Simulated Exam 31,32,33 Review

Examples of identity theft would include -taking over an individual's credit card account -applying for new credit cards in the compromised individual's name -lending money in the name of the compromised individual -purchasing lottery tickets in the name of another individual

# 1,2

Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? -The SEC may suspend all trading on a specific exchange for up to 90 days. -The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. -The SEC may suspend trading on exempt securities.

# 1,2

Margin regulations are determined by the Board of Governors of the Federal Reserve System. The authority for them to do so is found in the: A) Securities Exchange Act of 1934. B) Federal Reserve Act of 1913. C) Securities Act of 1933. D) Maloney Act of 1938.

A) Securities Exchange Act of 1934.

What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) The fiduciary can maintain the current allocation if ,while acting in the capacity of trustee, he believes it aligns with the goal of the trust B) Increase the cash position to 25% by taking some of the profits off the table C) Begin diversifying the equity portfolio D) Use the cash to acquire more shares of the stock

A) The fiduciary can maintain the current allocation if ,while acting in the capacity of trustee, he believes it aligns with the goal of the trust In virtually every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives.

In almost all states, the UGMA account has given way to the UTMA account. Although there are more similarities than differences between them, one of those differences is that A) transfer of ownership may be delayed to as late as age 25 in some states' UTMA accounts B) the account is in the name of the minor in an UTMA account C) there is more investment flexibility in the UGMA account D) the donor retains control over the investments with an UTMA account

A) transfer of ownership may be delayed to as late as age 25 in some states' UTMA accounts

Which of the following investment adviser representatives has violated the antifraud provisions of the Investment Advisers Act of 1940? -Carol purchases shares of a new issue, hoping to cause the price of the shares to rise by recommending that all her clients purchase the stock also. She doesn't tell clients that she owns the stock. -Arthur persuades a client to co-sign for a loan without disclosing that he is facing financial difficulties. -Julia recommends that clients purchase mutual fund shares that are available through several broker-dealers besides the one she represents. She discloses her affiliation with the broker-dealer and the amount of compensation she receives on transactions but doesn't tell clients that they can purchase the same mutual fund through other sources.

All 3

ABC Industries common stock has a beta of .8 while DEF Technologies common stock has a beta of 1.2. The total return for ABC was 15% and that for DEF was 24.5%. Based on this information, you could say that DEF had alpha of: A) +6.5% B) +2% C) +9.5% D) -2%

B) +2% Alpha is the extent to which a security's performance exceeds (or falls short of) what would be expected. With a beta of 1.2, DEF should produce a total return that is 1.5 times greater than that of ABC (1.2/.8 = 1.5). Therefore, anything in excess of 22.5% (1.5 × 15%) would create a positive alpha and anything less would generate negative alpha. In this example, the actual return of 24.5% is 2% greater than what would be expected and that is our positive alpha.

If John Good, a properly registered investment adviser, opens his own office and hires several representatives to work for him, his business card may NOT read. A) Good and Associates Investment Advisers, Inc. B) Good Performance Advisers, Inc. C) John Good Investment Advisers, Inc. D) Good's Investment Advisers, Inc.

B) Good Performance Advisers, Inc. In this instance, the word Good can be interpreted as an adjective modifying the word performance, as opposed to John's given name, Good.

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

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

Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA? A) Neither the SEC nor State X B) State X only C) Both the SEC and State X D) The SEC only

B) State X only Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser.

Under which of the following circumstances can an agent conduct customer transactions without the activity being recorded on the books and records of his broker-dealer employer? A) The securities are exempt under the Uniform Securities Act. B) The transactions are authorized in writing by the broker-dealer before execution of the transactions. C) The customer is a member of the agent's immediate family. D) The agent will receive no compensation.

B) The transactions are authorized in writing by the broker-dealer before execution of the transactions.

Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the CPI increased by 3%, the investor's total return over the holding period was: A) 5%. B) 0.33%. C) 3.33%. D) 2%.

C) 3.33%. An investor's total return is computed by adding together income plus capital gain (loss). In this case, the investor received $3 in dividends and lost $1. That resulted in a total return of $2 which, when divided by the $60 cost, results in a percentage return of 3.33%. Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return.

Which of the following financial instruments of XYZ Oil Corporation, whose shares are traded on the New York Stock Exchange, is NOT exempt from registration with the state? A) XYZ bonds issued and sold in the United Kingdom only. B) XYZ debentures listed on the New York Stock Exchange. C) Interests in oil and gas limited partnership units in which XYZ is the general partner. D) Convertible preferred stock issued by XYZ Oil Corporation.

C) Interests in oil and gas limited partnership units in which XYZ is the general partner. XYZ's participation as a general partner of an oil and gas limited partnership does not qualify the issue as exempt from state registration. XYZ's direct debt and preferred stock are exempt under the Uniform Securities Act.

Client inherits 1,000 shares of ABC mutual fund when NAV is 9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is 14.25 and POP is 15.00. What are the tax consequences of this sale? A) Long-term capital gain of $5,500. B) Long-term capital gain of $4,250. C) Long-term capital gain of $4,750. D) Long-term capital gain of $5,000.

C) Long-term capital gain of $4,750. Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). Sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares).

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is: A) liquidity risk. B) business risk. C) inflation risk. D) systematic risk.

C) inflation risk.

When it comes to computing market returns, it is TRUE to state that A) the mode is always higher than the mean B) the median is always higher than the geometric mean C) the geometric mean could never be greater than the arithmetic mean D) the median is always lower than the average

C) the geometric mean could never be greater than the arithmetic mean Because the geometric mean always involves taking a "root" of the product of the numbers rather than an average, it is either the same or lower (can never be higher) than the arithmetic (average) mean.

n investment adviser representative recommending investments for an IRA should give primary consideration to: A) maximum current income. B) the beneficiary's tax status. C) liquidity. D) risk.

D) risk. Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt to equity ratio is? A) 64.3% B) 40% C) 22.2% D) 28.6%

D) 28.6% The debt to equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt to total capital ratio, but probably will not shown that way on the exam.

Nonexchange-traded structured securities products (SSPs) typically have A) FDIC insurance coverage B) moderate liquidity C) a place in the portfolio of conservative investors D) some form of embedded derivatives

D) some form of embedded derivatives It is commonplace for SSPs to use derivatives, such as options.

If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program? A) Tolerance toward risk. B) The age of the client. C) The amount of income he requires for his retirement years. D) Current income and cash flow requirements.

D) Current income and cash flow requirements. While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments.

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? A) Treasury bond issued at par carrying a 6% coupon. B) AAA corporate bond carrying a 6% coupon. C) AA corporate bond carrying a 7% coupon. D) Treasury bond issued at par carrying a 7% coupon.

D) Treasury bond issued at par carrying a 7% coupon. All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality.

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following EXCEPT: A) accounts receivable. B) cash. C) marketable securities of other companies. D) convertible bonds it has issued.

D) convertible bonds it has issued. The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation.

The federal Securities Act of 1933 has certain requirements for those selling new issues. One of those requirements is to: A) deliver a copy of the prospectus prior to the sale. B) deliver a preliminary prospectus to any person who has purchased the new issue. C) be properly licensed prior to making the offering. D) deliver a final prospectus no later than with confirmation of the sale.

D) deliver a final prospectus no later than with confirmation of the sale.

Fusion Financial is a broker-dealer registered in States A, B and C with its home office in State B. A complaint is filed against the firm by a client who resides in State A. Under the powers granted under the Uniform Securities Act, the Administrator of State B could do all of the following EXCEPT A) gather evidence from State A B) subpoena witnesses from State C C) gather evidence from State B D) issue an injunction against Fusion Financial

D) issue an injunction against Fusion Financial An Administrator has the power to gather evidence both within and outside of the home state as well as subpoena evidence and witnesses in any state.​ Only the courts can issue an injunction.​

Ineligible investments in an IRA would include all of the following EXCEPT A) American Silver Eagles B) stamps C) Kruggerands D) cash value life insurance

A) American Silver Eagles A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA. No form of life insurance is, and collectibles, such as stamps, are also ineligible.

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A) consolidation. B) support and resistance. C) trend lines. D) moving averages.

D) moving averages. To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

Under the Investment Advisers Act of 1940, which of the following is (are) excluded from the definition of an investment adviser? -The publisher of a financial newsletter on a paid subscription basis, which contains only general securities recommendations. -Persons whose investment advice relates solely to issues distributed or guaranteed by the U.S. government. -A lawyer who charges a separate fee for investment advice that is provided as a separate part of the business.

# 1,2 Under the Investment Advisers Act of 1940, the following are excluded from the definition of investment adviser: banks or bank holding companies; publishers of bona fide publications of general and regular circulation, such as newspapers and magazines; persons advising about government issues; and persons whose advice is incidental to their profession and for which they receive no separate compensation.

There are several popular investment styles and, in many cases, portfolio managers use a blended approach to security selection. If a portfolio manager adhered to a pure value style, he would put most of his focus on: A) projecting future earnings based on past earnings. B) using technical analysis. C) the company's financial statements. D) lagging indicators.

C) the company's financial statements. The value style of portfolio management looks for stocks that are undervalued. For example, the current market price is near or less than book value per share. The only way to find that out is by looking at the company's balance sheet.

All the following securities are bought at a discount EXCEPT A) zero coupon bonds B) commercial paper C) Treasury bills D) CDs

D) CDs CDs are interest-bearing debt instruments issued by banks at their face value. All of the others are issued at a discount. In truth, only about 85% of commercial paper is, but that's good enough for NASAA.

One of the risks of investing on margin is that a severe decline in the market price of one of the securities in the account can trigger a call for additional funds. If this happens and the investor does not supply the money when demanded, the broker-dealer can A) liquidate only the security that has caused the decline B) make a short-term loan to the client to prevent the liquidation of securities in the account C) grant the client an extension of time to procure the needed funds D) liquidate its choice of securities in the account to bring the account back to the needed level

D) liquidate its choice of securities in the account to bring the account back to the needed level Leverage works two ways. It is great when the stock's price is rising, but can be painful when going the other way. When it drops below a certain point, the firm will need more money. In the risk disclosure document, it is made clear that the client is not entitled to choose which securities can be sold if a call for additional funds is not met.

Some registered investment advisers are federal covered while others register on a state by state basis. In the case of a state-registered investment adviser having its only office in Oregon with no offices in any other state, the authority of the Administrator would include: A) requiring each IAR to provide a statement of financial condition. B) the Idaho Administrator requiring registration of IARs who make telephone calls to residents of Idaho. C) requiring the IA to renew its consent to service of process when paying the annual fee. D) requiring IARs to pass a qualification exam.

D) requiring IARs to pass a qualification exam. As you know from being here right now, this test is required by the Administrator. What about the Idaho Administrator? Well, maybe the IARs are making 5 or fewer calls in any 12 month period. Maybe they are calling institutional clients domiciled in Idaho. In any event, if you have to choose between an answer that is 100% right all of the time (qualification exams), and one that is right only some of the time, go for the 100%.

An agent is registered in Montana and North Dakota. While working in his North Dakota office, he places a call to the cell phone of one of his clients who happens to be on vacation in Wyoming. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Idaho. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrator of: -North Dakota. -Idaho. -Wyoming. -Illinois.

# 1,2,3 he Administrator has jurisdiction from the state in which the offer was made, (ND), received, (WY), and accepted, (ID). Mailing of the certificate is of no consequence.

Which of the following statements regarding grantor trusts are CORRECT? -If the grantor has the power to revoke the trust, he is treated as the owner of the trust. -If the grantor or a non-adverse party can control the beneficial enjoyment of the trust, he is treated as the owner of the trust. -The grantor may be taxed on trust income only if the grantor actually received the income. -If the grantor can receive income from the trust, he is treated as the owner of the trust.

# 1,2,4 As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: -no contract may be terminated with more than 60 days notice in writing. -the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis. -unless a specific exemption applies, the fund may not engage in margin trading. -the contract must be in writing.

# 1,4 Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract.

Which of the following is (are) required to register with a state Administrator? -An adviser who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation. -Investment adviser representatives of federal registered advisers who have natural person clients and have a place of business in the state. -An investment adviser who has no place of business in the state and has five advisory clients in the state. -A person who is an officer of a federal registered investment adviser who has no natural person clients.

# 2

ABC Corporation, a newly formed company, has filed a registration statement with the SEC under the Securities Act of 1933. If they wish to use coordination to register in this state, which of the following statements is true? A) A statement of the maximum and minimum proposed offering prices and maximum underwriting discounts and commissions must be on file with the Administrator for two full business days prior to the date the federal registration statement becomes effective. B) If registered by coordination, the state registration may become effective before the federal registration. C) The federal registration makes state registration unnecessary. D) If registered in state X by coordination, the state registration will become effective 30 days after the federal registration becomes effective.

A) A statement of the maximum and minimum proposed offering prices and maximum underwriting discounts and commissions must be on file with the Administrator for two full business days prior to the date the federal registration statement becomes effective.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? -150 new investors buy into the corporation during the year. -1 new member is a nonresident alien. -50% of the corporation's income is derived from passive investments in limited partnerships. -The corporation issues several classes of stock.

All 4

An investment adviser compensated for a client's participation in a wrap fee program must provide the client with a written disclosure statement containing: A) at least the information in Form ADV Part 2A. B) at least the information required by Appendix 1 of Form ADV Part 2A, but not if another adviser has already furnished such a statement on the program to the client. C) only the services and fees of the program. D) at least the information required by Appendix 1 of Form ADV Part 2A, even if another adviser has already furnished such a statement on the program to the client.

B) at least the information required by Appendix 1 of Form ADV Part 2A, but not if another adviser has already furnished such a statement on the program to the client.

Which of the following statements regarding Roth IRAs is TRUE? A) Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal. B) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. C) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. D) Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 70-½.

C) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. Unlike traditional IRAs, Roth IRAs are not subject to the minimum distribution rules regarding a participant's age (70-½). Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59-½.

Jesse Liverless is the trustee of the Short Circuit Electric Corporation 401(k) plan. Jesse would be able to reduce his ERISA fiduciary exposure if A) loans to participants were permitted B) the plan provided for account reports no less frequently than annually C) the plan offered a broad index fund, a medium term government bond fund and a cash equivalent fund D) the firm provided educational sessions to participants covering the basics of investing

C) the plan offered a broad index fund, a medium term government bond fund and a cash equivalent fund ERISA Section 404 (c) describes a safe harbor for 401(k) plan fiduciaries. Among the requirements is to provide at least three different investment alternatives with a range of risk and provide account access no less frequently than quarterly.