Series 66
All of the following statements regarding the selling of private placements under the USA are true:
-they can be offered without limitation to institutional investors. -the seller must reasonably believe that all noninstitutional buyers are purchasing for investment purposes only. -no commission or other remuneration may be paid for soliciting noninstitutional buyers. Under state law, a private placement can be offered to no more than 10 noninstitutional investors in 12 consecutive months.
Under the USA, private placements are exempt from state registration if they limit solicitations to how many noninstitutional clients per 12 month period?
10 or fewer. The USA states that private placements are exempt from registration if they solicit a maximum of 10 noninstitutional (retail) clients during any 12 month period.
Bond rating
A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.
Execution of market orders
A market order to sell is filled at the highest bid while a market order to buy is filled at the lowest offer.
Institutional investors
Although many persons (as that term is broadly defined) who qualify as accredited investors are institutions, individuals do not. Insurance companies, whether or not they are authorized to do business in the state, are institutional investors.
Under the Uniform Securities Act, which of the following circumstances would exempt a security from registration? The security is exempt from registration under the act. The transaction in which the security is sold is exempt under the act.
Both 1& 2. It is illegal to sell securities that are not registered unless the security or the transaction itself is exempt from state registration requirements. This applies to new issues (primary distributions) and secondary market transactions.
An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require:
Anytime an adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.
Which of the following is NOT an exempt transaction as defined in Section 402 of the USA? A. Corporate bond sale to an insurance company. B. Isolated sale of a corporate bond on behalf of the bond's issuer. C. Sale of common stock by the county sheriff at the request of the state securities Administrator. D. Sale of XYZ common stock, traded on the OTC Bulletin Board, to an individual investor by the executor of an estate.
B. Isolated sale of a corporate bond on behalf of the bond's issuer. First of all, don't panic when you see a Section number - just answer the question based on the specific topic; in this case, the definition of an exempt transaction. An isolated sale of a corporate bond on behalf of the bond's issuer is not exempt. Under the USA, only isolated nonissuer transactions are exempt. In this question, the transaction is on behalf of the issuer, so this transaction is not exempt. The sale of a corporate bond to an insurance company is the sale of a security to a financial institution; this is an exempt transaction. A sale of common stock by the executor of an estate, or by the county sheriff is considered a fiduciary transaction and is exempt regardless of the client or the type of security.
Death during litigation
Death of a party to a suit does not end the suit. Unless the account was specified as a joint account with rights of survivorship, the executor of the deceased's estate will continue the suit.
A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be:
Disclosed promptly only to those customers who will be affected by the change through a new brochure. Disclosed in the summary of material changes in the annual updating amendment to the SEC. Because this will only affect new clients, the brochure (or Part 2A of the ADV), must be amended to reflect this new method of operation and made available to these clients and to the SEC at the end of the year. The state has no cause to receive a copy of a federal covered adviser's brochure.
Roth IRA
Eligibility for a Roth IRA is not affected by participation in a qualified plan, and effective January 2008, distributions may be rolled over into a Roth.
Federal covered Securities
Federal covered securities are not subject to the registration provisions of the USA, but they are subject to the act's antifraud provisions. In some instances, states may impose filing fees on federal covered securities, especially those issued by registered investment companies.
Exempt from registration under USA
Local companies that issue common stock sold only within the state must register their securities with the state Administrator. Airport authority bonds, airplane equipment trust certificates, and securities issued by religious organizations are exempt from registration with the state Administrator.
Which of the following would NASAA consider to be a substantial prepayment of fees?
NASAA defines a substantial prepayment of fees to be MORE than $500, six or more months in advance.
Notice filing
Notice filing is the registration method used by investment companies registered under the Investment Company Act of 1940.
Recordkeeping
Under the USA, recordkeeping requirements are slightly different for advisers and broker-dealers in that broker-dealers retain records generally for three years, whereas IAs retain them for five years.
Joint commissions, separate firms.
Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker-dealer.
Minor accounts
Unlike UGMA accounts where the assets are always transferred when the minor reaches the age of majority in that state, UTMA accounts may extend the transfer period first established by the Uniform Gift to Minors Act to as late as age 25. In neither case are the gifts revocable and, upon death of the minor, assets in either account go to the deceased's estate.
An applicant for registration as an investment adviser discloses on Form ADV that it plans to use palm readers to help determine investments most suitable for their clients. Under the Uniform Securities Act, the Administrator:
may deny applications only on the basis of the limitations of the law. A denial of registration must be based on the concept of law. There are stated reasons, such as felony convictions, outstanding injunctions, and insolvency. Although it is required to disclose methods of analysis used, the Administrator is not empowered to pass judgment on them.
A contract between an investment adviser and a customer may be assigned to another investment adviser provided
the client consents to the assignment. Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that no assignment of the contract may be made by the investment adviser without the consent of the other party to the contract.
Nonissuer transaction
A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction.
Which retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements?
A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.
Performance based fee
A performance-based fee must be based on capital gains minus capital losses, include both realized and unrealized gains and losses and must reflect a time period of no less than 12 months. This client is well above the minimum net worth requirements of $2 million. The rule requires that the performance be measured against a recognized benchmark but does not specify one.
Prospectus
A prospectus is any communication that offers a security for sale, including newspaper, radio, and television offers. Tombstone announcements are excluded from the definition. Also excluded are oral offers, discussions between an agent and a customer, and individual telephone solicitations. However, written communications to a customer may be considered a prospectus, in which case full disclosure of information must be included to avoid fraud charges. Tombstone advertisements are limited to identifying the issuer, price, amount, and type of security offered and where a prospectus and the security may be obtained.
Adviser payment possibilities
Advisers under contract to registered investment companies may be compensated on a performance-fee basis. This form of compensation is only permissible when managing the accounts of certain qualified individual investors.
Which of the following are federal covered securities? A security quoted on the Nasdaq Stock Market Shares of an investment company registered under the Investment Company Act of 1940 An offering in a security exempt from registration under the Securities Act of 1933. A security that has a federally imposed exemption from state securities registration.
All 4 Any Nasdaq security, shares of a registered investment company, an offering in a security exempt from registration under the Securities Act of 1933, a security that has a federally imposed exemption from state securities registration, and a security traded on a regulated exchange are all federal covered securities.
Custody of Client's funds
An adviser who has custody must (1) segregate client securities by client and keep them in a safe place (all clients must be notified in writing of the location of their securities and of any location changes), (2) deposit client funds in bank accounts that contain only the client's funds, naming the adviser as agent or trustee for the client (the funds of all clients may be combined in one account, but complete records must be kept by the adviser; all clients must be notified in writing of the location of their funds and of any location changes), (3) report to clients at least every 3 months with a written, itemized statement indicating the funds and/or securities in the possession of the adviser and all transaction for the period, and (4) arrange for an unannounced examination (audit) by an independent public accountant at least annually, who will report the audit results to the SEC. The Investment Advisers Act of 1940 does not require surety bonds. The Uniform Securities Act requires surety bonds.
Agency Cross transactions
An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that it has outperformed the overall market by 800% over the past ten years, and the firm therefore guarantees that clients will more than keep pace with inflation. At the bottom of the ad, in smaller print, is the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of:
An improper hedge clause. Hedge clauses may not be used to disclaim statements that are inherently misleading.
Which of the following must register as an agent? A. An individual who is paid a commission to sell certificates of deposit for ABC National Bank. B. An individual representing a broker-dealer who sells commercial paper. C. An employee of the Fed whose job is selling Treasury bonds to the public. D. An individual who sells commercial paper for ABC National Bank.
An individual who represents a broker-dealer selling commercial paper must register under the USA. Though the securities (commercial paper) are exempt, the representative must be registered as an agent of the broker-dealer. The only exceptions from the definition of "agent" apply to those who sell on behalf of issuers either of exempt securities or in exempt transactions. The commercial paper and Treasury bonds are exempt securities and the bank CDs here referred to are not of the negotiable, jumbo variety sold in the money market and are not securities so no registration is required.
Under the NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding the use of reports is TRUE?
An investment adviser is not prohibited from providing clients with recommendations or reports prepared by others (3rd party reports), but the adviser must disclose the true source of the recommendations or reports. However, the disclosure requirement does not apply to the research material, including 3rd party reports, an adviser uses in formulating investment advice.
Investment adviser under USA
An investment adviser representative means any partner, officer, director, or other individual, except clerical or administrative personnel, who is employed by an investment adviser that is registered or required to be registered. Therefore, unregistered personnel are not investment adviser representatives. An employee who supervises analysts who deal with the public must be an investment adviser representative. The employee of the federal covered adviser with an office in the state is also an investment adviser representative. The agent is an agent of a broker-dealer, not an investment adviser representative.
What is the difference between an offer and a sale?
An offer is made in an attempt to sell; a sale is the binding contract to sell a security for value. An offer will not require a principal's approval, but a designated supervisory individual must approve all sales on the date the order is executed.
529 plans
In all cases, funds withdrawn from a Section 529 Plan that are used to pay for qualifying expenses (like tuition), are exempt from federal income tax. The general rule is that residents of a state never pay income tax on funds withdrawn from that state's plan. It is not important where the student goes to school; only the state of residence matters.
Registration under 1940 Act
In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.
Under the Investment Advisers Act of 1940, what is true about registration?
If the adviser ceases to act as an adviser or goes out of business, the SEC will cancel the registration. Under the Investment Advisers Act of 1940, registrations become effective 45 days after filing, unless delayed by the SEC, and remain effective until withdrawn by the adviser or canceled, suspended, or revoked by the SEC. The SEC will cancel a registration if the adviser is no longer in existence or in the business. Although the ADV-W is the form for withdrawal, it becomes effective upon acceptance by the IARD, provided however that the investment adviser's registration continues for a period of 60 days after acceptance solely for the purpose of commencing a proceeding regarding any violation of the Act.
IRR
Internal rate of return (IRR) is a discount rate at which the net present value (NPV) of an investment is equal to zero. IRR can be used to measure return on bonds because of their even cash flows and on those stocks that pay stable dividends for the same reason. IRR accounts for the time value of money. If the IRR is higher than the cost of borrowing to fund the investment, the investment should be profitable.
Unethical Practice
It is not an unethical practice to charge higher commissions for trades that are difficult to execute, such as trading a thinly traded foreign security. The other activities are unethical business practices prohibited by NASAA's Statement of Policy.
What is allowed to be used in an advertising campaign?
It is not unethical to advertise free services as a benefit of using a firm, but failing to supply services offered as free is unethical. Using testimonials, guaranteeing future performance, and exaggerating the capabilities of the firm and its personnel are unethical.
Guaranteed Securities
It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.
Tammy Jones is retiring from her company next month on her 62nd birthday. Her 401(k) has $300,000 and offers her four different mutual funds. After calculating what she will receive from Social Security, she concludes that she will need an additional $500 a month to retain her current lifestyle. Which of the following would be the most appropriate recommendation?
It would benefit Ms. Jones most to roll the money into a traditional IRA. By doing this she would defer paying taxes on the $300,000-something she could not avoid if she took the lump-sum distribution or rolled the money into a mutual fund withdrawal plan. A self-directed traditional IRA account has more investment options than the four mutual funds offered in Ms. Jones's 401(k) account.
Leverage
Leverage is the use of borrowed money. This is reflected in a company's debt to equity ratio. Of these choices, the only one that is borrowed money is the bonds.
Mr. Jones, age 70, is retiring, and his employer has three investment options for his 401(k). You should advise him to:
Most advisers would agree that even when the employer's 401(k) plan permits retirees to continue to maintain their account, it is better for the client to move the assets to a self-directed IRA. Because of the immediate tax liability, it generally does not make sense to take a lump-sum distribution. Section 1035 exchanges are only allowable between insurance contracts.
Negotiable CD's
Negotiable certificates of deposit usually have a minimum face value of $100,000. It is rare to find one with a maturity that exceeds 360 days. Unlike nonnegotiable certificates of deposit, they may be bought and sold on the secondary market.
Fixed Income Securities risk
One of the characteristics of all fixed income securities is that the income never changes (fixed) so when interest rates change, the income of those securities can't follow along. Therefore, one risk common to all fixed income securities is interest rate risk.
A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is:
Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability, but has no flow-through.
Risks
Opportunity cost is the opportunity given up when an economic decision is made. In the investment field, it generally refers to the risks taken versus keeping money in a risk-free investment such as the 90-day Treasury bill. When one invests in common stock, there is no credit risk because there is no credit - stock is equity, not a debt.
Preferred stock and rates
Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.
When analyzing a preferred stock, an investment adviser would give the most credence to: the ability of the company to pay the stated dividend.
Preferred stock is purchased primarily as an income security based on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet that dividend paramount. Earnings per share and book value per share are computations relevant to common stock only.
Section 28(e) safe harbor
Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.
With regard to a state registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that it is filed through the IARD system
The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before, (not after), the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year, (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state registered.
Which of the following statements regarding registration of investment advisers is (are) TRUE under the Investment Advisers Act of 1940? If any material information filed in the registration becomes inaccurate, an amendment must be filed promptly. If any nonmaterial information filed on Form ADV changes, an amendment must be filed within 90 days of the end of the fiscal year.
The SEC requires prompt amendment of any material information changes on Form ADV (e.g., names, location, control, custody, organization) and also requires nonmaterial amendments within 90 days of the end of the adviser's fiscal year.
To assess the performance of a small cap stock fund you compare its results against the:
The appropriate benchmark for a small cap fund is the Russell 2000 because it is comprised of similar companies.
Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of:
The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members.
Market Measurements
The measurement that compares a stock's price history to the movement of the total market index for the same period is beta. Standard deviation indicates how much an investment's returns have fluctuated from its average returns over a period of time, while R-squared measures whether an investment's returns tend to go up and down at the same time as the markets. Duration measures how sensitive a bond will be to small changes in interest rates.
POD
The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.
Under the Securities Act of 1933, when registering securities with the SEC, who must sign the registration statement?
The principal executives of the company involved with money and a majority of the board of directors are required to sign the registration statement attesting to the facts presented as being true to the best of their knowledge and belief. This includes the chief executive officer, chief financial officer, and a majority of the board, but not the chief operating officer.
SEC Release IA-1092
The purpose of SEC Release IA-1092 is to clarify the definition of investment adviser in the Investment Advisers Act of 1940 and to clarify the types of activities that are subject to regulation.
A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check?
The semiannual interest of a TIPS bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the 5-year term, it has grown to $1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75% (remember it is a semiannual check).
When may an IA use the word guarantee?
The use of the term guaranteed with regard to principal and interest payments on U.S. government securities is permitted. An adviser cannot guarantee performance and cannot offer to return fees if that level is not reached.
One respect in which an LLC differs from an S corporation is that there is no statutory limit on the number of investors in an LLC
There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same and both can be formed with a single owner.
Capital Asset Pricing Model
Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.
When must register as an investment adviser
Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.
A person under USA
Under the Uniform Securities Act, the term "person" has a specific meaning. "Person" refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child, is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children. The term person has an extremely broad definition. It is best to remember the three things that are not persons: minors, individuals who have been judged incompetent, and deceased individuals.
State Administrator Authority
Under the broadcast and publishing exceptions, the Administrator does not have jurisdiction if the offer is made in a TV or radio broadcast originating outside the state or in a newspaper published outside the state. Furthermore, if a newspaper is published inside a state but more than two-thirds of its circulation is outside the state, the Administrator does not have jurisdiction.
Net Present Value
Under the net present value (NPV) approach, an investment is acceptable only if the present value of the expected returns is greater than the amount of the investment outlay. In other words, an investment is acceptable if the net present value is greater than zero.
Full Service Broker
Use of a full-service broker to effect transactions for an account over which an adviser has investment discretion is not a breach of fiduciary duty as long as the full-service broker's commission is reasonable in view of the services he provides to the adviser. "Services" can mean advice, analyses, research, custodial services, etc., but the term does not include sales incentives provided to the adviser.
Bonding
When an investment adviser maintains custody of client assets, a surety bond is generally required. The Uniform Securities Act states that an investment adviser need only meet the bonding requirements of its home state, even if it does business in states with higher bonding requirements.
Material Changing and reporting to SEC
Whether the firm is a state- or federal-covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.
YTM bonds
Yield to maturity reflects the internal rate of return on a bond. Internal rate of return (IRR) equates the cost of an investment to the cash flows produced by that investment.
Under the Uniform Securities Act, which of the following is (are) investment advisers? -Jane advises customers regarding the value of gold and silver coins. -The Trust Department of ABC Bank provides investment advice to its clients. -Tom writes a newspaper column that analyzes and recommends securities. -Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee.
4 only. Jane's advice does not concern securities; banks are exempt from the definition; Tom's advice is not specific on the basis of the situation of each client (impersonal advice). While an attorney is generally excluded, Jill is giving investment advice for a fee in a manner that is not incidental to her legal practice.
Accredited Investors
Accredited investors are financial institutions, wealthy persons, and, for a particular issue, persons involved in the management of the issuer. Certain institutional purchasers such as banks, insurance companies, investment companies, and employee benefit plans that have total assets in excess of $5,000,000 are included in the SEC's definition. In addition, any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1 million, excluding the value of the primary residence, or has earned in excess of $200,000 in each of the past 2 years and expects to earn more than $200,000 in the current year ($300,000 for married couples) is an accredited investor.
Unregistered non-exempt securities
Agents may accept unsolicited orders from clients, institutional or not, in unregistered nonexempt securities. If the transaction is with an institutional client, it can be solicited. In the case of unsolicited orders, the Administrator may demand written acknowledgement from the client that, in fact, the order was unsolicited.
Which of the following must be disclosed during a transaction recommendation under the Investment Advisers Act of 1940?
All Material Facts. It is a violation of the act for any person willfully or knowingly to make untrue statements of a material fact or omit to state a material fact in connection with a securities recommendation by an adviser. A material misstatement is one that may have an effect on an issuer's future financial prospects or the market value of its securities or may influence the decision of a customer.
An investment adviser renews its registration with the SEC by filing:
An annual updating amendment. Investment advisers renew their registration with the SEC by filing an annual updating amendment within 90 days (including weekends and holidays) of the end of their fiscal year. An important part of the annual updating amendment is the computation of assets under management (AUM) which confirms the adviser's continued eligibility for SEC registration.
Insurance trusts
As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate thereby saving estate taxes. The trust is irrevocable - no changes can be made, and this is one of the few disadvantages.
Arbitrage
Buying on one exchange and selling on another is called arbitrage, not market manipulation, and it is an accepted business practice.
An investment adviser registered in 3 states allows its IARs to attach research reports, bulletins, and other information to emails sent to customers. File copies would not be required when these bulletins are sent to: Persons connected to the investment adviser
Every investment adviser registered or required to be registered under the act must make and keep true, accurate, and current a file containing a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication, including by electronic media, that the investment adviser circulates or distributes, directly or indirectly, to 2 or more persons (other than persons connected with the investment adviser).
Investment advisor fees
Fixed annual fees, wrap fees, fees based on a percentage of assets under management, and commissions from trades effected for clients are acceptable forms of compensation. Unless the client has at least $1 million under management or a personal net worth of at least $2 million, performance-based fees are not permitted.
If a licensed agent believed that interest rates were about to fall and contacts all of her clients and suggests they purchase high quality debt securities with long-term maturities, this action:
Has probably violated the Uniform Securities Act's suitability standards. If interest rates fall as the agent guesses, debt securities with long-term maturities will increase in price. However, the agent is at fault for making the same recommendation to all of her clients, as the same product cannot be suitable for everyone. This may be referred to as a blanket recommendation on the exam. Even U.S. Treasury bonds, with the highest degree of safety available, are not always suitable based upon the specific objectives of the investor.
Holding Period Return
Holding period return is the total return on an investment over the period it was held. In order to compute this, one must know the income received (dividends) plus any capital appreciation (the difference between the purchase price and the sale price if sold, or current market price if still held). If you read the question carefully, it refers to a security "held" in her portfolio. Therefore, we don't have a sale date.
Internal Rate of Return
IRR is the rate of interest that equates the initial investment with the present value of future cash flows; it is the rate of return that results in an investment having a net present value of zero. It is possible, although difficult, to calculate IRR for investments with uneven cash flows. That is why it is used primarily with debt securities and common stocks with stable dividends.
Registration as an agent
If you receive direct compensation from a commission, you must register as an agent. If you represent a broker-dealer that charges commissions or an underwriting fee, you must register as an agent. If you do not charge a commission and are effecting exempt transactions and/or transacting exempt securities, you do not need to register as an agent. However, unless you are representing some sort of government-oriented entity, you usually do need to register. For example, if you represent a firm that doesn\'t charge a commission for the sale of a municipal or federal security, but does receive an underwriting fee, you have to register.
Variable life
In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the third year of coverage.
Registered agent
It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.
Which of the following is specifically excluded from the definition of an investment adviser under the Investment Advisers Act of 1940, when that person's investment advice is solely incidental to the practice of their profession?
Lawyers, accountants, engineers, teachers, and broker-dealers who do not charge a separate fee for investment-related advice, when such advice is solely incidental to the practice of their profession, are excluded from the definition.
USA state registration
Section 201 of the Uniform Securities Act specifies the conditions under which one is an investment adviser in the state. Specifically excluded are those IAs with no place of business in the state who confine their advisory activities in the state to other investment advisers, federal covered advisers, broker-dealers, banks, trust companies, savings and loan associations, insurance companies, employee benefit plans with assets of not less than one million dollars ($1,000,000), and governmental agencies or instrumentalities. If, however, in addition to the two banks, the firm did advisory business with more than 5 retail clients who were residents of Colorado, then, even with no place of business in the state, they would have to register.
Separate account options
Some variable annuity separate accounts have 50 or more sub-accounts to choose from. There are no guarantees as far as the amount of payout.
Capital Asset Pricing Model
The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return.
registration
The exemptions from the SEC registration requirement under the Advisers Act include advisers who render no advice on any exchange-listed security and whose clients are all in one state and certain foreign advisers who do not hold themselves out as investment advisers and have fewer than 15 clients per year. In order to qualify for the private fund adviser exemption, total AUM must be less than $150 million.
arithmetic mean
When a true average return is shown, that is the arithmetic mean. The median return (the number in the middle of the group of five) is 10%.
Under the Investment Advisers Act of 1940, a cash referral fee may be paid by an IA:
When a written agreement providing certain disclosures has been entered into between the IA and the third party. Please note that the question refers to the Investment Advises Act of 1940; this answer would not be appropriate under the Uniform Securities Act. A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures.
Working Capital
Working capital equals current assets minus current liabilities.
Under the Uniform Securities Act, an investment adviser would be permitted to maintain custody of customer cash and/or securities if:
notification was given to the Administrator and custody was not prohibited by that state's rules. In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about net worth? Under the USA, in order to maintain custody, an IA must have net worth of no less than $35,000.
529 funding
A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years worth may be used under this method (5 × $14,000 = $70,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $140,000. Please note: The annual exclusion was increased to $14,000 effective January 1, 2013.
An agent has a new client who is prone to tergiversation. As such, it would probably make sense to
Accept solicited orders only. Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders.
Under the Investment Advisers Act of 1940, which of the following is TRUE about the use of the term "investment counsel" by investment advisers?
Advisers may use the term "investment counsel" only if two conditions are met: rendering investment advice must be their principal business, and a substantial part of that business must be providing investment supervisory services-that is, continuous advice based on the individual needs of each client.
Advisory contracts must contain
Advisory contracts must disclose services provided; the term of the contract; the amount of the advisory fee or the formula used to compute the fee; the amount of fee to be refunded (if any) if the advisory fee is prepaid and the contract is terminated; a provision as to discretionary authority; and a provision requiring the consent of the client to assign the contract. All choices listed must be included.
Under the Uniform Securities Act, any partner, officer, or director of a registered investment adviser is an investment adviser representative if that individual does which of the following? A. Offers advice concerning securities. B. Manages client accounts or portfolios. C. Determines securities recommendations for representatives to disseminate. D. Supervises personnel engaged in the above activities but does not sell these services to the public
All of the above. The Uniform Securities Act defines any individuals associated with an investment adviser as investment adviser representatives if they manage accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities, including any partner, officer, or director who offers advice concerning securities. Persons who manage client accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities are investment adviser representatives.
IRA Contributions
An IRA contribution can only be made by someone who has earned or otherwise eligible income. Earned income is defined as salary, wages, commissions, and tips. Alimony, (but not child support) is considered eligible income for an IRA. Individuals can contribute to an IRA even if they are covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible depending on the individual's income. Dividends and capital gains are not considered earned income.
NSMIA
The National Securities Markets Improvement Act preempts state registration of covered securities. State administrators may not impose registration requirements on securities that are subject to federal regulation.
SEC appointments
The SEC was created by the Securities Exchange Act of 1934 with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. The policies of the SEC are determined by five commissioners appointed by the President of the United States, with the advice and consent of the Senate, to staggered 5-year terms (with 1 expiring each year). No more than three commissioners may belong to the same political party, and commissioners may not engage in any outside employment.
Orders and Exempt Transactions
Unsolicited orders, regardless of the nature of the security, are always exempt transactions. Transactions by a fiduciary (other than the custodian in a minor's account) are always exempt transactions. In order for the sale to the pension fund to qualify, the fund must have assets of no less than $1 million.
AMT
A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.
Section 402(a) of the Uniform Securities Act contains a lengthy list of securities that are exempt from the registration and advertising filing requirements of the Act. Included in that list would be all of the following EXCEPT: Common stock listed on the NYSE. Bonds issued by the city of Berlin, Ohio. Church bonds. Bonds issued by the city of Berlin, Germany.
Bonds issued by the city of Berlin, Germany. Securities exempt from state registration include those issued by a U.S. or Canadian governmental unit, such as municipal bonds, and securities issued by nonprofit and charitable organizations, such as church bonds. However, bonds issued by a non-sovereign foreign government (cities, etc.) are not considered exempt securities unless guaranteed by the sovereign (German, in this case) government. Even before the NSMIA created the exemption for federal covered securities, those listed on the NYSE received what was called the "blue-chip" exemption.
An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid?
Money market funds generally come with a check-writing privilege offering investors the opportunity to convert the asset to cash at once. Although all mutual funds are readily redeemable, under the Investment Company Act of 1940, the fund has seven days to redeem. One must request the cash value from the insurance company.
Standard Deviation
Standard deviation measures security's volatility versus its own historical performance. Two-thirds of the time, a stock can be expected to generate a return within one standard deviation; 95% of the time, within two.
One common characteristic that face-amount certificate companies, unit investment trusts, and management investment companies that are registered with the SEC under the Investment Company Act of 1940 have is that:
State registration is accomplished by notice filing. These are the three types of investment companies described in the Investment Company Act of 1940. All are federal covered securities, but unlike the others, they are generally required to do a notice filing with the Administrator of each state in which their interests are sold.
Howey Decision- US Supreme Court case
The Howey decision defined a security as an investment of money, in a common enterprise, where there is an expectation of a profit, and through the efforts of a third party and not the investor.
Estate tax valuation
The IRS permits an estate to value assets either as of date of death or 6 months later. In either case, estate taxes (if any) are due 9 months after the date of death. Cost basis is irrelevant because heirs acquire securities on a stepped-up basis. However, trading by the executor in the account is taxed in the same manner as any other person; only the heirs receive the tax break.
John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities?
The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.
Market risk of a particular stock
The earning power of the company is not a measurement of the stock market (market risk), while the other factors here are. That is a fundamental strength and protects against business or financial risk. Because market risk is a systematic risk, some of the ways to protect yourself are by being able to hold the security for a long period of time (long time horizon) or by timing your purchase when the market is at or near a bottom. Obviously, stocks whose trading pattern indicates wide fluctuations in market price are going to have greater market risk so staying away from them will reduce the overall market risk of the portfolio.
Rule of 72
The rule of 72 is a shortcut for determining the required rate of earnings required for a specific investment to double within a specified unit of time. In this case, the investment has quadrupled, or doubled twice. Therefore, we compute the rate for the investment to double in 4 years, 2 times; 72 divided by 4 years is 18%.
Registration under SEC
Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: pension consultants once their AUM reach $200 million; small and mid-size advisers who would be required to register in 15 or more states; and those advisers with at least $100 million in AUM, but not $110 million in AUM Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.
ERISA Section 404(c)
Section 404(c) relieves a plan fiduciary from liabilities associated with losses stemming from employee investment choices. To qualify for this protection, the plan must provide at least 3 core diversified investment options, participants must have the ability to transfer assets among investment options at least quarterly, and sufficient information must be provided to participants to allow for informed decision making.
Share splits and registration
Shares issued as a result of a stock split need not be registered because the distribution of additional shares through a stock split or stock dividend is not within the definition of an offer to sell or a sale as long as no consideration (payment) is involved.
Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act,
Sharon must be registered in State X in order to accept the order. Regardless of whether the security is exempt or the transaction is exempt, an agent must be licensed in any state which is the domicile of a client placing an order (unless the agent is representing a broker-dealer that is exempt from registering in that state). An agent does not have to be registered as an agent in every state the BD is, only in those where the agent expects clients to reside. Remember, there is no de minimis exemption for BDs and agents as there is for IAs and IARs.
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in
States A and D. In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).
An investment adviser is registered in States A and B with their principal office in State B. The Administrator of State A can request to see:
The Administrator of State A can request that advertisements placed in his state be filed because that is business relating to his state. As long as the IA meets the "home" state's financial and recordkeeping requirements, that is good everywhere.
Form 8-k
The Form 8-K is used to report significant events that could affect the price of the company's stock. The SEC does not consider a relocation of a subsidiary to be of significant magnitude.
Broker dealer definition under USA
The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.
IA definition
The Uniform Securities Act defines an investment adviser representative as anyone who is a partner, officer, director, or other employee or person associated with an investment adviser other than clerical or ministerial personnel who (1) make recommendations or provide advice regarding securities, (2) manage accounts or portfolios of clients, (3) determine which recommendations or advice should be given, (4) solicits, offers, or negotiates for the sale of, or sells, advisory services, or (5) supervises any such persons. An individual or a firm may be registered as an investment adviser, but only an individual can be an investment adviser representative.
Coefficients
The correlation coefficient ranges from -1.0 to +1.0 and measures the varying relationship of assets (or securities) to one another. A correlation close to +1.0 would indicate that the assets should move in tandem. A correlation close to 0 would indicate that the assets would have little relationship to one another, and a correlation of -1.0 would indicate that the assets should exhibit virtually opposite behavior.
ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $.25 per share and capital gains of $.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50 and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be:
The current yield on mutual funds is calculated by dividing the annualized yield ($.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = .0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.
When analyzing a specific common stock, the expected return is:
The expected return is computed by taking the probability of each possible return outcome, multiplying it by the return outcome itself, and then adding them all together. For example, if you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning 20%, and a 20% chance of earning -10%, the expected return would be equal to 10%, as illustrated below: = (0.4) (0.1) + (0.4) (0.2) + (0.2) (-0.1); = .04 + .08 = .12 − .02; = 0.10; and = 10%. You will not have to do this calculation on the exam, but you should know the concept. If you were trying to compute the expected return for a portfolio (more than one security), then you would take the average of the individual results to get an overall expected return.
Under USA, when do an agent's registration expire?
The expiration date for the registration of agents, broker-dealers, investment advisers, and investment adviser representatives under the Uniform Securities Act is December 31. Note that the question asks for the expiration date under the Uniform Securities Act, which is December 31. Do not be confused by actual practice, which may vary in some states.
Exempt transaction
The purchase of securities from a broker-dealer by an employee of a bank is a nonexempt transaction because it is a sale of a security by a broker-dealer to a member of the public. Transactions between broker-dealers and issuers, transactions between banks, and between banks and insurance companies are exempt because they occur between financial institutions. Exempt transactions are most often identified by the transaction's parties, rather than the type of security involved.
Investment Policy Statement
Under the rules of the Department of Labor (DOL),one of the most important documents participants are entitled to receive automatically when becoming a participant of an ERISA-covered retirement plan, is a summary of the plan, called the summary plan description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits. However, it has nothing to do with the investment policies that will be followed by the plan's advisers.
