Final Exam 5
According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is: A) 10 or fewer B) 10 or more C) More than 10 D) Less than 10
A) 10 or fewer **An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising. **
The Administrator may require the filing of advertisements related to which of the following securities? A) An oil lease certificate of interest B) Common stock offered to existing shareholders C) An insurance company's guaranteed investment contract D) Mutual fund shares
A) An oil lease certificate of interest **A certificate of interest is a security regulated by the Administrator along with its advertising. Advertisements sent to existing stockholders, as well as those related to investments issued by an insurance company, are exempt from filing. Also, mutual fund advertising is regulated by FINRA, not by a state Administrator.**
All of the following are characteristics of forward contracts, EXCEPT: A) Delivery and settlement of the contracts occurs immediately B) The contracts are negotiated off of an exchange C) The contracts cannot be offset D) The amount and type of the delivered commodity are negotiable
A) Delivery and settlement of the contracts occurs immediately **A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery.**
Which of the following is NOT TRUE regarding exchange-traded notes (ETNs)? A) ETNs are forms of secured debt instruments that have no credit risk B) The return on ETNs is linked to the performance of an index, commodity, or currency C) ETNs may be sold short D) At maturity, ETN investors receive the value of the underlying asset
A) ETNs are forms of secured debt instruments that have no credit risk **An investment in an ETN may be risky since it is an unsecured debt instrument. An ETN's performance is linked to an underlying index, commodity, or currency. Although ETNs do not pay interest, any gains on the underlying instruments are paid at maturity. ETNs can be purchased on margin and are able to be sold short.**
An investment company has entered into a contract with an investment adviser. The investment adviser seeks to have an exculpatory provision included in the contract. According to the Investment Advisers Act of 1940, which of the following statements is TRUE? A) Exculpatory provisions are prohibited in any contract B) The contract is valid only when exculpatory provisions are included C) A majority of shareholders would need to approve the exculpatory provisions of the contract D) In order for an exculpatory provision to be allowed, the SEC would need to approve the contract
A) Exculpatory provisions are prohibited in any contract **An exculpatory provision is prohibited in any contract entered into by an investment adviser and its clients. This is true even if the client is an investment company. An exculpatory provision protects officers and directors from liability from acts of willful misfeasance, bad faith, gross negligence, or reckless disregard of their duties. Any contract that includes such a provision would be void.**
If TopJob Advisers has limited discretionary authority over client funds, it is required to: A) Prepare a balance sheet and file it with the Administrator B) Prepare a balance sheet that is audited by an independent CPA and file it with the Administrator C) Prepare a balance sheet only if the majority of the firm's clients are qualified pension plans D) Prepare an audited balance sheet and provide its books and records to be spot checked by the Administrator, but only if 72 hours' advance notice is provided
A) Prepare a balance sheet and file it with the Administrator **If a registered investment adviser has discretionary authority over client funds or securities, it is required to file a balance sheet; however, the balance sheet is not required to be audited. An audited balance sheet is required to be created and filed if an adviser has custody or full discretion.**
An investment adviser's application for registration indicates that it will base its investment decisions on non-financial criteria, including psychic readings. According to the Uniform Securities Act, which of the following statements BEST describes the Administrator's power? A) The Administrator may deny or postpone a registration only for the reasons that are specified in the law. B) The Administrator may act in the public's best interest and deny the registration. C) The Administrator must review the track record of the applicant in order to determine the feasibility of this criteria for investing. D) The Administrator should encourage the adviser to use alternative methods of analysis and grant registration if there is a reasonable basis for this methodology
A) The Administrator may deny or postpone a registration only for the reasons that are specified in the law. **The state Administrator may only cite reasons that are found in state law to disqualify a person from registration (e.g., a felony conviction, violation of commodities laws, misleading statements, etc.). The law does not make reference to the specific analytical methods that IAs may use to determine their investment decisions. Instead, an Administrator's requirement is for investment advisers to disclose the methods that they will use.**
A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event of her death. She does not currently have a great deal of discretionary income. Which of the following would be most suitable for the IAR to recommend? A) A whole life policy, cancelable after 15 years B) A 15-year term life insurance policy C) A whole life policy with a 15-year term rider D) A universal life policy with increased premiums after 15 years
B) A 15-year term life insurance policy **Based on the client's future obligations and lack of discretionary income, term life offers the least expensive policy for the period she needs it for. A whole life policy charges higher premiums. A whole life policy with a term rider would be even more expensive, and the same is true of universal life.**
A top-down approach to investing would generally include all the following, EXCEPT : A) An analysis of economic trends B) An analysis of a specific company's past stock price C) An analysis of various industry sectors D) An analysis of specific companies within an industry sector
B) An analysis of a specific company's past stock price **Analyzing the past stock price of a specific company is typical with doing technical analysis. However, when doing a top-down analysis, the first step is to identify economic trends, then identify specific sectors or industries that may benefit from that trend. Lastly, identify specific companies within a sector that may be affected by a specific economic trend.**
A limited partnership sells an asset for a capital gain in the current year; however, the gain is distributed to the partners in the following year. What is the tax consequence of the gain? A) As ordinary income in the year it is distributed to the partners B) As a capital gain in the year it is realized by the partnership C) As ordinary income in the year it is distributed to the partnership D) As passive income the year realized by the partnership
B) As a capital gain in the year it is realized by the partnership **The key to this question is to recognize that there is only one answer that recognizes the result as a capital gain. Any capital gains that are realized by the partnership are taxed to the partners in the year in which the gain is incurred, not when the distribution is made to the partners. When a partnership generates income, a tax liability is created for the partners in the year in which it is generated. All sources of partnership income are reported to the partners on Schedule K-1. Capital gains can be classified as either short-term or long-term. **
Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals? A) Broker-dealers with no place of business in a state and a limited number of noninstitutional clients in a state must register B) Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register C) Investment advisers with no place of business in a state and whose only clients are institutional investors in a state need not register D) Investment advisers with no place of business in a state and a limited number of noninstitutional clients need not register
B) Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register **There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent's activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients.**
Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all electronic communications and their amendments must be maintained by the adviser for how long if distributed directly or indirectly and to how many persons? A) Three years if sent to two or more persons B) Five years if sent to two or more persons C) Three years if sent to ten or more persons D) The life of the firm if sent to thirty-five or more persons
B) Five years if sent to two or more persons **According to NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons.**
Which of the following is NOT TRUE regarding the characteristics of a real estate investment trust (REIT)? I) At least 90% of the income from a REIT must be derived from investing in real property II) At least 75% of the income from a REIT must be distributed to investors each year III) Any investment losses from a REIT are not passed through to investors IV) If sold to the public, the shares of a REIT must be registered with the SEC A) I only B) I and II only C) II and III only D) III and IV only
B) I and II only **REITs are required to generate at least 75% of their income from investing in real property—not 90%. Also, REITs are required to distribute at least 90% of their income to its shareholders each year—not 75%. For those REITs that are sold to the public, they must be registered with the SEC under the Securities Act of 1933. If a REIT incurs a loss, it is retained by the REIT and not passed through to the shareholders.**
A partner of an investment adviser may put all of the following information on her business card, EXCEPT the designation: A) CPA B) IAR C) CFP D) MBA
B) IAR **The initials IAR (investment adviser representative) may not be used. The abbreviation could signify that the individual has met some type of regulatory qualification. The use of the designation IAR is improper since it is not a designation approved by any professional organization. An IAR only needs to file with the state Administrator. A CPA (certified public accountant) and a CFP (certified financial planner) may be abbreviated since this qualification requires a person to meet specific standards and pass a number of examinations. MBA (Master of Business Administration) may also be abbreviated since the person has obtained a degree from a college or university. **
In an effort to diversify his portfolio, a client purchases a large amount of land in a rural area to be used for future development. Which of the following statements concerning this investment is TRUE? A) It carries a large amount of market risk and business risk B) It carries a larger-than-average amount of liquidity risk based on whether the land may be resold C) It would have no effect on the investor's portfolio diversification D) It carries a large amount of inflationary and financial risk
B) It carries a larger-than-average amount of liquidity risk based on whether the land may be resold **The only true statement is that the real estate investment will carry a large amount of liquidity risk. Real estate investments do not have business or financial risk. Undeveloped land tends to perform well against inflation. Rural locations may also offer real estate investors some diversification against the concentrations made in urban settings.**
Paul and Todd are starting their own business. They are trying to decide whether to organize this new business as a partnership or an S Corporation. What are some of the advantages of an S Corporation compared to a partnership? A) Favorable tax treatment B) Limited liability C)More transparency D)Fewer start-up costs
B) Limited liability **In a partnership, the general partners are liable for the partnership's debts. (Limited partners are not liable; however, there's no indication in the question stem that either Paul or Todd is a limited partner.) In an S Corporation, the owners are not liable for any of the company's debts. Instead, they have only limited liability. Both the S Corporation and LP are pass-through entities and receive favorable federal tax treatment. For these entities, all losses and profits are passed through to the owners.**
According to the Investment Advisers Act of 1940, access persons must submit their personal security holdings reports by: A) Promptly upon becoming an access person; then at least monthly thereafter B) No later than 10 days after becoming an access person; then at least every 12 months thereafter C) No later than 30 days after becoming as access person; then at least monthly thereafter D) No later than 45 days after becoming an access person; then at least monthly thereafter
B) No later than 10 days after becoming an access person; then at least every 12 months thereafter **According to the Investment Advisers Act of 1940, access persons include officers, directors, partners and other supervised persons who have access to non-public information. They are required to submit their personal securities holdings reports no later than 10 days after becoming an access person; then at least once every 12 months thereafter. Personal security transactions by an access person must be reported no later than 30 days after the end of each calendar quarter.**
The disadvantages of limited partnerships include: A) Inflation risk B) Potential assessments C) Double taxation of distributions D) Limited liability
B) Potential assessments **An investor in a limited partnership may receive an assessment (i.e., a demand that he contribute additional capital to the partnership). Many partnerships invest in assets, such as real estate, that may actually be a hedge against inflation, which addresses inflation risk. One of the advantages of limited partnerships compared to C Corporations is that they are not subject to double taxation, which eliminates that choice. For tax purposes, limited partnerships are pass-through entities. This means that all income, losses, and gains are passed through to the partners, who must declare the income on their own tax returns. When investing in LPs, limited liability is considered an advantage, not a disadvantage.**
Which of the following statements is FALSE concerning variable life insurance policies? A) All death benefits and cash values will fluctuate B) Premiums must be deposited into the insurance company's general account C) The policyholders assume the investment risk D) They are defined as securities
B) Premiums must be deposited into the insurance company's general account **For variable life insurance policies, all premiums are deposited in a separate account, rather than the insurance company's general account. Variable life insurance policies are considered securities and investment risk is assumed by the policyholders. **
All of the following statements are TRUE regarding forward contracts, EXCEPT: A) They have counter-party risk B) They are standardized and traded on an exchange C) They are often used to hedge against currency or exchange-rate risk D) The buyer is obligated to accept delivery of the underlying commodity at a specified time and price
B) They are standardized and traded on an exchange **Unlike futures contracts, forwards are not standardized agreements and they are not exchange-traded. Since forwards are not exchange-traded, the exchange does not guarantee against counter-party failure. Forward contracts are not readily transferable. In other words, to assign the contract to a third party, both the buyer and seller would need to agree on the assignment.**
According to the Uniform Securities Act, which of the following choices would meet the definition of a broker-dealer in State A? A) The trust department of the Merchants Bank located in State A B) Woodwyle Incorporated, a broker-dealer located in State B that conducts transactions for a customer who has moved to State A C) A person located in State A, who is in the business of providing advice relating to securities D) An agent located in State A, who effects securities transactions for his own account or the account of others
B) Woodwyle Incorporated, a broker-dealer located in State B that conducts transactions for a customer who has moved to State A **Woodwyle is defined as a broker-dealer and must be registered in the state to conduct business with existing customers who have moved to the state. An agent not registered in the state has 60 days to obtain registration in the state, provided the broker-dealer is registered in the state, the agent is registered in at least one state, and is not disqualified from registration in the state. **
In order to determine the suitability of a potential investor for a limited partnership, which of the following forms would the client complete? A)The partnership agreement B)The subscription agreement C) A private placement memorandum D) The certificate of limited partnership
B)The subscription agreement **Many states require potential partners to complete a subscription agreement, in order to determine their suitability as it relates to income, net worth, investment experience, and an understanding of investment risk. A certificate of limited partnership is filed by the general partner when setting up the partnership. The partnership agreement discloses the rights and duties of the partners. A private placement memorandum is given to investors in a private placement, in lieu of a prospectus.**
Ellis purchases an equity-indexed annuity contract that guarantees a 5% return with a 10% interest-rate cap. The index to which the funds are tied falls in value by 2% this year. What return does Ellis receive? A) -2% B) 3% C) 5% D) 8%
C) 5% **In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. In this case, the index earned -2%, so the client receives the guaranteed maximum 5% rate. **
Which of the following is NOT TRUE regarding a viatical settlement contract? A) The rate of return cannot be determined before the insured dies B) The inability to accurately calculate the actual life expectancy of the insured C) An investment in a viatical settlement contract is considered to be liquid D) If the insured lives longer than expected, the investor is required to pay the premiums to keep the policy in force
C) An investment in a viatical settlement contract is considered to be liquid **With a viatical settlement contract, if the insured lives beyond life expectancy, the investor is required to continue to pay the insurance premiums. Since the death of the insured is ultimately unpredictable, the future financial commitment is unknown. A viatical settlement contract is not a liquid investment as there is not a secondary market for such investments.**
Two years ago, in her personal account, a portfolio manager invested in, and continues to hold, stock that was issued through a private placement. Today, the company is going public and she recommends that same company's stock to her clients. The portfolio manager has just: A) Violated FINRA's new issue rule B) Engaged in insider trading C) Created a conflict of interest D) Commingled customer cash
C) Created a conflict of interest **In this situation, the portfolio manager has created a conflict of interest. If her clients buy the initial public offering (IPO) stock, the offering will be successful, which would allow her to cash out the investment she had acquired through the private placement. None of the other violations apply in this situation. **
A married couple received a $50,000 cash wedding gift and would like to use the money as a down payment on a new home. They anticipate closing on the new home within six months. Which of the following investments would be suitable? I) A money-market mutual fund II) A bank-insured CD III) A diversified portfolio of blue chip stocks A) I only B) II only C) I and II only D) I, II, and III
C) I and II only **Since both money-market mutual funds and bank-insured certificates of deposit are very conservative and liquid investments, they would be the best choices for this couple. A stock portfolio would expose the couple to market risk and would therefore be unsuitable based on their short time horizon and capital preservation need.**
An agent who holds full discretionary authority over a customer's account may: I) Buy or sell securities in the account without consulting the customer II) Receive a fee for using his discretion in trading the account III) Withdraw money from the account IV) Borrow assets from the customer's account A) I only B) I and II only C) I and III only D) II and IV only
C) I and III only **An agent who has been granted full discretionary authority over a customer's account may buy or sell securities in the account without consulting the customer and may withdraw money from the customer's account. However, even if an agent has been granted discretionary authority, he may not receive a fee for using his discretion in trading the customer's account and may not borrow the client's assets.**
According to the Uniform Securities Act, if an investment adviser is registered in, and has an office in, a particular state, it must: I) File any required financial statements with the Administrator II) Maintain books and records as required by the Administrator III) File an updated Form ADV with the Administrator for any material changes to its business IV) Schedule annual inspections with the Administrator A) I and II only B) II and III only C) I, II, and III only D) I, II, III, and IV
C) I, II, and III only **Investment advisers initially register with the Administrator by filing Form ADV. If the adviser experiences any material changes to its business, an updated Form ADV must be filed. The Administrator also requires advisers to file financial statements and to maintain certain books and records. While the Administrator may subpoena books and records at any time, it does not inspect advisers on a specific schedule. **
Under the Uniform Securities Act, the sale of limited partnership interests to a bank is exempt from: I) The antifraud provisions II) The registration requirements III) The filing requirement for advertisements A) I only B) II only C) II and III only D) I, II, and III
C) II and III only **Any sale of securities to an institution (e.g., a bank) is considered an exempt transaction under the USA. This exempts the securities from registration and any related advertising from being filed with the Administrator. However, no person, security, or transaction is exempt from the antifraud provisions of the Uniform Securities Act.**
Which of the following forms would a publicly traded corporation typically file with the SEC during its lifetime? I) SEC Form 1092 II) Form 10-K III) Form 8-K IV) Form 10-Q A) I and III only B) I, II, and III only C) II, III, and IV only D) I, II, III, and IV
C) II, III, and IV only **Publicly traded companies disclose their annual financial reports on Form 10-K and quarterly reports on Form 10-Q. Public companies must also report certain material corporate events on a more current basis. Form 8-K is the current report companies must file with the SEC to announce major events that shareholders should be informed about. SEC Release 1092 was published by the SEC to provide guidance to investment advisers.**
Under the Uniform Securities Act, which of the following statements are NOT TRUE concerning an Administrator taking disciplinary action against a person? I) There must be written findings of fact and conclusions of law. II) The Administrator may take action against a person with or without the opportunity for a hearing. III) The Administrator does not need to provide the person with prior written notice. IV) The Administrator's order may be appealed if the person files a petition in court within 90 days. A) I and IV only B) II and III only C) II, III, and IV only D) I, II, III, and IV
C) II, III, and IV only **The Administrator must provide a person with prior written notice, an opportunity for a hearing, and written findings of fact and conclusions of law when taking disciplinary action against a person. The Administrator's order may be appealed if the person files a petition in state court within 60 days.**
Currently, the price of gold is increasing as the price of Treasury bills is declining. These two assets are considered: A) Perfectly correlated B) Uncorrelated C) Negatively correlated D) Slightly correlated
C) Negatively correlated **When two investments are moving in the opposite direction, they are said to be negatively correlated. Those that move in the same direction are correlated. Those that show no pattern of correlation are uncorrelated**
Sharpshooter Investments (a broker-dealer) has submitted its registration paperwork to the state Administrator. According to the Uniform Securities Act, its registration will become effective at: A) Noon on the 10th day after filing B) Noon on the 20th day after filing C) Noon on the 30th day after filing D) Midnight on the 30th day after filing
C) Noon on the 30th day after filing **Assuming a broker-dealer applicant has submitted all required documentation, its registration becomes effective at noon on the 30th day after filing with the state. The Administrator does have the power to grant an earlier effective date, and may defer the effective date until the 30th day after the filing of any amendment to the initial application.**
A client has his portfolio invested in a number of different equity securities in the energy, manufacturing, and technology sectors. His investment adviser representative wants to help him reduce his systematic risk. Which of the following types of securities would the IAR most likely discuss with the client? A) Securities which have a positive correlation with the securities that are currently in his portfolio, such as debt instruments. B) Securities which have a negative correlation with the securities that are currently in his portfolio, such as S&P 500 Index Exchange-Traded Funds. C) Securities which have a negative correlation with the securities that are currently in his portfolio, such as debt instruments. D) Securities which have a positive correlation with the securities that are currently in his portfolio, such as S&P 500 Exchange-Traded Funds.
C) Securities which have a negative correlation with the securities that are currently in his portfolio, such as debt instruments. **In order to minimize systematic (market) risk, the Modern Portfolio Theory states that an investor should have different asset classes in his portfolio that have a negative correlation. When securities are negatively correlated, their prices have a tendency to move in opposite directions, such as the movement of common stocks relative to debt instruments**
A client with a net worth of $2,500,000 has $300,000 in funds managed by an investment adviser. The investment adviser normally charges 1% of the assets under management but will waive the fee if the performance of a client's account does not attain a certain level of capital appreciation. According to the Investment Advisers Act, which of the following statements is TRUE? A) Only a control person of the investment adviser may approve the arrangement B) Only the SEC may approve the arrangement C) This provision is allowed if the client signs the contract D) This practice is prohibited
C) This provision is allowed if the client signs the contract **This case is an example of a contingent fee, which generally includes any arrangement in which the adviser's fee depends on attaining a specific level of capital gains or appreciation (or avoiding capital losses or depreciation). The SEC considers contingent fees a type of performance fee, which are generally prohibited in advisory contracts. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser, or clients who have a net worth in excess of $2,000,000. Since the client has a net worth of $2,500,000, she would qualify for this exception.**
Which of the following choices would NOT meet the definition of an exempt transaction? A) A transaction by a trustee involved in a bankruptcy B) An unsolicited nonissuer transaction with a retail investor C) Transactions between an issuer and retail investors D) A transaction executed by a bona fide pledgee
C) Transactions between an issuer and retail investors **Any transactions by trustees involved in a bankruptcy--sheriffs, marshals, guardians, and other fiduciaries are considered exempt transactions. Unsolicited nonissuer transactions whether with retail or institutional investors and transactions executed by a bona fide pledgee are also considered exempt transactions. However, transactions between issuers and retail investors are not exempt from registration. A transaction between an issuer and underwriter would be an exempt transaction.**
A portfolio has an alpha of 0%, a beta of 1.0, and an actual return of 12%. What would the alpha of the portfolio be if the beta was 0.9 and the actual return was 10.6%? A) 1.40% B) -1.40% C) 0.00% D) -0.20%
D) -0.20% **Alpha is the difference between the portfolio's actual return (which is given) and expected return. The expected return can be determined by using the Capital Asset Pricing Model (CAPM). Since this question doesn't provide a risk-free rate, the calculation of expected return is simply beta multiplied by the market return (Expected Return = Beta x Market Return). The first step is to find the return on the market. Since the portfolio has an alpha of 0%, the actual rate of return on the portfolio is equal to the expected rate of return (i.e., 0% Alpha = Actual Return of 12% - Expected Return). If a portfolio has a beta of 1.0, its expected return will be the same as the market return (i.e., Expected Return of 12% = Beta of 1.0 x Market Return). In summary, if alpha is 0% and beta is 1.0, the portfolio's actual rate of return is the same as the market return, which is 12%. Using the market return of 12%, the expected return can be determined if the beta changes to 0.9. The expected return is 10.8% (Beta of 0.9 x Market Return of 12%. Therefore, the alpha can then be calculated by taking the actual return on the portfolio minus the expected return (actual return of 10.6% - expected return of 10.8% = -0.2% alpha).**
Over the past 10 years, the annual percentage returns for a mutual fund have been 7%, 8%, -9%, 8%, -4%, 5%, 6%, 8%, 10%, and 12%. What is the range of returns? A) 5.1 B) 8 C) 7.5 D) 21
D) 21 **The range of a data set is the difference between the lowest and highest number. When the data points are arranged from the lowest to the highest, it becomes clear that the range is 21 (from -9 to +12)
A wrap account would likely be MOST suitable for a client who: A) Employs a buy-and-hold strategy B) Wants to minimize the taxes generated in the account C) Often conducts his own research and trades actively D) Executes several securities transactions per week
D) Executes several securities transactions per week **A wrap account is a type of account that's managed by an investment adviser where the firm charges one flat fee that covers both portfolio management and transactions costs. A traditional fee-plus-commission account may be less expensive for a client who does not trade frequently, (i.e., whose portfolio has a low turnover). The client who employs a buy-and-hold strategy fits this category. A wrap account would not help the client who wants to minimize taxes. The client described as often conducting his own research and trading actively may be a good choice, but its seems as though this client is unlikely to want to pay another person to manage his account. The client who executes several securities transactions per week is the most likely person to benefit from a wrap account.**
According to the Investment Advisers Act, in order to register as an investment adviser with the SEC, which of the following choices is required? A) File a consent to service of process, pay a fee, and individually register all employees B) File Part 1 of Form ADV C) File Part 1 of Form ADV and produce a surety bond D) File Part 1 and Part 2 of Form ADV
D) File Part 1 and Part 2 of Form ADV **In order to register as an investment adviser with the SEC, the applicant must file Part 1 and Part 2 of Form ADV with the SEC. Individual registration of employees with the SEC is not required.**
An equity-indexed annuity is a type of: A) Variable annuity that tracks the S&P 500 Index B) Variable annuity that tracks the DJIA C) Fixed annuity that tracks the performance of a designated mutual fund D) Fixed annuity that offers the potential for greater returns
D) Fixed annuity that offers the potential for greater returns **An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.**
All of the following are characteristics of futures contracts, EXCEPT: I) Most of the contract's terms are set by the buyer and the seller II) The amount of the commodity being traded is standardized III) Prices are negotiated between the buyer and the seller IV) The buyer of a futures contract cannot be forced to take delivery A) I only B) I and II only C) II and III only D) I and IV only
D) I and IV only **A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument. Most of the contract's terms, such as the size of the contract, the point of delivery, the delivery month, and the grade of the underlying security or commodity are set by the exchange on which it trades. Although futures contracts may be offset, they differ from options because the buyer of futures contract may be forced to take delivery.**
Under the Uniform Securities Act, all the following are considered to meet the definition of agent, EXCEPT: I) A sales representative of a broker-dealer who sells only securities that are covered under a federal exemption II) An assistant to a sales agent who accepts orders when the agent is unavailable III) A subsidiary of a bank that is registered as a broker-dealer and sells non-exempt securities to the public IV) A broker-dealer that sells only exempt securities within the state A) I and II only B) I and IV only C) II and IV only D) III and IV only
D) III and IV only **By definition, a sales representative of a broker-dealer is an agent. This is true regardless of whether the securities being sold are covered under a federal exemption. Also, a sales assistant is considered an agent if she is authorized to accept client orders. Choices (III) and (IV) describe activities involving the broker-dealer (firm) and not an agent (individual).**
An adviser recommending a limited partnership should discuss all of the following risks with the client, EXCEPT: A) Lack of liquidity B) Loss of capital C) Regulatory changes D) Inflation
D) Inflation **The potential investment risks associated with limited partnerships include illiquidity, potential loss of capital, and changes in the regulatory or tax environment. Inflation, however, is not usually a risk associated with these investments. Indeed, one of the advantages of limited partnerships is that they may provide a hedge against inflation by allowing people to invest in real estate or commodities, the price of which tends to increase along with inflation**
Which of the following is NOT included in the adjusted gross income (AGI) of a customer? A) Salary, tips, and bonus B) Alimony support payments that are received from an ex-spouse C) Dividends received from stock D) Interest received from a municipal bond investment
D) Interest received from a municipal bond investment **A client's federal adjusted gross income (AGI) consists of her taxable income. Examples of taxable income include a client's salary, tips, bonuses, alimony received, and dividends. Since municipal bond interest is tax-free, it is not a part of the AGI. **
Jill has created a revocable trust to provide for the support of her adult child. The trust has generated $20,000 in income during the year and is invested in a wide variety of stocks and bonds. Which of the following statements concerning this trust is NOT TRUE? A) Jill controls the assets in the trust. B) The trust must be structured as a living trust. C) The trust will become irrevocable upon Jill's death. D) Jill reduces her potential estate tax liability by the amount of the gains in the trust.
D) Jill reduces her potential estate tax liability by the amount of the gains in the trust. **A revocable trust must be established as a living trust since the donor retains control over the assets. This type of trust does not reduce the donor's potential estate tax liability. With an irrevocable trust, the donor loses control of the assets, but the assets will not be included as part of the donor's estate. This is the trade-off between the two types—retain control and potentially pay more taxes (revocable trust) or lose control and potentially pay less in taxes (irrevocable trust).**
Hi-Growth Investments is a state-registered investment adviser that has increased the number of its branch offices and expanded its product line due to the recent acquisition of Static Advisers, a smaller regional boutique investment advisory firm. Hi-Growth must inform the Administrator of any amendments to its registration statement: A) Within 48 hours of the closing of the acquisition B) Within 10 business days of the end of the month in which the acquisition occurred C) The earlier of 60 days after the acquisition, or the anniversary date of the Hi-Growth's acquisition D) Promptly
D) Promptly **The Administrator must be informed promptly of any material change in the registration of either the firm or an individual employed by the firm.**
Which feature of a deferred compensation plan is generally considered to be a disadvantage? A) The plan must be made available to all employees regardless of tenure B) The plan has a short vesting period C) Unless the plan is funded by the end of the year, the employer will be subject to harsh penalties for breaching its fiduciary duty D) The plan is not tax-deductible
D) The plan is not tax-deductible **Deferred compensation plans are nonqualified and funded with after-tax dollars. These plans are not available to all employees and do not require immediate funding.**
All of the following statements are NOT TRUE, EXCEPT: A) Variable life, as with universal life, gives the policyholder the flexibility to change the death benefit and the premium payments B) Universal life, as with variable life, gives the policyholder flexibility in changing how the cash value is invested C) Variable life, as with whole life, has fixed premiums and a fixed death benefit D) Variable life, as with whole life, has fixed premiums paid at fixed intervals
D) Variable life, as with whole life, has fixed premiums paid at fixed intervals **While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals. **
An investment adviser's client base is limited to insurance companies. If the adviser has its only office in State A, with whom must it register? A) With the SEC under the Investment Advisers Act of 1940 and with State A using the coordination method under the Uniform Securities Act B) With the SEC under the Investment Advisers Act of 1940 and notice file with State A C) With the SEC under the Investment Advisers Act of 1940 only D) With State A under the Uniform Securities Act, but not with the SEC under the Investment Advisers Act of 1940
D) With State A under the Uniform Securities Act, but not with the SEC under the Investment Advisers Act of 1940 **In this example, since the investment adviser is dealing exclusively with insurance companies, it is exempt from registration under the Investment Advisers Act of 1940. However, the IA would likely be required to register in State A because it has an office there**
