Final Exam 1
non-issuer transaction
(secondary market trade) involves any purchase or sale of a security whereby the issuer does not directly or indirectly derive a benefit.
He wants the ability to buy more shares at a guaranteed price in case the stock goes up
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?
4%
A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80% of the performance of the S&P 500, whichever is greater. The index declines over the course of the next year. What return will your client receive?
As the seller, the broker-dealer may attempt to prove that the firm did not know about the error and that reasonable care was taken to discover any errors
A client who purchased a security from a broker-dealer has filed a lawsuit arguing that he is entitled to damages after discovering a material error on the firm's part. Which of the following is a reasonable defense to the suit?
current ratio increases
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?
The employee would be required to register in any state in which he solicits investors
A firm that is expecting to take its shares public has recently hired a new employee to assist in selling shares to investors. According to the Uniform Securities Act, which of the following statements is TRUE?
A widower investing the proceeds of his deceased spouse's life insurance policy, whose main objectives are current income and capital preservation
A limited partnership would be the least suitable for which of the following investors?
are tax-deductible (pre-tax)
According to IRS rules, contributions that are made to either public charities or private foundations
No later than 30 days after the end of each calendar quarter
According to the Investment Advisers Act of 1940, when must an access person submit a transaction report?
Give notice or notice file in any state where they transact business with six or more individual retail clients
According to the Uniform Securities Act, the Administrator may require federal covered advisers to:
A statement that the implementation of client financial plans may be limited because of the incomplete product selection available through PPP
Action Advisers creates financial plans for clients. It generally implements these plans through Packaged Products Producers (PPP), a limited broker-dealer owned by Action. PPP offers a mix of mutual funds and variable annuities, but does not engage in transactions involving individual stocks or bonds. What information must be disclosed to Action's advisory clients?
individual
All are required to be disclosed except Social Security numbers, unless the applicant is an
states
All listed securities, such as Nasdaq securities, are also federal covered and, therefore, exempt from registration with the
Both the agent and broker-dealer, promptly
An agent is terminated by his broker-dealer. Who must notify the Administrator and when?
The agent needed approval for the new account prior to executing the first order
An agent opens a new account for a client and enters a market order to buy 200 shares of XYZ. At the end of the day, the agent turns in a new account form and a copy of the order ticket for approval by the supervisor. Under the Uniform Securities Act, which of the following statements is TRUE?
Standard Deviation
An investment adviser has computed investment returns from clients over the past three years. Which of the following methods would be most useful for calculating the variance of returns that the clients have attained?
10 days after the end of the calendar quarter
An investment adviser must record the personal securities transactions that are effected by its officers, directors, partners, and employees by no later than:
10 days of the end of each quarter, excluding direct obligations of the U.S. government
As an investment adviser, you are required to record and keep a record of every transaction in a security for a client's account within:
Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers
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?
Efficient Market Hypothesis
Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as:
The policy may establish a minimum death benefit
Charlie Johnson owns a variable life insurance policy. Which of the following statements is TRUE concerning Mr. Johnson's policy?
Limited liability company
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:
SEC Release IA-1092
IAR/RR who intends to implement a plan using only products offered by a given broker-dealer must inform the client that the plan's implementation may be limited as a result. The IAR/RR should also disclose that PPP is a subsidiary of Action, since this is a conflict of interest. Mutual funds may provide sufficient diversification for many clients
Any unusually excessive fees
If a client executes a secondary market trade through a broker-dealer, what information must be disclosed to the client?
Buy S&P 500 Index puts
If a client is long a large number of stocks in different industries, he may reduce the risk of a market decline by doing which of the following?
Current ratio
If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the:
Initiate transactions in the account
If an agent participates in a joint account with a client, the agent may:
Since the agent unknowingly made misrepresentations regarding a security, the agent is not subject to disciplinary action.
If an agent unknowingly misrepresents the risk associated with a security, which of the following statements is correct according to the Uniform Securities Act?
qualification
Intrastate offerings are commonly registered by
It is acceptable if Kyle, Christina, and Christina's broker-dealer agree to it in writing
Kyle and Christina have been friends since high school. Christina is an agent of a broker-dealer, while Kyle is a wealthy musician. Together they open a joint brokerage account. They each deposit $30,000 and agree to split any profits equally. What are the regulations for this arrangement?
initial public offering
Registration by coordination would most likely be used to register what type of offering?
The Efficient Market Hypothesis
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:
The firm's current financial condition
The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application?
Yes, since the investment manager did not follow the stipulations of the investment policy statement
The investment policy statement of a qualified retirement plan states that no more than 50% of the plan's assets may be invested in stocks. The investment manager places 65% of the plan's assets in stocks in order to take advantage of a bull market and increase the value of the plan's assets. Has the investment manager violated the fiduciary responsibility provisions of ERISA?
asset allocation fund
The manager of the XYZ Fund is permitted to move assets between the stock and bond markets, depending on economic conditions. Last year the manager had 70% of the fund's assets invested in stocks while only 30% in bonds. This year she has reversed the ratio. XYZ fund is most likely a(n):
Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services
Under NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding investment advisory fees charged to customers?
An investor purchased bonds and received a warrant as a bonus
Under the USA, which of the following choices is considered an offer of securities?
The objectives of the trust as a whole should be taken into consideration when making investment decisions
Under the Uniform Prudent Investor Act, which choice BEST explains the level of care a trustee must exercise when managing a trust?
10 years
Under the Uniform Securities Act, an Administrator may deny registration to an agent because of findings that indicate the agent had been convicted of a felony within the past:
Five years
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:
The sale of an outstanding security on the New York Stock Exchange
Under the Uniform Securities Act, which of the following sales is considered a non-issuer transaction?
exempt security
Uniform Securities Act any security issued by Canada or a Canadian Province, or savings and loan association, or any railroad company is considered an
Low price earnings ratios
Value investors would be interested in companies that have:
Income is only taxed once
What is the biggest advantage of investing in a general partnership?
Other taxable income that is generated by the trust
When considering the tax consequences of trading securities within a trust, the trustee should examine:
50% of the market value of the security
When trading on margin, clients are required to deposit:
They are exempt from state registration and they must register with the SEC.
Which TWO of the following statements are TRUE regarding investment advisers with $135 million of assets under management?
Contributions are made with after-tax dollars
Which of the following features is a characteristic of a Roth IRA?
Rotating between long-term and short-term bonds
Which of the following is not a sector rotation strategy?
Public offerings of securities
Which of the following securities or transactions are subject to the registration provisions of the Uniform Securities Act (USA)?
It may result in a portfolio that does not accurately track the index.
Which of the following statements is TRUE about indexing?
They must have a legitimate business purpose in order to receive the full potential tax benefits
Which of the following statements is TRUE concerning family limited partnerships?
The Administrator may issue a cease-and-desist order to an agent of a broker-dealer without a hearing
Which of the following statements is TRUE regarding the state securities Administrator?
limited partnerships
Which types of investments have historically shown a great deal of exposure to regulatory risk?
An employee of a school district
Who is permitted to participate in a tax-sheltered annuity established under Internal Revenue Code Section 403(b)?
New York Stock Exchange (NYSE)
a stock trade that occurs on the ______ is an example of a non-issuer transaction
purchase of long-term bonds
allows an investor to capture higher long-term interest rates
passive strategy
an IA attempts to build a portfolio that will mirror or match the performance of a specific index
Dodd-Frank Act
an adviser has a choice and may register with the state Administrator or the SEC once it has assets under management (AUM) of $100 million
agent
an employee of an issuer selling stock to the public would be considered an ______ under the USA
Broker-dealers and/or their agents
are always required to notify their clients if the fees that they are going to be charged are excessive or out of the ordinary.
US Treasury bills and Tax anticipation notes
are both short-term debt instruments and are considered money-market instruments
Convertible debentures
are debt instruments; however should not be assumed to one year or less
money-market securities
are defined as debt instruments that have less than one year until maturity
Mutual funds
are federal covered securities
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. These are generally prohibited under the Uniform Securities Act, some state Administrators make exceptions.
Investment Advisor representative (IAR)
are persons who are associated with an IA and make recommendations, manage accounts, solicit or negotiate the sale of IA services, or supervise any persons who engage in these activities.
systematic risk
can not be diversified
Barbell Strategy
consists of buying short-term and long-term bonds, but not intermediate-term bonds
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
Withdrawals
from a Roth IRA are classified as qualified distributions only if it has been at least five years since the investor first opened and contributed to her Roth IRA.
coordination
he method of registration most often used by the new issuers of securities is registration by
Rule 147 exemption
is a federal or SEC exemption and does not apply to the USA. An issuer conducting an offering of securities in one state is required to register offering in that state.
Standard deviation
is a statistical term used to characterize the dispersion of numerical measures in a given population.
money-market mutual fund
is an instrument that issues common shares which represent an investor's ownership interest in a portfolio fo money-market securities
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 earnings per share, high dividend yield, low price-to-book ratio, and/or low price-to-earnings ratio.
market maker
is prohibited from adding a large markup to a stock price in order to ensure a profit
contemporaneous market price
is the current price at which a firm is willing to effect a trade
Sector rotation
is the moving of investments from one industry sector into another in anticipation of a change in the economy.
regulatory risk
is the possibility that changes in the law or regulations can have an adverse impact on the value of investment. Although all kind of investments can be subject to ______, limited partnerships have historically been particularly vulnerable.
Variable life insurance
is unsuitable for a client who needs to meet a short-term savings goal
limited partnership
may not be a suitable investment for any of these individuals. The use of insurance proceeds are definitely the least suitable based on his circumstances and investment objectives.
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
Form ADV Part 2
or the brochure is actually a disclosure document that investment advisers provide to their clients; this is not used by broker-dealers
IA representatives
persons who perform clerical functions (e.g., accountants) are not considered
standard deviation
provides a good indication of volatility.
short-term bonds
provides the opportunity to invest elsewhere if the bond market takes a downturn
Investment Company Act of 1940
regulates investment companies, their investment advisers, custodian banks, and distributors.
NASAA's model rules
require that advisory fees be reasonable based on industry standards. Disclosing a fee and receiving written acceptance from a client does not assure that an adviser has met its fiduciary requirement. Even if a client agrees to an excessive fee, it is still excessive and may be a violation.
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.
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.
Open-end investment company (mutual fund)
shares are not appropriate for short-term trading, do not trade on an exchange, and cannot be purchased on margin. On the other hand, most ETFs and closed-end fund shares trade on an exchange and allow the use of margin and short selling
Efficient Market Hypothesis (EMH)
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
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.
standard deviation
tells how tightly a set of values is clustered around the average. It is a measure of dispersal, or variation, in a group of numbers
Internal Rate of Return (IRR)
the client can use that rate to compare this investment to other investments
long end of the barbell
there is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the
IAR
there is no requirement for a person to be an employee or to be solely dedicated to sales to meet the definition of
state registration
transaction by fiduciary, such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, is exempt from
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
