Quiz 4

An individual forms a broker-dealer as a sole proprietorship. Which of the following actions are required by the Administrator? I. Filing Form BD II. Submitting a Consent to Service of Process III. Maintaining a minimum amount of net capital IV. Paying a filing fee a.I, II, and IV only b.II, III, and IV only c.I only d.I, II, III, and IV

d.I, II, III, and IV

Which of the following communications would be exempt from the sales literature and advertising filing requirements of the Uniform Securities Act? a. A brochure on U.S. Treasury securities b. A form letter used to prospect for small business retirement plans c. An ad espousing the tax advantages of condominium investments d. A group e-mail sent to several existing clients explaining the advantages of annuity investing

a. A brochure on U.S. Treasury securities The Administrator may require the filing of sales literature and advertising for nonexempt securities. Ads concerning exempt securities (such as Treasuries) are not subject to the filing requirements under the USA. Individual correspondence is not subject to filing with the Administrator, but form letters and group e-mails that are considered sales literature, must be filed. (

Paul and Mary Smith have discussed various portfolio allocations with their adviser Chuck. He has considered the Smiths' risk tolerance and expected return in order to recommend an efficient portfolio, that is, one in which the portfolio offers the: a. Highest expected return for the lowest level of risk b. Average of expected returns for the lowest level of risk c. Lowest of expected returns based on its Beta for the least amount of investment d. Greatest return based on the average Beta of each stock in relation to the total return

a. Highest expected return for the lowest level of risk.

Your client owns a portfolio of blue-chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: a. Write covered calls b. Buy calls c. Write covered puts d. Buy puts

a. Write covered calls The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase the yield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock. (

An equity-indexed annuity is linked to the S&P 500 Index and has a spread of 2.5%. If the S&P returns 7.5% in one year, the annuity's rate of return will be: a. 2.5% b. 5.0% c. 7.5% d. 10%

b. 5.0% Some equity-indexed annuities have a spread, margin, or asset fee. These represent the amount that will be deducted from the returns generated by the underlying index to determine the contract's returns. If the annuity had a spread of 2.5% and its underlying index returned 7.5%, then the annuity would be credited with 5% that year (7.5% - 2.5% = 5%).

Section 15 of the Securities Exchange Act of 1934 regulates: a. Exchange-listed securities transactions b. Broker-dealer registration c. The sale of equity securities by insiders d. The delivery of prospectuses for nonexempt securities

b. Broker-dealer registration

Which bonds would have the greatest sensitivity to interest rate changes? I. Bonds with long durations II. Bonds with short durations III. Bonds with high coupons IV. Bonds with low coupons a.I and III b.I and IV c.II and III d.II and IV

b. I and IV Duration is a measure (expressed in terms of years) of a bond's price sensitivity to small changes in interest rates. The longer a bond's duration, the greater its price sensitivity. Also, bonds with low coupons are more sensitive to interest changes than bonds with high coupons. Therefore, a change in rates will result in a greater percentage change in a bond's value if it has a low coupon.

Which of the following statements is TRUE regarding discounted cash flow? a. It is used to calculate the volatility of the market b. It is used to determine the attractiveness of an investment c. It can only be used to determine the value of a bond d. It can only be used to determine the value of common stock

b. It is used to determine the attractiveness of an investment Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace.

In which of the following situations does the registration of a broker-dealer result in an Administrator automatically registering an individual of the firm as an agent? a.The individual is an attorney who represents the firm b.The individual is a director of the broker-dealer and is actively engaged in the business of the firm c.The individual is an agent of the broker-dealer and is registered in another state d.The individual had been previously employed by the broker-dealer

b. The individual is a director of the broker-dealer and is actively engaged in the business of the firm. The registration of a broker-dealer in a state will automatically constitute the registration of an individual as an agent if this person is actively engaged in the business of the firm and is a partner, director, officer, or occupies a similar status.

Over the past 10 years, the annual percentage returns for a mutual fund have been 7%, 8%, -9%, 8%, -4%, 5%, 6%, 8%, 10%, and 12%. Which of the following represents the mode? a.5.1% b.8% c.7.5% d.-9% to 12%

b.8% the mode is the number that appears most frequently in a set of data points.

An employee of a federally chartered bank would like to sell mutual funds to the bank's current customers. Which of the following statements is TRUE? a. The bank employee is exempt from the definition of an agent in this situation b. The bank employee is exempt if the securities are sold only to current customers c. The bank employee needs to be registered as an agent d. The bank employee is exempt because of a safe harbor rule

c. The bank employee needs to be registered as an agent. Bank employees who solicit the sale of securities are considered agents of broker-dealers. The sale of mutual funds, which are considered securities, would cause the employee to meet the statutory definition of an agent.

Over the past nine years, the annual percentage returns for a mutual fund have been 7%, -6%, -3%, 8%, 6%, 5%, 11%, 13%, and 8%. What is the median return? a.5.4% b.8% c.7% d.19%

c.7% The median return is the middle number in a data set. When the returns in this question are listed in order from the lowest to the highest (-6, -3, 5, 6, 7, 8, 8, 11, 13), it is clear that there are four points below 7% and four points above 7%. Therefore, the median return is 7%. Choice (a) is the arithmetic mean (or average) of the data set. Choice (b) represents the mode, since 8% appears more often than any other number. Choice (d) is the range or the difference between the lowest and the highest number in the data set.

Paul wants to set up a pension plan for his small business but does not want to obligate the company to making set annual contributions, nor does he want a plan that will be complex or expensive to administer. Which plan would be the best choice for Paul's company? a. A SEP plan b. A Money Purchase plan c. A 403(b) plan d. A Coverdell IRA

a. A SEP plan A simplified employee pension plan would be the best choice given this criteria. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee's account. A Money Purchase plan, choice (b), does require an employer to make fixed annual contributions regardless of its cash flow. A 403(b) plan, choice (c), may be established only by certain tax-exempt organizations such as a public school system.

Randy inherited his father's IRA. If his father died at the age of 69 and Randy did not choose to take a lump-sum distribution, he must withdraw the entire account: a.By no later than the fifth year following the owner's death b.And rollover the funds into this own IRA c.By no later than the 10th year following the owner's death d.By the time Randy reaches the age of 70 1/2

a. By no later than the fifth year following the owner's death. According to IRS rules regarding inherited IRAs, a non-spouse who inherits an IRA and the decedent had not yet reached the age of 70 1/2, may take a lump-sum distribution, have the funds distributed over his expected lifetime, or have the funds distributed by the end of the fifth year following the IRA owner's death.

The rate of return that a mortgage company may earn over the life of a loan to a customer is the: a.Holding period rate of return b.Real rate of return c.Risk-free rate of return d.Expected rate of return

a. Holding period rate of return The return that is earned over the life of an investment and/or a loan is referred to as the holding period rate of return. Since the question asks for the return over the life of the investment (i.e., the loan), the holding period rate of return is the best answer.

Which TWO types of risks are NOT associated with options and derivatives contracts? I. Reinvestment risk II. Opportunity risk III. Purchasing-power risk IV. Market risk a. I and III b. I and IV c. II and III d. II and IV

a. I and III Reinvestment risk and purchasing-power risk are not associated with options or derivatives contracts. Reinvestment risk is the possibility that a principal payment received from an investment will need to be reinvested at a lower rate due to a change in interest rates, or the investor might need to assume more risk to receive the same rate of return. Purchasing-power risk, the risk that the value of assets will be eroded by inflation, applies to long-term debt instruments. Market risk is the day-to-day potential for losses from fluctuations in securities prices. This type of risk cannot be avoided.

Mary Smith is setting up an investment advisory business in the town in which she grew up. She has known the mayor of the community since childhood. She places an advertisement in the local newspaper that quotes the mayor saying, "I have known Mary Smith since childhood and we are fortunate to have someone with her expertise and integrity locating her investment advisory business in our community." This advertisement would be: a. Acceptable as long as it stated whether the mayor was receiving more than a nominal fee for his statement b. Acceptable as long as the advertisement contained a footnote describing the mayor's qualifications c. A violation of the IA Act of 1940 and, therefore, prohibited d. Prohibited because a mayor is not qualified to comment on the competence of an investment adviser

c. A violation of the IA Act of 1940 and, therefore, prohibited. A broker-dealer may use testimonials as long as they disclose whether more than a nominal fee was paid for them. An investment adviser may not use testimonials in its advertising.

Under the Investment Advisers Act of 1940, when is a firm's registration required to be renewed? a.Within 30 days of the calendar year-end b.Within 90 days of the adviser's fiscal year-end c.Within 30 days of the adviser's fiscal year-end d.Within 90 days of the calendar year-end

b. Within 90 days of the adviser's fiscal year-end. This is a tricky question because federal regulation of IAs is based on fiscal year, while state regulation is based on calendar year. According to the Investment Advisers Act of 1940, IAs are required to renew their registration within 90 days of their fiscal year-end. On the other hand, the Uniform Securities Act requires registration renewal to be completed at the end of the calendar year.`

Under the Uniform Securities Act, which of the following statements is/are TRUE of exempt securities? I. Any security that is exempt under the Uniform Securities Act is also exempt under federal regulations II. Any security that is exempt under federal regulations is also exempt under the Uniform Securities Act III. Certain federal covered securities are required to notice file with the state Administrator IV. All Canadian securities are exempt from registration a.I and III only b.II and IV only c.III only d.I, II, and IV only

c.III only Certain federal covered securities are required to notice file with the State Administrator. The notice filing provision applies to investment company securities and securities distributed through a Regulation D Rule 506 offering. A security can be exempt under federal law, but not state law, and vice versa. Regarding choice (d), only securities being issued by some form of Canadian government are exempt from registration; the exemption does not apply to offerings made by Canadian corporations.

The Hedger's Bear Fund mirrors the S&P 500 Index but holds only short positions in those securities. The fund has a: a. Beta of 0 b. Beta of 2.0 c. Coefficient of correlation with the S&P 500 Index of 0 d. Coefficient of correlation with the S&P 500 Index of -1

d. Coefficient of correlation with the S&P 500 Index of -1. The correlation of coefficient measures how closely the returns of two investments are related. Perfect correlation (two investments moving in the same direction and in the same percentage terms) is 1.0. No correlation is 0. A perfect negative correlation is -1. In this case, the portfolios are identical but one is long and the other short. A 4% positive move in the S&P Index would result in a -4% return in the Hedger's Bear Fund (a short index fund). This is a negative correlation.

All of the following securities prices are quoted based on the market price, rather than NAV, EXCEPT: a. Open-end management companies b. Closed-end management companies c. Exchange-traded funds d. Hedge funds

a. Open-end management companies Open-end management companies (mutual funds) and unit investment trusts (UITs) are valued each day, at the close of market, based on their net asset value. Closed-end management companies and ETFs trade in the market at either a premium or discount to their NAV, or they are quoted at their market value. Since hedge funds do not trade, their value is not transparent.

One element in preparing a financial plan for a client is to determine the appropriate type and amount of life insurance. If a client is conservative, 30 years old, and married with 2 young children, whose income is unpredictable, the IA may recommend what type of life insurance policy? a. Universal life insurance b. Whole life insurance c. Term life insurance d. Variable life insurance

a. Universal life insurance Since the client is conservative, with unpredictable income, universal life may be more suitable, since the premiums can be increased, decreased, or skipped, by using the cash value to fund the policy. The insurance company guarantees a minimum return on the cash value, which can be used to increase the death benefit. With whole life or term life, any premiums not paid may result in a lapse of the policy. Variable life would not be suitable for a conservative client, as the cash value may increase or decline based on the performance of the separate account. If a client is single with no dependents, life insurance may not be a concern for the client when creating the plan

Over the past 10 years, an investment adviser has developed a computerized trading algorithm that produces average returns of 30% per year. To recover the costs associated with development, the adviser now plans to charge clients an annual fee equal to 25% of their average balance. An Administrator would consider this fee: a. Unreasonable, since past performance is not indicative of future returns b. Reasonable based on average results from the past c. Unreasonable due to the significant amount of the gains being taken as compensation compared to normal fees from other advisers d. Reasonable, since the system is unique and not available from other investment advisers

c. Unreasonable due to the significant amount of the gains being taken as compensation compared to normal fees from other advisers. Performance-based fees are only available for qualified investors. Assessing a fee of 25% of the gains may be considered reasonable, but an asset-based fee of 25% would certainly be considered excessive. Generally, an asset-based fee exceeding 2% is considered excessive.

If employed by a federal covered adviser, which of the following individuals would be required to register as an IAR in State A? a.A person who works at the home office located in State B b.A person who resides in State A but works at the home office located in State B c.A person who resides and works in state B, and has five retail clients who live in state A d.A person who works at the home office in state A however all of his clients are institutions located in State A and State B

d. A person who works at the home office in state A however all of his clients are institutions located in State A and State B. If an IAR is employed by a federal covered adviser, the de minimis exemption—limiting the number of retail clients—does not apply. The IAR may exceed the five-client threshold in a state as long as he does not have a place of business. However, when an IAR is employed by a federal covered adviser and has an office in the state, the IAR would be required to register in that state, regardless of the number or type of clients being serviced. In choice (d), although all of the clients are institutions, since the IAR has a place of business in State A he is required to register in State A

Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE? a. Client notification must be made immediately regarding the location where the firm will hold the funds b. Client funds may only be held in an account that is established for that specific purpose c. Client funds may be held by a qualified custodian that has met certain standards d. Clients must receive a statement at least annually that discloses certain details of the funds held by the firm

d. Clients must receive a statement at least annually that discloses certain details of the funds held by the firm. Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided.

All of the following are TRUE regarding option positions, EXCEPT: a. Investors sell covered options to generate income b. Investors buy options to hedge stock positions c. Long calls will hedge short stock positions d. Long puts will hedge short stock positions

d. Long puts will hedge short stock positions Options may be used in many different ways to augment a stock portfolio. When seeking to add income, investors will sell covered options. For example, a client who owns 100 shares of XYZ at $34 may sell an XYZ Oct 40 call for a premium of 3. If the stock remains stable, the investor will be able to keep the stock and have a $300 gain for the premium. If the stock rises and the call is exercised, the investor will simply sell the shares he currently owns. The investor's profit is based on the difference between his purchase price ($34) and the option strike price ($40), plus the option premium ($3). Investors interested in hedging stock positions must buy options. Long calls are a hedge for short positions, while long puts are a hedge for long stock positions.

While presenting a financial plan to a customer, an IAR talks about different types of risk. One of the primary risks mentioned by the IAR relates to the impact of current events, consumer confidence, and the general political climate. This risk is called: a. Inflation risk b. Nonsystematic risk c. Reinvestment risk d. Market risk

d. Market risk Of the choices available, market risk is the best fit. Market risk is the general risk of investing in a given market or economy. Inflation is a form of systematic risk that affects all bonds. Nonsystematic, inflation, and reinvestment risks are not broad enough to cover the events mentioned.

Which of the following products is NOT a derivative? a. LEAPS b. CMOs c. Index options d. UITs

d. UITs A unit investment trust (UIT) is a type of investment company where investors' money is pooled and invested in securities. Investors in UITs have shares of beneficial interest in the portfolio. The shares are priced according to the performance of the portfolio of securities purchased. A UIT is not a derivative, since its value is not based on a specific security, but on the entire portfolio. Long-Term Equity Anticipation Securities (LEAPS) are long-term call or put options and are derivatives. An index option and a collateralized mortgage obligation (CMO) are both derivatives.

Your client would like to invest her traditional IRA contribution for long-term growth, but in such a way as to maximize diversification and minimize costs. Which of the following investments would be the best recommendation for her? a. Invest in a mutual fund that mirrors the S&P 500 Index b. Invest in a variable annuity that has a subaccount that mirrors the S&P 500 Index c. Buy a stock from each of 10 different sectors d. Invest in a variable life insurance policy that has a subaccount that mirrors the S&P 500 Index

a. Invest in a mutual fund that mirrors the S&P 500 Index. A major advantage of investing in a variable annuity, choice (b), is to participate in the earnings the market offers while deferring tax on those earnings. Since an IRA is tax-deferred anyway, the client could do this by just investing the IRA contributions directly into a mutual fund, choice (a). This would result in lower fees for the client, since variable annuities have a number of additional fees (e.g., mortality and expense risk fees) on top of the typical mutual fund expenses for each subaccount. Buying stock from 10 different sectors, choice (c), would not provide as much diversification as a portfolio modeling the S&P 500 Index, a broad market index. The IRS does not permit IRA contributions to be used to purchase life insurance, choice (d). Also, a life insurance policy should never be recommended to someone who does not need the insurance, since its cost will be subtracted from the cash value in addition to the usual mutual fund expenses for each subaccount.

Robin works part-time for an investment adviser and develops financial plans for the advisory clients. The customized financial plans that she creates for a fee often include recommendations for clients to purchase insurance or variable annuities as well as open IRAs or some other types of retirement accounts. Robin does not earn commissions for selling variable annuities and insurance products to implement the clients' plans. Is Robin an investment adviser? a.No, she is an investment adviser representative. b.No, since she does not provide investment advice on a full-time basis. c.No, since she does not receive compensation for implementing her financial planning recommendations. d.Yes, since she charges a fee for financial planning services

a. No, she is an investment adviser representative.

Which of the following statements is FALSE regarding an investment adviser's contract? a. The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer b. Contracts may allow for an adviser to be compensated based on the value of the assets under management between designated dates c. Contracts may not be assigned without customer consent d. If the investment adviser is a partnership, advisory clients must be notified of any change in partners

a. The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer. The regulators consider sharing in the gains of a customer's account to be a form of performance-based fee. These fees are generally prohibited in advisory contracts unless the customer qualifies for a waiver or exemption based its status (e.g., institutional investors or officers/directors of the firm), net worth, or assets under management. Asset-based fees are not considered performance-based fees if they are calculated based on the value or average value of the assets and not the appreciation.

Which of the following statements BEST describes discounted cash flow? a. The total value of an investment's anticipated cash flows in today's dollars b. Purchasing power in the future will have more worth than cash today c. Discounted cash flow uses depreciation and market-adjusted cash flows d. A method used to measure the risk-adjusted return on a bond

a. The total value of an investment's anticipated cash flows in today's dollars . Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.

Which TWO of the following statements are TRUE regarding derivatives? I. Interest-rate swaps are considered derivatives. II. Unit investment trusts (UITs) are considered derivatives. III. A credit default swap (CDS) is considered a derivative. IV. Mutual funds are considered derivatives. a.I and III b.I and IV c.II and III d.II and IV

a.I and III Futures, options, and forward contracts are all considered derivatives. Mutual funds, unit investment trusts (UITs), and closed-end funds are considered investment company products. Credit default swaps allow investors to swap or transfer the credit risk associated with a bond to another investor. The party selling the CDS is insuring an investor in the event that the issuer of a bond defaults. Interest-rate swaps usually allow an investor to swap a fixed rate of return for a variable rate of return. Be prepared to recognize that swaps are derivatives.

A broker-dealer has been unknowingly selling unregistered, non-exempt securities through non-exempt transactions without the permission of the state securities Administrator. If the broker-dealer becomes aware of this issue, what is its best course of action? a.The broker-dealer should offer a letter of rescission to the customer. b.The customer should sue the broker-dealer in criminal court. c.The broker-dealer and customer should agree to use arbitration. d.No action should be taken since there is no violation.

a.The broker-dealer should offer a letter of rescission to the customer. This is not a case that involves fraudulent (criminal) activity; however, selling non-exempt securities in a state in which they are not registered is a violation (civil). The best course of action is for the broker-dealer to offer the customer a letter of rescission. In the letter, the broker-dealer offers to repurchase the securities at their original cost, plus interest, minus any of the investment income that has been received by the client.

Stephen Gigs is about to retire and is concerned about having enough income to supplement his Social Security retirement savings. He would like to buy a conservative investment that can help offset inflation. Mr. Gigs takes the advice of his agent and purchases Treasury Inflation-Protected Securities (TIPS) with a face value of $100,000 and a coupon rate of 2 3/4%. Six months later, he reads that the CPI is up 3 1/2%. What is the approximate amount of Mr. Gigs' next interest payment? a. $1,375 b. $1,423 c. $2,750 d. $3,500

b. $1,423 The CPI rose 3 1/2% and, therefore, the principal of the TIPS will increase by 3 1/2% ($100,000 + [$100,000 x 3.5%]) = $103,500. Mr. Gigs' interest will be calculated by multiplying the new face amount by the coupon rate of 2 3/4%, then dividing by two since interest is paid semiannually. ($103,500 x 2.75%) / 2 = $1,423.13. Remember, the stated rate is an annual rate and will not change.

John and Audrey are a married couple. They are both thirty-five and have a 4-year-old daughter. They both work and together they earn more than $200,000 per year. John received a substantial bonus last year, which they want to save in order to purchase a home in 3 to 5 years. Which of the following investments would be the BEST recommendation for them? a.A short-term, investment-grade bond fund b.A short-term municipal bond fund c.A bond index fund d.An equity-indexed annuity

b. A short-term municipal bond fund John and Audrey have a short-term investment goal--they want to buy a house in the next couple of years. Thus, capital preservation and liquidity should be two of their main goals. Choice (b) is the best answer, but choice (a) is also a viable answer. Both funds would meet these objectives. However, the stem of the question indicates that they have a high income and are probably in a high marginal tax bracket. Thus, a municipal bond fund would provide them with income that is free from federal taxes and is possibly state and local tax-exempt as well.

A client would like to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations would be most suitable? a. A managed closed-end fund b. An S&P 500 Index mutual fund c. An S&P 500 Index exchange-traded fund d. A DJIA exchange-traded fund

b. An S&P 500 Index mutual fund Although all these investments would be suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund would be the most cost-effective method for an investor who has $250 a month to invest to accomplish this goal. The closed-end fund and ETFs are purchased on an exchange, and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge, (i.e., they are no-load). If the investor were purchasing a large dollar amount at one time, any of these funds might be appropriate.

Your client dies and leaves a sizable investment portfolio. Within two weeks of his death, the executor of his estate presents the proper documentation to you. She has you sell off the decedent's portfolio, investing the proceeds in money-market instruments in anticipation of the distribution to the heirs of the estate. The value of the holdings declines substantially in the period between his death and their sale. For estate tax purposes, the assets will be valued: a. Nine months after death, or at the time of death, whichever is less b. At the time of death c. At the time of sale d. At the time of death or sale, whichever is greater

b. At the time of death

Kate is an agent at Leopold Securities and works in the firm's New York office. She uses the telephone to contact a client in New Jersey. She recommends buying stock in Tomato Garden Industries, a company located in New Jersey. Which of the following statements is TRUE? a. Since the company is located in the same state as the client, this would be considered an exempt transaction b. Both the New York and the New Jersey Administrator may have authority over the offer c. She is not permitted to make this type of offering using the telephone d. An offer exists only if a sale is made

b. Both the New York and the New Jersey Administrator may have authority over the offer The Administrator has authority over any offer to buy or sell that is originated, accepted, or directed in the Administrator's state. A sale need not be made in order to meet the definition of an offer to sell.

Maria wants to open a 529 savings plan for her daughter. The advantages of this type of account include all of the following factors, EXCEPT: a. Earnings grow on a tax-deferred basis Maria wants to open a 529 savings plan for her daughter. The advantages of this type of account include all of the following factors, EXCEPT: a. Earnings grow on a tax-deferred basis b. Contributions may be deducted from the donor's federal and state income taxes c. There are no limits on the contributor's income d. Distributions are not subject to federal income taxes provided they are used to pay for education expenses

b. Contributions may be deducted from the donor's federal and state income taxes Contributions to 529 savings plans are not tax-deductible as far as the federal government is concerned. Some states do allow their residents to deduct part or all of their contributions to 529 plans from their state income taxes, provided they invest in a plan sponsored by the state in which they live.

Although an exempt reporting adviser (ERA) is not required to register, it must still satisfy which of the following requirements? a.File Form ADV Part 2 with the SEC b.Notice file with the Administrator c.Amend its ADV within 90 days if material information changes d.Prepare an annual brochure

b.Notice file with the Administrator Exempt reporting advisers are required to file Form ADV Part 1A with the SEC and must notice file with the Administrator. Any material information changes must be reported promptly. As is the case with other investment advisers, an ERA is required to amend its Form ADV within 90 days of its fiscal year end.

If an advisory client is most concerned with minimizing her tax liability, common stocks may provide a greater benefit than corporate bonds because: a.Stocks tend to offer a lower yield than corporate bonds b.Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed c.The unrealized capital gains on some bonds is taxed each year as ordinary income d.Capital gains on stocks are taxed at a lower rate than the capital gains on corporate bonds to encourage investments in stocks

b.Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed. If an investor owns stock of a domestic corporation (or shares of a fund that contains these types of stocks) and has satisfied a holding period, any dividends that are distributed by the company (or fund) are considered a qualified cash dividends and are taxed at a maximum rate of 20%. On the other hand, the interest on corporate bonds is taxed as ordinary income (possibly as high as 39.6%). Capital gains are only taxable if they are realized (i.e., the investor sells the asset at a price that is higher than what he originally paid).

Important considerations that an investor should take into account before investing in a limited partnership would include all the following matters, EXCEPT: a. Checking into the general partner's qualifications for running the entity as well as his financial position b. A complete assessment of the funding available to the partnership c. An analysis to determine whether the business will lose enough money to make the investment a viable tax shelter d. A determination as to whether the length of the investment program is compatible with the investor's financial position

c. An analysis to determine whether the business will lose enough money to make the investment a viable tax shelter The ideal situation for a limited partnership is for the business to generate a positive cash flow, but to report a loss due to the deductions that are applied to revenue. In the investment, there is an expectation of profit, which is made attractive to the investor by the timing of the profit and the way it is taxed. It is wrong to consider the merits of a limited partnership based on how poorly the business will perform.

A management company may be established as either open-end or closed-end. What is the difference between the two types? a.Closed-end funds redeem their own shares b.Open-end fund shares trade in the secondary market c.Closed-end shares may trade at a premium or discount to the NAV d.Open-end funds may issue bonds in order to raise additional capital

c. Closed-end shares may trade at a premium or discount to the NAV. Closed-end fund shares trade in the secondary market at either a premium or discount to their NAV. Although closed-end funds may issue senior securities (preferred stock or bonds) to raise additional capital, open-end funds cannot. Also, open-end fund securities are able to be redeemed; they do not trade in the secondary market.

All of the following statements are TRUE of a 529 plan, EXCEPT: a.Withdrawals used for educational purposes are not subject to federal taxation b.There are no income limits placed on contributors c.Contributions are unlimited d.A married couple may give a lump sum of $140,000 without incurring federal gift taxes

c. Contributions are unlimited The contribution limits for a 529 plan are quite high (much higher than those for a Coverdell Education Savings Account, which is capped at $2,000 a year) but they are not open-ended. Each state establishes the maximum amount that may be contributed to all 529 plans maintained for one beneficiary (usually $200,000 to $300,000). All the other statements are correct. Note, however, that an investor who contributes the maximum amount allowable to a 529 plan may incur federal gift taxes. A single investor may contribute up to $14,000 per year ($28,000 for a couple) for each beneficiary without incurring gift taxes. An investor may also aggregate 5 years' worth of annual contributions into one and give a $70,000 lump sum ($140,000 for a married couple) without incurring federal gift taxes.

Harold has established a revocable trust. His son Stanley is the trustee and his daughter Dora and her children are the beneficiaries. The income is currently taxable to: a. Dora b. Dora's children c. Harold d. Stanley

c. Harold Since this is a revocable trust, all the income produced by the trust must be included in Harold's (the grantor's) tax returns. The trust income would not normally be taxable to the trustee unless the trustee is also the grantor or one of the beneficiaries. Note, however, that the trustee would be responsible for making certain that the proper tax payments were made. If the trust is irrevocable, then the income is generally taxed to the trust or the beneficiaries.

Fred works for Lasker Securities and is holding an investment seminar in Connecticut. Fred has sent 100 invitations to people located in New York. Since his firm has no place of business in New York, he has the responses returned to his office in Connecticut. Which TWO of the following statements are TRUE? I. Lasker Securities would not need to be registered as a broker-dealer in New York if it has no place of business in New York, and the seminar is to be held in Connecticut. II. Lasker Securities would need to be registered as a broker-dealer in New York, since it is conducting business in the state. III. Fred would need to register in the state of New York as an agent, since he is doing business within the state. IV. Fred would not need to be registered as an agent in New York, but must be registered in Connecticut, since the seminar will take place in Connecticut. a. I and II b. I and III c. II and III d. II and IV

c. II and III Lasker is conducting business in the state of New York if its agents solicit securities business within that state, even though the broker-dealer has no place of business within the state. Sending invitations to attend an investment seminar is considered doing business. Fred must be registered as an agent in both states since he is acting on behalf of the broker-dealer in the solicitation of securities business in New York, and conducting an investment seminar in Connecticut.

Rigid Advisers supervises a number of aggressively managed portfolios for a collection of high net worth clients. The firm requires written discretionary authority as part of its contract with any new customer. Which TWO of the following statements are TRUE regarding such discretionary authorization? I. The authorization relieves the adviser of having to make a suitability determination when executing transactions due to the blanket indemnity provisions contained within a standard POA. II. Each transaction the adviser executes for a customer must be suitable based on the objectives and risk tolerance of a given client. III. The adviser must keep a copy of the written discretionary authorization for its records. IV. The adviser must get a new POA signed by each client at least annually. a. I and III b. I and IV c. II and III d. II and IV

c. II and III Written discretionary authority to manage the client's account does not relieve an adviser of any suitability requirements. All transactions executed by the adviser must still be suitable for the individual customer. In addition, the adviser must maintain a copy of the written authorization for its client account records. A new power of attorney (POA) is not required each year.

According to the Securities Act of 1933, which of the following descriptions would meet the definition of a security? I. A contract for the future delivery of 35,000 pounds of pork bellies II. An options contract for the future delivery of 50,000 pounds of copper III. Ownership interest in an endowment life insurance policy, with a cash value of $75,000 IV. An unsecured promissory note issued by a corporation, maturing in 270 days or less V. A money-market mutual fund a.I and III only b.I, II, and III only c.II, IV, and V only d.I, II, III, and IV

c. II, IV, and V only Although futures contracts are not securities, options on futures are defined as securities. Choice (I) is a futures contract. Choice (II) is an option on a futures contract. Insurance products are not securities unless the contract described is variable (variable life, variable annuities). An unsecured promissory note issued by a corporation that matures in 270 days or less is exempt from registration, but it is defined as a security. Money-market mutual funds are highly liquid, very safe investments that can be converted into cash, but these instruments are also securities

Under the Uniform Securities Act, an institutional investor: a.Has more than $2.1 million of net worth b.Has a minimum of $1 million under management with an investment adviser c.May be designated as such by rule or order of the Administrator d.Is any financial institution or trust

c. May be designated as such by rule or order of the Administrator. The best answer to this question is that, by rule or order, the Administrator has the power to designate a person as an institutional investor. Choices (a) and (b) provide the two different financial tests that a person could meet in order to be considered a qualified client. As for choice (c), both financial institutions and trusts may be considered institutional investors, but there is a financial requirement that must be met.

On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator? a.On Tuesday, June 3 b.On Wednesday, June 4 c.On Thursday, June 5 d.On Friday, June 6

c. On Thursday, June 5 If an IA's net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency.

According to modern portfolio theory (MPT), the expected return of an investment is the: a. Average return including realized and unrealized gains and losses, plus income over a measured time period b. Market return on the investment adjusted by the beta of the stock or the portfolio c. Possible returns on the investment weighted by the likelihood that return will occur d. Standard deviation of gains and losses over the life of the investment

c. Possible returns on the investment weighted by the likelihood that return will occur

A client purchases 1,500 shares of Bergman's Basketballs, an IPO that was underwritten by Broker-Dealer X. If the salesperson who sold the shares to the client is employed by Broker-Dealer Z, a member of the selling group, the client: a. Does not need to receive a prospectus since the shares were purchased from a member of the selling group b. Should receive the prospectus from Broker-Dealer X c. Should receive the prospectus from Broker-Dealer Z d. Should receive the prospectus from the issuer

c. Should receive the prospectus from Broker-Dealer Z Failing to furnish a client who has purchased shares of a new issue with a prospectus is an unethical and/or dishonest business practice by a broker-dealer and/or an agent. The responsibility to furnish this document falls on the broker-dealer that sold the security to the client.

An investment adviser charges fees based on a percentage of the assets being managed by the firm for the client. The schedule of fees reveals that the more assets the firm manages for the client, the lower the advisory fee. For customers with more than $5 million under management, the firm's advisory fees are negotiable. Which of the following statements is TRUE? \ a. The firm's fee structure is illegal since all customers must be charged the same rate for the same advisory services b. That part of the firm's fees that declines as assets increase is acceptable, but advisers may not negotiate different fees with different clients for the same amount of assets under management c. This fee structure is acceptable as long as the resulting fees are reasonable d. Any fee structure is acceptable as long as it is disclosed to the client and the client consents to it

c. This fee structure is acceptable as long as the resulting fees are reasonable It is unethical for an investment adviser to charge an unreasonable advisory fee. State Administrators may conduct surveys of investment adviser fees to determine what is reasonable. Negotiable fees are acceptable as long as the resulting fee is reasonable.

An affiliate of a state-registered investment adviser just launched a new hedge fund. One of its IARs believes that this fund would be a good choice for several of her clients. According to the NASAA Model Rule on Unethical Business Practices of Investment Advisers: a. The affiliated adviser must be also be registered in the state b. The IAR must give a copy of the hedge fund's prospectus to all potential investors c. This relationship must be fully disclosed to all potential investors d. This is a prohibited practice

c. This relationship must be fully disclosed to all potential investors Recommending the hedge fund managed by an affiliated entity would be a conflict of interest, which would need to be disclosed to all potential clients. Hedge funds are generally not registered under the Securities Act of 1933 and are not subject to prospectus requirements. Investors are usually given a similar document called an offering memorandum instead.

Under the Investment Advisers Act of 1940, which of the following is required to register with the SEC? a.An investment adviser with clients in 13 states b.An investment adviser that recommends exchange-traded securities c.An investment adviser that manages more than $110 million ($110 MM) in assets d.An investment adviser that only manages the money of a few wealthy clients

c.An investment adviser that manages more than $110 million ($110 MM) in assets Unless exempt from registration, advisers are required to register with either the state Administrator or the SEC, but not both. An adviser has a choice and may register with the state Administrator or the SEC once it has assets under management (AUM) of $100 million. Once the adviser s AUM reaches $110 million, it is categorized as a federal covered adviser and is required to register with the SEC. In addition, firms that provide advice to an investment company, or firms that provide advisory service in 15 or more states, are also categorized as federal covered. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level.

Melissa is listening to a group of individuals discussing trends in the current market. They are saying that they are fully invested and have no purchasing power and that they believe the market will continue to rise. Melissa, however, anticipates a market peak followed by a downturn. She is most likely a follower of which style of investing? a. Momentum investing b. The Random Walk Theory c. The Sharpe Ratio d. Contrarian investing

d. Contrarian investing Melissa is an adherent to the contrarian style of investing. She goes against the wisdom of the majority

An investment adviser would like to send an e-mail to potential clients and include a report which contains a listing of all of its recommendations. Is this an unethical business practice? a. It is, since an adviser is not permitted to use electronic communication to list past recommendations b. It is, since an adviser is only permitted to send this type of communication to existing clients c. It is not, provided the report has been filed with either the SEC or the appropriate state prior to the adviser sending the e-mail d. It is not, provided the first page of the report bears a legend stating that future recommendations will not always be as profitable as those that were made in the past

d. It is not, provided the first page of the report bears a legend stating that future recommendations will not always be as profitable as those that were made in the past. NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers states that any notice, circular, or report is considered advertising whether or not it is delivered by written or electronic means. An adviser is permitted to include a listing of all recommendations, provided the following conditions are met. The adviser furnishes a list of all recommendations it has made within the immediately preceding period of not less than one year and (i) states the name of each such security recommended, the date and nature of each such recommendation (e.g., whether to buy, sell, or hold), the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each such security as of the most recent practicable date, and (ii) contains the following cautionary legend on the first page: "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list." Advertising does not need to be filed with the SEC or the state prior to being disseminated and may be sent to both existing and potential clients.

An agent who is registered in State A contacts an individual investor in State B. The investor agrees to open an account and buy a security through the agent. If the broker-dealer is registered in State B, but the agent is not, the agent MAY: a.Sell the security if it is registered in State B and the agent's registration is pending in State B b.Sell the security as long as the agent's supervising principal is registered in the state c.Sell the security if it is exempt d.Not sell the security

d. Not sell the security In order to sell a security in a state, the broker-dealer and the agent must be registered in that state. Since the agent is not registered in State B, he may not sell the security to the investor. It is important to note that individual investor is a new client. If the investor was an established client who previously lived in State A, but had moved to State B, the agent could continue to service the client's account for 60 days after the client moved. However, this provision is only available if the agent's registration was pending in State B

According to the Uniform Securities Act, all of the following sales and advertising literature may be subject to filing with the Administrator, EXCEPT a(n): a. Prospectus for a limited partnership b. Pamphlet for an oil and gas program c. Brochure for a mining company d. Offering circular for an endowment policy

d. Offering circular for an endowment policy The Administrator may require the filing of sales and advertising literature for securities investments. Limited partnerships, oil and gas programs, and mining companies issue securities. Endowment policies are insurance products, not securities.

A person located in State A has been a client for four years of a firm that is headquartered in State B. The firm is registered in both States A and B. Based on the advice of the firm, the client buys securities that become worthless. Two years later, the client files a civil suit to recover the purchase price of the securities. If the agent who sold the securities to the client has passed away, the client is: a. Not permitted to file a civil suit since the agent has passed away b. Only permitted to file a civil suit in State B, since that is where the firm is headquartered c. Permitted to file the civil suit but will not be able to recover damages since the statute of limitations has passed d. Permitted to file the civil suit and may be able to recover damages

d. Permitted to file the civil suit and may be able to recover damages Under the provisions of the Uniform Securities Act, every cause of action survives the death of any person who might have been a plaintiff or defendant. The client may file the suit in State A and need not file the civil suit in the state where the firm is headquartered. The statute of limitations for civil liabilities under the USA is three years from the sale or rendering of investment advice, or within two years of discovery. Therefore, the suit may be filed and the customer may recover damages. (The client still has one year left to file.)

An IAR is discussing the investment objectives with one of her clients. The client is convinced the real estate market is near its bottom, and due to recover in the next 12 to18 months. Since she has a limited amount to invest ($50,000) and wants an investment that is diversified and liquid in the event she is wrong, the IAR may recommend a: a.Real estate limited partnership b.Real estate general partnership c.Subchapter S Corporation that invests in real estate d.Real estate investment trust

d. Real estate investment trust A limited partnership is a very illiquid investment and suitable for long-term investors. A general partnership is also illiquid and all partners have unlimited liability. A Subchapter S Corporation lacks liquidity because it is limited to 100 shareholders. Real estate investment trust (REIT) shares trade in the secondary market and are, therefore, liquid. The shareholders have limited liability and participate in a diversified portfolio of various real estate holding

To measure the variability of returns on various investments, you would use which of the following metrics? a. CAPM b. Standard duration c. Correlation coefficient d. Standard deviation

d. Standard deviation Standard deviation is used to measure the variation of returns from the weighted mean return of a security. The greater the standard deviation, the greater the risk

Why would an investment adviser perform a capital needs analysis for a client? a. To determine how much income the client will need at retirement b. To determine how to best reduce the client's tax liability c. To determine how much disposable income the client has available to purchase insurance d. To determine how much insurance the client needs in order to fund future financial goals

d. To determine how much insurance the client needs in order to fund future financial goals A capital needs analysis is used to determine the amount of insurance a client needs to purchase today in order to fund her future financial goals. For example, if the client dies prematurely and the value of her investments are not sufficient to pay for her child's college education, life insurance is needed to fund the difference.

An investment adviser wants to gain access to equity initial public offerings (IPOs). In order to have more IPO choices, the adviser contacts Jane who is not affiliated with the firm. Jane is not registered with any state Administrator or with the SEC. Jane will charge the firm a finder's fee for any investment secured through her service. Under the Investment Advisers Act of 1940, why is Jane prohibited from accepting payment? a.Because she must be registered as a broker-dealer to sell securities to individuals b.Because the IA has gone outside its normal broker-dealer research group who could have performed the same service for a lower cost c.Because the investment is not suitable and the clients have never expressed interest in IPOs d.Because Jane is acting as a solicitor for the adviser when she finds the IPOs

d.Because Jane is acting as a solicitor for the adviser when she finds the IPOs. Since Jane is assisting the IA, she is considered a solicitor and there must be a written agreement in place with the firm for which she is soliciting. Making payments to solicitors is allowed provided such an agreement exists and is disclosed to clients. Choice (a) is incorrect because Jane is not selling securities directly to individual investors and is, therefore, not required to register as a broker-dealer.