Test Quesitons #6
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) systematic risk B) liquidity risk C) inflation risk D) business risk
B - A portfolio of listed common stocks will have little to no liquidity risk, as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.
When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, A) the investment adviser representative and the federal covered advisers must notify the Administrator promptly B) the investment adviser representative and the employing adviser must notify the Administrator promptly C) only the investment adviser representative must notify the Administrator promptly D) only the terminating investment adviser must notify the Administrator
C
The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT when the service provided is an individual supervisory service when the client is an investment company when the contract is for an impersonal advisory service requiring payment of less than $500 when the client is an individual with a net worth of more than $1 million A) I and II B) I, III, and IV C) II and III D) II, III, and IV
C - A disclosure brochure is not required to be delivered if the client is a registered investment company, or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements.
A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct? A) The issuer will attempt to call in Bond A. B) Bond B will be selling at a greater discount than Bond A. C) Both bonds will be selling at a discount. D) Bond B will be selling at a greater premium than Bond A.
D - When interest rates go down, bond prices will go up. As far as which bond will sell at the higher premium using the discounted cash flow method, it is clear that the bond with the longer duration will be worth more.
A corporation offering securities registered under the Securities Act of 1933 may make which of the following statements? A) The SEC has declared this prospectus effective. B) The SEC has passed on the merits of these securities as an investment. C) The SEC has endorsed our securities for sale to the public. D) The SEC has passed on the adequacy of the information in our prospectus.
A - When a security registers with the SEC, the date that sales may commence is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.
Under the Investment Advisers Act of 1940, the exclusion for providing investment advice that is solely incidental to the practice of a profession is available to all of the following EXCEPT: A) economists. B) teachers. C) accountants. D) attorneys.
A - ENGINEERS is the E, not economists
The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice: relates solely to municipal issues. relates solely to issues issued by or guaranteed by the U.S. Treasury. is solely incidental to their professional practice as an aeronautical engineer. is limited to insurance companies only. A) II and III. B) I, II, III, and IV. C) III and IV. D) I, II, and IV.
A - Advice to solely insurance companies qualifies one for an exemption from registration, but does not exclude the person from the definition of IA
Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm? A) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign B) Donating a maximum of $350 to the campaign C) Donating a maximum of $250 to the campaign D) Donating a maximum of $150 to the campaign
B - $350 if you can vote for them $150 if you cant vote for them
All of the following statements regarding a Section 529 QTP are true EXCEPT A) the plan owner can rollover any unused funds to a member of the beneficiary's immediate family without incurring any tax liability as long as the rollover is completed within 60 days of the distribution. B) a beneficiary may be covered under both a Coverdell ESA and a Section 529 QTP. C) the plan owner can rollover the assets into a different plan no more frequently than once every 12 months. D) agents selling a Section 529 Plan must deliver a currently effective prospectus.
D - Because Section 529 Plans are technically municipal fund securities, an official statement or offering circular is the document delivered, not a prospectus.
All of the following may be required of a federal covered security EXCEPT paying a filing fee providing a consent to service of process submitting copies of any information filed with the SEC using a state-sanctioned legend on the offering documents A) II and III B) I and II C) I, II, and III D) IV only
D - Federal covered securities may be required to pay a filing fee, provide a consent to service of process, and if requested, submit copies of any and all documentation filed with the SEC. However, requiring a legend or other similar statement is beyond the jurisdiction of the state on a federal covered security.
Adnan is an investment adviser representative associated with a state-registered investment adviser. He is registered in several states. To be in compliance with the Uniform Securities Act, Adnan A) must meet the financial requirements of all of the states in which he does business. B) must meet the financial requirements of the state in which the investment adviser's principal office is located. C) must meet the financial requirements of the state with the most stringent requirements. D) has no financial requirements with regard to a minimum net worth.
D - There are no financial requirements placed on IARs, only the IA. Investment advisers must meet the financial requirements of the state where the firm's principal office is located.
Under the USA, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective? A) Notice filing B) Application C) Coordination D) Qualification
Aq
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of the Securities Exchange Act of 1934 the Investment Company Act of 1940 the Investment Advisers Act of 1940 the Uniform Securities Act A) I, II, and III B) II and IV C) II, III, and IV D) I and III
B
Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) 5% coupon maturing in 20 years B) 10% coupon maturing in 10 years C) 7% coupon maturing in 9 years D) Zero-coupon bond maturing in 11 years
B - bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow. When looking at a DCF valuation, pick the highest coupon
The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state? A) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state, but not authorized to do business in this state B) Bonds issued by the Province of Alberta C) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state D) Equipment trust certificates issued by a regulated common carrier
C - securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state.
An investment adviser (IA) has its primary office in State A. They have branches in states B and C, and they advertise in states D, E, and F. What net capital requirements must they meet? A) Where its principal office is located B) The state where the largest number of its clients reside C) Whichever state is the highest D) All the states combined
A
Under the Uniform Securities Act, which of the following statements are TRUE about the authority of an Administrator? A cease and desist order may be issued prior to a hearing. A cease and desist order may be issued after a hearing. A cease and desist order is valid for a maximum of 30 days. A) I, II, and III B) II and III C) I only D) I and II
D - In issuing a cease and desist order, the Administrator may provide prior notice and hearing or may issue the order without prior notice or hearing (summarily). There is no time period associated with the order.
Rank the following bonds in order of shortest to longest duration. ABC 8s of 2035. DEF 9s of 2034. GHI 5s of 2036. JKL zeros of 2033. A) IV, III, I, II. B) II, I, III, IV. C) IV, II, I, III. D) III, I, II, IV.
B - There is an inverse relationship between a bond's coupon rate and its duration. A higher coupon will pay the investor back through cash flow at a faster rate. Therefore, a zero-coupon bond with no cash flow has a duration equal to its maturity.
A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A) going short soybean forwards B) going long soybean futures C) going long soybean forwards D) Going short soybean futures
A - Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.
A client invests $100,000 in a commercial real estate venture taking a 10% interest as a limited partner. Unfortunately, the demand for new office space deteriorates and the partnership is unable to meet the mortgage payments. The end result is foreclosure with a net loss of $2 million. This would have the effect of: A) giving the client a passive loss of $100,000. B) giving the client a passive loss of $200,000. C) requiring the client to pay his share of the loss to the creditors. D) a potential claim against the agent who sold the client this program.
A - As a limited partner, the loss is "limited" to the original investment.
Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment adviser is known as A) a cohort B) a client C) a customer D) a consumer
C - Regulation S-P uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal.
A registered representative presenting a variable life insurance policy proposal to a prospect must disclose which of the following about the insured's rights of exchange of the VLI policy? A) The insurance company will allow the insured to exchange the VLI policy for a traditional whole life policy within 45 days from the date of the application or 10 days from policy delivery, whichever is longer. B) Within the first 18 months, the insured may exchange the VLI policy for either a whole life or universal variable policy issued by the same company with no additional evidence of insurability. C) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability. D) The insured may request that the insurance company exchange the VLI policy for a traditional whole life policy issued by the same company within 2 years. The insurance company retains the right to have medical examinations for underwriting purposes.
C - Federal law requires that issuers of variable life insurance policies allow exchange of these policies for a form of permanent life insurance, (usually whole life), issued by the same company for a period of no less than 2 years. The exchange must be made without additional evidence of insurability.
Under the Securities Act of 1933, the SEC A) attempts to make certain that all pertinent information is fully disclosed B) guarantees that the statements made in the prospectus and registration statement are accurate C) approves securities registered with it D) passes on the investment merit of the security
A
A broker-dealer registered in all 50 states, using both radio and television advertisements to promote its services, directs prospects to a toll-free number that will connect them with a registered agent. An existing customer living in New York calls and is connected to an agent in Cleveland who is registered in Ohio, Michigan, and Pennsylvania. The client asks the agent to recommend something that would fit the existing account's stated investment objectives. Under the Uniform Securities Act, the agent: A) should transfer the call to an agent who is registered in New York. B) can only recommend securities that are exempt from registration. C) can make a recommendation because the call was received in Ohio, a state in which the agent is registered. D) can make a recommendation because the call was made on an unsolicited basis from an existing client.
A - Agents must be registered in the state of residence of the client.
Which of the following statements regarding estates are CORRECT? Estate taxes are due on April 15 of the first year following the death of the deceased Estate taxes are due 9 months after the date of death of the deceased Assets are valued based on their market value as of the date of death, or, alternatively, 6 months later Assets are valued based on their cost, or, alternatively, 6 months after the date of death A) II and III B) II and IV C) I and III D) I and IV
A - Estate taxes are due, unless an extension has been obtained, no later than 9 months after the date of death. For estate tax purposes, the executor (or administrator) may elect to use the values as of the date of death or those 6 months later (the alternative valuation date).
Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) An agent sells U.S. treasury bonds to an individual client. B) The sale of an unregistered nonexempt security to an individual client at that client's request. C) An executor liquidates the estate's portfolio. D) The sale of ABCD common stock, listed on the OTC Bulletin Board, to an insurance company.
A - Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.
A state-registered investment advisory firm that plans to take custody of clients' securities must do which of the following? Receive permission from the state Administrator. Give notice to the state Administrator. Provide a copy of its balance sheet to clients. Provide a custody brochure to clients. A) II and III. B) I and IV. C) II and IV. D) I and III.
A - For a state-registered investment adviser to take custody of customer funds and securities, it must give notice to the state Administrator and provide those customers with a copy of its balance sheet. Permission from the state Administrator is not required and there is no such thing as a custody brochure.
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) verify that the investment adviser still qualifies for SEC registration B) provide updated information on those associated persons who are in charge of giving investment advice C) ensure that full disclosure has been made in the adviser's brochure D) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian
A - In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
Which of the following are included in the definition of federal covered security? ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland City of Portland, Maine, GO bond sold to a resident of Augusta, Maine City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia A) I, II, and IV B) I, II, III, and IV C) I and II D) II, III, and IV
A - Muni bonds for a state are registered in that state and federally covered in other states
Which of the following securities are NOT exempt from state registration? A) Securities issued by Jones Corporation, whose shares are publicly traded in Kansas and entirely owned by Kansas residents. B) Securities issued by the Japanese government. C) Securities issues by the Episcopal diocese of Cleveland, Ohio. D) An investment contract issued by the pension fund of ABC Corporation, a large manufacturing corporation whose shares are traded on the New York Stock Exchange.
A - Publicly traded intrastate offerings are required to register with the state Administrator where the issue is offered.
The antifraud provisions of the Uniform Securities Act would apply to all of the following except A) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. B) newsletter publishers who do not give advice to subscribers on the subscriber's specific investment situation. C) a broker-dealer registered pursuant to the limited registration option available to Canadian broker-dealers and their agents. D) persons availing themselves of the de minimis exemption.
A - The Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) ABC 5s of 2050 B) JKL 4s of 2022 C) DEF 6s of 2051 D) GHI 7s of 2052
A - The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration
An agent in Illinois, Missouri, and Iowa has a client move from Chicago to Detroit on July 1, 2016. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On August 1, 2017, the client discovered that the agent's firm never licensed him in Michigan and, therefore, he is subject to civil liability to the purchaser. The statute of limitations for this sale runs out A) August 1, 2019 B) September 1, 2019 C) September 1, 2018 D) August 1, 2020
A - The statute of limitations for civil liability is the earlier of 3 years after the date of the sale or 2 years after discovery of the violation. In this case, the earliest date is 2 years after the discovery date of August 1, 2017.
When a variable annuity is annuitized A) the number of annuity units redeemed each payment period remains constant B) the number of accumulation units redeemed each payment period varies based upon the performance of the separate account C) the number of accumulation units redeemed each payment period remains constant D) the number of annuity units redeemed each payment period varies based upon the performance of the separate account
A - The value of each unit is what varies.
When an investment adviser representative terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides A) the investment adviser representative and the employing adviser must notify the Administrator promptly B) only the investment adviser representative must notify the Administrator promptly C) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly D) only the terminating investment adviser must notify the Administrator.
B - A federal registered investment adviser is exempt from registration at the state level, and therefore, has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the State Securities Administrator that you are working there, as well as when you terminate.
The Administrator may by order deny, suspend or revoke any registration, or bar or censure any registrant or any officer, director, partner or person occupying a similar status or performing similar functions for a registrant, from employment with a registered broker-dealer or investment adviser, or restrict or limit a registrant as to any function or activity of the business for which registration is required in this state, if he finds that the order is in the public interest and that the applicant or registrant A) is not qualified solely on the basis of lack of experience B) is permanently or temporarily enjoined by any court of competent jurisdiction from engaging in or continuing any conduct or practice involving any aspect of the securities business C) has been charged, within the past ten years, with any misdemeanor involving a security or any aspect of the securities business, or any felony D) has engaged in honest or ethical practices in the securities business
B - Being charged with a violation is not the same as being convicted
All of these are reasons a corporation might choose to establish a nonqualified plan rather than a qualified plan except A) a nonqualified plan typically has lower administrative costs. B) the employer can take a tax deduction at the time the contribution is made to the plan. C) the corporation can exclude rank-and-file employees from a nonqualified plan. D) a nonqualified plan has more design flexibility than a qualified plan.
B - Employers are not permitted to take a tax deduction until the assets are received by the executive as income after the deferral period.
Under the Uniform Securities Act, which of the following is NOT cause for disciplinary review action by the state securities Administrator? A) Tom, a registered investment adviser, fails to disclose that he recently filed for bankruptcy protection. B) The ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors. C) Ed is suspended from conducting business in the securities industry for a period of 6 months by FINRA. D) Joe files an application for registration as an investment adviser and omits the fact that he was convicted of fraud 12 years ago.
B - Investment advisers may employ investment adviser representatives as independent contractors.
Which of the following statements is not true of investment advisers under the Uniform Securities Act? A) Compensation is a key factor in determining whether a person is required to register as investment adviser. B) Only written advice concerning investments is covered by the act. C) Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell. D) A natural person may register as an investment adviser. Explanation
B - One of the three prongs defining an investment adviser under both state and federal law is the giving of investment advice. That advice can be in written or oral form. Any person, as defined in the USA, may register as an investment adviser. Even though we tend to think of the investment adviser as the company you will be working for, a significant percentange of state-registered investment advisory firms are sole proprietorships (one-person shops). Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is another one of the three prongs in determining whether a person is defined as an investment adviser.
Which of the following statements regarding the private placement exemption under the USA are TRUE? There may be no more than ten offers to noninstitutional purchasers during any consecutive 12-month period. The seller reasonably believes that the retail buyer is purchasing for investment only. No investors may resell stock acquired in a private placement without a prescribed holding period. Commissions may be paid on sales to noninstitutional purchasers. A) I and III. B) I and II. C) II and III. D) III and IV.
B - There is a limit of 10 offers during any 12 months to noninstitutional (retail) purchasers. Because the purchase is "for investment purposes only", the seller must have reason to believe that retail buyers intend to hold the security rather than turn it over quickly
An investment of $5,000 made 16 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 25%. B) 9.0%. C) 4.5%. D) 18%.
B - This investment has quadrupled in 16 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 8 years. Dividing 72 by 8 years gives us an approximate rate of 9%.
Registration with the state as an investment adviser would be required for a person with an office in this state who: A) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million. B) manages $13 million in assets for 4 clients. C) only gives advice on securities issued by or guaranteed by the government of the United States. D) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets.
B - Under the NSMIA, as amended by Dodd-Frank, investment advisers with less than $100 million in assets under management must register with the states. If the person serves as a pension consultant with more than $200 million in assets, the person has the option of registering with the SEC or the states
Compliance with delivery requirements pertaining to an adviser's brochure under the Uniform Securities Act would require an adviser to: A) furnish clients with a copy of the brochure at least 48 hours before entering into the agreement. B) furnish clients with a copy of the brochure within 120 days of the end of the adviser's fiscal year unless there have been no material changes. C) file a copy of the brochure with SEC on an annual basis. D) furnish clients with a copy of the brochure on an annual basis even if there have been no material changes.
B - Whether state or federal covered, unless there have been no material changes, investment advisers must send a brochure to eligible clients within 120 days of the end of the adviser's fiscal year. Under the NASAA brochure rule, there is a requirement not found in the federal law. State-registered investment advisers are required to deliver the brochure to the client at least 48 hours before entering into an advisory contract or at the time of entering into an advisory contract if the advisory client has the right to terminate the contract without penalty within five business days after entering into the contract
Mr. Peabody Fawcett and his sister, Ms. Gwenyth Paige-Newberry open a brokerage account at your firm with an initial deposit of $11 million. The account is opened as tenancy in common (TIC) with Peabody owning 40% and Gwenyth the balance. Several years later, Peabody is fatally injured while playing polo. As a result A) Mr. Fawcett's share will be transferred to his sister and an individual account will be opened in her name B) 40% of the value of the account will be transferred to an estate account in his name and 60% will be transferred into an individual account in her name C) the account will be frozen until the results of the probate court are released D) the account will be frozen until receiving instructions from the executor of Mr. Fawcett's account
B - With an account opened as tenancy in common (TIC), in the event that one party dies, their portion of the assets will be transferred to an estate account and distributed according to will; the surviving party's assets remain undistributed and will be transferred into an individual account.
Books and records must be maintained in the principal office of the adviser for the first two years. Books and records must be maintained in an easily accessible place for no less than five years from the end of the last fiscal year in which an entry was made. Copies of all investment letters, advertisements, or communications to two or more persons must be preserved for five years from the end of the fiscal year of the publication date. An adviser who ceases business continues to be responsible for the maintenance and preservation of certain records, such as corporate charters and minute books, for three years after termination of the enterprise. A) I only B) I, II, and III C) I, II, III, and IV D) II only
C - All books and records required to be maintained by actively registered investment advisers—including investment letters, advertisements, or other communications to two or more persons (10 if the question dealt with federal law)—must be preserved in a readily accessible place for five years from the end of the fiscal year in which they were created or communicated. For the first two years, they must be maintained in the appropriate office of the adviser. The adviser remains responsible for the preservation of certain records, such as corporate charters and minute books or partnership agreements if operated in that business form, for three years after ceasing business.
To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the solicitor. While the sales script used may be written by the promoter, making sure that its content is fair and reasonable is the responsibility of the investment adviser. Cash referral fees to promoters hired to solicit may be paid only in the case of impersonal advisory services. A) I and IV B) I and II C) II and III D) III and IV
C - All relationships between registered investment advisers and a promoter where compensation is involved must be in writing. It is important to note that compensation is defined as more than $1,000 over a 12 -month period. Making sure that the content of any scripts is fair and balanced is the responsibility of the investment adviser, regardless of who prepared t
Broker-dealers and their agents can have their licenses suspended or revoked for engaging in business practices in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. Which of the following activities would NASAA consider an unethical or prohibited practice? Hypothecating a customer's securities in a margin account without written consent from the customer Executing a margin transaction in new customer accounts before receiving written margin agreements from the customers Charging unreasonable fees for custody and securities transfer services A) I, II, and III B) II and III C) I and III D) I and II
C - Charging unreasonable fees for services is also a prohibited practice, but the signed margin agreements only need be obtained promptly after the first trade in the account, not prior.
Which of the following does NOT constitute market manipulation under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Entering numerous buy orders at the close of the trading day to prevent a stock from closing lower. B) Engaging in transactions that would cause an appearance of increased market activity when no beneficial change of ownership actually occurs. C) Excessive trading in a client's account for the sole benefit of increasing commission income. D) Deliberately responding to a request for a quote with inaccurate information.
C - Excessive trading for the purpose of increasing commissions is the prohibited practice known as churning, but it is not a form of market manipulation. Intentionally providing inaccurate quotes, creating fictitious volume, and entering orders to prevent a stock from moving up or down are forms of market manipulation.
Social media can be static or interactive. Examples of static content typically available through social networking sites include all of the following except A) video recordings of public appearances. B) banner ads. C) an online seminar. D) biographical information.
C - If others besides the originator can contribute content, it is interactive. In most cases, participants in an online seminar are able to post questions and interact with the presenter.
Which of the following statements are TRUE? An agent may never be simultaneously employed by more than one broker-dealer. An agent must submit separate registrations for each broker-dealer with which he is registered. Certain states prohibit agents from dual or multiple registration. An agent who sells securities in several states must be registered with different broker-dealers in each state. A) II, III, and IV B) IV only C) II and III D) I only
C - In general, an agent will only be registered with a single broker-dealer. However, the USA does permit registration with more than one under certain conditions. An agent must submit separate registrations for each broker-dealer with which he is registered, and an agent may be prevented from multiple registration in those states that prohibit dual or multiple registrations.
In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management? A) An investment adviser with assets under management of less than $25 million B) An investment adviser that acts as an adviser solely to one or more national banks C) An investment adviser that acts as an adviser solely to one or more venture capital funds D) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million
C - It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM.
John Johnson was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. Mr. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will: A) determine Mr. Johnson's status on the basis of the extent to which his child support payments are being paid. B) consider Mr. Johnson to be statutorily disqualified since in this state his crime is a felony. C) disregard that conviction when determining Mr. Johnson's qualifications for registration. D) consider granting registration to Mr. Johnson, but only if he receives heightened supervision.
C - The conviction on Mr. Johnson's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to Mr. Johnson's application for registration in that state.
Which of the following would not be justification for the Administrator to cancel the registration of an agent? A) A court has declared the agent mentally incompetent B) The agent has been reported as deceased C) The agent violated several provisions of the Uniform Securities Act D) The Administrator's repeated attempts to contact the agent were futile
C - Violation of the Act is cause for disciplinary action, not cancellation
A client of yours purchased a periodic payment variable annuity 10 years ago. Each month, the client invested $200 and then died suddenly when the account contained 1,355 accumulation units with a value of $16.23 each. Which of the following statements is CORRECT? The beneficiary will receive 21,991.65. The beneficiary will receive $24,000. There is no income tax liability on the part of the beneficiary. If the beneficiary is younger than 59½, there is a 10% tax penalty on any distribution. A) I and III. B) II and IV. C) II and III. D) I and IV.
C - since $24,000 was the investment, even though the current value is less, the beneficiary will receive that higher amount.
While enjoying some après-ski after a long day vacationing out of state on the slopes, Gervaise, an investment adviser representative with a federal covered investment adviser, spots several existing advisory customers. They invite Gervaise to join them for some spirits, and the invitation is warmly accepted. After about an hour, some of these customers and their friends ask Gervaise if it would be possible to have a lesson on what specific stocks should be considered under current market conditions. To make this presentation, Gervaise A) must not receive any compensation, direct or indirect. B) must be registered in this state because the advice being given is specific rather than general. C) does not have to be registered in the state because, as a representative of a covered adviser, registration is required only in those states where a place of business is maintained. D) does not have to be registered in the state as long as the only participants are these existing customers.
D - IARs representing federal covered investment advisers register only in those states where they, the IARs, have a place of business. Being on vacation out of state indicates that Gervaise does not maintain a place of business there. When that is the case, an IAR can do business (and giving this lesson is doing business) with existing customers without the need to register there. As their IAR, Gervaise can certainly receive compensation whether direct or in the form of the beverage of choice. When dealing with existing customers, it is expected that an IAR will give advice about specific securities. Things change dramatically if someone other than an existing customer attends.
A client with a margin account notifies an agent of his vacation next week. The day after the client departs, there is a substantial market sell-off, and the drop in the value of the client's portfolio requires additional money deposited in the client's account immediately. Which of the following actions of the agent would NOT be prohibited? A) Contacting the client's banker and arranging a loan on behalf of the client to meet the margin maintenance call B) Lending the client sufficient funds to meet the margin maintenance call C) Transferring funds from the client's spouse's account to meet the margin maintenance call D) Doing his best to reach the client, and if unsuccessful, notifying his principal, in order that sufficient securities in the account be liquidated to meet the margin maintenance call
D - If the client cannot be reached, or otherwise does not come up with funds, the only way to satisfy the margin maintenance call is through the liquidation of shares in the account. The broker-dealer determines which securities are to be liquidated. None of the other actions described here would be permitted. An agent can never lend money to a client, nor may loans be arranged through banks. To transfer funds from another account, permission of all owners of that account must be obtained.
XYZ Brick Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the Administrator is unnecessary because the issue is exempt. Should XYZ be served with a court order, the burden of proving its issue is exempt is on the: A) CEO. B) Administrator. C) court. D) company.
D - In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption (the company, not the CEO).
In which of the following cases would an individual representing an issuer in a transaction with a client be excluded from the Uniform Securities Act's definition of an agent? A) The individual sells shares of a security issued by and representing an interest in a federal savings and loan association. B) The individual sells shares of a public utility regulated in respect of its rates and charges by a governmental authority of the United States or any state. C) The individual sells shares of a federal credit union. D) The individual successfully solicits an order from an insurance company to purchase 10,000 shares of the issuer's stock.
D - Individuals representing issuers in the sale of their securities may or may not be defined as agents. When the transaction is exempt, such as sale to an institution like an insurance company, the individual is not defined as an agent.
Which of the following actions is a form of market manipulation? A) Wash sales B) Front running C) Arbitrage D) Matched orders
D - Only matched orders, the practice of simultaneously entering identical (or nearly identical) buy and sell orders for a security to create the appearance of active trading in that security, is market manipulation. Wash trades, not wash sales, are also market manipulation
Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940? No registered investment company may commence a public offering with less than $1 million of capital. No investment company may own more than 3% of the voting stock of another registered investment company. No investment company may purchase portfolio securities on margin. A) I and III B) I, II, and III C) I and II D) II and III
D - The act requires an investment company to have a minimum of $100,000 in initial capital, not $1 million.
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 Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) 2% B) .33% C) 5% D) 3.33%
D - The math looks like this: three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 which, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return; it is just another example of a question containing unnecessary information.
An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is: A) income. B) preservation of principal. C) capital appreciation. D) growth with income.
A - 85% of this portfolio is generating income.
Many corporations make available dividend reinvestment plans for their shareholders. Among the benefits of using these plans are all of these EXCEPT: A) discounts from the current market price. B) reduced or eliminated commissions. C) avoiding taxation until the shares are sold. D) the ability to add additional funds to the dividend.
C - DRIPs, like any other plan involving dividend reinvestment, do not avoid current taxation
Financial ratios derived from a corporation's balance sheet can be useful tools for investors. Someone looking to determine the company's liquidity would most likely to ignore its A) quick asset ratio B) acid-test ratio C) debt to equity ratio D) current ratio
C - debt to equity ratio deals with capitalization and is not a liquidity test.
The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of A) 11%. B) 2%. C) 4%. D) 7.5%.
D - Mid Range add the lowest and highest and divide by 2
Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Software used to analyze client's portfolios B) Research reports prepared by a third party other than the broker-dealer C) Proprietary research reports analyzing the performance of a specific industry D) Software used to simplify the investment adviser's preparation of its tax returns
D - Tax preparation software benefits the adviser, but not the client. If it benefits the adviser and not the client it does not fall within section 28(E)
Which of the following are methods of portfolio rebalancing? You can sell off investments from over-weighted asset categories and use the proceeds to purchase investments for under-weighted asset categories. You can purchase new investments for under-weighted asset categories. If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance. You can purchase new investments for better performing asset categories. A) I, II, and III. B) III and IV. C) I and III. D) I, III, and IV.
A -
An investment adviser representative with a registered investment adviser would like to structure an arrangement for a new advisory account in which profits and losses in the account will be shared with the client. Under the USA, which of the following statements is TRUE? A) An investment adviser representative may not share in the profits and losses in an advisory client's account. B) Sharing may only occur if the client has a net worth of at least $2 million or at least $1 million in assets under management with the firm. C) This arrangement must be agreed upon before the opening of the account. D) In order for an investment adviser representative to share in the profits and losses in an advisory account, written authorization must be given by both the client and the employing investment adviser.
A - Sharing in accounts is permissible under certain conditions for agents of broker-dealers, but the USA specifically prohibits investment advisers and their representatives from sharing in an account with any advisory clients under any circumstances. AGENTS CAN, IARS CANNOT
The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm's clients is known as: A) discretionary misrepresentation. B) blanket recommendations. C) matched purchases. D) churning.
B - When the same security is recommended to all or most of an IA's clients, the regulators considered this to be an unethical practice known as "blanket recommendations" since the same security will almost never be suitable for everyone.
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) an adviser who only gives advice on U.S. government securities B) a pension consultant offering advisory services to employee benefit plans C) a financial representative for a celebrity D) a financial representative for a professional athlete
A- If you are only giving advice concerning direct obligations of the federal government, you are excluded from the definition of a federal investment adviser
Both state and federal law will permit an investment adviser to engage in agency cross transactions provided the advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses all of the following except A) on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. B) no transaction is effected in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser. C) the adviser will be receiving commissions from both sides of the trade. D) there is a potential conflict of interest because of the division of loyalties to both sides.
A- Report for agency cross transactions is anually, not bianually
An investor who resides in New York reads a newspaper ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been made in A) New York B) neither New Jersey nor New York C) New Jersey and New York D) New Jersey
B
Carmen Lobianco, who has been highly successful in business, has a thirty-year-old son. The son has been a quite a spendthrift. Lobianco is afraid the son will not be able to live within his means. To protect this from happening, Lobianco places $2,500,000 into a trust for the benefit of the son. To provide added safety, Lobianco arranges for the Amalgamated Bank and Trust Company to have total control over the assets. In this case, which of the following is not correct? A) Amalgamated Bank and Trust Company is the trustee. B) Carmen is the trustee. C) Carmen is the grantor. D) Carmen's son is the beneficiary.
B
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly permit immediate vesting of employer contributions. A) II and IV B) I and III C) II and III D) I and IV
B
Lower maintenance costs would be least likely to be found when using which of the following management styles? A) Strategic. B) Tactical. C) Buy and hold. D) Rebalancing.
B
Which of the following statements regarding the filing requirements for institutional investment managers with investment discretion over portfolios with an aggregate value of $100 million or more of 13(f) securities are TRUE? Form 13D must be filed. Form 13F must be filed. Filing must occur within 10 days of the month-end. Filing must occur within 45 days of the quarter-end. A) I and IV. B) II and IV. C) I and III. D) II and III.
B
Averaging techniques would include all of the following EXCEPT A) maintaining a DRIP with a stock listed on the NYSE B) reinvesting all distributions from an open-end investment management company C) maintaining a constant ratio plan D) dollar cost averaging
C
In which one of these business entities does the term "member" refer to the owners? A) Limited partnership. B) S corporation. C) Limited liability company. D) Sole proprietorship.
C
Under federal law, the brochure rule requires: A) concurrent delivery of the Form ADV Part 1A. B) delivery no later than 5 business days after the formalizing of the advisory. C) delivery of a brochure, or summary of material changes, to all clients within 120 days of the end of the adviser's fiscal year. D) delivery no later than 48 hours before entering into an investment advisory contract.
C
Under the Uniform Securities Act, which of the following are NOT considered investment advisers or investment adviser representatives in this state? An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. United Trust Company of America An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state A) I and II B) I, II, III, and IV C) II and IV D) IV only
C
A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) easily accessible for 2 years in the firm's principal office. B) for 5 years after the end of the fiscal year in which the most recent entry was made. C) for 3 years after the termination of the enterprise. D) for 3 years after the end of the fiscal year in which the most recent entry was made.
C - NASAA's Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.
If an individual leaves her current employer and takes a new job, which of the following can she NOT do with the assets in her 401(k) plan? A) Roll them over into a traditional IRA. B) Keep them in the plan. C) Roll them over into a variable annuity using a 1035 exchange. D) Roll them over into the new employer's 401(k) plan.
C - Qualified distributions from a 401(k) plan cannot be rolled over into a variable annuity. The 1035 exchange only works for transferring between certain insurance contracts.
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated the position for $55 per share while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, the investor's real rate of return is closest to: A) 14%. B) 4%. C) 11%. D) 1%.
C - The investor receives a total of $7 in return on this investment: $5 in capital gains and $2 in dividend income. The return on this $50 investment is 14%, and when adjusted for 3% inflation, the investment's real rate of return is 11%.
Walter and Wanda Willingham are new client's. While reviewing their holdings, you notice an account at a local bank titled, "Walter Willingham, in Trust for Walter Willingham, Jr." The account provides that, upon Walter's death, the assets in the account will pass to his son. This is an example of A) an UTMA account B) a testamentary trust C) an account opened JTWROS D) a Totten trust
D - Upon the death of the trustee, the money will immediately be made available to the named beneficiary.
NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents states that it is unethical for an agent registered with a broker-dealer to personally lend money to the broker-dealer firm with which the agent is registered. personally lend money to a bank that is a client of the broker-dealer firm with which the agent is registered. split commissions with an agent registered with a broker-dealer that is under common control. borrow money from a mortgage broker who is a client of the agent. A) II and III. B) I and IV. C) I and III. D) II and IV.
D - Agents may only borrow from clients who are lending entities and a mortgage broker does not lend money; the broker arranges the loan, but does not act as a principal.
Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file A) a Form 13F. B) a Form ADV-E. C) a Form 112. D) a Form 13D.
A
Under the USA, which of the following are considered a sale or an offer to sell? The gift of assessable common stock The gift of nonassessable stock The sale of a warrant to purchase stock A) I and III B) I, II, and III C) III only D) I and II
A
Under the Uniform Securities Act, the Administrator may require that a prospectus for a security registered under qualification be sent or given to each person to whom an offer is made A) before the sale of the security. B) within 72 hours of the effective date. C) only upon request of the offeree. D) before or concurrent with the filing of the registration statement.
A
Which of the following is an exempt security under the Uniform Securities Act? A) Negotiable certificates of deposit with $100,000 denominations. B) Common stock traded on the London Stock Exchange. C) Shares of a U.S.-based insurance company not authorized to sell policies in that particular state. D) Commercial paper maturing in 12 months.
A
