TUESDAY FINAL EXAM
One method security analysts use to define companies is by their market capitalization. How is a company with a market capitalization of $400,000,000 categorized? A) Small-cap. B) Mid-cap. C) Micro-cap. D) Large-cap.
A)Small-cap. The general consensus is that companies with a market capitalization between $300 million and $2 billion are considered small-cap. Less than that is micro-cap; larger is either mid-cap or large-cap. 16.4.1� in the License Exam Manual
Flow-through is one of the features of A) open-end investment companies B) direct participation plans C) variable annuities D) REITs
B)direct participation plans Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program "flows through" to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses. Reference: 10.2 in the License Exam Manual
Which of the following documents must an existing customer sign to establish a discretionary account? A) Trading authorization B) Customer's agreement C) Options agreement D) New account application
A)Trading authorization To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements. Reference: 1.6.2.16 in the License Exam Manual
Under the NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, investment advisers who advertise must comply with the rules of the Investment Advisers Act of 1940, which include: A) a prohibition against testimonials from clients. B) the requirement that advertisements must be sent to the SEC for approval before dissemination to the public. C) a prohibition against reduced-fee introductory offers. D) a prohibition against showing the adviser's past performance.
A)a prohibition against testimonials from clients. Advertisements may not include testimonials from clients or others, refer selectively to past recommendations, or refer to a chart or device for evaluating securities without explaining its limitations and difficulties. There is no requirement for filing of advertising with the SEC, or anyone else for that matter. Introductory reduced-fee offers, while rare, are not prohibited as long as they are not discriminatory. Past performance may be used in advertising as long as it meets the requirements of the Rule. Reference: 3.13 in the License Exam Manual
Stanford Securities, Inc., is a registered broker-dealer in 22 states. Stanford has just created a wholly owned subsidiary, Stanford Advisers, Inc., and expects to have at least $100 million in assets under management within the next 45 days. Stanford Advisers, Inc.: A) will not have to register in any state. B) will only have to register in the state in which Stanford Advisers, Inc., maintains their principal office. C) must register in each state in which they maintain an office. D) must register in each state in which they intend to offer advisory services.
A)will not have to register in any state. Unlike broker-dealers, where there is no such concept as federal covered, a new investment adviser that reasonably expects to reach the $100 million minimum threshold within 120 days of the initial filing of the Form ADV invariably registers with the SEC as a federal covered investment adviser and, therefore, does not register in any state. Reference: 3.3.2.1.4 in the License Exam Manual
Which of the following constitutes a discretionary account? A) An account in which the investor gives the broker-dealer authority as to pricing or timing of an investment B) An account in which the investor gives the broker-dealer written authority to buy or sell securities C) The agent's personal trading account D) The broker-dealer's trading account
B)An account in which the investor gives the broker-dealer written authority to buy or sell securities In a discretionary account, an agent has received authority to select the amount and type of investment for a client; the authorization must be in writing. Timing and price of a trade are not considered discretionary. Reference: 1.6.2.15 in the License Exam Manual
Which of the following are TRUE of a REIT? I. It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income. II. It may loan money for commercial construction projects. III. It generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property. IV. It is only suitable for an investor who is in a 28% or higher tax bracket, who has a net worth in excess of $200,000, or who is able to benefit from the flow through of losses.
B)I, II and III A real estate investment trust (REIT) is an investment that makes direct investments in real estate, generating its income from renting the property (e.g., apartments, shopping malls) to lessees. Alternatively, it can make mortgage loans and generate income from them. Depending on its distribution of income, it may qualify for the same type of special tax treatment as a regulated investment company. REITS are not flow-through vehicles as are DPPs. Reference: 7.1.7 in the License Exam Manual
Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) Commission B) Redemption fee C) Sales load D) 12b-1 fee
B)Redemption fee If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares. Reference: 7.1.2.2 in the License Exam Manual
One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be: A) no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains. B) no current tax, but any withdrawals would be taxed as ordinary income. C) no current tax on the portion applicable to the mutual funds; ordinary income on the cost basis of the company stock; and long-term capital gains on the unrealized appreciation of the company stock when it is sold. D) current tax at ordinary income rates on the unrealized appreciation of the company stock, ordinary income rates on the balance when withdrawals are taken.
B)no current tax, but any withdrawals would be taxed as ordinary income. As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (Net Unrealized Appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long term capital gain rates on the appreciation whenever the stock was sold. Reference: 20.4.3* in the License Exam Manual
All of the following statements are true regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers EXCEPT: A) the contract must describe the discretionary powers the client is granting to the adviser. B) the contract must be written in 10-point type or larger. C) the contract must describe the services the adviser will provide to the client. D) the contract may be for an initial period of more than 1 year.
B)the contract must be written in 10-point type or larger. There is no specific requirement in NASAA's Model Rule concerning type size. Contracts must describe the adviser's services, discretionary powers, and initial term period, which may be for any period of time. Reference: 3.14 in the License Exam Manual
If an investment adviser representative is engaged in criminal activity while violating a rule under the Uniform Securities Act, but had no knowledge of the rule violated, the maximum penalty that may be imposed is a: A) three years in prison and a fine of three times the amount of the loss. B) $5,000 fine and three years in prison. C) $5,000 fine. D) $10,000 fine and two years in prison.
C)$5,000 fine. The maximum penalty for criminal violations is $5,000 and/or 3 years imprisonment. However, no prison sentence can be imposed if the person can prove he had no knowledge of the rule being violated. Reference: 2.15.2 in the License Exam Manual
Two contrasting styles of portfolio management are growth and value. Which of the following pairs best describes the contrast? A) High P/E ratio/low current ratio B) Capital structure/earnings per share C) Earnings momentum/book value D) Dividend yield/dividend payout ratio
C)Earnings momentum/book value One of the important metrics to growth managers is the rate at which the company is growing. Earnings momentum is an excellent indicator of that. On the other hand, the primary tool of the value manager is the company's financial statements. Value managers frequently look for companies whose market price is less than their book value. Perhaps you misread "low current ratio" as "low P/E ratio" (which would have been a correct contrast). This is why you have to read each word carefully. Reference: 16.3.2 in the License Exam Manual
One of the quantitative measurements of investment performance is total return. In performing this computation, it would not be necessary to know: A) capital growth during the period. B) purchase price. C) length of time the investment was held. D) income received during the period.
C)Length of time the investment was held. The computation of total return is the sum of all income plus capital growth divided by the original purchase price. It is not a function of time, so the holding period is not required. Reference: 19.2.1� in the License Exam Manual
Which of the following expounds that including non-correlated assets in a portfolio can reduce certain risks? A) Efficient market hypothesis (EMH) B) Monte Carlo simulations C) Modern portfolio theory (MPT) D) Capital asset pricing model (CAPM)
C)Modern portfolio theory (MPT) Instead of emphasizing particular stocks, modern portfolio theory (MPT) focuses on the relationships among all the investments in a portfolio. This theory holds that specific risk can be diversified away by building portfolios of assets whose returns are not correlated. Reference: 16.5.2 in the License Exam Manual
One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of a: A) small-cap stock. B) cumulative preferred stock. C) large-cap stock. D) AAA corporate bond.
C)large-cap stock. The dividend growth model is a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future. Therefore, it can only be applied to a corporation whose dividends might be expected to increase. It is far more likely that a large-cap stock will be paying dividends than a small-cap. Bonds don't pay any dividends and, in any event, their interest, just like the dividends on preferred stock, is fixed; there is no growth possible. Reference: 4.1.7.1 in the License Exam Manual
Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include each of these EXCEPT A) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b) B) the issuer must take "reasonable steps" to verify that all purchasers are accredited investors while no such obligation falls upon issuers in a 506(b) offering C) securities issued under Rule 506(c) are federal covered while those under Rule 506(b) are not D) all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501 whereas Rule 506(b) permits a limited number of sophisticated, but not accredited investors
C)securities issued under Rule 506(c) are federal covered while those under Rule 506(b) are not Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered to be a federal covered security. Reference: 1.5.2 in the License Exam Manual
Which of the following statements best defines inflation risk? A) The uncertainty that one will not receive back an equal amount of principal in the future. B) The uncertainty that a given amount invested today in a fixed income instrument will not generate the same nominal income in the future. C) The uncertainty that the nominal return of an investment will not outpace the overall market. D) The uncertainty that the value of an investor's assets will decrease as measured by real dollar purchasing power.
D) The uncertainty that the value of an investor's assets will decrease as measured by real dollar purchasing power. Inflation risk is the uncertainty that an investment's purchasing power will decrease due to the shrinking value of the currency. An investor's real rate of return is the nominal rate less the inflation rate. Reference: 13.1.3 in the License Exam Manual
Under the Uniform Securities Act, which of the following statements is TRUE regarding the Administrator's power to deny or revoke an exemption? A) In a proceeding to revoke an exemption, it is assumed that the exemption applies and the Administrator must prove that it does not apply. B) The revocation may apply to a period prior to the date on which the revocation order was issued. C) The Administrator may not revoke the exemption of securities issued by a nonprofit corporation. D) An order revoking an exemption may be issued without prior notice to the persons affected.
D)An order revoking an exemption may be issued without prior notice to the persons affected An order revoking an exemption, sometimes referred to as a summary order, may be made effective without prior notice. The injured party may request a hearing in writing, which must be granted within 15 business days of receipt of the request. No denials or revocations may be made on a retroactive basis. The Administrator does have the power to revoke the exemption granted to securities issued by nonprofit entities. In any proceeding, the burden of proving an exemption is on the person claiming it, not the Administrator. Reference: 2.8 in the License Exam Manual
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may loan money to a client if: I. the investment adviser is a financial institution in the business of loaning money. II. the investment adviser is also a broker-dealer. III. the client is an affiliate of the investment adviser.
D)I, II and III. Loaning money to a client is unethical conduct, unless the investment adviser is a financial institution in the business of loaning money, or the client is an affiliated person of the adviser. The broker-dealer is included because broker-dealers lend money to clients in the form of margin loans. Therefore, they are considered to be in the business of loaning money. Margin loans are considered an integral component of the broker-dealer's business of effecting securities transactions. Reference: 3.17 in the License Exam Manual
If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is TRUE? A) The investment adviser must notify the Administrator. B) No notice to the Administrator is required. C) Both the representative and the investment adviser must notify the Administrator. D) The representative must notify the Administrator.
D)The representative must notify the Administrator. It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.
A discussion referring to blue-sky laws would include all of the following EXCEPT: A) a state securities law that grants state securities Administrators the power to deny or revoke a broker-dealer's or an agent's registration within its state. B) state laws that are designed to protect the public against fraud in securities sales within a state. C) forms requiring issuers selling securities in the state to comply with state securities laws. D) the Securities Act of 1933 and Securities Exchange Act of 1934.
D)the Securities Act of 1933 and Securities Exchange Act of 1934. Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws. Reference: 2.1.1 in the License Exam Manual
