Midterm Exam
A consent to service of process allows the Administrator to A) ensure that the legal appeal process is expedited as a result of the Administrator's access to information. B) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant or the registrant's successor. C) verify the accuracy and completeness of registration without obtaining the registrant's prior approval. D) terminate a registrant's application.
B
A statement of the financial status of the customer is needed for all of the following except A) equipment-leasing limited partnerships. B) real estate investment trusts. C) real estate limited partnerships. D) oil and gas limited partnerships.
B
An investment adviser representative has a client for whom investment-grade bonds are a suitable addition to the portfolio. That being the case, bonds with which of the following Moody's ratings would not be considered? A) BB B) Ba C) Baa D) AAA
B
Which of the following firm's earnings are likely to exhibit the greatest degree of sensitivity to the business cycle? A) Telecommunications provider B) Furniture producer C) Food and beverage producer D) Entertainment producer
B
A bond has a conversion price of $100 and is currently selling at 145. What is the parity price of the common stock? A) $100.00 per share B) $1.45 per share C) $145.00 per share D) $14.50 per share
C
What procedure would a limited partnership follow to register with the state as an investment adviser representative (IAR)? A) A limited partnership would submit the initial application for registration on Form ADV Parts 1A and 1B. B) Unless granted a waiver, qualification by examination is required as a condition of registration. C) A limited partnership cannot register as an investment adviser representative. D) A limited partnership would submit the initial application for registration on Form U4.
C
You have a client who has shown an interest in investing in precious metals. Which of the following could be an appropriate recommendation? A) Lead B) Diamonds C) Palladium D) Tin
C
HKBH Creations is a global manufacturing company that has issued common and preferred stock. Among the differences between the two securities is that the preferred stock A) is considered an equity security. B) has preference in voting on the payment of the dividends. C) generally pays dividends on a quarterly basis. D) may be convertible.
D
A client calls to discuss purchasing a specific security that he has been following. The agent handling the account recognizes that a potential conflict of interest exists. The best course of action would be to A) disclose the conflict of interest and proceed if the client wishes. B) disclose the conflict of interest and end the discussion promptly. C) turn the client over to another agent who is not conflicted. D) accept the client's order because it is clearly unsolicited.
A
A preferred stock with which one of the following features would be most likely to maintain a relatively stable market price when interest rates are rising? A) Adjustable rate B) Callable C) Convertible D) Cumulative
A
An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm, A) Neither the agent nor his employing broker-dealer need register as an investment aviser B) the agent must register as an investment adviser representative. C) the agent must register as an investment adviser because the research is being done after hours. D) the agent must register as an investment adviser because the research is being done after hours.
A
An investment adviser representative is examining the financial statements of several corporations in an effort to find a suitable investment for certain clients. While reviewing the income statements, subtracting the cost of goods sold (COGS) from the revenues reveals each company's A) gross margin. B) earnings before interest and taxes (EBIT). C) pretax income. D) net income.
A
An investment adviser structured as a partnership lends money to a customer to buy recommended securities. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this activity is A) unethical. B) acceptable, provided the securities are used as collateral for the loan and the loan conforms to the provisions of Regulation T. C) acceptable, provided the loan is made under the provisions of Regulation T of the Federal Reserve. D) acceptable, provided the securities are used as collateral for the loan.
A
An investor with no position in a stock thinks the price of a stock will decrease significantly over the next few months. Which of the following option strategies would you recommend? A) Buy a put option B) Sell a put option C) Sell a call option D) Buy a call option
A
Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases except A) checks made out to third parties are forwarded within three business days. B) CIA has a power of attorney granting authority to withdraw funds from the custodian. C) checks made out to CIA instead of the executing broker-dealer are deposited within three business days. D) CIA's advisory contract calls for the automatic deduction of advisory fees.
A
Following the rules of the Uniform Securities Act, an investment adviser ensures that all clients receive a written contract prior to the firm engaging in advisory activities in their accounts. The contract clearly states all of the account details, including the services to be provided, the fees to be charged, and the procedure for handling early terminations. Because the investment adviser (IA) has a tendency to pursue some rather unorthodox methods of analysis, the contract provides that the clients waive their right to sue in the event that the IA violates any provision of the Uniform Securities Act. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) waivers of this type are never permitted. B) the adviser has met the requirements of providing a written contract. C) the contract is misleading and could lead to action by the Administrator. D) the contract is enforceable only if signed by the client.
A
Prosperity Financial Investments (PFI) is a registered investment adviser with $85 million in total assets under management. PFI also manages the PFI Growth Fund, a registered open-end investment company with assets of $30 million. If one of PFI's investment adviser representatives (IARs) voluntarily terminates registration, the notification procedure would be which of the following? A) The IAR must notify the Administrators of the states in which the individual is registered. B) PFI and the IAR must notify the Administrators of the states in which the individual is registered. C) PFI, as a federal covered adviser, must notify the SEC. D) PFI must notify the Administrators of the states in which the individual is registered.
A
The Investment Advisers Act of 1940 provides for an exemption from registration to investment advisers whose clients are residents of the state in which the adviser has its principal office and only place of business and who do not give advice dealing with securities listed on any national exchange (e.g., New York Stock Exchange). This exemption is denied to any investment adviser meeting all of the requirements but having as a client A) a private fund. B) an accredited investor. C) an insurance company. D) a bank.
A
Under the Investment Advisers Act of 1940, which of the following would not meet the criteria of persons associated with an investment adviser? A) An individual whose only function is posting trades to client accounts B) An individual whose only connection to the firm is a position on the board of directors C) The individuals responsible for bringing new clients to an advisory firm D) A manager in an investment advisory firm who supervises five investment adviser representatives
A
Vivandiere Fashions, Inc. (VFI) is expanding and wishes to raise additional capital by bringing in additional owners. This would best be accomplished by issuing A) equity securities. B) debt securities. C) options. D) partnership units.
A
An investment adviser representative may share in the profits and losses of a customer's account A) if the investment adviser representative deducts the advisory fee charged the customer from any profits earned. B) under no conditions. C) as long as both the customer and the representative's employer give written consent. D) provided a written contract is executed between the investment adviser and the client.
B
An investor is looking at purchasing $10,000 face of bonds. One choice is U.S. Treasury bonds priced at 104.24, and the other choice is AAA-rated corporate bonds priced at 103⅜. How much more will the Treasuries cost? A) $86.50 B) $137.50 C) $13.75 D) $8.65
B
An investor owns $10,000 face amount of convertible debentures. The conversion price is $20 per share. If the issuer declares a 5:1 split, the antidilution provision in the indenture would result in the conversion price A) increasing to $250 per share. B) reducing to $4 per share. C) remaining at $20 per share. D) increasing to $100 per share.
B
An investor purchased 300 shares of Amalgamated Auto Parts (AAP) at a price of $60 per share. Shortly after the purchase, with the price of AAP at $62, the investor sold three AAP 60 call options when the premium was 6 points. At expiration, AAP stock was trading at $53 per share. The net result to this investor is A) a gain of $300. B) a loss of $300. C) a gain of $100. D) a loss of $100.
B
If DMF Corporation issues $10 million of convertible debentures at par, all of the following balance sheet items will be affected immediately except A) the assets. B) the net worth. C) the working capital. D) the liabilities.
B
If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A) Privately placed investment B) Real estate investment trust C) Direct investment in a shopping center renting retail space to a broad variety of stores D) Interest in a real estate limited partnership
B
If a customer holds certificates of beneficial interest in a real estate investment trust (REIT), all of the following statements regarding this investment are true except A) investors may receive dividends periodically. B) the issuer must redeem certificates on shareholder request. C) a mortgage REIT represents pooled capital for real estate financing. D) the certificates are publicly traded.
B
If the yield curve becomes inverted, a likely cause would be that the Fed has A) loosened short-term credit. B) tightened short-term credit. C) tightened long-term credit. D) loosened long-term credit.
B
MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation C) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation D) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price
B
SEC Rule 204A-1 requires every investment adviser registered with the commission to prepare and maintain a code of ethics. One of the terms in that code is access person. All of the following are considered access persons except A) all of the directors, officers, and partners if they are providing investment advice as the firm's primary business. B) any supervised person of an investment adviser. C) a supervised person who is involved in making securities recommendations to clients or who has access to such recommendations that are nonpublic. D) a supervised person who has access to nonpublic information regarding any clients' purchase or sale of securities or nonpublic information regarding the portfolio holdings of any reportable fund.
B
The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, the act grants an exemption if the client is which of the following? I. A broker-dealer II. An insurance company III. An investment company IV. A person receiving impersonal advice for which the annual fee is less than $500 A) I and II B) III and IV C) I, II, III, and IV D) I, II, and III
B
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? I. An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only II. An adviser with a place of business in the state whose total fee income in the state amounts to $150 III. An adviser with no place of business in a state who provides advice on only fixed annuities IV. An adviser with a place of business in the state who provides advice only to open-end investment management companies registered under the Investment Company Act of 1940 A) I, II, and IV B) I and II C) I only D) I, II, and III
B
The term used to describe the processes and policies followed by a financial institution to protect firm and customer data in electronic form from criminal or unauthorized use is A) identity theft. B) cybersecurity. C) antivirus software. D) business continuity planning.
B
Under the NASAA Model Custody Rule, an investment adviser (IA) would be permitted to take or have custody of any securities or funds of any client if A) permission was obtained from the Administrator and custody was not prohibited by that state's rules. B) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules. C) customer permission was obtained prior to entering into the contract. D) the IA maintained adequate net worth or a surety bond.
B
Which of the following persons is required to register with the SEC as a federal covered adviser? A) An adviser who manages assets of $90 million or more B) An adviser who gives advice only to registered investment companies C) A publisher who gives incidental investment advice only D) An adviser who gives advice related only to U.S. government securities
B
Which of the following statements best explains an agency cross transaction for an advisory client? A) A sales transaction where the investment adviser receives a commission rather than a fee B) A transaction in which an investment adviser or an investment adviser representative acts in a brokerage capacity for both the advisory client and another person on the other side of the transaction C) A broker-dealer activity that involves selling securities from one client to another client of the firm D) A transaction in which an investment adviser offers securities in exchange for securities owned by another registered investment adviser
B
Which of the following statements is correct regarding an unsolicited trade in an unregistered, nonexempt security? A) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. B) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. C) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. D) It is an exempt transaction only if it is an order to buy; an order to sell an unregistered, nonexempt security is not an exempt transaction.
B
Which of the following types of investments requires the longest commitment and has the least short-term liquidity? A) U.S. Treasury bonds B) Private equity fund C) REIT D) Class B mutual fund shares
B
A corporate executive decides it is in the company's best interest to purchase a yacht. Over the years, the company has built up substantial retained earnings and will use accumulated funds to make the purchase. An analyst interested in how this purchase will affect the company's debt to asset ratio would examine A) the income statement. B) the statement of cash flows. C) the balance sheet. D) the seaworthiness of the ship.
C
A majority vote of the outstanding shares of an open-end investment company is needed in order to approve a change A) regarding the selection of specific securities to be added to the fund's portfolio. B) in the maximum load charged for Class A shares. C) from being an open-end to a closed-end investment company. D) from the old to a new custodian bank.
C
ABC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities is not be defined as a broker-dealer in State N under the Uniform Securities Act if it has no offices in State N and if which of the following are true? I. Its only clients are insurance companies. II. It has contact with fewer than six State N residents in any 12-month period. III. Its only solicitation of State N residents is through radio advertisements originating in State M but received in State N. IV. It occasionally engages in firm commitment underwriting with issuers based in State N. A) I and II B) III and IV C) I and IV D) II and III
C
An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following? A) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities. B) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly. C) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that other state, the individual need not register separately. D) Registration is required only if an offer is directed, accepted, and paid for in that state.
C
An investment adviser may borrow from all of the following clients except A) a broker-dealer in conjunction with a margin account. B) a savings and loan association that has offered to finance new computers for the adviser's office. C) a mortgage broker who helped the adviser negotiate mortgage terms for its office building. D) a commercial bank in conjunction with a mortgage on the office building from which the advisory operates.
C
An investment adviser that has custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must do which of the following? I. Notify the Administrator by the close of business on the day after discovery II. File a report of its financial condition with the Administrator no later than the close of business on the day after notification III. Cease doing business A) I and III B) II and III C) I and II D) I, II, and III
C
Federal and state securities laws deem certain conduct by investment professionals to be criminal in nature. Included in those activities are certain practices designed to manipulate the market prices of securities. An activity that would fall within the spectrum of the prohibitions would be A) churning customer accounts. B) guaranteeing customers against loss. C) wash trades. D) front running.
C
Inverse ETFs are suitable primarily for investors A) who follow a passive investment strategy. B) who wish to leverage their income. C) who have a very short time horizon. D) who are bullish on the market's future.
C
Investors in exchange-traded funds (ETFs) find they offer several attractive advantages over mutual funds. All of the following would be advantages that ETFs typically have over mutual funds except A) the ability to buy on margin. B) greater tax efficiency. C) lower trading costs for active traders. D) intraday pricing for active traders.
C
It is correct to state that on the day they are issued, warrants have A) intrinsic value but no time value. B) time value and intrinsic value. C) time value but no intrinsic value. D) no time or intrinsic value.
C
One of your clients purchased several units in a real estate limited partnership offering. If the enterprise in unsuccessful and files for bankruptcy, which of the following have a claim on the entity's assets ahead of your client? I. Fellow limited partners II. The bank that holds the mortgage on the property III. The bank that holds the unsecured loans on the property IV. The general partner A) I and II B) I and III C) II and III D) III and IV
C
One of your clients sits on the board of directors of a company whose stock trades on the New York Stock Exchange. Two months ago, the client purchased 500 shares of the stock at $50 per share. Needing some additional cash for an upcoming vacation, the client has decided to sell this stock when the market price is $48 per share. You can make this trade as long as it complies with the provisions of A) Regulation A. B) Regulation D. C) Rule 144. D) Rule 147.
C
Several years ago, an investor purchased $100,000 of U.S. Treasury bonds bearing a 2.80% coupon. Because of economic conditions, those bonds are now yielding 3.5% in the secondary markets. Therefore, the investor's semiannual income will A) Increase. B) be approximately $1,750. C) stay the same. D) decrease.
C
The XYZ Corporation's income statement contains the following information: Total revenue$200,000 Cost of goods sold$60,000 Administrative expenses$30,000 Depreciation$10,000 Miscellaneous expenses$3,000 Taxes paid$5,000 Based on this information, what is XYZ's gross profit? A) $100,000 B) $97,000 C) $140,000 D) $110,000
C
The devaluation of a country's currency to improve its trade deficit would most likely benefit A) a domestic producer of an export good that represents a relatively small proportion of consumer expenditures. B) a domestic producer of export goods that have no close substitutes. C) a domestic producer of luxury goods for export. D) a foreign producer of luxury goods for export.
C
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft dollar compensation? A) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers B) Rent-free use of unused space in the broker-dealer's office C) Clearance and settlement services provided by the broker-dealer D) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements
C
XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wishes to examine certain financial records of XYZ's, the Administrator would be able to do all of the following except A) ask FINRA to perform the examination. B) do so during normal business hours without prior notice. C) examine those records located in State U. D) ask the State C Administrator to perform the examination.
C
A broker-dealer registered in multiple states must meet the record retention requirements of A) the state where the broker-dealer is incorporated. B) the state with the most stringent requirements. C) the state where the principal office of the broker-dealer is located. D) the SEC.
D
A commodities speculator purchased a single wheat futures contract at $7.50 per bushel. The contract size represents 5,000 bushels. Shortly before expiration, the speculator closes the position and receives a net $7.45 per bushel. This investor A) must make delivery of the wheat. B) has a $250 gain. C) must take delivery of the wheat. D) has a $250 loss.
D
A transaction in which an investment adviser acts on behalf of both the advisory client and another person on the other side of the transaction is known as A) a discretionary trade. B) an exempt transaction. C) an illegal and unethical activity. D) an agency cross transaction.
D
An investor interested in acquiring a convertible debenture as part of her investment portfolio would A) be interested in tax advantages available to convertible debt securities. B) want the assurance of a guaranteed dividend on the underlying common stock. C) seek to minimize changes in the bond price during periods of steady interest rates. D) want the safety of a fixed-income investment along with potential capital appreciation.
D
Decoction Medical Supplies (DMS) has issued $100 million of $50 par 6% preferred stock convertible at $10. The stock is callable in eight years at $50.50. The major beneficiary of a call feature is generally agreed to be A) the broker-dealer delivering the called stock. B) the preferred stockholder. C) the common stockholder. D) the issuer.
D
Many investors diversify their portfolios by adding foreign stock. The most popular way is through American depositary receipts (ADRs). A unique risk faced by these investors that does not apply when investing in domestic securities is A) business risk. B) market risk. C) liquidity risk. D) currency risk.
D
NASAA has a Model Rule dealing with investment adviser brochures. If an advisory client wanted information about each individual providing investment advice and having direct contact with clients in the state, that information would be found in A) Form ADV Part 1B. B) Form ADV Part 2A. C) Form ADV Part 1A. D) Form ADV Part 2B.
D
One area of paramount importance to state Administrators is seeing that investment advisers make all material disclosures to their advisory clients. An example of a failure to disclose is when the adviser has a financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to those clients. That disclosure would not need to be made in the case where the investment adviser A) has discretionary power over the account. B) maintains custody of the account's assets. C) accepts prepayment of more than $500 six or more months in advance. D) engages in agency cross transactions.
D
Senescent Retirement Planning (SRP) is registered as a broker-dealer with the SEC and a number of states. As such, the client relationship summary (Form CRS) must be delivered to each retail investor before or at the earliest of any of these except A) a securities transaction or an investment strategy involving securities described to a retail investor. B) the opening of a brokerage account for the retail investor. C) placing an order for the retail investor. D) entrance into an investment advisory contract with the retail investor.
D
Seven years ago, Sarah Smith was convicted of possession of a controlled substance in a state where that violation is considered a felony. Sarah has just filed an application for registration as an agent with Kapco Securities, a registered broker-dealer in a state where that violation is only considered a misdemeanor. When viewing this agent's application, the Administrator will A) censure the broker-dealer for even thinking of employing this individual. B) treat the crime as a financial misdemeanor. C) treat the crime as a nonfinancial misdemeanor. D) treat the crime as any felony.
D
The Uniform Securities Act requires that investment advisers maintain certain records relating to their business operations. If the firm wishes to upgrade to a modern system, such as disk storage, A) the most modern form currently permitted is microfilm or microfiche. B) it must obtain approval from the Administrator prior to determining its method of record retention. C) it must keep its records in paper form. D) it can do so if the system meets certain requirements, including that the information on the disk cannot be altered.
D
The consumer price index is best described as A) a measure of transactions between a country and the rest of the world over a period of time, usually a year. B) the inflation rate for a given period of time. C) an unbiased estimate of changes in the cost of living. D) a weighted average cost for a basket of goods and services.
D
Under the SEC's marketing rule for investment advisers, A) a written agreement must be in effect between the adviser and any promoter when compensation exceeds $100. B) testimonials are given by promoters while endorsements are given by clients. C) an investment adviser may compensate a bad actor for an endorsement as long as the person's status and compensation are disclosed. D) testimonials are given by clients while endorsements are given by promoters.
D
When plotted on a graph, the difference between short- and long-term interest rates typically reflects an upward-sloping line known as the yield curve. When it is an upward-sloping curve, it is a positive or normal yield curve. Long-term interest rates are typically higher than short-term rates for a number of reasons. Among those reasons are all of the following except A) the time value of money. B) the loss of liquidity associated with long-term investments. C) the increased risk of default over long periods. D) the increased buying power of money resulting from inflation.
D
Which of the following statements are true? I. When an investment adviser representative begins or terminates employment with an adviser registered under the Uniform Securities Act, only the investment adviser must notify the Administrator. II. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. III. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. IV. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. A) I and III B) III and IV C) II and IV D) I and II
D
