Series 65 Mastery Exam
For a profitable and rapidly growing firm, holders of preference shares are leastlikely to benefit from the firm's growth if the preference shares are A) cumulative. B) common stock C) convertible. D) participating.
A Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed and, regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock - do not make a silly error and choose common stock.
Which of the following items will affect a corporation's cash flow? I. Cash II. Depreciation III. Net sales IV. Accounts receivable A) II and III B) I and IV C) I and II D) III and IV
A Cash flow is basically net income plus depreciation. Net sales is the beginning of the company's income. Cash and accounts receivable are assets, and cash flow comes from the income statement, not the balance sheet.
All of the following are required to compute the total return of a common stock EXCEPT A) dividend yield as of the pricing date B) purchase price of the stock C) price of stock at the end of the holding period D) amount of dividends paid during the holding period
A Dividend yield is a measure in itself. The information needed for a total return calculation is any income received from holding the security plus any appreciation realized from holding the security.
Holders of which of the following securities would be most likely to receive preemptive rights? A) Common stock B) Preferred stock C) Treasury stock D) Secured bonds
A It would be very rare for any security other than common stock to receive preemptive rights.
An investor has 1,000 shares of a JNS, Inc., a large-cap value stock purchased 5 years ago at $40 per share. It is currently trading at $52 per share. The investor believes that the current market for this stock is going to remain stable for the next 9 to 12 months. To increase his return on this investment, the representative should recommend that the customer A) sell 10 JNS 55 calls B) buy 10 JNS 40 puts C) buy 10 JNS 55 calls D) sell 10 JNS 40 puts
A To generate income using option contracts against a long stock position, you will always sell the contract. In this context, the sale of call contracts would accomplish the objective. This is the covered call writing strategy.
XYZ Securities is a broker-dealer based in Wisconsin with offices in no other state. In addition to its Wisconsin clients, XYZ has 30 retail customers living in Illinois. During the winter, if 10 existing customers vacation in Florida for up to 7 weeks at a time, XYZ Securities is a broker-dealer in A) Wisconsin and Illinois B) Wisconsin, Illinois, and Florida C) all states having enacted the USA D) Wisconsin only
A Under the USA, XYZ Securities is a broker-dealer in Wisconsin because it maintains an office there. XYZ Securities is also a broker-dealer in Illinois because with 30 Illinois retail (non-institutional) customers, registration is required even if there is no physical office in Illinois. Because none of XYZ's clients has taken up residence in Florida, such clients are transients rather than residents.
A corporation with a 10%, $100 par cumulative preferred paid $5 to preferred stockholders last year. This year the company wants to pay common dividends. How much must it pay each preferred share outstanding before paying common shareholders? A. $5 B. $15 C. $0 D. $10
B A 10% cumulative preferred stock with a $100 par value would pay an annual dividend of $10 ($100 × 10%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $5 that was paid last year left $5 in dividends in arrears. Therefore, this year requires that a $15 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders.
If a client wishes to open a margin account, the most important warning you should give is that A) not all stocks can be purchased on margin B) because of the leverage involved, the client can lose more than the original amount invested C) the Fed has the power to change margin requirements at any time D) the cost of the money borrowed to carry the account is not fixed and has no upper limit
B Although the other choices are true, the most important caveat to explain to a client is that buying on margin could lead to a loss equal to or greater than the investor's original principal.
Which of the following statements is NOT true of Regulation S-P? A) Customers may be provided privacy information on internet web pages. B) Consumers must be given an initial privacy notice. C) Customers must be given annual privacy disclosures on a separate piece of paper. D) Consumers need not be given an annual privacy notice.
C A customer with an ongoing relationship with a member must receive both an initial and an annual privacy notice. It may be included in other documents but must be clear and conspicuous. Consumers have a one-off relationship, so there is no requirement to provide them or former customers with annual disclosures.
Under the Investment Company Act of 1940, a closed-end management investment company is required to do all of the following EXCEPT A) have a stated investment objective B) publish its management fees C) redeem its shares upon request D) issue shares with voting privileges
C Closed-end management investment company shares trade in the open market (either listed or OTC) once the primary offering is done. The selling price is determined by supply and demand within the market. A redeemable share would be characteristic of an open-end management investment company (mutual fund).
A popular strategy for income investors who wish to take advantage of potentially higher interest rates when reinvesting maturing securities is A) rebalancing B) barbelling C) laddering D) bulleting
C Laddering involves investing a sum at one time, but with different maturities. As each bond (or CD) matures, it is reinvested at current rates and then becomes the longest maturity in the portfolio.
Which of the following investors would be exempt from filing Form 144 when selling securities they own? A) An investor selling shares acquired in a Regulation D private placement. B) An employee of the company selling unregistered shares. C) An employee of the company selling registered shares purchased in the open market. D) An affiliated person selling unregistered shares.
C Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file Form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.
Which of the following is a direct commitment between one buyer and one seller? A) Settlement contract B) Option contract C) Futures contract D) Forward contract
D A forward contract is a direct commitment between one buyer and one seller. The forward seller is obligated to make delivery; the forward buyer is obligated to take delivery. Unlike futures or options where parties other than the two who originated the contract may take the role of the "other side," with a forward contract it is only the two originators who are involved.
An investor's portfolio is heavily weighted in AA and AAA rated municipal bonds with an average maturity of 18 years. The client has the most exposure to A) default (credit) risk B) liquidity risk C) business risk D) interest rate risk
D For any high-quality fixed income security or fixed income portfolio with a relatively long average maturity, the greatest risk is the risk of interest movements. This becomes even more important with longer maturities. Another risk to consider here is the loss of purchasing power.
The Investment Advisers Act of 1940 as further modified by SEC Release IA-1092, includes all of the following in the definition of an investment adviser EXCEPT A) a pension consultant offering advisory services to employee benefit plans B) a financial representative for a professional athlete C) a financial representative for a celebrity D) an adviser who only gives advice on U.S. government securities
D If you are only giving advice concerning direct obligations of the federal government, you are excluded from the definition of a federal investment adviser. A major portion of SEC Release IA-1092 defined those advising celebrities and professional athletes and those acting as pension consultants as investment advisers.
To generate income using option contracts against a long stock position, you will always sell the contract. In this context, the sale of call contracts would accomplish the objective. This is the covered call writing strategy. A) an illegal and unethical activity B) a discretionary trade C) an exempt transaction D) an agency cross transaction
D If you are representing both sides to the trade, you are engaged in an agency cross transaction.
A security has been registered in 23 states using the process known as coordination. When recommending this stock to a client, it would NOT be permitted to state that the security A) is not a registered investment company B) is registered on both a federal and state level C) does not meet the NSMIA's definition of a federal covered security D) has an additional level of safety because it is registered on both a federal and state level
D Registration, regardless of the number of states and/or the SEC, has nothing to do with safety.
Which of the following are examples of unsystematic risk? I. Market risk II. Business risk III. Default risk IV. Interest rate risk A) I and IV B) II, III, and IV C) I, II, III, and IV D) II and III
Unsystematic risk is risk that you can diversify away. Holding a diversified portfolio of stocks will protect against the business failure of a specific holding while the same is true with a diversified portfolio of bonds and the risk of default of a single issue. Systematic risk (market risk and interest rate risk) is the risk you take by simply being in the market itself, which cannot be diversified away.
Investors purchasing Nasdaq traded stocks generally are not concerned with A) liquidity risk B) systematic risk C) market risk D) business risk
A Liquidity risk addresses the ability for you to turn your investment into cash in a relatively short period of time. Nasdaq listed securities are traded within a market that has breadth and depth. Market risk is different from marketability or liquidity risk. Market risk is the risk inherent in any investment simply because it is traded within a market subject to supply and demand.
Use of a corporation's balance sheet and income statement would be of greater importance to an investment manager following which style? A) Contrarian B) Growth C) Value D) Market capitalization
C Value managers focus their attention on the company's financial statements in an effort to undercover value.
An investor interested in obtaining the benefit of professional portfolio management, has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves independently from the computed NAV. This investor must be following a A) balanced fund B) special situations fund C) closed-end fund D) common stock fund
C Because closed-end funds trade in the secondary markets, their prices are determined by supply and demand. As a result, the market price could be above, below, or the same as the NAV at any given point in time. Note that when the exam uses an adjective to describe a fund (balanced, common stock, and so forth), it is always an open-end company (mutual fund).
Which of the following is a written document that sets forth a client's objectives, sets limitations on the portfolio manager, provides guidance to the portfolio manager, and provides a means for evaluating performance? A) Financial planning disclosure B) New account form C) Risk profile questionnaire D) Investment policy statement
D The investment policy statement (IPS) is a written document that sets forth a client's objectives and limitations on the portfolio manager. It gives guidance and provides a means for evaluating investment performance of the portfolio manager. It includes the investor's objectives including risk tolerance and constraints, such as time horizon, need for liquidity, and unique circumstances or preferences (no tobacco or fossil fuel stocks).
When an agent is recommending an investment in an emerging market foreign security, disclosure must be made to the client that the investment is subject to I. market risk II. political risk III. currency risk IV. liquidity risk A) I, II, III, and IV B) I, II, and III C) II, III, and IV D) I and II
A Investments in foreign securities will open up an investor to risks of not only the market, but also risks of the economy of the foreign country, economic and political stability of the foreign country, foreign currency fluctuations, and especially with emerging markets, even liquidity risks due to the dependence upon that country's trading rules.
When investors tend to increase their investments in debt securities into those on the long end of the spectrum rather than those with short-term maturities, it generally leads to A) an inverted yield curve B) long-term yields that greatly exceed short-term yields C) a positive yield curve D) a flat yield curve
A Investors buying long-term debt rather than short-term debt will have the effect of driving the prices of long-term instruments up and, as a result, their yields down. This will give us the inverted or negative yield curve.
All of the following social media sites are considered to be predominately used for personal rather than business communications EXCEPT A) LinkedIn B) Twitter C) Facebook D) Instagram
A LinkedIn is viewed as a site used far more for business purposes than the others.
For an investment adviser to advertise a proprietary technical-based formula for timing the market, disclosure must be made of the I. extent of difficulty involved in applying the formula II. limitations of using the formula III. recommendations based on the formula that generated profits in the previous year IV. amount of experience the adviser has using the formula A) I and II B) II and III C) I, II, III, and IV D) II, III, and IV
A On this exam, any question dealing with charts, formulas, and tables will always be looking for two points: disclose the difficulties and the limitations.
When market conditions are such that a passively managed portfolio no longer meets its target allocation, the tool most commonly used to rectify the situation is A) rebalancing B) sector rotation C) re-targeting D) tactical management
A Periodically, (sometimes quarterly, sometimes semi-annually, and sometimes annually) passive portfolio managers will rebalance the mix of assets in their portfolio to bring them back to the target allocation.
Two brothers are interested in forming a business together. They have three initial concerns: (1) maximizing their benefits despite the fact that the business is expected to lose money for at least the first year or so, (2) making sure that the business will be able to continue in the event one of the brothers dies, and (3) minimizing their personal liability for the obligations of the business. On the basis of the brother's concerns, which form of business is appropriate for the situation? A) LLC B) Limited partnership C) C corporation D) General partnership
A The LLC will allow losses to flow through to the brothers, continue in the event one brother should die, and have the same type of protection as that offered by a C corporation.
An individual who is licensed with the Administrator as an agent of a broker-dealer wants to offer wrap fee programs sponsored by the firm. In order to do so, it would be necessary to A) register with the state as an investment adviser representative B) maintain his current agent registration only C) register with the SEC as an investment adviser representative D) register with the state as an investment adviser
A The agent would be required to register with the state as an investment adviser representative. The broker-dealer would have to register as an investment adviser, not the agent. Unless an exemption applies, the investment adviser representative must always register with the state in which advisory business is transacted by that individual. It is the registered investment adviser (the firm) that must register as such with the federal government (SEC) or with the state in accordance with the terms of the NSMIA.
The standard deviation of returns is the measure of the A) dispersion of a security's returns from its average return B) volatility of a security with respect to the overall market C) degree to which the returns of securities are correlated D) relationship of the co-movement of two securities with respect to each other
A The standard deviation calculates the dispersion of a security's return from its own average return or mean. Around 68% of the average returns for a security are one standard deviation away from the mean in either direction. About 95% of the returns are two standard deviations away from the mean. And about 99% of the returns are three standard deviations.
Which of the following debt instruments pays no interest? A) T-notes B) T-bills C) T-bonds D) TIPS
B Treasury bills are always issued at a discount from their face value. At maturity, the investor receives par.
When analyzing a company's financial position, an investor could determine which of the following from the company's balance sheet? A) Gross revenues for the year B) The net worth of the firm at the end of the reporting period C) The amount of cash and cash equivalents expended during the first half of the fiscal year as opposed to the second half D) The average number of days it takes for inventory turnover
B Under balance sheet accounting: Assets = liabilities + net worth. Net worth can then be determined as assets minus liabilities. Although inventory is a balance sheet item, the turnover ratio requires knowing the annual sales, an income statement entry.
One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A. an UTMA account. B. a Totten trust. C. a durable power of attorney. D. an irrevocable trust.
B. A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts.
Which of the following business structures is most appropriate for retaining money in the business? A) An LLC B) An S corporation C) A C corporation D) A sole proprietorship
C Only in the case of a C corporation is money retained not subject to tax on the personal level. In all of the other choices, any income is passed through to the owners making it inefficient to accumulate funds in the business.
The most important of the following nonfinancial considerations an agent should ascertain from the client when determining suitability is A) tax status B) education C) political orientation D) risk tolerance
D It is important to know both risk tolerance and tax status, but tax status is a financial consideration, and this question asks for a nonfinancial consideration.
Holders of certain professional qualifications may be granted a waiver from taking the Series 65. However, that waiver would not apply to an individual holding which of the following designations? A) CLU® B) ChFC® C) CFA® D) CFP®
A In addition to the 3 above, the CIC and PFS designations also qualify. However, none of them will waive the requirement to pass the Series 66.
A client calls to discuss purchasing a specific security that he has been following. The agent handling the account recognizes that a potential conflict of interest exists. The best course of action to follow would be to A) accept the client's order because it is clearly unsolicited B) disclose the conflict of interest and proceed if the client wishes C) turn the client over to another agent who is not conflicted D) disclose the conflict of interest and end the discussion promptly
B There is no problem with conflicts of interest as long as they are fully disclosed. If, after disclosure, the client wishes to proceed, that is fine. Unsolicited orders may make the security that is the subject of the discussion exempt from registration, but that has nothing to do with failure to disclose conflicts of interest.
As the number of stocks in a portfolio increases, the portfolio's systematic risk A) increases at a decreasing rate B) can increase or decrease depending on the beta of the added stocks C) decreases at a decreasing rate D) decreases at an increasing rate
B When you increase the number of stocks in a portfolio, unsystematic risk will decrease at a decreasing rate. However, the portfolios systematic risk can be increased by adding higher-beta stocks or decreased by adding lower-beta stocks.
Sven Johannson purchased an American depository receipt (ADR) on a Swedish corporation. Based on the current price of the company's stock, the dividend yield is 2.5%. Johannson hopes to hold the stock for several years and experience a capital gain. It would be true to state that Johannson will A) not pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. B) pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk. C) pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. D) not pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk.
C An ADR is a convenient way for U.S. investors to own foreign securities without having to open foreign brokerage accounts. The U.S. investor in an ADR does not eliminate any of the consequences of owning foreign securities just because he or she holds an ADR instead of the foreign security itself. Therefore, foreign taxes are deducted from dividend payments and the investor experiences exchange rate risk during the holding period. In most cases, the U.S. investor receives a credit against U.S. taxes for the foreign taxes paid.
An early distribution from a traditional IRA can avoid the 10% tax penalty in all of the following cases EXCEPT A) death B) reaching age 59½ C) a QDRO D) payments made under IRS Rule 72(t)
C The 10% early distribution tax penalty is avoided through use of a qualified domestic relations order (QDRO) only in the case of a qualified plan, not an IRA.
Averaging techniques would include all of the following EXCEPT A. maintaining a DRIP with a stock listed on the NYSE B. dollar cost averaging C. reinvesting all distributions from an open-end investment management company D. maintaining a constant ratio plan
D Averaging techniques involve some form of regular investing; a constant ratio plan involves buying and selling different asset classes to keep the ratio between them at a static percentage.
If an economist was describing defensive issues, he would probably not include companies that produce: A) building materials. B) clothing. C) tobacco products. D) food products.
A Defensive issues are issues that are defensive against a downturn in the economy. Building materials are usually susceptible to downturns when the economy is bad.
Your client wishes to begin a self-funded retirement plan that will enable him to make contributions until he is 75 years of age with no required minimum distributions. Which of the following would be your recommendation? A) Deferred compensation plan B) Roth IRA C) Traditional IRA D) 401(k)
B A Roth IRA would be your best choice in this instance. Unlike the traditional IRA and qualified retirement plans, a Roth IRA has no required age to begin distributions. You must begin distribution of a traditional IRA and 401(k) by no later than April 1 of the year following the year you turn 72. With a Roth, because the withdrawals will be tax exempt, the IRS does not care when you begin taking your money out. Therefore, with no required distribution age, you can make contributions for as long as you have earned income. The term self-funded plan will always refer to an IRA.
In the investment industry, the term "2&20%" most commonly refers to A) a strategy involving buying and selling options on the same underlying asset B) the fees charged by hedge fund managers C) the minimum acceptable return in a bull market D) the sales commission paid on an equity index annuity
B Hedge funds are known for their higher management fees. A typical example is 2% of the assets under management plus 20% of the profits.
A general partner of a real estate DPP is bound by a fiduciary duty to the partnership. Which of the following activities would NOT be considered a conflict of interest for a general partner? A) Selling an office building that is owned by his wife to the partnership B) Determining which accounting firm will prepare the partnership's annual tax filings C) Accepting a short-term loan from the partnership D) Acting as an agent for a competing limited partnership
B The general partner is charged with the management responsibilities. Selecting the accounting firm for the partnership's tax filings is just one of many operating decisions made by the general partner.
ABC Securities, Inc. is a broker-dealer providing services to a number of investment advisers in exchange for directed brokerage business. If any of those investment advisers are offered the opportunity to attend several cybersecurity fora held in various parts of the United States, under Section 28(e) of the Securities Exchange Act of 1934, it would A. be permitted as long as the only payment made by the broker-dealer was travel and transportation costs B. be permitted as long as the only payment made by the broker-dealer was the registration costs C. be permitted only if the investment adviser paid all of the costs of attendance D. not be permitted unless the broker-dealer was also registered as an investment adviser
B The safe harbor provisions of Section 28(e) permit the payment of registration fees for seminars, but not any other associated costs.
Investment advisers must disclose any material disciplinary action to all current and prospective clients. The broadest definition of material would include any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years. Fines levied by any SRO require disclosure if they were in excess of A) $1,000. B) $10,000. C) $2,500. D) $5,000.
C SRO proceedings in which the adviser or management person received a fine in excess of $2,500 meet the definition of material disciplinary action and require disclosure.
As part of a comprehensive financial plan, a registered investment adviser representative of All-Star Advisory Services recommends the purchase of several stocks from the inventory of All-Star's affiliated broker-dealer. Under the Investment Advisers Act of 1940, this activity A) requires the written consent of the client B) is prohibited C) requires the consent of and written disclosure to the client prior to completion of the transaction D) requires advance written disclosure to the client
C Unlike broker-dealers, prior to completion of the transaction, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client.
The characteristics of an exchange-traded futures contract would include all of the following EXCEPT A) the delivery price and month of delivery B) the quantity and quality of the commodity C) the location of delivery of the underlying asset D) a high likelihood that the contract will be exercised
D Unlike forward contracts, only a small percentage (some estimate only 2%) of futures contracts are ever exercised. All of the other items are part of a standard futures contract.
An investor with a corporate bond portfolio wishes to rebalance his portfolio to protect against inflation. Historically, the best way to protect such a portfolio against inflation is to purchase A) Eurobonds B) common stock C) preferred stocks D) fixed annuities
B The amount of interest paid on a bond does not change, it is fixed. To combat inflation, the most likely candidate for an investment for this portfolio would be an equity position (common stock). The idea is that the market value of the common stock will grow to keep up with inflation and will therefore be less subject to purchasing power risk. Preferred stocks, Eurobonds, and fixed annuities are fixed income securities.
Which of the following statements regarding investment companies is TRUE? A) An investment company can offer investors 2 ways of participating in the fund under management through the purchase of closed-end shares, or, if the investor prefers, open-end redeemable shares. B) The only 2 types of investment companies provided for in the Investment Company Act of 1940 are open-end and closed-end management investment companies. C) It is generally prohibited for an investment company registered under the Investment Company Act of 1940 to acquire more than 3% of the outstanding voting shares of another investment company. D) When investors sell or redeem their open-end fund shares, they receive the net asset value (NAV) as of the previous day's close.
C Among the restrictions placed on the operations of investment companies is the 3% limitation on ownership of another investment company's shares. The Investment Company Act of 1940 classifies investment companies as face amount certificates, unit investment trusts, or management investment companies (open end and closed end). When mutual fund shares are sold, you receive the NAV that is next computed, not the previous day's NAV.
If a customer enters a market order to buy 100 shares of GFT, the trade will be executed at the A) lowest offer B) lowest bid C) highest bid D) highest ask
A A market order mandates that a trade must be executed at the best execution (price) that can be attained for the client. This question is meant to find out your knowledge of the difference between a bid and an offer and what an inside market is. The inside bid is the highest price a dealer is willing to pay to someone who wants to sell this stock. The inside offer, usually referred to as the ask, is the lowest price made available by a dealer to those wishing to buy this stock.
Relatively high portfolio volatility is least appropriate for investors with A) a short-term time horizon B) a long-term time horizon C) an intermediate-term time horizon D) an indefinite time horizon
A Time horizon is one of the most often tested investment constraints. Remember that the longer the time horizon, the more risk that can be taken and vice versa. A person with a short-term investment horizon should not invest in volatile securities. Longer-term investors can sustain volatility because they have sufficient time to sit out highs and lows.
Which of the following would be the most likely reason that clients would consider adding an investment in commodities to their portfolios? A) Commodity prices tend to have a high correlation coefficient with inflation rates. B) Commodity prices tend to have a high correlation coefficient with the equity markets. C) Investments in commodities tend to have greater liquidity than equity securities. D) Commodity prices tend to be less volatile than stock or bond prices.
A Diversification is an important part of portfolio construction. The benefits of diversification increase when assets that are negatively correlated are included. Historically, commodity prices tend to follow inflation over the short run and have a low or negative correlation to equities. Their prices are generally more volatile than stocks and bonds and liquidity is not a reason for investment in commodities
The assumptions underlying the efficient market hypothesis (EMH) lead its proponents to believe that stock market prices react rapidly to newly released information and, therefore, limit the ability of the investor to achieve abnormal gains. Which of the forms of EMH concludes that an investor cannot achieve abnormal gains using fundamental analysis? A) Semi-strong form B) Weak form C) Strong form D) Spring form
A The semi-strong form of the EMH holds that security prices rapidly adjust to the arrival of all new public information. As such, current security prices fully reflect all publicly available information. The semi-strong form says security prices include all security market (price, volume) and non-market (financial statements) information to the public.
An investment adviser representative would be permitted to borrow money from which of the following clients? A) The XYZ Short-Term Bond Fund B) The investment adviser representative's father for graduate school tuition C) The Amalgamated Dock Workers Credit Union D) ABC Mortgage Brokers
C Securities professionals are quite limited in their ability to borrow money from clients. The prime exception is when the client is in the money-lending business, such as a credit union. Mortgage brokers do not lend money—they put borrowers and lenders together.
One of the terms found in the Securities Exchange Act of 1934 is that of a "person associated with a broker-dealer." Included in that definition would be all of the following EXCEPT A) the individual managing the firm's smallest branch office B) an individual registered with the broker-dealer as an agent who does not maintain a place of business in the state C) any person directly or indirectly controlling, controlled by, or under common control with the broker-dealer D) an individual whose sole duties are ministerial in nature
D As defined in the act, the term "person associated with a broker or dealer" or "associated person of a broker or dealer" means any partner, officer, director, any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term.
A client calls and tells her adviser that she has read about how to avoid estate taxes by transferring all her assets into an irrevocable living trust and would like the adviser's opinion on the matter. The adviser's most appropriate and ethical response should be to A) discuss the advantages of the arrangement and assist the client in drafting the appropriate documents for a fee B) recommend the client consult with a qualified legal professional C) urge the client to consult with an attorney without disclosing that this attorney pays a referral fee to the investment adviser D) refuse to discuss the trust with the client because the adviser does not want the client to transfer her assets to another account
B Do not represent yourself as something you are not. The only response that would be appropriate in this instance is to suggest checking with a competent expert. Advisers may have knowledge, but unless they are tax attorneys or tax accountants, it is imperative that they do not represent themselves as tax experts. The attorney or tax adviser recommended should be competent.
Which of the following quantitative measurements would probably be the most important to an investor in high-quality fixed income investments? A. Expected return B. After-tax return C. Annualized return D. Inflation-adjusted return
D One of the risks that an investor in fixed income securities (regardless of rating) incurs is the loss of purchasing power. To create a measure of a fixed income investor's return, you should take into account the impact of inflation through the calculation of inflation-adjusted return.
A GTC order is entered to buy 500 LMN at 24.35. By the close, the firm has acquired 100 shares at 24.25 and 200 at 24.35. The remainder is unfilled. What is the outcome? A) The customer must accept the execution for 300 shares and the remainder of the order remains open until filled or canceled. B) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day. C) The customer may demand that the firm deliver the remaining shares at 24.35. D) The customer may reject the incomplete order unless the remainder can be filled within two business days.
A The term GTC (good-till-canceled) is a delimiter to any order entered in to the market place. It indicates that the order should remain valid until it is entirely filled or is canceled by the entering party. If the order is not completed on the day it was entered, it will stay in effect for as many days as it takes to complete. This order is also a limit order in that the client is indicating that he is not willing to pay anything more than $24.35 per share. A total of 300 shares have been purchased at that price or better. The order will remain open until the final 200 shares are purchased within that price limit or until the client cancels the remainder of the order.
As a result of the Dodd-Frank Act of 2010, which of the following firms or individuals would be required to register with the federal regulatory authorities? A) Westlake Fund Managers, Inc., the manager of venture capital fund with $200 million under management B) Riverbend Partners, money managers with $110 million in assets under management C) Retirement Specialists, Inc., a firm offering consulting services to qualified pension plans with aggregate assets of $150 million D) J. Haines Investment Consultant, a sole proprietor with $75 million in assets under management
B The NSMIA created a new category of investment adviser known as a federal covered adviser. Its purpose was to rid the industry of the duplication of efforts in registration and regulation of investment advisers. The Dodd-Frank Act of 2010 went further and requires a registered investment adviser with less than $100 million in assets under management to register with the individual states in which it wants to do business and not with the SEC. If a registered investment adviser has $110 million or more in assets under management, it is required to register with the SEC. If an adviser has at least $100 million but less than $110 million in assets under management, it may register with either the state or the SEC. Managers of venture capital funds are not required to register with the SEC.
An investment adviser with custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the State Administrator. Under NASAA rules, the adviser must I. notify the administrator by the close of business the day after discovery II. file a report of its financial condition with the Administrator no later than the close of business 1 day after notification including a statement as to the number of client accounts III. cease doing business IV. notify all clients and make plans for the return of the funds and securities A) I, II, and IV B) I and II C) I, II, and III D) I, II, III, and IV
B This rule requires notification to the Administrator no later than the first business day after discovery. This notice is followed up with a complete report of the adviser's financial condition within 1 additional day. There is no requirement to discontinue business unless the state regulator orders a closure. It is required that the regulator be kept up to date on what is done to correct the problem. If the resolution is not acceptable, this may lead to closure of the business and notification to the existing clients.
A corporation may benefit by attaching warrants to a new issue of debt securities from A) a decrease in the company's amount of debt service coverage B) a decrease in the earnings per share C) a decrease in the company's interest costs D) a decrease in the bond's rating
C When a corporate issuer attaches a warrant to an issue of preferred stock or debt it is giving the investor a potential opportunity by setting the price that the investor will be able to purchase the underlying common stock in the future regardless of the current market value. In return, the investor will accept a lower interest rate on the debt or lower stated dividend rate on the preferred stock. This results in a lower cost of capital. That lower cost of capital should translate into higher earnings. It is true that the exercise of the warrants may have a dilutive effect on the earnings per share. However, warrants are always issued with an exercise price above the current market so it will be some time (if ever) before they are exercised. The lower interest cost might possibly lead to a higher rating. With lower intestest expense, the debt service coverage will be higher. Think about a reduction to the interest rate on your home mortgage. Your take-home pay now covers the lower monthly payments by a larger factor than before.
Under Section 401 of the Uniform Securities Act, the term agent does not include an individual who represents an issuer in effecting transactions in a security A) issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state B) issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state C) issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association D) issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state
D
Isabelle Burns is an investment adviser representative with Constructive Allocation Programs (CAP), a firm whose client base is composed of high net worth individuals. In her personal portfolio, Burns has an investment in Torex, a company that has developed software to speed up internet browsing. Burns has thoroughly researched Torex and believes the company is financially strong although currently, significantly undervalued. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, Burns may A) not recommend Torex to a client unless CAP gives written consent to do so B) not recommend Torex as long as she holds a position in the stock C) recommend Torex to a client without disclosing her position as long as the stock is suitable for the client D) recommend Torex to a client, but she must disclose her investment in Torex to the client
D Securities professionals must act fairly in all situations and must fully disclose any actual or potential conflicts of interest to all affected parties. It could be that firm policies require consent before an IAR can recommend a security in which she has a position, but that is not part of the NASAA Model Rule.
