Parts 1-4 Series 65

Which of the following compensation arrangements is typically NOT allowed under the Investment Advisers Act of 1940? A) An adviser waives a client's fee if the client experiences a loss for the year. B) An adviser varies fees according to the time spent managing the account. C) An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results. D) An adviser charges clients a percentage of assets under management

A A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour.

Which of the following investment vehicles is NOT considered a security under the Uniform Securities Act? A) Annuities with a fixed rate of return B) Commercial paper maturing in fewer than 270 days C) U.S. government bonds D) Common stock issued and sold intrastate

A A fixed annuity is not defined as a security and is subject to the rules and regulations of the state Insurance Commissioners. As such, a fixed annuity does not fall under the provisions of the Uniform Securities Act. Even though the U.S. government bonds (and, under certain conditions, the commercial paper) are exempt securities, they are still securities.

The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT A) an adviser whose only clients are banks B) an adviser whose only clients are insurance companies C) an adviser whose only clients are venture capital funds D) an adviser who maintains an office in only one state, advises only residents of that state (none of whom is a private fund), and gives advice relating solely to securities not traded on any national exchange

A Advising banks only does not qualify one for the exemption. Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities.

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee ) need not register as an agent of the issuer under any circumstances B) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales C) may receive commissions without registration D) must register as an agent of the issuer

B Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required.

Which 2 are most associated with a U. S. Treasury bond? Credit risk Liquidity risk Reinvestment risk Interest rate risk A) II and III B) III and IV C) I and II D) I and IV

B We negate credit risk when it comes to U.S. Treasury securities. Liquidity is also not an issue. However, any interest-bearing bond carries interest rate risk, as well as reinvestment risk.

Which of the following statements is most accurate regarding employer-sponsored retirement plans? A) The employee in a defined benefit plan bears the shortfall risk. B) In a defined contribution plan, the payments received are related to the number of years of service and the individual's final salary. C) In a defined benefit plan, the payments provided are related to the contributions made and investment performance achieved. D) In a defined benefit plan, the client can have some reasonable certainty about the amount of income that will be received in retirement.

D In a defined benefit plan, the client can have some reasonable certainty about the amount of income that will be received in retirement. The investment risk is borne by the employer rather than the employee. That is the case with the defined contribution plan.

Each of the following terms is commonly found in modern portfolio theory EXCEPT A) the capital asset pricing model B) the feasible set C) the efficient set D) the internal rate of return

D Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) borrowing under the same terms and conditions as the client could find at a commercial bank B) who was in the money-lending business C) who was an immediate family member of the adviser D) who was an affiliate of the adviser

D Loaning money to a client is prohibited unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA's client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money.

An agent of a broker-dealer has a client who lost her job but will be starting a new job in 3 weeks. The client is in need of $900 for the 3-week gap. Under what circumstances may the agent arrange a loan for the client? ) If the loan is less than $1,000 B) If the client is agent's niece C) If the loan is repaid within 30 days D) If the client has $5,000 in her brokerage account

D Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client's portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500.

A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that 1. has no place of business in the United States. 2. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser. 3. has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million. 4. holds itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940 A) IV only B) II and III C) I and IV D) I, II, and III

D There are 4 requirements to be considered a foreign private adviser. Choices I, II, and III are all included, and, if choice IV said - does not hold..., it would have been the fourth requirement. By holding itself out to the public, it can't be a private adviser.

An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to A) 10% B) 8% C) 12% D) 14%

D This question is asking for the total return, which is 14% (12% appreciation + 2% dividend). Had the question asked for the inflation-adjusted return, (which it doesn't), that is 14% minus the 4% CPI.

When a corporation domiciled in the U.K. issues U.S. dollar-denominated bonds in the United States, it is issuing A) ADRs. B) Ameribonds. C) Eurobonds. D) Yankee bonds.

D Yankee bonds are foreign bonds, denominated in U.S. dollars and issued in the United States by foreign banks and corporations. ADRs are issued in the U.S. by domestic banks and represent receipts for securities traded on foreign exchanges. Eurobonds are issued by a borrower in a foreign country, denominated in a currency other than one native to the issuer's country. Yankee bonds are a form of Eurobond, but that is not the best answer to this specific question.

Which of the following investment vehicles provides for redemption by the issuer? A) Unit investment trust (UIT) B) Closed-end fund (CEF) C) Face amount certificate (FAC) D) Exchange-traded fund (ETF)

A A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face amount certificates are not redeemable - the investor's funds are returned when the debt is paid off.

An agent would be engaged in a prohibited practice if he 1. split commissions with other agents of his broker-dealer 2. sold a nonexempt, unregistered security to a CPA who specialized in auditing financial institutions 3. shared both the gains and losses in a client's account with written approval of both the client and the employing broker-dealer 4. aggressively traded a discretionary account on a daily basis with long-term growth as an objective A) II and IV B) I and IV C) I, II, III, and IV D) I and II

A An agent cannot lawfully sell an unregistered, nonexempt security unless in an exempt transaction. The sale to the CPA is not an exempt transaction, as would be the sale to a financial institution. Day trading in an account with long-term growth as an objective would constitute unsuitable activity and, therefore, is prohibited under USA. Sharing commissions is only permitted with agents of the same or affiliated broker-dealers. Remember that investment adviser representatives may never share in the gains and losses in a customer's account in the same fashion that agents can.

The tax consequence of transferring proceeds from one fund to another within the same family of funds is: A) on the date of the transaction, any gain or loss is recognized for tax purposes B) losses are deducted and gains are deferred C) gains are taxed and losses are deferred D) no gain or loss is recognized until redemption

A An exchange is the sale and then a purchase of a new security and is therefore a taxable event.

ABC Securities is a two-office broker-dealer in State X that intends to underwrite an initial public offering of 1 million shares of stock for Circular, Inc. If the issue will be offered exclusively to residents of State X, registration of this offering A) will most likely occur by qualification B) will most likely occur by notice filing C) will most likely occur by coordination D) is not required because of the de minimis test

A An issue done solely within one state (intrastate offering) is registered using qualification. Notice filing is used by certain issues of federal covered securities, primarily investment companies. Coordination is the simultaneous registration on both the federal and state level; neither of those two could possibly apply to the circular offering.

Which of the following is an issuer transaction? A) John's father, a founder of XYZ corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission. B) John sold the securities he had inherited from his father to his neighbor, Peter, at the market price without charging a commission. C) John inherited securities of the XYZ Corporation from his father who, as a founder to the company, received the shares directly from the company as a result of stock options. D) John purchased shares in XYZ Corporation in a transaction made in the over-the-counter market.

A An issuer transaction is one where the issuer of the securities receives the proceeds of the sale. John's father, although a founder of the company, purchased shares directly from the company. This transaction is an issuer transaction because the firm received the funds from the sale of the shares. In all the other instances, the firm, the original issuer of the securities, did not receive the proceeds of the transaction. These transactions are called nonissuer transactions.

Publicly-traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Unqualified opinion B) Disclaimer of opinion C) Adverse opinion D) Qualified opinion

A An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.v

Under the Securities Act of 1933, which of the following securities is required to register with the SEC? A) Debentures of First Newtown Bank Holding Corporation B) GNMA pass-through certificates C) Tupelo Mississippi Bridge revenue bonds D) 5-year Treasury notes

A Bank holding company securities are not exempt from registration requirements under the Securities Act of 1933. Treasury securities, agency securities (such as GNMA pass-through certificates), and municipal securities (such as revenue bonds) are exempt from registration requirements under the act.

Which of the following does NOT meet the compensation test for defining investment advisers under SEC Release 1A-1092? A) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do B) Subscription payments received by a publisher of a newsletter providing impersonal securities-related advice C) An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice D) A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists

A Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent—she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation.

While several methods of registration are described under the Uniform Securities Act, which of the following would be most appropriate for an investment company registered with the SEC under the Investment Company Act of 1940? A) Notice filing B) Qualification C) Registration D) Coordination

A Federal covered securities (those listed on the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market) are exempt from registration under the USA. However, the states are permitted to assess fees and some require filing of certain information. This is notice filing and most commonly occurs with investment companies registered under the Investment Company Act of 1940.

Under the USA, which of the following statements regarding the posting of surety bonds is NOT true? A) The Administrator requires all broker-dealers to post bonds even if they maintain net capital in excess of minimum amounts. B) The Administrator requires the posting of bonds primarily to cover the cost of civil liabilities associated with violations of the Uniform Securities Act. C) The Administrator can accept securities instead of cash if the posting of a bond is required. D) Bonds may be required for agents of broker-dealers.

A Firms that maintain net capital in excess of minimum requirements may be exempted from the requirement of posting surety bonds. Agents exercising discretion over client accounts may be required to post a surety bond.

A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid 1 year in advance instead of quarterly. The firm would A) now come under the requirement to include a balance sheet as part of its brochure B) continue doing business as before because the firm was already charging more than $1,200 per year C) need SEC permission to make this change D) be in violation of the law that prohibits pre-payments more than 6 months in advance Explanation

A For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance.

Which of the following securities is NOT exempt from the registration provisions of the Securities Act of 1933? A) A new stock being offered in three states B) A high-quality corporate promissory note maturing in 180 days C) A U.S. government bond D) An equity security issued in only one state solely to residents of that state

A Government securities, money market instruments (the promissory note is another way of saying commercial paper), and intrastate offerings are exempt from the registration provisions of the 1933 Act. A stock being offered in three states would have to register with the SEC and possibly with those states.

Investment companies must send financial reports to shareholders A) semiannually B) quarterly C) monthly D) annually

A Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) ATF Overseas Opportunities Fund B) XYZ Government Income Fund C) NavCo Tax-Free Municipal Bond Fund D) ABC Investment-Grade Bond Fund

A Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification nor the best hedge against inflation. A high-grade bond fund will not add diversification.

According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, all of the following practices are considered unethical for an agent except A) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. B) receiving written discretionary authority from a client within 10 business days of first executing a discretionary trade with oral authority from the client. C) determining the quantity of a specific security to purchase once the client has designated that security and the action to be taken. D) selling 3,000 shares of ABC at a price the agent determines is the best the client can get, without oral or written discretionary authority.

A It is not unethical for an agent to choose time and price of a trade as long as the client has determined the asset, the action, and the amount. Discretionary authority must be received by agents in writing prior to any discretionary trading taking place in the account. Please note that it is investment advisers and their IARs, not broker-dealers and their agents, who are allowed to use oral discretion for the first 10 business days after the initial discretionary trade.

A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of negotiable CDs, Treasury bills, and commercial paper. This is probably A) a money market fund B) an index fund C) a balance fund D) an exchange-traded fund (ETF)

A Money market funds hold money market instruments like negotiable CDs, Treasury bills, and commercial paper.

In cases of fraudulent sales practices or advice with respect to securities, state securities Administrators may 1. not take enforcement action against federally covered investment advisers 2. take enforcement action against federally covered investment advisers 3. not take enforcement action against state-registered investment advisers 4. take enforcement action against state-registered investment advisers A) II and IV B) I and IV C) I and III D) II and III

A State securities Administrators have jurisdiction over any securities transaction or investment advice that involves fraud, whether or not the person involved is a federal covered investment adviser. If it involves a security, there are no exemptions from the Uniform Securities Act for fraud.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advertisements must comply with rules set out under the Investment Advisers Act of 1940. Those rules include A) requiring a written agreement between an investment adviser and a promoter who receives more than $1,000 over a 12-month period for endorsing the services of the adviser. B) a requirement that a copy of all advertisements be sent to the SEC at the time they are disseminated to the public. C) a prohibition against reduced-fee introductory offers. D) a prohibition against showing the adviser's past performance.

A State-registered investment advisers must comply with the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. That model rule states that, when it comes to advertising, IAs and their IARs must comply with the rules of the Investment Advisers Act of 1940. The SEC Model Marketing Rule for Investment Advisers incorporated significant amendments to the Advisers Act. Among the requirements of the rule is that an adviser who compensates a non-affiliated third party promoter for endorsing the services of the IA must have a written agreement with that promoter if the compensation will exceed $1,000 over a 12-month period. Advertisements may not contain false statements, refer selectively to past recommendations, refer to a chart or device for evaluating securities without explaining its limitations and difficulties, or offer anything free of charge if in fact there will be some requirement, however minor, for obtaining the free item. There is no federal filing requirement for advertisements of investment advisers (although filing may be required by the state Administrator). As long as the past performance is displayed in a manner consistent with the rules, there is no problem.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who has violated the prohibition against insider trading is liable for a civil penalty of A) 3 times the amount of the profit gained or loss avoided on the transaction B) twice the amount of the profit gained or loss avoided on the transaction C) 10 times the amount of the profit gained or loss avoided on the transaction D) the amount of the profit gained or loss avoided on the transaction

A The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that the SEC may seek treble (triple) damages through the courts for violations of the insider trading rules. This means that the SEC may seek court action that imposes civil penalties of 3 times the profit gained or 3 times the loss avoided as a result of inside information.

When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has A) stronger governance. B) lower reporting costs. C) higher risk. D) less liquidity.

A The first step is to notice that the question is looking for the statement that is not correct. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters. Private funds are not liquid and because they are private, they do not have the costs of regular reporting to the SEC. In general, private funds are considered a higher-than-average risk investment.

The Securities Act of 1933 covers all of the following except A) blue-sky laws B) full and fair disclosure C) liabilities for misleading filings D) prospectus requirements

A The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. Misleading information can lead to civil and perhaps even criminal liability. The act is federal in scope, whereas blue-sky laws refer to state securities regulations.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) contain information that doesn't have a place in the main body of the financial statements B) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background C) serve as a bibliography indicating where additional information may be obtained D) contain a detailed history of the enterprise and its products or services

A There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are the following: method of accounting used, collateral securing debt, pension liabilities and many others. Footnotes are an integral part of the financial statements and are usually found with this notation: "The accompanying footnotes to the financial statements are an integral part of these statements."

Sortel Industries has preferred stock outstanding that pays annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should she be willing to pay for a share of Sortel preferred stock? A) $44.12 B) $42.10 C) $31.88 D) $33.89

A This is a middle school math question. It is asking, 3.75 is 8.5% of what number? The computation is: 3.75 ÷ 0.085 = $44.12.

Which of the following is TRUE of a zero-coupon bond? The rate of return is locked in. There is no reinvestment risk. The imputed interest is taxed as ordinary income on an annual basis. A check for the interest is paid at maturity. A) I, II, and III B) I, III, and IV C) I only D) I and IV

A Zero-coupon bonds pay no periodic interest and are always issued at a discount from par. The appreciation of the zero from its discounted purchase price to its face value is thought of as interest to the bondholder, but this annual "phantom income," so named because you don't receive it, is taxed as ordinary income on an annual basis. When the bond is purchased, the investor locks in that yield, and with nothing to reinvest, there is no reinvestment risk.

When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, ) only the investment adviser representative must notify the Administrator promptly B) the investment adviser representative and the federal covered advisers must notify the Administrator promptly C) the investment adviser representative and the employing adviser must notify the Administrator promptly D) only the terminating investment adviser must notify the Administrator

A if you are working for a registered investment adviser within a specific state, that state securities Administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the state securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the state securities Administrator that you are working there, as well as when you terminate.

The price of which of the following will fluctuate most with fluctuating interest rates? A) Money market instruments B) Long-term bonds C) Short-term bonds D) Common stock

B Because of its longer duration, long-term debt prices will fluctuate more than short-term debt prices as interest rates rise and fall. When buying a debt instrument, one is really buying the interest payments and final principal payment. Money has a time value: the longer it takes to receive the money, the less it is worth today.

All of the following are exempt transactions EXCEPT ) a client, on his own initiative, requesting a transaction in a security that is not registered in the state B) a Certified Financial Planner selling NYSE-listed securities to numerous high-net-worth individual clients C) an administrator of an estate selling securities to liquidate the estate's assets D) a pledgee liquidating securities that were put up as collateral for a loan that has now gone into default

B A Certified Financial Planner selling NYSE-listed securities to numerous individual clients, regardless of their net worth, might be engaged in a nonexempt transaction, not an exempt transaction. This would not be true if the financial planner's clients were all financial institutions rather than individuals. Transactions by an administrator and an executor are exempt transactions, as are unsolicited nonissuer transactions. When securities that have been pledged as collateral for a loan, if that loan goes into default, the liquidation of that collateral is an exempt transaction.

Which of the following is a discounted cash flow computation? A) Holding period return B) Net present value C) Standard deviation D) Current yield

B A key component of a DCF computation is using the time value of money. None of these, other than NPV, consider the time value of money.

An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would A) only be allowed to contact existing clients of the broker-dealer B) not have to be registered as an agent of the broker-dealer C) have to be registered as an agent of the broker-dealer D) have to be registered as an investment adviser representative

B Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business.

Which of the following must register as an agent when representing a broker-dealer? A) A partner of a broker-dealer who has no securities sales functions B) An employee who accepts unsolicited orders from institutional clients C) The telephone switchboard operator who directs orders to the appropriate extension D) An individual who represents an underwriter only in transactions between an issuer and the underwriter

B An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? A) Both will decrease by the same amount B) Bond with the 10-year call C) Both will increase by the same amount D) Bond with the 5-year call

B As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall. That additional call protection in essence lengthens the duration of the bond and, as we know, the longer the duration, the greater sensitivity to interest rate changes. In this case, with declining rates, bond prices will rise.

A broker-dealer is registered in States A and B. An agent of theirs is registered in State A, and one of the agent's clients moves from State A to State C. If the agent wishes to continue to do business with this client, which of the following statements is CORRECT? A) As long as they have 5 or fewer retail clients in State C, neither the broker-dealer nor the agent must register there. B) Both the broker-dealer and the agent must register in State C. C) Only the agent must register in State C. D) Only the broker-dealer must register in State C.

B As long as a broker-dealer has at least 1 retail client in a state, registration is required. Furthermore, an agent cannot do business with a client who has become a resident of a state unless she is registered as an agent of a registered broker-dealer in that state. Unlike investment advisers, there is no de minimis exemption for broker-dealers and agents.

An investment adviser is analyzing 4 bonds of similar quality for a client. Bond A has a coupon of 6%, matures in 12 years, and is currently priced at 50. Bond B has a coupon of 8%, matures in 9 years, and is currently priced at 50. Bond C has a coupon of 4%, matures in 18 years, and is priced at 45. Bond D has a coupon of 12%, matures in 6 years, and is priced at 50. Based on NPV, which of these bonds represents the better value? A) Bond A B) Bond C C) Bond D D) Bond B

B Because you don't have the proper calculator to do a real PV calculation, NASAA expects you to use the rule of 72. Remember, under that rule, dividing 72 by the interest rate tells you the number of years it will take for a deposit to double. Or, if you divide 72 by the number of years, it will tell you the interest rate required for a present deposit to double. Finally, a positive NPV is when you can buy the bond for less than its present value. So, let's look at all 4 choices. Bond A, at 6%, takes 12 years to double. That's exactly the time to maturity, so the PV of this bond should be approximately $500 (a quote of 50). The same is true of bonds B and D—their PV should be approximately $500 (72 ÷ 8% = 9 years; 72 ÷ 12% = 6). Because their price is the same as the PV, the NPV is zero. However, with bond C, 72 divided by 4% equals 18 years, so this bond also has a PV of approximately $500 (50), but it can be purchased for less than that: 45 ($450). Therefore, with an NPV of $50, bond C is the best value. One final point: If you are stuck and have to guess, note that 3 of the 4 bonds are selling for $500 with the other priced at $450. If they are all going to mature at $1,000, a good guess would be that the cheapest one is the best deal.

Which of the following could accelerate a rise in a bull market? A) Sell stop B) Buy stop C) Sell limit D) Buy limit

B Buy stop orders are placed above the market, and as prices increase, the stops are hit, creating additional buying.

Issuing callable bonds is advantageous to the issuer because it allows the company to A) call in the bonds at less than par value and capture the difference as income B) replace a high, fixed-rate issue with a lower issue after the call date C) issue fixed-income securities at a yield lower than usual D) take advantage of high interest rates

B Callable bonds allow the company to take advantage of reduced interest rates by calling in high bonds with high interest rates and replacing them with lower ones. The marketplace requires that the company pay a higher coupon rate on callable compared to ones that are not callable. This compensates the investor for taking the risk of a future call. The call price would never be less than the par value.

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Net income divided by average total equity B) Current assets divided by current liabilities C) Dividend divided by earnings per share D) Gross profit divided by net sales

B Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio which measures how much of a company's earnings are distributed to common stockholders.

A federal covered investment adviser is one who 1. has $110 million or more in assets under management 2. manages an investment company registered under the Investment Company Act of 1940 3. limits his advice to securities listed on the NYSE 4. is affiliated with a federally chartered bank A) I and III B) I and II C) I, II, III and IV D) II and III

B Federal registration is generally required of any investment adviser managing at least $110 million in assets. The NSMIA provides that any investment adviser under contract to a registered investment company under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Determining if one is a federal covered investment adviser is not based on affiliations; it is generally a function of AUM or managing an investment company.

Net asset value per share for a mutual fund can be expected to decrease if A) the securities in the portfolio have appreciated in value B) the fund has made dividend distributions to shareholders C) the issuers of securities in the portfolio have made dividend distributions D) the fund has experienced net redemptions of shares

B If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee B) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee C) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee D) decline the transaction because short-term trading of funds is not allowed

B If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares—it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares).

One of your clients just inherited some money and wishes to invest $250,000 into the GEMCO International Equity Fund. The client is attracted to the Class B shares because there is no up-front sales charge on them while the Class A shares have a 3% front-end load. The appropriate response would be that A) the client is doing the smart thing by avoiding the sales charge, even though you will be losing out on the opportunity to earn a nice commission B) because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size C) you feel so strongly that the Class A shares represent a more attractive solution for the client that you will rebate your share of the commissions D) as long as the client will hold the Class B shares no longer than 4 years, the higher 12b-1 fees will be much less than the load paid on the Class A shares

B In the real world, there is probably no fund group that would accept a $250,000 order for Class B shares; more than likely, no fund group would even accept one above $100,000. That is because at that level, the reduced front-end load available on the Class A shares due to reaching a breakpoint, combined with the lower (or lack of) 12b-1 charge and no redemption charge (CDSC), makes them a better deal than the Class B shares. Rebating of commissions is not permitted, and even at the 4-year holding period, there still is a CDSC.

According to the Uniform Securities Act, each of the following is a security EXCEPT A) a U.S. Treasury bill B) a contract in soybean futures C) a limited partnership in an oil and gas exploration program D) an interest in a condominium project with a rental pool

B Interests in a condominium complex that has a rental pool feature, U.S. Treasury bills, and limited partnership interests in oil and gas exploration programs are securities under the USA. The USA excludes certain financial instruments from the term "security," such as term and whole insurance policies, commodity futures contracts, and collectibles.

Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A) disciplinary information about material events within the past 10 years B) compensation earned on dealings with clients C) the fact that any listed person has no formal education after high school D) the name, title, and telephone number of the individual supervising any listed person

B It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) the state in which the principal office of the member is located B) the SEC C) FINRA D) the state with the most stringent financial requirements

B It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

Which of the following are characteristics of negotiable jumbo CDs? Issued in amounts of $100,000 to $1 million or more Typically pay interest on a monthly basis Always mature in 1 to 2 years with a prepayment penalty for early withdrawal Trade in the secondary market A) II and IV B) I and IV C) I and III D) II and III

B Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of 1 year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semiannual basis, not monthly.

Which of the following would appear as assets on a corporation's balance sheet? Prepaid expenses Deferred tax credits Notes payable Notes receivable A) I, II, and IV B) I and IV C) I and III D) II and III

B Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT A) suitability requirements B) fees and expenses C) liquidity D) regulatory oversight

B The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators.

The most common form of organizational structure for venture capital investment is the A) venture capital fund of funds. B) limited partnership. C) limited liability company. D) corporate venture capital funds.

B The most common structure for venture capital is the limited partnership. This is true for virtually all private equity including hedge funds.

Under the Uniform Securities Act, a registration statement for a security must be signed by A) the issuer's chief executive officer and the underwriter B) the issuer's chief executive officer, chief financial officer, and a majority of the issuer's board of directors C) a majority of the issuer's board of directors only D) a majority of the issuer's board of directors and the underwriter

B The underwriter's signature is not required on a registration statement, but the chief executive officer, the chief financial officer, and a majority of the board of directors must all sign.

ABC Investment Company shares are trading at $13.80 on a per-share basis. The net asset value per share is $12.00. Which of the following conclusions correctly defines the relationship between trading price and NAV? ) The fund's shares are trading at a discount of 15% to underlying NAV. B) The fund's shares are trading at a premium of 15% to the NAV. C) NAV per share is calculated as per-market demand and supply for the fund's shares. D) The value of $13.80 is calculated as total assets minus total liabilities divided by total outstanding shares.

B This is a closed-end investment company whose shares are trading at a premium. The premium is 15% relative to the underlying NAV ($1.80 ÷ $12.00). The market price, not the NAV of the fund's shares, is determined by supply and demand in the market. How do we know this is not a mutual fund? There are two ways. Mutual funds do not trade; there is no secondary market for them. Secondly, the sales charge is 13.8% ($1.80 ÷ $13.80) which is far above the maximum 8.5% allowed.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) an open-end investment company. B) selling at a premium. C) selling at NAV. D) selling at a discount.

B When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the assets are the $100 million portfolio value and the liabilities are $10 million for the unpaid securities plus the $5 million in accrued management fees. Subtracting the $15 million in liabilities from the $100 million in assets leaves $85 million. Divide that by the 2,611,437 shares outstanding, and the quotient is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price ($3.83 ÷ $36.38), which is well in excess of the maximum 8.5% permitted.

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was A) above $18.20 per share B) above $22 per share C) below $22 per share D) above $20 per share

B With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace.

A client owns an investment-grade bond that has a coupon of 7% and is priced to yield 5.4%. If similarly rated bonds are being issued today with coupons of 5%, it would be expected that the client's bond A) has a negative net present value B) has a positive net present value C) will be selling at a discount from par D) has a zero net present value

B With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). We are told that this bond is offering a yield of 5.4%, which is more than the current market rate. Because a present value computation using a 5.4% rate would reflect a lower value than a 5% rate (the higher the discount rate, the lower the value), the bond can be purchased at a price below its present value. Any time that occurs, the instrument has a positive net present value (the difference between the price and the present value).

Which of the following statements is NOT true? A) A stock with a beta of 0.8 will move 20% less than the market. B) Beta is a volatility measure of a security compared with the overall market. C) Beta is a measure of a security's deviation from its historical average returns. D) A stock with a beta of 1.2 will move 20% more than the market.

C A measure of a security's deviation from its historical average returns is the security's standard deviation. Beta measures a security's volatility in relation to the overall market. Stocks with a beta greater than 1 are more volatile than the market and stocks with a beta less than 1 are less volatile than the market.

The business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough? A high rate of inflation A low rate of inflation A high rate of unemployment A low rate of unemployment A) I and III B) I and IV C) II and III D) II and IV

C A trough is the latter stage of a recession. Unemployment is higher than normal, and with a lesser demand for goods and services, the inflation rate is low.

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a utilities fund B) a closed-end company C) a unit investment trust D) a growth fund

C A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed; it is not traded.

Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? Commissions on recommended securities transactions Commissions on insurance sales Incentives from the issuer of a recommended security A) II and III B) I and II C) I, II, and III D) I and III

C Advisers must disclose compensation received on sales of securities and nonsecurities products and also compensation received from the issuer of a recommended security.

Under the Investment Company Act of 1940, which of the following would be considered an affiliated person? 1. Persons who control, are controlled by, or share common control with the company 2. Any officer, director, or employee of the company 3. Persons who own or control 5% or more of the voting shares of the company A) I and III B) II and III C) I, II, and III D) III only

C Affiliated persons are any investment company directors, officers, employees, or owners of 5% or more of the voting shares of stock, and/or any persons controlling or controlled by such persons.

An agent is assisting a prospective client in opening an account. The individual refuses to provide his net worth and annual income. The agent should A) seek permission to consult with the client's fiduciary team, including accountants and attorneys to obtain the financial information B) proceed with opening the account, but limit recommendations to conservative investments C) in the absence of company policy to the contrary, open the account but limit transactions to unsolicited orders D) refuse to open the account Explanation

C An agent must attempt to obtain client financial information. The broker-dealer, through its principals, may decide whether to accept business from a client refusing to provide financial information. In the absence of financial information, neither the firm nor the agent has the means to determine client suitability. Thus, the firm may only accept unsolicited orders from this client.

An intrastate offering is exempt from A) all registrations B) blue-sky registration C) federal registration D) state registration

C An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.

An investment adviser with custody of customer funds and securities must send the customer a statement of account activity no less frequently than A) monthly B) annually C) quarterly D) with every transaction

C An investment adviser in possession of customer assets must send a statement to the customer at least every three months. The statement must list the securities and funds held by the adviser and their location, and it must show all transactions in the account since the last statement date.

SEC Release IA-1092 requires an investment adviser to make each of the following disclosures except A) that the investment adviser may structure his personal securities transactions to trade on the market impact caused by his recommendations to clients. B) any compensation received from an issuer of a security being recommended to clients. C) annual compensation for the past five years or initial registration if that is shorter. D) if his personal securities transactions are inconsistent with the advice given to clients.

C An investment adviser must disclose his methods of compensation and must disclose compensation received from the issuer of any recommend security. However, investment advisers are under no obligation to disclose their annual income. An investment adviser who structures his personal securities transactions to trade on the market impact caused by his recommendations to clients must disclose this practice to clients. An IA generally also must disclose if his personal securities transactions are inconsistent with the advice given to clients.

An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close? A) $11.15, less redemption fee, if any B) $10.65 C) $10.65, less redemption fee, if any D) $10.65, less commission

C An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.

Which of the following statements correctly describes a mutual fund or open-ended investment company? A) In contrast to a closed-end investment company, a mutual fund will eliminate systematic risk. B) Marketability is limited because a willing buyer must be found in the secondary marketplace. C) Each investor's account value is based on the number of shares owned multiplied by the fund's net asset value. D) Shareholders are not taxed on the earnings of the fund because taxation takes place at the entity level.

C An investor's account value in a mutual fund is based on the number of shares multiplied by the fund's net asset value. As long as the fund distributes a certain percentage of its income, there is no taxation at the entity level; rather, shareholders pay tax on the distributions. Guaranteed marketability of fund shares is ensured.

Under the NASAA Model Rule on Business Continuity and Succession Planning, which of the following investment advisers should be most concerned about succession planning? A) The Four Partners Advisory Service B) Bob and Ted's Excellent Advice, LLC C) Jeremy's Financial Planning and Advice, organized as a sole proprietorship D) Finest Financial Advisers, Incorporated

C Because a sole proprietorship has only one individual, Jeremy, in the business, his death or incapacity would likely lead to closure of the business. This could have disastrous implications for his clients unless proper succession planning is done in advance. Although this kind of planning is required for all investment advisers, the effect on the LLC, corporation, and partnership, all of which have multiple owners, is not as critical as a sole proprietorship.

Many parents prefer to use a Section 529 plan over a Coverdell ESA to finance their child's education plans because 1. contribution limits are higher 2. funds may be withdrawn tax-free if used for qualified education expenses 3. there are no earnings limits 4. 529 contributions are tax deductible on the federal level A) I, II, and III B) III and IV C) I and III D) I and II

C Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year while those to a Section 529 plan can be as high as $300,000 in some states. A married couple cannot make a Coverdell contribution if their income exceeds $220,000, while there is no earnings limit to contribute to a 529. In neither case is the contribution tax deductible on the federal level (although the Section 529 plans may have tax advantages in some states). We are often asked about choice II. The question is asking about differences between the two plans and choice II is true for both of them.

Which of the following statements regarding state registration of securities is TRUE? A) Registration by coordination is effective on the 10th day after filing with the Administrator. B) Registration by qualification is effective after 30 days. C) Registration by coordination is effective concurrent with federal registration. D) Notice filing is effective when ordered by the Administrator.

C Coordination is the method used to register a security simultaneously under the Securities Act of 1933 and under the USA in a state. If the security's federal registration is pending and the Administrator has received all of the required material, the two registrations can be declared effective at the same time.

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? A) Treasury STRIPS, maturing in 2036 B) 6% Treasury bond maturing in 2035 C) 8% Treasury bond maturing in 2036 D) 5% Treasury bond, maturing in 2037

C Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile because they have the longest duration. The actual calculation of the duration of each of the other bonds given is beyond the scope of this exam.

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Attorneys B) Investment advisers C) Banks D) Credit unions

C In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, when is it unethical for an investment adviser to borrow money from a client? A) When the client is an affiliate of the investment adviser B) When the client is a bank or financial institution in the business of loaning money C) When the client is an immediate family member D) When the client is a broker-dealer

C It is unethical to borrow money or securities from a client, unless the client is a broker-dealer, a bank or other financial institution in the business of loaning money, or an affiliated person of the adviser. Owing money or securities to a client is not only unethical, it could also influence advice rendered to a client, creating a potential conflict of interest. Even when the client is an immediate family member, borrowing must not take place unless it meets one of the conditions state above. How do we know the family member does not meet one of those conditions? We know because nothing in the question indicates such and, on the exam, if such is the case, it will be clearly spelled out.

Under Section 303 of the Uniform Securities Act, in order for an issue to register using coordination, it must simultaneously register under the provisions of A) the Securities Exchange Act of 1934 B) the Investment Company Act of 1940 C) the Securities Act of 1933 D) the Uniform Securities Act

C Registration by coordination is a form of state registration that coordinates state registration of a security with simultaneous federal registration of that security. Securities are registered at the federal level under the Securities Act of 1933.

Which of the following is not included in the calculation of a mutual fund's NAV per share? A) Closing values of portfolio assets B) Accrued management fees C) Accrued sales charges D) Accrued custodian bank fees

C Sales charges have nothing to do with a mutual fund's net asset value. The NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio and that is valued as of the close of the markets, generally 4PM Eastern time.

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has a client in State X, registration as an IAR would be required in State X. B) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. C) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. D) because Sharon's client is a bank, she does not have to register as an IAR in State X.

C The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office.

The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from that requirement are A) closed-end management investment companies. B) open-end management investment companies. C) face-amount certificate companies. D) unit investment trusts.

C The two investment companies offering redeemable securities, open-end funds, and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.

The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from that requirement are A) closed-end management investment companies. B) unit investment trusts. C) face-amount certificate companies. D) open-end management investment companies.

C The two investment companies offering redeemable securities, open-end funds, and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.

Under which of the following conditions may an agent sell an unregistered nonexempt security? A) Never B) When the broker-dealer employing the agent has no office in the state C) Only to a noninstitutional client D) If the order was unsolicited

D Agents may accept unsolicited orders from clients, institutional or not, in unregistered nonexempt securities. If the transaction is with an institutional client, it can be solicited. In the case of unsolicited orders, the Administrator may demand written acknowledgment from the client that, in fact, the order was unsolicited.

What happens to bond durations when coupon rates increase and maturities increase? As coupon rates As maturities increase, duration: increase, duration: A) increases.increases. B) decreases.decreases. C) increases.decreases. D) decreases.increases.

D As coupon rates increase, the duration on the bond will decrease because investors are receiving more cash flow sooner. As maturity increases, duration will increase because the payments are spread out over a longer time.

Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form 13F. B) Form U4. C) Form 506. D) Form D.

D Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering.

Kellie is a senior equity analyst for a large brokerage firm. She primarily uses fundamental analysis techniques to assist her in picking stocks for her firm's clients. Today, she is reviewing the XYZ Corporation. The company is a manufacturer of computer keyboards and is currently going through an expansion phase. Which of the following techniques would Kellie be least likely to use to determine whether to buy, sell, or hold this company's stock? A) She may consider trends towards tablets and smart phones. B) She may examine the overall state of the economy, the computer industry, and then XYZ Corporation. C) She may review the company's stock 200-day moving average. D) She may calculate the intrinsic value of the stock using one or more of the stock valuation models.

C. Reviewing the company's stock 200-day moving average is a technique used by technical analysts (chartists). All of the other techniques are used by fundamental analysts. The process of examining the economy, the specific industry, and the specific company is a reflection of top-down fundamental analysis.

When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state A) only the agent and the SEC-registered broker-dealer must notify the Administrator promptly B) only the agent must notify the Administrator promptly C) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator D) only the agent and the state-registered broker-dealer must notify the Administrator

C. When an agent transfers employment from any broker-dealer to any other broker-dealer, both the agent and the broker-dealers must notify the state securities Administrator.

An agent registered with a broker-dealer in this state would be permitted to do all of the following EXCEPT A) split commissions with another agent at an affiliated broker-dealer B) share in the profits in an account with a customer with written permission of the customer and the broker-dealer C) solicit transactions in unregistered exempt securities D) borrow money, with written permission of the customer and the broker-dealer, from an immediate family member who is a client

D Money may never be borrowed from a client, unless something in the question indicates that the client is in the business of lending money or an affiliate of the firm. As a testing matter, that will only be banks or broker-dealers in margin accounts. Exempt securities are unregistered because they are exempt and solicitations for trades are no problem. Sharing in the profits in an account with a customer is permitted under these conditions, and splitting commissions with agents of the same broker-dealer or different broker-dealers under common control is also permitted. However, two registered agents representing nonaffiliated broker-dealers may never share commissions.

When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A) Mutual funds must make payment within 7 days of a redemption request and guarantee a return of the original investment. B) A fund always redeems shares at NAV, with little chance of a financial loss. C) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. D) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.

D Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment.

The Investment Company Act of 1940 states that: ) an investment company must have $5 million capital before its securities can be offered to the public B) it is unnecessary for the prospectus to disclose the management fee C) no more than 50% of the board of directors of an investment company may be officers or employees of the company or investment advisers to the company D) open-end companies may issue common stock only

D Open-end companies may issue only common stock. The prospectus must state the management fee, and an investment company needs only $100,000 to offer itself to the public. In addition, no more than 60% of the board of directors can be made up of officers or employees of the company.

Moonglow Specialties, Inc., is currently trading at $20 per share. Recently, the company reported net income of $1 million. The company is capitalized with 200,000 common shares and $5 million of 20-year debentures with a coupon of 4%. Given the data, Moonglow's price-to-earnings (P/E) ratio is closest to A) 2 times. B) 3 times. C) 5 times. D) 4 times.

D P/E ratio = market price per share ÷ earnings per share. Earnings per share = net income ÷ shares = $1 million ÷ 200,000 shares = $5. P/E = 20 ÷ 5 = 4. The net income is after all expenses including the interest on the debentures. As is frequently the case, the question includes information irrelevant to the answer.

Which of the following is NOT a characteristic of the active management approach to investing? A) Higher expenses as compared to passive approaches B) Focus on beating the market C) Attempt to predict market changes D) Belief in random walk theory and efficient markets

D Proponents of the active management approach do not believe that markets are completely efficient or random. Instead, they feel that it is possible to predict market movements and to achieve returns that beat the market. Because an active approach to investment management involves more frequent trading and research than passive approaches, the active approach is generally more expensive to maintain.

It would be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to A) attempt to convince a client that a specific mutual fund is a suitable investment for that client B) effect a securities transaction not recorded on the books of the broker-dealer after having received written authorization from the firm to do so C) promise to provide a service that the agent is capable of performing D) purchase a stock for her own account knowing that a large institutional buy order is about to be processed for that same stock

D Purchasing a security in advance of an expected block transaction is the wrongful practice known as front running. There is nothing wrong with trying to sell a client by convincing him that you are recommending a suitable investment. Likewise, promising to deliver services that you are able to deliver is not unethical. Off the books transactions are a problem unless, as in this case, prior written authorization has been received from the broker-dealer.

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT A) shares of other mutual funds B) call options C) high-yield bonds D) stock on margin

D The Investment Company Act of 1940 generally prohibits mutual funds from making purchases on margin. There are exceptions to this rule, such as in the case of hedge funds. A fund is not prohibited from buying options or low-quality bonds. A mutual fund may invest in other mutual funds so long as it does not acquire more than 3% of the outstanding shares of the other fund.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding, the net asset value per share is closest to A) $36.38 B) $26.11 C) $34.46 D) $32.55

D The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding which is approximately $32.55.

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is A) a corporate bond fund B) an aggressive growth fund C) a money market fund D) a municipal bond fund

D. Municipal bonds are considered second only to U.S. government securities in terms of safety. Also, interest received from the bonds is generally exempt from federal income tax.