of agent under the Uniform Securities Act? a. A NYC official who sells investment-grade GO bonds to the public b. A finance V.P. of a major appliance manufacturer who sells AAA bonds to the public c. A finance officer of a biotech company who sells IPO stock to his company's investment banker d. A clerk processing 401(k) distributions for former coworkers

b Sometimes employees of an issuer selling securities may be considered agents. Generally, an employee of an issuer selling stock to the public would be considered an agent under the USA. Exemptions occur when the employee sells exempt securities, such as municipal debt, or is involved in an exempt transaction, such as a sale of securities to an investment banker during an underwriting. Employees who simply process financial transactions for coworkers are exempt unless they receive additional compensation for these activities

According to the Uniform Securities Act, the Administrator may require federal covered advisers to: a. Register in every state in which they have a branch office b. Give notice or notice file in any state where they transact business with six or more individual retail clients c. Register with the Administrator in any state where they transact business with six or more individual retail clients d. Do nothing because the Administrator has no jurisdiction

b The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC. (

Which of the following is/are regulated under the Investment Company Act of 1940? I. Investment companies investing money into other investment companies II. The firm that serves as a mutual fund's custodian and holds its assets III. The minimum rate of return required to remain registered as a fund IV. The performance of the investment company a. I only b. I and II only c. I, II, and III only d. All of the above

b The Investment Company Act of 1940 regulates investment companies and their investment adviser, custodian bank, and distributor. The Investment Company Act of 1940 does not regulate performance nor does it require minimum rates of return in order to maintain registration. (67537)

Rancho Rio Investments is a single-office investment advisory firm that is based in New Mexico and plans to expand its business to New Jersey. Under the Uniform Securities Act, in which TWO of the following situations is Rancho Rio NOT considered to be an IA in New Jersey? I. The firm transacts business only with New Jersey broker-dealers II. The firm transacts business in New Jersey, but only with a few employee benefit plans that contain assets under $500,000 III. The firm's only business in New Jersey is with 10 or fewer non-institutional customers within a 12-month period IV. The firm's only business in New Jersey is with a limited number of federal covered advisers a.I and II only b.I and IV only c.II and III only d.II and IV only

b Under the Uniform Securities Act, any investment adviser that has no place of business in a given state and whose clients are banks, broker-dealers, investment advisers, and other institutions is exempt from registration in that state. Also, any IA that has no place of business in the state and deals with five or fewer retail customers who are residents of the state within a 12-month period is also exempt. Since this question makes no reference to Rancho Rio having an office in New Jersey, it may transact business with New Jersey institutional investors, such as broker-dealers (choice I) and investment advisers (choice IV), without being registered in New Jersey. To do business with an employee benefit plan in a state without being registered, the plan must have assets of $1 million or more

A client and his wife purchased their home for $300,000. They have occupied their home for the last 26 years and have made $80,000 of improvements over the years. The home was recently put on the market for $800,000, but eventually sold for $770,000. Upon sale, the taxable capital gains would be how much? a.$470,000 b.$0 c.$390,000 d.$500,000

b Upon the sale of a primary residence, a portion of any capital gains are excluded from taxation. If filing a single tax return, the first $250,000 of gains from the sale are excluded. If filing a joint tax return, the first $500,000 in gains are excluded. In general, to qualify for the exclusion, both the ownership test and the use test must be met. For example, five years prior to the sale of the home you must have occupied the home as your primary residence for a minimum period of two years. (89659)

Which of the following can be included in an investment advisory contract? a.A clause which indemnifies the adviser from any wrongdoing b.A statement indicating that the IA guarantees performance against a benchmark and, if it is not met, the IA will surrender its fee for that year c.The fact that conflicts may exist, without disclosing the details of those conflicts d.That the IA is entitled to a portion of all of its clients' profits

b Within the contracts that IAs establish with clients, they are prohibited from inserting provisions that would make them blameless for misdeeds (indemnifying clauses), failing to disclose conflicts of interest, and summarily taking a portion of a client's profits. However, IAs are permitted to structure a contract in such a way that if they do not perform at a given level, they will not earn some of their advisory fee. In this case, they would receive a base fee and a performance adjusted fee; or simply sacrifice some of their fee due to inferior performance. This arrangement is referred to as a fulcrum fee. Although this fee structure is available to advisers in the mutual fund business, it is rarely used

According to NASAA's Statement of Policy on Unethical Business Practices, all of the following information must be disclosed in an investment advisory contract, EXCEPT: a. Whether the contract grants the adviser discretionary authority over the client's account b. Whether the contract may be assigned to another registered investment adviser without the client's consent c. The amount of prepaid fees that will be returned if the contract is terminated d. The method(s) by which the adviser's fees will be calculated

b provides that the entering into, or renewal of, an investment advisory contract would need to include disclosure of: • All fees and services provided • The term of the contract • A formula for computing the advisory fee • The amount of prepaid fees to be returned in the event of an early termination of the contract • The fact that no assignment of the contract will be made without the consent of the client • Whether the contract grants discretionary power to the adviser • The fee for managing equity securities may be higher than for fixed-income securities Choice (b) is not true since the contract may not be assigned without the consent of the client.

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered: a. Too aggressive b. A strategic asset allocation strategy c. A tactical asset allocation strategy d. Churning

b strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions

The advantages of investing in a limited partnership include: a. The potential for assessments b. Lack of control c. The ability to limit risk d. Tax losses that can reduce taxes on other portfolio income

c A limited partner is risking only the amount she invests in the partnership. The potential for assessments (demands for more money from investors) and the lack of control over the management of the venture are considered disadvantages of limited partnerships. Tax losses generated by the partnership are passed on to investors, but they may only be used to reduce income generated by other passive activities. They may not be used to reduce earned income (wages and salaries) or income from most other types of investments.

An advisory client believes that the economy is heading into recession. Which of the following is the most appropriate strategy in anticipation of a market decline? a.Buying index calls b.Selling index puts c.Selling index futures d.Buying index futures

c Selling stock index futures is a bearish strategy which may be used by a speculator or a hedger. The other strategies that are listed are bullish and are not appropriate for an investor who anticipates a market decline

The Dividend Discount Model is BEST described as: a.A relative valuation model that compares companies in the same sector. b.A model that determines whether a growth stock is overvalued. c.A model that determines a stock's price based on past dividends. d.A model that determines a stock's price based on future dividends.

d The Dividend Discount Model indicates that the current value of a stock should be based on its future dividends which are discounted to present value. If the current market value of a stock is less than the discounted value of future dividends, it is considered a bargain. From a practical standpoint, the model has value for utility stocks, REITs, and companies that pay steady dividends

An adviser is constructing a bond portfolio for a client whose goals are stable income and return of principal. The adviser determines that the appropriate benchmark to compare this portfolio's performance is the Wheyman Intermediate-term Government Bond Index. Which of the following statements is NOT TRUE regarding this decision? a.Choosing this index implies that mortgage-backed securities are not a large part of the portfolio. b.This portfolio should have low levels of risk to match the benchmark. c.The client's goals of stable income and return of principal are not guaranteed by the choice of this benchmark. d.Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio.

d When constructing a portfolio, an adviser typically starts by considering the securities in the benchmark and will then determine what additional securities may add value to the portfolio. The benchmark indicates not only the types of securities that should be included in the portfolio, but also the types that should not be. In this example, the choice of a government bond index as the benchmark for the client's portfolio is indicative of the fact that the portfolio should not include a large percentage of securities that have a high degree of risk. Since the benchmark is an intermediate-term government bond index, it is expected that it will offer a low return that is in line with the low level of risk that is typically associated with government bonds. Since a benchmark is simply a measuring stick for comparison purposes, choosing this benchmark does not guarantee that the goals will be met and it does not protect against bad investment decisions or market fluctuation. As referenced in choice (d), beta is actually used to compare the volatility of a portfolio to the volatility of the market; it does not measure excess returns above a benchmark (which is measured by alpha). Another important point is that beta is not a measure to be used for fixed-income portfolios

Which TWO of the following are considered exempt reporting advisers (ERAs)? I. Venture capital advisers II. Private fund advisers with assets under management of less than $150 million III. Family office advisers IV. Private fund advisers with assets under management exceeding $150 million a.I and II b.I and III c.II and III d.III and IV

a Venture capital advisers and private fund advisers with assets under management of less than $150 million are exempt from registration as an adviser with the SEC and/or state Administrator; however, they must still pay fees and report public information via the IARD/FINRA system.

An investor purchases a mutual fund in a joint brokerage account and receives a dividend, which the investor decides to reinvest in the fund. Which TWO of the following statements are TRUE regarding the tax consequences of this transaction? I. Reinvested dividends are not subject to taxation. II. Reinvested dividends are subject to taxation. III. Any dividend received, whether reinvested or not, is subject to taxation. IV. Qualified dividends are not subject to taxation. a.I and III b.I and IV c.II and III d.II and IV

c All dividends, interest, and capital gains distributed from a mutual fund are subject to taxation unless the investment is purchased within a tax-sheltered account such as a 401(k) or individual retirement account. Qualified dividends are subject to taxation

Under the USA, which of the following transactions is NOT considered exempt? a.An offering being made to an investment company b.A transaction by an executor of an estate c.An unsolicited issuer transaction that is executed through a registered broker-dealer d.A transaction by a trustee that is involved in a bankruptcy proceeding

c Although the USA provides a specific exemption to unsolicited, non-issuer transactions, the transaction being referenced in choice (c) is an issuer transaction and is therefore not given an exemption Under the Uniform Securities Act, exempt transactions include any offer to an investment company or other institutional investor as well as a transaction by an executor of an estate or a trustee involved in a bankruptcy

An agent of a broker-dealer publishes a Web page that discusses the benefits of dollar cost averaging and why investors should invest with long-term goals in mind. If a customer in a state where the agent is not registered reads the Web site, which of the following legends must be on the Web site in order to take advantage of the safe harbor rule and not register in the state? I. The agent will only conduct business in the state if registered or exempted. II. Follow-ups will be handled only by agents who are registered or exempt. III. Internet advertising is exempt from state regulation and subject to SEC review. IV. The rule number of the safe harbor being used is disclosed. a. I and II only b. I, II, and IV only c. III only d. IV only

a According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for the general dissemination of information on products and services, when advertising on the Internet an agent must include a legend in which it is clearly stated that (1) A broker-dealer agent or investment adviser representative in question may transact business in the state only if first registered, excluded, or exempted from state registration requirements. (2) Follow-up, or individualized responses to persons in this state by a broker-dealer agent or investment adviser representative that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with state registration requirements, or an applicable exemption or exclusion. The SEC is not the only entity that regulates Internet advertising, and there is no requirement to disclose rule numbers

In completing Form BD, all the following information is required, EXCEPT: a.The Social Security number if the applicant is a corporation b.Whether the applicant has been charged with a crime c.Whether the applicant has been convicted of a crime d.Minor rule violation

a All are required to be disclosed except Social Security numbers, unless the applicant is an individual.

Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as: a. Efficient Market Hypothesis b. Sector Rotation c. CAPM d. Modern Portfolio Theory

a Efficient Market Hypothesis (Theory) states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market. Sector rotation is the moving of investments from one industry sector into another in anticipation of a change in the economy. CAPM, Capital Asset Pricing Model, describes the relationship between risk and expected return. Modern Portfolio Theory focuses on diversifying across various asset classes to enhance returns without significantly increasing risk.

Which of the following events would NOT require a public company to file a Form 8-K report? a.A minority owned subsidiary changes locations b.The auditors of the company resign c.The company acquires a controlling interest in another company d.The company merges with another company

a Form 8-K is the report that companies must file with the SEC to announce material corporate events that shareholders should know about. A change in the location of a minority owned subsidiary, choice (a) is not a material event which may affect the company or its shareholders. Choices (b), (c), and (d), all require the filing of a Form 8-K

The economic cycle consists of four stages--full recession, early recovery, late recovery, and early recession. Since the market tends to move ahead of the economic cycle, an adviser who believes the economy is in a full recession may advise clients to rotate into what sector? a. Cyclicals, such as transports and technology b. Fixed income securities c. Staples and defensive stocks d. Services and utilities

a In anticipation of changes in the economic cycle, an adviser may advocate sector rotation, in which a client's portfolio holdings are rotated from one or more business sectors into others. If the economy is in full recession, one strategy is to rotate into cyclical stocks that would benefit from a recovering economy, such as industrials, e.g., manufacturers of autos, appliances, or houses, which would experience increased sales in a recovery

An investment adviser, concerned that the financial services sector is going to decline in value, rebalances his client's investment portfolios. This form of asset allocation is known as: a. Tactical asset allocation b. Strategic asset allocation c. Market asset rebalancing d. Correlation allocation

a Tactical asset allocation is an active allocation strategy based on the anticipation of future trends or changes in economic events. Changes are made in the allocation of assets to take advantage of perceived events. One example is sector rotation, in which assets may be reallocated from one industry sector to another, as the business cycle changes

If an investment increases in value, which of the following statements would be TRUE? a.If it was held for less than one year, the annualized rate of return would be greater than the holding period return b.If it was held for less than one year, the holding period rate of return would be greater than the annualized return c.Regardless of the actual holding period, the holding period and annualized return are always identical d.If held for more than one year, the holding period return would be less than the annualized return

a The holding period rate of return states how much an investor earns over the period an investment is held. The annualized rate of return states how much an investor makes over a one-year period. If an investor had a 5% rate of return over six months, her holding period rate of return would be 5%; however, her annualized rate of return would be 10% (the 5% return earned over the six-month period multiplied by two). If the holding period had been more than one year, the opposite would be true--the holding period return would be larger than the annualized rate of return

For a Coverdell ESA, what is the maximum allowable contribution and how is treated for tax purposes? a.$2,000 per year and made on an after-tax basis up to the child's 18th birthday b.$2,000 per year and made on an after-tax basis up to the child's 30th birthday c.$2,000 per year and made on a pre-tax basis up to the child's 18th birthday d.$2,000 per year and made on a pre-tax basis up to the child's 30th birthday

a The maximum allowable contribution to a Coverdell Education Savings Account (CESA) is $2,000 per year up to the child's 18th birthday. The funds are contributed on an after-tax basis and may be used for any level of education.

Bert and Berti are both 60 years old and earned $150,000 jointly last year. They contribute to their 401(k) plans but would like to save more for their retirement. The most suitable type of plan for an IAR to recommend is a: a.Roth IRA, in which each may contribute $6,500 per year b.Traditional IRA, in which each may contribute $5,500 per year c.Roth IRA, in which both may contribute $5,500 per year d.Traditional IRA, in which both may contribute $6,500 per year

a The maximum annual contribution to either a traditional or Roth IRA is $5,500, per individual. However, for people age 50 or older, the maximum annual contribution is $6,500. Bert and Berti's gross income does not exceed Roth income eligibility requirements, so the Roth is typically a better choice compared to a traditional IRA, since withdrawals from a Roth are tax-free. With the traditional IRA, any earnings are taxed as ordinary income upon distribution, plus the contributions may be taxed if contributions were made on a pretax basis. Given the clients' ages, income, and the tax-free withdrawals, the Roth is the better investment choice

An investment adviser representative is supervising a large, diverse portfolio for an elderly client. Although the account is nondiscretionary, the client almost always accepts the recommendations of the IAR. The portfolio contains a significant position in bonds that are denominated in foreign currency, and the IAR has become concerned that the increased volatility in the currency market could damage the value of the client's investments. The IAR is thinking about recommending the use of foreign currency futures to hedge the foreign currency risk of the portfolio. Considering prudent investor standards, which of the following statements is TRUE? a. Since there are no categorical prohibitions on types of investments under prudent investor standards, the use of futures could be appropriate for a portfolio under certain conditions b. Under prudent investor standards, futures may be used in a portfolio only if the account is held outside the United States c. Since futures are very volatile, they should never be recommended or used by a fiduciary subject to prudent investor standards d. Since futures are not securities, they may not be recommended by an investment adviser representative subject to prudent investor standards

a The standard of prudence under the Uniform Prudent Investor Act is applied to the client's total portfolio, rather than on an investment-by-investment basis. Since there are no categorical restrictions on types of investments under the Act, anything might be appropriate as part of a portfolio designed to achieve specific aims. In this case, the use of futures to hedge currency risk could be appropriate as part of an overall strategy for this elderly investor. (62147)

A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE? a. The current ratio increases b. Working capital increases c. Bond interest coverage probably increases d. Stockholders' equity increases

a When the $35,000 in current liabilities is paid in cash, current assets fall to $115,000 and liabilities fall to $40,000. The result is an increased current ratio of 2.875, compared to 2 before the payment. Working capital and stockholders' equity would stay the same. Bond interest coverage compares earnings before interest and taxes to the bond interest expense, and would not be affected in this case.

An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate investment in a bypass trust? a.Government securities, since they preserve the value of the assets that will be passed to the beneficiaries b.Growth stocks, since the beneficiaries will not need the funds for several years c.Municipal securities, since the income that will be provided to the beneficiaries is tax-free d.Bonds with short-term maturities due to the grantor's age

b A Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent's death. These trusts are structured in such a way that the children will be required to pay estate taxes on any assets that exceed the current estate tax exemption. The key to this specific question is to identify the ages of the beneficiaries. Since both children are in their 40s, a growth investment is the most appropriate. The focus must be on the beneficiaries, not the grantor

Which of the following persons would be subject to statutory disqualification under the Securities Exchange Act of 1934? a. A person accused of insider trading b. A person who pleaded guilty to stock manipulation five years ago c. A person who was the defendant in a civil lawsuit d. A person who was the chief executive officer of a failed broker-dealer

b A statutory disqualification is the denial of an applicant for registration based on the past transgressions of the applicant, including violations of any securities or commodities law. Being the chief executive of a failed broker-dealer does not itself lead to statutory disqualification, but this information must be disclosed on any subsequent application in the securities industry. A person accused of insider trading has not been convicted

Jake purchased a corn futures contract at $1.20 per bushel. At the end of the contract, if the price of corn has fallen to $1.10 per bushel, which of the following statements is TRUE? a.Jake makes delivery. b.Jake takes delivery. c.The contract expires worthless. d.Jake neither takes delivery nor makes delivery.

b As the purchaser of the contract, Jake has an obligation to take delivery. On the other hand, the party that initially sold the contract has an obligation to make delivery.

All of the following statements regarding discounted cash flow are NOT TRUE, EXCEPT: a. It is used to calculate the volatility of the market b. It is used to determine the attractiveness of an investment c. It can only be used to determine the value of a bond d. It can only be used to determine the value of common stock

b Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace

A project manager needs an internal rate of return of 8%. Her evaluation of a proposed project indicates that it has a net present value (NPV) of zero. Based on this information, the project's estimated internal rate of return (IRR) must be: a.Lower than 8% b.Equal to 8% c.Greater than 8% d.Impossible to determine based on the information provided

b For the project manager to determine whether a project is a viable investment based on a required minimum internal rate of return (IRR), he should calculate the net present value (NPV). NPV is calculated by comparing the present value of the future cash flows (using the present value formula) to the cost of the project. By comparing the projects inflows (in today's dollars) to the project's cost, the manager can determine if the NPV is positive, negative, or equal to zero. If the NPV is positive, then the rate of return earned on the project is greater than the required IRR. On the other hand, if the NPV is negative, then the rate of return earned on the project is less than the required IRR. In this question, since the NPV is zero, the rate of return is equal to the required IRR.

Jack purchased 100 shares of XTRO at $20. After nine years, he gave the shares to his nephew Sam when the fair market value of XTRO was $16 per share. Sam held the stock for seven months and then sold the shares for $23 per share. What is the tax consequence for Sam? a.Short-term capital gain of $300 b.Long-term capital gain of $300 c.Short-term capital gain of $700 d.Long-term capital gain of $700

b If securities are received as a gift, any tax implication is delayed until the securities are subsequently sold. For the recipient, the two details that should be determined are 1) the donor's cost basis and 2) the fair market value (FMV) at the time of the gift. One of these two will represent the recipient's basis for determining a capital gain or loss at the time of sale (referred to as dual basis), as described below: • If the securities are later sold for a price that is higher than the donor's cost, the seller's basis is the donor's cost and the donor's holding period is included. • If the securities are later sold for a price that is lower than the FMV at the time of receiving the gift, the seller's basis will represent the FMV and the holding period begins on the day after the gift is received. When securities are given as a gift after they had appreciated in value and the recipient subsequently sells them for a gain, the recipient's basis is the lesser of the donor's cost or the fair market value at the time of the gift (i.e., always the donor's cost). However, this is a tricky question since the securities were gifted at a time when the fair market value ($16) is less than the donor's cost ($20). Sam later sold the stock for a price that was higher than Jack's cost. For that reason, Sam will use the $20 cost as his basis against the proceeds of $23 on the sale, which results in a capital gain of $3 per share, or $300. In this situation, Sam is able to add Jack's holding period to his own (nine years plus seven months) to establish a long-term holding period and therefore he realizes a long-term gain.

If an agent unknowingly misrepresents the risk associated with a security, which of the following statements is correct according to the Uniform Securities Act? a.This is considered an act of fraud. b.Since the agent unknowingly made misrepresentations regarding a security, the agent is not subject to disciplinary action. c.Unknowingly making misrepresentations will result in the denial, suspension, or revocation of the agent's registration. d.Unknowingly making misrepresentations will result in the denial, suspension, or revocation of the registration of the security.

b In this question, since the agent did not willfully intend to mislead an investor, unknowingly making misrepresentations regarding a security is not considered fraudulent. For this reason, the agent is not subject to disciplinary action by the Administrator. However, if the misrepresentations were intentional, the Administrator may deny, suspend, or revoke the agent's registration. If action is ever taken against an agent, it will not have an effect on the registration of the security.

A hedge fund is being sold to accredited investors as a private placement under Regulation D. An agent believes that this fund would be an excellent investment for several of his clients. The agent may recommend the fund to which of the following investors? a.A newly-retired man, whose annual income last year was $200,000 b.A middle-aged couple who are both physicians with a joint annual income of $400,000 c.A young aggressive investor with a net worth of $500,000 and an annual income of $150,000 d.A couple that just won the lottery, whose annual income this year was $500,000 and whose net worth is $550,000

b Many hedge funds are issued as private placements under Regulation D. In order to qualify for the exemption, they must be offered only to accredited investors, or no more than 35 nonaccredited investors. Accredited investors include: • Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future • A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future • An individual or a couple with a net worth of at least $1 million The investor in choice (a) meets the income requirement but his income will probably drop now that he is retired. The investor described in choice (c) does not meet either the income or the net worth requirements. The couple described in choice (d) just won the lottery. Thus, their income was probably much higher this year than normal and it is unlikely to remain at the same level. Only the couple described in choice (b), two doctors in their prime earning years, can reasonably expect to continue making the same income

FGW Investment Advisers created an aggressive investment strategy that outperformed the market over the past four years. Recently, FGW's performance has been poor which has resulted in a loss of a few clients. In order to maintain the interest of the remaining clients, FGW holds an information session. What economic argument could FGW use to explain the reason for the poor performance? a.The Dow Theory b.The Efficient Market Hypothesis c.The Modern Portfolio Theory d.The Capital Asset Pricing Hypothesis

b The Efficient Market Hypothesis states that financial markets are efficient and that the prices of securities reflect all known information and will adjust instantly to reflect any new information. Therefore, outperforming the market over an extended period is unlikely.

An agent of a broker-dealer intends to sell shares of a security, but the transaction does not involve his firm. If he proceeds with the transactions, in which of the following situations will he NOT be accused of selling away? a.The agent requests approval from both the State Administrator and his firm b.The agent notifies his firm and awaits approval (if required) c.The agent notifies his firm and awaits verbal approval (if required) d.The agent notifies the State Administrator, but not his firm

b The rule regarding private securities transactions requires an agent to provide written notice to his firm if he intends to engage in securities transactions that are not within the scope of his firm's business. If he executes the transaction and does not notify his firm, the action is considered selling away. In addition, if the agent will be compensated for the transactions, he must also receive written approval from his firm to participate. On the other hand, if he will not be compensated, the firm is required to provide a written acknowledgement to him and has the right to impose conditions on his participation

An investment adviser's client is considering acquiring a company for $10 million. The company's expected future cash flows are $2 million in the first year, $4 million in the second year, and $8 million in the third year. Which of the following measures would be most helpful when evaluating the this investment? a.Estimated payback period b.Internal rate of return (IRR) c.Future value of current cash flows d.Average rate of return

b This is really a question about the present and future values of the company. The present value of the company is simply the purchase price of $10 million, while the future values are the cash flows of $2 million, $4 million, and $8 million. The internal rate of return is the rate of return that makes the present value of all cash flows [i.e. $2/(1 + r)1, $4/(1 + r)2, and $8/(1+ r)3] equal to the market value (i.e. $10 million). In the formula, the "r" is the missing IRR. Once the IRR is calculated, the client can use that rate to compare this investment to other investments (e.g., competing companies, bonds, or money market securities).

Under the Uniform Securities Act, which of the following statements is/are TRUE regarding the registration of securities? I. A security is considered registered for one year from the effective date of its registration statement II. Once the registration statement is declared effective by the Administrator, the security is considered to be registered as long as the issuer files quarterly and annual financial statements III. If the registration statement for a security is declared effective by the Administrator of one state, it is also immediately effective in any state in which an identical registration statement has been filed IV. The filing of a registration statement may be done by a person other than the issuer a.II only b.I and IV only c.I, III, and IV only d.II, III, and IV only

b Under the USA, a registration statement is effective for one year from its effective date and may be filed by the issuer, a registered broker-dealer, or any other person on whose behalf the offering is being made. The filing of quarterly and annual financial statements is not a requirement for registration. Also, if an Administrator of one state declares an offering effective, it does not automatically mean that the registration is effective in any other state

Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is: a. Paid by the trust b. Paid by the husband c. Paid by the wife d. Not taxable, since the proceeds of life insurance are not taxable

c A grantor trust is one in which the grantor retains a right to any income generated by the trust, as well as the power to revoke the trust. The income generated by the trust must be included in the grantor's taxable income. The grantor is responsible for paying all taxes on any funds the trust distributes or retains for future distribution. For tax purposes, it is irrelevant that the income is used to pay the premiums on insurance policies owned by the grantor or the spouse.

The expected return for a portfolio is 12%. The portfolio has a beta of 1.4 and the actual return is 18.8. What is the alpha? a.+2.00 b.-2.00 c.+6.80 d.-6.80

c A portfolio's alpha is calculated by taking the actual return and subtracting the expected return. A portfolio's beta is used to determine the expected rate of return according to the capital asset pricing model (18.8 - 12 = +6.80). In this question, the portfolio has beta of 1.4, which is included in the 12% expected return. Conversely, if the actual return was 12% and the expected return was 18.8%, the alpha would be -6.80

Colleen is an agent for a broker-dealer. She is buying a condominium but needs additional cash for the down payment. Her father, who is also one of her clients, has offered to help. Which of the following is TRUE? I. Colleen's father may give her a gift without limitation II. Colleen's father may give her a loan III. Loans from clients are strictly prohibited IV. Any loans from clients are limited as to the amount a.I only b.II only c.I and II only d.III and IV only

c Colleen may accept a gift from her father. Also, she may borrow money from certain clients such as immediate family members, or clients who are in the business of loaning or borrowing money, or if there is a personal or business relationship that exists outside the brokerage relationship

Carrie has three children and recently lost her husband. Her children each have two children of their own. If Carrie wants to set up a trust which allocates an equal share of her assets to each branch of her family, she should set it up as: a.A bypass trust b.A per capita trust c.A per stirpes trust d.A sprinkling trust

c In a per stirpes distribution, each branch of a family receives an equal share of an estate. In this question, Carrie's three children represent separate branches of her family. If Carrie dies and her children are still living, each child will receive one-third of her estate. If one of Carrie's children dies before her, her deceased child's heirs will equally split the decedent's one-third of the estate. On the other hand, a per capital (by head) distribution allocates estate assets to all surviving members equally, regardless of how close or distant the relationship

Which TWO of the following investments are NOT considered money-market instruments? I.A U.S. Treasury bill II. A money-market mutual fund III. A convertible debenture IV. A tax anticipation note a.I and II b.I and III c.II and III d.II and IV

c Money-market securities are defined as debt instruments that have less than one year until maturity. U.S. Treasury bills and tax anticipation notes (TANs) are both short-term debt instruments and are considered money-market instruments. A money-market mutual fund is an instrument that issues common shares which represent an investor's ownership interest in a portfolio of money-market securities. Convertible debentures are debt instruments; however, since the maturity of the debentures is not provided in the answer, it should not be assumed to be one year or less.

All the following descriptions are TRUE of a closed-end management company, EXCEPT: I. Shares are purchased at the current offering price II. Shares are redeemable III. Investors can purchase full and fractional shares IV. The company may issue only common stock V. When making a purchase, a customer will pay a markup or a commission a. I and V only b. I, III, and V only c. II, III, and IV only d. II, III, and V only

c Shares of a closed-end fund are not redeemable instruments. The shares are usually traded in the open market on an exchange. The purchaser pays either a commission or a markup on both a purchase and a sale. A closed-end fund may issue common stock, preferred stock, or bonds. The fund may issue only full shares. Unlike a mutual fund, the closed-end management company may not issue fractional shares

The disadvantages of hedge funds for investors include all of the following choices, EXCEPT: a. Lack of liquidity b. Lack of transparency c. Sophisticated investment strategies d. Complicated tax structures

c Some of the disadvantages of hedge funds are illiquidity, less transparency than other investments, and more complicated tax structures. An advantage of hedge funds for most investors is that they engage in sophisticated investment strategies

According to the Investment Advisers Act of 1940, when must an access person submit a transaction report? a.No later than 10 days after the end of the calendar quarter in which the transaction was effected b.Promptly c.No later than 30 days after the end of each calendar quarter d.Within 90 days of the end of the adviser's fiscal year

c The Investment Advisers Act of 1940 requires an access person of an adviser to report his personal securities transactions by no later than 30 days after the end of each calendar quarter. On the other hand, the Uniform Securities Act requires an adviser to maintain a record of all personal securities transactions by no later than 10 days after the end of the calendar quarter.

In order to determine the lump-sum amount that a person will need at retirement, what elements are required for an investment adviser to make the projection? I. Life expectancy II. Inflation rate III. Current cash flow IV. Investment return a.I and II only b.II and III only c.I, II, and IV only d.I, II, III, and IV

c The three elements that are required to project the lump sum amount that a person will need at retirement are life expectancy, inflation rate, and investment return. However, the person's current cash flow is relevant, but only after the lump-sum estimation has been completed. For example, the current income of a 30-year-old will not have an effect on the amount that she will need in order to retire at age 60

A client contacts a firm and indicates his desire to buy a call option on a stock that he already owns. Why would the investor buy a call option on the stock? a. He wants to hedge his position b. He wants to generate income and increase his rate of return c. He wants the ability to buy more shares at a guaranteed price in case the stock goes up d. He wants to reduce his losses

c When buying a call option on a stock, the client is able to buy the underlying security at a specific price. He would buy a call option if he believes the price of the security is going to increase. In this situation, buying a call does not generate income, hedge risk, or increase the rate of return.

Your client is considering purchasing a fund of hedge funds. Which of the following statements concerning this investment is TRUE? a. Funds of funds may be purchased only by investors who meet standards established by the SEC b. These securities may be redeemed at the end of the trading day c. These securities will outperform traditional mutual funds over time d. These securities are not liquid investments

d A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds are not required to register with the SEC, funds of hedge funds typically do not have this exemption available to them. Since funds of funds are invested in illiquid securities, hedge funds, they do not typically offer investors the opportunity to sell on a daily basis. (Traditional mutual funds offer this feature.) Liquidity means an investor can efficiently sell or convert her investment into cash.

When advertising on the Internet, an agent of a broker-dealer must disclose which of the following items? I. The name of his affiliated broker-dealer II. The name of the broker-dealer that reviewed and approved the content III. The fact that the agent is working within the scope granted by the broker-dealer IV. A legend stating that he will not conduct business unless registered or exempt a. I and II only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV

d According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for general dissemination of information, the name of the broker-dealer or investment adviser who approved the content as well as the one with whom the agent is affiliated must be on all Internet-based advertising. In addition, only individuals who are properly registered within the potential customer's state or exempt may follow up and respond to potential leads.

An investment adviser representative was the subject of a customer complaint two years ago in the state of Idaho and resigned his position as a result. The Administrator conducted an investigation, the results of which were not made public. He is currently applying for a mortgage for a new home in Boise. The bank where he is applying requests his employment history and contacts the investment adviser for verification. The personnel manager at the firm is reluctant to give the bank any information about its former employee and directs the bank to contact the state Administrator. When the bank calls the Administrator, what information can it expect to receive? a. The Administrator will provide the details of the complaint since it was securities-related b. The Administrator will contact the investment adviser for authorization to release the information c. The adviser must contact the Administrator for approval to release the information to the bank d. The Administrator will not release any details of the complaint

d According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of his officers or employees to disclose information except among themselves or, when necessary, in a proceeding or investigation under the Act that was not made public

Which of the following statements is TRUE regarding an omitting prospectus for an investment company? a. Investment advisers may not omit a prospectus under any circumstances b. Performance data may not be included c. An application to invest may be included d. An investor must be informed that she should read the full prospectus

d Certain investment company advertising may be published even if it meets the definition of a prospectus. An omitting prospectus is an exempt investment company advertisement that only includes information available in the full prospectus (such as performance). An application to invest may not be included. The customer must be informed as to how she may obtain the actual prospectus, and that the prospectus should be read prior to investing any money. An application to receive a prospectus may be included

The securities holdings report that an access person of an adviser is required to file with her firm's chief compliance officer does NOT include: a.The type of securities held in her personal account b.The date that the person submits the report c.The name of the broker-dealer that maintains the person's account d.The prices paid to acquire the securities

d Choices (a), (b), and (c), must be included in the report that an access person submits to her firm's CCO. However, the price that is paid to acquire securities is actually included in a different report (the transaction report).

A hedge fund investment would be least suitable for a client who is seeking: a. Professional management of their funds b. Exposure to a wide range of securities and strategies c. Tax advantages d. Liquidity

d Hedge funds typically invest in a variety of securities, using a number of strategies, as deemed appropriate by the investment manager. When a hedge fund is set up as a limited partnership, investors receive the flow-through of passive gains and losses. Most funds will allow investors only to withdraw their funds after a certain period, or only during certain periods--thus, the lack of liquidity

Modern Portfolio Theory (MPT) defines risk as the: a. Possibility of loss of principal b. Possibility that returns will be less than the rate of inflation c. Slope of the regression line of portfolio returns versus the market d. Variability of expected returns about the mean

d In MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used

Bob is a business manager for professional athletes. As manager, he negotiates their contracts, pays their bills, and provides them with tax advice. When trying to minimize their tax liabilities, Bob will periodically provide advice relating to securities. He considers this advice to be incidental to the business management service he provides. According to the Investment Advisers Act, would Bob be considered an investment adviser? a.No, the Act specifically excludes persons who provide financial services to athletes and entertainers b.No, since the investment advice is incidental to the business management service provided c.Yes, if Bob receives special compensation for the investment advice that he gives his clients d.Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers

d SEC Release 1092 states that sports and entertainment representatives who provide investment advice to their clients are investment advisers and subject to the Investment Advisers Act. The fact that the question refers to Bob as a business manager rather than a sports representative is not relevant. Advice that is incidental to a professional's services is limited to lawyers, accountants, teachers, and engineers. Entertainment and sports representatives who provide securities-related advice for compensation may not claim an exclusion from the definition of investment adviser. (79471)

Sid is an investment adviser. A number of his clients are willing to accept a relatively high level of risk to achieve potentially high returns. At various times in his career, Sid has attempted to anticipate market events to generate higher returns for his clients. He has found that over time, the results were disappointing. Sid is now a firm believer in indexing. Sid's view of a portfolio's performance over an extended time horizon is an example of: a. The Random Market Theory b. Modern Portfolio Theory c. The Dow Theory d. The Efficient Market Hypothesis

d The Efficient Market Hypothesis states that financial markets are efficient and that the prices of securities reflect all known information; therefore, prices adjust instantly to reflect new information. It would, therefore, be unlikely to consistently outperform the market over an extended period.

Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration? a.The sale of securities by a sheriff b.An isolated, non-issuer transaction c.A transaction executed on a national securities exchange d.A Rule 147 offering

d The Rule 147 (intrastate) exemption is a federal or SEC exemption and does not apply to the Uniform Securities Act. For that reason, an issuer conducting an offering of securities in one state is required to register the offering in that state. On the other hand, a transaction by a fiduciary, such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, is exempt from state registration. Additionally, isolated, non-issuer transactions and transactions executed on the New York Stock Exchange, Nasdaq, or any other recognized national or regional exchanges are exempt from state registration.

An investor purchased a 6%, A-rated, corporate bond at par value. After one year, the bond's total return is actually 6.50%. The most likely reason for this is: a.The credit rating of the bond was lowered, which increased the bond's yield b.Market interest rates increased to 6.50% for A-rated issues c.The investor's payment of accrued interest at the time of purchase lowered his effective return d.Interest rates have decreased

d The formula for calculating a bond's total return is interest received, plus appreciation, minus any depreciation, divided by the original cost of the investment. Since the 6% bond was originally purchased at par, but now has a total return of 6.5%, it is indicative of the bond's value having increased. Based on the inverse relationship between bond prices and interest rates, a bond's value will increase as market interest rates decrease.

Under the Uniform Securities Act, all of the following meet the definition of an agent, EXCEPT an individual who: a. Works for a broker-dealer and sells exchange-listed securities b. Effects transactions in registered securities with the public c. Represents a broker-dealer in effecting securities transactions, but does not earn commissions d. Represents an issuer in effecting exempt transactions

d Without exception, an individual who represents a broker-dealer in effecting securities transactions is considered an agent. Also, if an individual represents an issuer and receives compensation for selling securities that have been subject to registration, she is an agent. However, in choice (d), since the individual is representing an issuer in an exempt transaction, she is not considered an agent. Remember, if an individual represents a broker-dealer in effecting securities transactions, she must always register as an agent, even if she is involved in executing exempt transactions. To determine if an individual qualifies for an exception as an agent, determine who the individual represents -- a broker-dealer or issuer. Exceptions are available for individuals who represent an issuer, but not if representing a broker-dealer