Greenlight Exam 1
Which of the following choices is a characteristic of equity-indexed annuities? A) A guaranteed minimum rate of return that is equal to the value of the underlying index B) A rate of return that varies with the value of the underlying index C) A rate of return that is determined by the subaccounts selected by the contract owner D) A standardized rate of return that is set annually by the National Association of Insurance Companies (NAIC)
B) A rate of return that varies with the value of the underlying index **In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. However, the guaranteed return is never as high as the return of the actual index. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate return may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked (choice [b]).**
A semi-retired IAR works for an investment adviser that is located in State A, but she intends to spend the winter months in her second home in State B. The IAR put the addresses of both her office in State A and her home address in State B on her business cards since she intends to continue servicing her clients that reside in State A over the winter months. If the investment adviser does not have an office in State B, which of the following statements is TRUE? A) Neither the IAR nor the investment adviser need to be registered in State B since they are only doing business with clients whose residence is in State A. B) Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card. C) The IAR needs to register in State B, but the investment adviser does not. D) The investment adviser needs to register in State B, but the IAR does not since neither she nor her clients are residents of the state.
B) Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card. **Because the IAR has put both her home address in State B and phone number on her business cards, her residence qualifies as an office in State B. Both the investment adviser and the IAR are required to register in State B, despite the fact that they are only doing business with clients who are not residents of State B.**
A Nasdaq listed company is offering 1,000,000 shares of common stock in State A. The Administrator in State A may: I) Not require registration of the stock in State A. II) Require the issuer to perform notice filing. III) Require the issuer to pay a fee.Investigate the underwriter for possible fraud in connection with the offering. A) I and III only B) I and IV only C) II and III only D) II and IV only
B) I and IV only **Securities that are listed on a national exchange (e.g., Nasdaq, NYSE, or AMEX) are referred to as federal covered securities and, therefore, are not required to be registered at the state level. Additionally, if the federal covered security is listed on an exchange, the state may not require the issuer to pay a fee, submit a notice filing, or provide a consent to service of process. However, the state Administrator may investigate any broker-dealer (including the underwriter) that participates in the offering for fraud or deceit and file an enforcement action if it is warranted.**
Securities that are registered through qualification may only be sold: A) Upon effective SEC registration B) Once the registration is declared effective by the Administrator C) The day after receiving the Administrator's approval D) Upon completion of the 20-day cooling-off period
B) Once the registration is declared effective by the Administrator **Securities that are registered through qualification may be sold once the registration is declared effective by the Administrator. Note that in choice (c), the use of the term approved is inappropriate. Securities that are deemed effective for sale by an Administrator may not be described as having been approved by the Administrator.**
If a client buys a futures contract and holds it to expiration, what is his obligation? A) The buyer is obligated to offset his position on the exchange B) The buyer is obligated to take delivery of the underlying commodity C) The buyer of a futures contract has no obligations D) The buyer is obligated to deliver shares of stock
B) The buyer is obligated to take delivery of the underlying commodity **Futures contracts obligate an investor to either buy or sell a fixed amount of a commodity (e.g., wheat) at some point in the future. Although some investors choose to offset their obligation prior to the contract's expiration, an investor who does not offset his contract must either take or make delivery of the physical commodity. Buyers are obligated to take or accept delivery of the commodity, while sellers are obligated to make delivery.**
When executing a trade for a client, an agent inadvertently misrepresents the risks associated with U.S. Treasury bonds. Under the Uniform Securities Act, which of the following statements is TRUE? A) If the client profits from the trade, then no violation has occurred. B) This activity is unethical. C) ) There is no violation since no action can be taken against inadvertent activity. D) Since there are no risks associated with U.S. Treasury bonds, no violation of the USA has occurred.
B) This activity is unethical. **Since the action was inadvertent, it does not constitute fraud. However, the action certainly represents unethical activity which could lead to civil liabilities, due to the fact that the client has the right to sue to recover his losses. For choice (d), suggesting that U.S. Treasury bills, bonds, and notes are free of risk is inaccurate. Although government securities have no credit (default) risk, they remain subject to interest-rate risk.**
When is a mutual fund's prospectus required to be delivered? A) When a client places a buy order for mutual fund shares B) When a client is solicited to buy mutual fund shares C) At or prior to the confirmation of purchase of mutual fund shares D) Only upon request from the client
B) When a client is solicited to buy mutual fund shares **Agents selling mutual fund shares are required to deliver a prospectus when they attempt to sell to prospective investors (i.e., at or before solicitation). In some instances, agents of broker-dealers can use a summary prospectus when selling, but only if the full prospectus is delivered at the confirmation of the sale.**
An investment adviser representative indicates to his compliance officer that he believes a new stock offering shows great promise and has a significant upside. The IAR plans to purchase significant amounts for his clients as well as his personal account. The research department of the IAR's firm does not currently follow the issuing company. Does this proposed course of action violate the IAR's fiduciary responsibilities to his clients? A) No, since he is not discriminating between clients and he is also buying the stock for his personal account. B) Yes, since he does not have a reasonable basis for his recommendation and the purchase may not be suitable for each of his clients. C) No, since some amount of equity is good for all clients. D) Yes, since the research department of his firm does not follow the stock.
B) Yes, since he does not have a reasonable basis for his recommendation and the purchase may not be suitable for each of his clients. **Based on the information provided in the question, the IAR does not seem to have a reasonable basis for his recommendation. It is unlikely that a new stock offering would be suitable for all of his clients.**
A resident of State A buys a 4% general obligation bond offered by State B. The investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the bond's taxable equivalent yield? A) 13.33% B) 5.20% C) 5.71% D) 9.00%
C) 5.71% **The interest derived from a municipal bond is exempt from federal taxes, but is typically subject to state income tax. Since the State B bond is being purchased by a resident of State A, the interest must be declared as income and is subject to state income taxes. On the other hand, if the issuing municipality is located within the state in which the investor files her return, interest on the bond is exempt from state taxes as well. The formula for calculating the taxable equivalent yield for a tax-free bond is: Tax-free yield ÷ (100% - Tax rate %). For this question, the taxable equivalent yield is 5.71% (4% ÷ [100% - 30%]).**
According to the Uniform Securities Act, which of the following is an exempt security? A) An equity transaction between the issuer and its underwriter B) The pledge of securities to collateralize a loan C) A public offering of U.S. government securities D) An isolated, unsolicited transaction involving non-exempt securities
C) A public offering of U.S. government securities **Choice (c) involves an exempt security. However, choices (a), (b), and (d) are examples of exempt transactions.**
Of the following choices, which one is a derivative? A) A UIT B) A hedge fund C) A swap D) A REIT
C) A swap **Of the given choices, only a swap is considered a derivative. A derivative is a security whose price is dependent on or derived from one or more underlying assets. There are many different types of swaps, including interest-rate swaps, currency swaps, and credit default swaps.**
Which of the following factors is the BEST measure of a bond's volatility? A) Standard deviation B) Effective Yield C) Duration D) Alpha
C) Duration **Duration measures the price sensitivity of a particular bond based on changes in interest rates.**
Which of the following statements is TRUE regarding American style versus European style exercise for option contracts? A) European style options may be exercised by the seller only on the business day before expiration. B) American style options may only be exercised by the buyer on the business day of expiration. C) European style options may only be exercised by the buyer on the business day of expiration. D) American style options may be exercised by the seller at any time before expiration.
C) European style options may only be exercised by the buyer on the business day of expiration. **European style options may only be exercised by the buyer on the business day of expiration. However, American style options may be exercised by the buyer on any day up to, and including, the day of expiration. Only the buyer of the contract has the ability to exercise the option. In contrast, sellers are exercised against.**
Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, an investment adviser closes one of its branch offices and must therefore file an amendment. What constitutes a prompt filing with the IARD? A) Filing the notice by December 31 of the current year B) Filing the notice by October 31 of the current year C) Filing the notice by September 30 of the current year D) Filing the notice by the end of the adviser's fiscal year.
C) Filing the notice by September 30 of the current year **Amendments to Form ADV are required to be filed promptly with the Investment Adviser Registration Depository. Under the Uniform Securities Act, a filing is done promptly if it is done within 30 days of the event that caused the filing requirement, which in this question is September 30.**
Assuming an expected rate of return, a specific holding period, and a sum to be invested, an IAR is able to determine an investment's: A) Present value B) Discount rate C) Future value D) Internal rate of return
C) Future value **The future value of an investment is based on the present value of the amount invested, using a discount rate each year, and doing so over a given period of time. The assumption is that the annual return is reinvested at the same rate, or is compounded over the given time period, thereby resulting in a future value that exceeds the present value.**
The maximum criminal penalties for violations of the Investment Advisers Act are: I) A $5,000 fine II) A $10,000 fine III) Five years in prison IV) Three years in prison A) I and III B) I and IV C) II and III D) II and IV
C) II and III **Under the Investment Advisers Act of 1940, the maximum criminal penalty is five years in prison and/or a $10,000 fine. If the question was based on the Uniform Securities Act, the maximum criminal penalty is three years in prison and/or a $5,000 fine.**
An agent inadvertently sold an unregistered, non-exempt security to a client. Under the Uniform Securities Act, which of the following actions may the agent take to remedy the situation? I) Have the security registered as soon as possible to avoid regulatory issues II) Buy the security back from the customer III) Pay the customer interest per year (up to the maximum legal rate), minus any dividend or interest income that was received from the date of purchase A) I and II only B) I and III only C) II and III only D) I, II, and III
C) II and III only **If an agent discovers that she has inadvertently sold an unregistered, non-exempt security to a customer, the agent may repurchase the security from the customer through a letter of rescission. The letter of rescission is the firm's/agent's offer to buy back the security, plus interest (at the legal rate of interest), minus any dividend or interest income that was received from the date of purchase. If the letter of rescission is offered, the customer must respond within 30 days. If she fails to respond, she waives the right to sue.**
An investment adviser maintains its home office in State A and is also registered there. State A has a minimum financial (net worth) requirement of $70,000. The firm intends to open an office and provide advisory services in State B, which has a minimum financial requirement of $80,000. Is any action required for the adviser to open the office in State B? A) Yes, it must increase its net worth by $10,000. B) Yes, it must increase its net worth to $150,000 to cover the requirements of both states. C) No, it is only required to satisfy the requirement of its home state. D) Yes, it must post a $10,000 bond to cover the additional requirement of State B.
C) No, it is only required to satisfy the requirement of its home state. **According to the Uniform Securities Act, an investment adviser's minimum financial requirement is set by the state in which the adviser maintains its principal place of business. No other state may impose higher requirements than the adviser's home state. For that reason, this adviser is only required to satisfy the $70,000 requirement of its home state (State A).**
According to modern portfolio theory (MPT), the expected return of an investment is the: A) Return as measured by alpha B) Income, such as bond interest, that has been guaranteed by the issuer C) Possible returns on the investment weighted by the likelihood of that return occurring D)Standard deviation of gains and losses over the life of the investment
C) Possible returns on the investment weighted by the likelihood of that return occurring ** MPT defines the expected return of an investment as the possible returns on the investment weighted by the likelihood of that return occurring.**
According to the Uniform Securities Act, if a person has no place of business in State A and is not registered in State A, which of the following actions is permitted? A) Representing a broker-dealer and receiving commissions for selling exempt securities to customers who are residents of the State A. B) Representing a broker-dealer and offering non-exempt securities to customers who are located in State A. C) Selling unlisted securities to institutions that are located in State A. D) Representing an issuer and receiving compensation for selling the issuer's securities to individuals who reside in State A.
C) Selling unlisted securities to institutions that are located in State A. **In choice (c), the person is not required to register as a broker-dealer in State A as long as it has no place of business in the state and effects securities transactions only with institutional investors that are located in State A.**
Under the Uniform Securities Act, an investment adviser is required to provide a balance sheet when it files Form ADV Part 2 in all of the following situations, EXCEPT when: A) The investment adviser requires prepayment of advisory fees of $800, seven months in advance. B) The investment adviser has custody over clients' funds and securities. C) The investment adviser inadvertently received client securities, but returned them after two business days. D) The investment adviser has the authority to execute transactions in an account in which a client has beneficial interest.
C) The investment adviser inadvertently received client securities, but returned them after two business days. **In choice (c), the investment adviser has three business days to return the securities before custody is established. Since the adviser returned the securities in two business days, custody was not established and no balance sheet is required. Under the USA, investment advisers that require the prepayment of fees of more than $500, six months or more in advance, are required to include a balance sheet when they file Form ADV Part 2 (choice [a]). In choice (b), the investment adviser has custody, which also requires the inclusion of a balance sheet when it files Form ADV Part 2. In choice (d), the investment adviser has authority to execute transactions in an account that belongs to a client; therefore, the adviser has discretion over the account and is required to provide a balance sheet when it files Form ADV Part 2.**
All of the following fall under the jurisdiction of a state securities Administrator, EXCEPT: A) Transactions that originated within the Administrator's state B) Transactions that were directed into the Administrator's state C) Transactions that were forwarded into the Administrator's state D) Transactions that were accepted in the Administrator's state
C) Transactions that were forwarded into the Administrator's state **State securities Administrators have jurisdiction over securities transactions that are directed into their state, originate within their state, or are accepted in their state.**
Which of the following is a risk-adjusted return? A) Alpha B) Beta C) Internal rate of return D) Standard deviation
A) Alpha **The difference between an investment's expected return (as indicated by its hypothetical position on the Security Market Line) and its actual return is considered its alpha. An investment's alpha is also referred to as its risk-adjusted return. Some analysts believe that stocks with positive alphas represent buying opportunities, while negative alphas are signals to sell. Alpha is also used to evaluate the performance of portfolio managers. Managers whose portfolios show positive alphas are considered to be adding value with their management skills.**
An investment adviser is registered with the state Administrator in State A. The fee structure, which is disclosed on the registration form, indicates a flat fee which will be assessed annually. What is an investment adviser representative's responsibility as it relates to disclosing the fee structure? A) Clients must be provided with the IA's brochure at the time of, or before, the commencement of advisory services. B) Clients must be provided with a copy of the investment adviser's Form ADV five days before the contract becomes effective. C) Verbal disclosure is sufficient according to the USA. D) A copy of the disclosure form must be provided by no later than the confirmation of the client's first trade.
A) Clients must be provided with the IA's brochure at the time of, or before, the commencement of advisory services. **The investment adviser's disclosure document, also referred to as its Brochure, must be a copy of Form ADV Part 2 or a document created by the investment adviser that contains specific information found in Form ADV Part 2. This document must be provided to the client at, or before, the time the advisory contract becomes effective. Advisers are not required to send their clients the entire Form ADV as indicated in choice (b).**
If the average current ratio for a sector is 2.0, which of the following companies has the best short-term outlook? A) Company A with a current ratio of 3.5 B) Company B with a current ratio of 1.7 C) Company C with a current ratio of 1.3 D) Company D with a current ratio of 0.7
A) Company A with a current ratio of 3.5 **The current ratio measures the liquidity or short-term financial health of a company. The formula for calculating the current ratio is Current Assets ÷ Current Liabilities. Typically, a higher current ratio is a signal of a stronger business, especially in the short-term. Since company A has the highest current ratio and is higher than the sector average, it has the best short-term outlook.**
Which of the following metrics is the MOST important when attempting to diversify a stock portfolio? A) Correlation B) Asset allocation C) Weighted average D) Standard deviation
A) Correlation **Correlation measure the degree to which two securities move in relation to each other. The greatest diversification benefit is found when a security is negatively correlated. Choice (b) — asset allocation — is incorrect since the question relates to diversifying a stock portfolio. Asset allocation involves the process of building a portfolio that consists of multiple asset classes (e.g., stocks, bonds, cash equivalents, real estate).**
What is the name of the process by which an investor calculates the sum of the present values of projected cash flows to determine the fair market value of an investment? A) Discounted cash flows B) IRR C) CAPM D) Net present value
A) Discounted cash flows **When an investor takes an investment's future cash flows (e.g., dividends or interest payments) and calculates their present value, she is using discounted cash flow analysis. The process is referred to as discounting since the present value formula takes the future value and divides by the time value of money term, i.e., (1+r)t. Net present value takes the process a step further by subtracting the actual market price of an investment by the fair market value that is found in the discounted cash flow analysis.**
According to the Uniform Securities Act, in which TWO of the following cases is an investment adviser exempt from sending clients a written disclosure document under the Brochure Rule? I) The adviser's clients are only investment companies. II) An adviser provides impersonal advisory services to online subscribers that cost $250 per year. III) An investment adviser has no office in the state. IV) The adviser's clients are select institutional investors. A) I and II B) I and IV C) II and III D) II and IV
A) I and II **According to the Uniform Securities Act, an investment adviser must satisfy the Brochure Rule and provide its clients or prospective clients with a disclosure document (usually Form ADV Part 2). Exceptions to this rule are made available if the adviser's only clients are investment companies or for contracts which involve impersonal advisory services that cost less than $500.**
A Canadian broker-dealer may continue to effect transactions for its Canadian clients who are in the U.S. temporarily, provided it satisfies which TWO of the following? I) It is a member of a self-regulatory organization or stock exchange in Canada II) It establishes an office in the appropriate state III) It effects transactions only with Canadian residents who are in the U.S. temporarily IV) It only allows investors to trade exempt securities A) I and III B) II and III C) II and IV D) I and II
A) I and III **According to the Uniform Securities Act, a Canadian broker-dealer may continue to transact business with its existing Canadian clients who are in the U.S. state temporarily. Additionally, the broker-dealer must have a place of business in Canada, be a member of an SRO or stock exchange in Canada, and file an application and consent to service of process with the state Administrator.**
Which of the following statements best describes an equity-indexed annuity? A) It is a fixed annuity that offers the potential for greater returns. B) It is a variable annuity that tracks a major index. C) It is a variable annuity that guarantees a minimum return. D) It is a fixed annuity that exactly mirrors the performance of a designated index.
A) It is a fixed annuity that offers the potential for greater returns. **An equity-indexed annuity (EIA) is a type of fixed annuity and is not a security. Since an EIA is not a security, these contracts are not required to be registered with the SEC. The owner receives a guaranteed minimum interest rate; however, there is potential upside since the rate of return is based on the performance of an index (e.g., the S&P 500 Index). If the index underperforms, the investor receives the guaranteed minimum rate, but if the index performs well, the investor receives the indexed return up to a maximum capped rate.**
According to the Investment Advisers Act of 1940, a notice that offers advisory services and appears in a publication, on radio, or on TV is considered an advertisement if it is offered to more than: A) One person B) Five persons C) 10 persons D) 35 persons
A) One person **This question is simply asking about the definition of advertising. Communications that are made through the public media which offer investment advisory services, including analyses or reports, are considered advertising if they are addressed to more than one person. A different issue that relates to advertising is the retention requirement. According to the Investment Advisers Act of 1940, an adviser must maintain a copy of any advertisement that is distributed to 10 or more persons.**
According to the Uniform Securities Act, which of the following activities is considered a prohibited business practice by a broker-dealer? A) Stating to a client that the offering price of a security is the current market price, when the broker-dealer is the only firm making a market in that security. B) Stating to a client that the price at which it is offering to sell a security is the current market price, when the broker-dealer is one of five registered market makers in that security. C) Providing a client with material, public information regarding a company in which the client has expressed interest. D) Lending money to a client who is purchasing securities through her margin account.
A) Stating to a client that the offering price of a security is the current market price, when the broker-dealer is the only firm making a market in that security. **If a broker-dealer states to a client that a security is being offered at a price that represents the current market price, the broker-dealer must have reasonable grounds for making this statement. If the broker-dealer is the only firm that is making a market in the security, the price that it is quoting may NOT be considered the current market price. Therefore, if a broker-dealer is the only market maker and made this statement to a client without proper disclosure of this fact, it is considered an unethical business practice. In choice (b), the broker-dealer is not the only firm making a market and is therefore not setting the price. In choice (c), providing material, public information is permitted. The concern is when material, non-public information is being distributed. In choice (d), a broker-dealer may extend credit (a loan) to a customer who is purchasing securities in a margin account.**
Which of the following statements BEST describes a discounted cash flow (DCF) analysis that could lead to a recommendation to a client? A) The calculation results in the present value of the future cash flows exceeding the current market value B) The calculation results in the present value of future cash flows being equal to the current market value C) The calculation provides the amount of additional income that the investor will receive from the investment D) The evaluation of cash flows results in the fixed-income investment trading at a premium
A) The calculation results in the present value of the future cash flows exceeding the current market value **Discounted cash flow (DCF) analysis is a method of estimating an appropriate price for an income-producing investment (e.g., a bond). The calculation begins by taking a bond's future cash flows (e.g., interest payments and principal) and discounts them back to the present value, using the present value formula. Once the calculation is done, a person can then compare his estimated value from the DCF analysis to the current market value. If the bond is currently trading for more than the DCF value, the investor is effectively required to pay more than what he thinks the bond is worth (i.e., it is overvalued). If the bond is trading for less than the DCF value, then it a good investment (i.e., it is undervalued). Undervalued bonds (those that can be purchased for less than their estimated value) represent the best investments. The reason for this is that an investor will actually be earning more than the discount rate that was used in the initial analysis. Remember, bonds do not pay more or less income based on DCF analysis. Discounted cash flow analysis is used to determine what the fixed interest payments are worth right now (i.e., in the present). DCF analysis also does not measure whether a bond is worth more or less than its par value, instead it compares an estimated value to the current market prices, which may be at a discount or premium.**
If an adviser inadvertently receives client funds and/or securities, it can avoid the implication that it is maintaining custody of the assets by returning them to the sender within: A) Three business days of receiving them B) Three calendar days of receiving them C) Seven business days of receiving them D) Seven calendar days of receiving them
A) Three business days of receiving them **An investment adviser that holds clients' cash and/or securities, even temporarily, puts those assets at risk of misuse or loss. For an investment adviser to avoid the implication of having custody after inadvertently receiving client funds or securities, it must return them to the sender within three business days of receiving them.**
An individual wants an insurance contract that will accumulate a market-competitive return on the cash value in her contract, but she also wants the ability to pay fixed premiums. She should buy a: A) Variable life policy B) Whole life policy C) Term life policy D) Universal life policy
A) Variable life policy **A variable life insurance policy charges level premiums, but allows for the possibility of achieving higher returns than offered by a whole life policy.**
One month ago, a client purchased a convertible debenture, which is convertible at $20. If the underlying common stock is currently trading at $22 per share, what is the parity price of the bond? A) $1,020 B) $440 C) Par value D) $1,100
D) $1,100 **For questions that involve convertible securities, the first step is to find the conversion ratio (number of shares received upon conversion). For formula for finding conversion ratio is Par ÷ Conversion Price; therefore, the ratio is 50 to 1 ($1,000 ÷ $20). The second step is to determine the aggregate value of the shares. Since the investor is entitled to 50 shares and the shares are trading at $22 per share, the parity price of the bond is $1,100 (50 shares x $22). Parity represents the price at which both the bond and the aggregate value of the stock are equal.**
During the first quarter of the year, XYZ common stock paid a $1 dividend, but the stock's price fell from $50 per share at the beginning of the quarter to $48 per share at the end of the period. Based on the quarterly results, what is the stock's annualized total return? A) 8% B) 2% C) -2% D) -8%
D) -8% **A security's total return takes into account the cash flow from dividends or interest, plus appreciation or minus depreciation, and divides by the original value. In this case, during the first quarter, the stock paid a $1 dividend, but its price fell by $2. To determine the quarterly return,$1 + (-$2) ÷ $50 = -2%. To annualize the return, the -2% quarterly return is multiplied by four, which equals a -8%.**
An investor is long 1,000 bushels of wheat that she purchased for 50 cents per bushel. What's the investor's gain or loss if the price of wheat has dropped to 45 cents per bushel? A) A gain of $5,000 B) A loss of $5,000 C) A gain of $50 D) A loss of $50
D) A loss of $50 **Since the investor went long and the price went down, she will be losing money. She bought the wheat for $0.50 per bushel (50 cents = $0.50) and the price is now $0.45; therefore, she has lost $0.05 per bushel. Since the position is 1,000 bushels, the total loss is $50 (1,000 but x $0.05 loss) which will be realized if the position is sold**
Which of the following persons is required to register as an agent in State A? A) A person who representing a broker-dealer in effecting interstate securities transactions for a client who is temporarily vacationing in a State A. B) An employee of the Federal Reserve Board who is located in State A and executes orders to buy and sell Treasury bills for the account of her employer. C) A person who represents an issuer that is domiciled in State A and effects transactions between the issuer and its underwriter. D) A person who represents a broker-dealer that is located in State A and solicits securities transactions on an intrastate basis for clients' accounts.
D) A person who represents a broker-dealer that is located in State A and solicits securities transactions on an intrastate basis for clients' accounts. **A person who represents a broker-dealer in securities transactions is defined as an agent. An agent who is located in State A is required to be registered in that state. Note the use of the term intrastate which in this case does not involve an issue of securities, but rather, securities solicitations that occur only within one state. As an exclusion from registration, agents who are not registered in a state may execute transactions for existing customers who are temporarily in that state. A person who represents an issuer in a securities transaction is not defined as an agent provided she is only dealing with exempt securities or involved in exempt transactions (e.g., a transaction between the issuer and its underwriter). The same is true for an employee of the government who effects securities transactions on behalf of the government.**
A broker-dealer is registered and intends to sell stock from its own account to a client. Which of the following statements is TRUE? A) Prior to the completion of this transaction, the firm must notify its client that it is acting in a principal capacity. B) Prior to the completion of this transaction, the firm must notify its client that it is acting in a principal capacity and then obtain the client's written consent. C) The firm is able to charge a markup as well as collect a commission for the execution of the trade. D) After the completion of this transaction, the firm must disclose that it acted in a principal capacity.
D) After the completion of this transaction, the firm must disclose that it acted in a principal capacity. **After a broker-dealer executes a transaction in a principal capacity, the firm is required to disclose its capacity on a confirmation statement. Firms that act in a principal capacity are able to charge a markup.**
An IAR is comparing an S Corporation and a limited partnership for a client. What is an advantage of investing in an S Corporation that is not available with a limited partnership? A) An S Corporation offers unlimited personal liability. B) An S Corporation pays higher returns. C) An S Corporation allows for an unlimited number of shareholders. D) An S Corporation provides investors with more control over management decisions.
D) An S Corporation provides investors with more control over management decisions. **In an S Corporation, its shareholders have voting rights, which provides some control over management decisions. However, in a limited partnership, taking part in management decisions jeopardizes an investor's status as a limited partner and may result in creditors of the partnership considering the investor to be a general partner with unlimited personal liability for debts of the partnership. Both of these business entities provide investors with limited liability. As with a limited partnership, an S Corporation's gains and losses flow through to its investors, but there is no way to determine which will pay more since the flow-through is based on the performance of the specific vehicle's management. An S Corporation is limited to 100 shareholders.**
A client sells an XYZ November 40 call and receives a premium of $300. What is the client's maximum loss? A) $300 B) $4,000 C) $4,300 D) An unlimited amount
D) An unlimited amount **When and investor sells call options and does not own the underlying stock, the call writer has an unlimited potential maximum loss. If the underlying stock's price increases, the call seller/writer may be exercised against and forced to buy the stock in the market at its current higher price and subsequently sell at the lower strike price. Theoretically, the stock's potential upside is unlimited.**
Under the Uniform Securities Act, an investment adviser must deliver a disclosure document (brochure) to a client: A) Five business days prior to signing the contract, as long as the client has two business days to rescind the contract without penalty B) Within three business days of an existing client's request C) With each statement, but at least on a quarterly basis D) At least 48 hours prior to signing the contract or, if given at the time that the contract is signed, the client must be given five days to rescind the contract
D) At least 48 hours prior to signing the contract or, if given at the time that the contract is signed, the client must be given five days to rescind the contract **A disclosure document (ADV Part 2 or a document containing the same information) must be provided to new clients at least 48 hours prior to the signing of the contract, or at the time of the contract signing with the customer. If provided at the time of the signing of the contract, the client must be given five days to rescind the contract. The disclosure document must be sent to existing clients at least annually. If an existing client requests a current copy of the disclosure document, it must be sent to the client within seven days of the request**
According to the Uniform Securities Act, the application process for an investment adviser includes: A) Having net capital that is at least 2% of the assets managed B) Filing all client contracts with the Administrator for approval C) Determining the value of each account on a daily basis D) Filing a completed Form ADV and a Form U4 for each IAR who will be providing advisory services
D) Filing a completed Form ADV and a Form U4 for each IAR who will be providing advisory services **For an investment adviser, the application process includes the filing of a completed Form ADV and a Form U4 for each investment adviser representative who will be providing advisory services on behalf of the firm.**
An individual earns $35,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company for which he works has recently instituted a pension plan. Since he's now covered by a corporate pension plan, which of the following statements is TRUE regarding his IRA? A) He must liquidate the IRA by taking a lump-sum distribution. B) He may keep the IRA, but additional contributions are prohibited. C) He may keep the IRA and make a contribution of up to $6,000 each year, but he may not be included in his employer's pension plan. D) He may keep the IRA and make a contribution of up to $6,000 each year.
D) He may keep the IRA and make a contribution of up to $6,000 each year. **An individual who is covered by a corporate pension plan may continue to make contributions of up to $6,000 to an IRA. However, the contribution may or may not be tax-deductible. Any individuals who are age 50 or older may contribute an additional $1,000**
Disadvantages of investing in a C Corporation include which of the following choices? I) Shareholders are taxed on dividends that they receive. II) The corporation is taxed on its income. III) Shareholders may not deduct their share of the corporation's losses on their personal tax returns. IV) Shareholders are paid last if the corporation liquidates. A) I only B) I and II only C) II, III, and IV only D) I, II, III, and IV
D) I, II, III, and IV **All of the choices are disadvantages of investing in a C Corporation.**
The retention requirements for the books and records of investment advisers and broker-dealers are: I) Five years for a broker-dealer with two years easy accessibility II) Three years for investment advisers with two years easy accessibility III) Three years for a broker-dealer with two years easy accessibility IV) Five years for an investment adviser with two years easy accessibility A) I and II only B) I and IV only C) II and III only D) III and IV only
D) III and IV only **The requirements for maintaining books and records specify three years for a broker-dealer and five years for an investment adviser. In each case, broker-dealers and investment advisers must maintain the most recent two years of records in an easily accessible location and in their original condition.**
Which of the following designations are acceptable on a business card? I) RIA for an investment adviser that is registered with the SEC II) RIA for an investment adviser that is registered with a state Administrator III) IAR for an investment adviser representative who has passed the appropriate qualifying exam A) I and II only B) II and III only C) I, II, and III D) None of the above
D) None of the above **Investment advisory firms and their investment adviser representatives are prohibited from using abbreviations on their business cards of other forms of advertising.**
A state Administrator is permitted to apply all of the following administrative actions, EXCEPT: A) Order a broker-dealer to cease conducting business in the state. B) Suspend a broker-dealer's registration in the state. C) Bar an agent from association with any other broker-dealer registered in the state. D) Require a higher minimum financial requirement than the state in which a broker-dealer maintains its principal office.
D) Require a higher minimum financial requirement than the state in which a broker-dealer maintains its principal office. **No other state Administrator may impose financial requirements on a broker-dealer that are more restrictive than those that are established by the state in which the broker-dealer maintains its principal (main) office.**
If a client has no life insurance and low income, what life insurance policy should be recommended? A) Whole life B) Universal life C) Variable life D) Term life
D) Term life **If a client currently has no insurance and low income, a term life policy is likely the best choice. A term policy is the cheapest alternative since the insured is simply paying for pure insurance. Unlike the permanent insurance policies (e.g., whole, universal, or variable), a term policy does not build cash value.**
An investment adviser's sole office is located in State A and its only client is the State A Triple Tax-Free Municipal Bond Fund. The adviser exercises discretion over the fund's investments and also performs safekeeping services for the fund. Which of the following statements is TRUE? A) The investment adviser must be registered in State A. B) Since the investment adviser has discretion over a client's funds, it must meet the minimum net worth requirement of the Uniform Securities Act or State A, whichever is higher. C) Since the investment adviser maintains custody of a client's funds and securities, it must meet the minimum net worth requirement set by the Uniform Securities Act or State A, whichever is higher. D) The investment adviser is not required to meet the net worth requirements or post a bond since it is regulated at the federal level.
D) The investment adviser is not required to meet the net worth requirements or post a bond since it is regulated at the federal level. **Since the investment adviser's only client is an investment company (a mutual fund), it is considered a federal covered adviser. A federal covered adviser is not required to register at the state level and is not subject to state requirements (e.g., maintaining a minimum net worth requirement). Additionally, the Investment Advisers Act of 1940 (which is the appropriate regulation for federal covered advisers) does not impose minimum net worth requirements.**
An agent represents a broker-dealer that is headquartered in State A, but has offices in numerous states. The Administrator of State B has revoked the broker-dealer's registration, causing the firm to close that office. One of the agent's clients has moved to State B and the agent wants to continue to do business with her. According to the Uniform Securities Act, which of the following statements is TRUE? A) This is acceptable provided the broker-dealer no longer maintains a place of business in the state and the agent conducts business with existing clients who are not residents of the state. B) This is acceptable provided the agent's registration is in effect in State B. C) This is not acceptable if the broker-dealer no longer has a place of business in the state. D) This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B.
D) This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B. **An agent's registration is only in effect while he is employed by a broker-dealer that has an effective registration in the state. When the Administrator of State B revoked the broker-dealer's registration, the agent's registration was effectively revoked as well. Since the broker-dealer is no longer registered in the state, its agents are prohibited from engaging in business with residents of the state.**
