Week 2
The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a code of ethics. Which of the following is charged with the responsibility of enforcing that code? A) Chief compliance officer of the IA B) The SEC C) Each individual IAR D) Administrator of the state in which the IA has its principal office
A. Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the code of ethics is being followed. Although each individual IAR must follow that code, it is the CCO with the supervisory responsibility. U7LO6
When a security is being registered under coordination, all of the following are required EXCEPT A) filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC B) payment of the appropriate fee C) a description of the proposed use of the proceeds of the underwriting D) prompt filing with the Administrator of any amendments filed with the SEC
A. The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least 2 full business days before the effective date, not with the initial filing. U4LO3
An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has A) less reinvestment risk and more interest rate risk. B) more interest rate risk and less liquidity risk. C) more liquidity risk and less interest rate risk. D) more reinvestment risk and less interest rate risk.
A. The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk. However, it has more interest rate risk (longer duration) than the Treasury note. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity. U13LO11
Which of the following statements describes an advantage of a Roth IRA over a traditional IRA? A) There are no annual contribution limits once an individual attains age 59½. B) The required minimum distribution date rules do not apply if the distribution is made in the form of an annuity. C) Qualifying distributions are received free of income tax if a holding period and age requirement is met. D) The AGI limits for contributions are the same as those for traditional deductible IRA contributions.
C. A Roth IRA distribution is tax free if the distribution is made on or after the owner attains age 59½ (or other specified events), and a 5-year holding period requirement is met. The contribution limits are aggregated with that of a traditional IRA regardless of age; however, there are AGI limits with a Roth IRA but none with a traditional IRA. U24LO1
Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty? A) When the account is fully funded with nondeductible contributions B) A distribution taken at age 55 if the owner is retired C) A distribution taken to satisfy the terms of a court-ordered property settlement D) When the distribution is paid in equal annual amounts over the owner's life
D. A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs. U24LO4
Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan, and after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) she would have to obtain Mary's permission first B) she would be engaging in an prohibited practice C) both Susan and Mary would have to disclose the cash payment to Amanda D) only Susan would have to make disclosure to Amanda
D. Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward. U7LO1
When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact EXCEPT A) a drop in the value of equity securities held in the fund's portfolio B) a capital gains distribution C) interest payments made on debt securities held in the fund's portfolio D) a greater value of shares being redeemed than purchased
D. Because shares are purchased and redeemed at NAV, net redemptions (this case) or net purchases have no effect on the net asset value of the fund's shares. However, receipt of cash in the form of interest payments causes assets to increase, while falling equity prices leads to a decrease. Distributions of capital gains (or dividends) represents a payment of cash, thus decreasing the amount of assets on hand. U14LO3
Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? 1. Roth IRA contributions made for the year 2. High income level 3. Participation in an employer-sponsored plan 4. Marital status
The maximum annual contribution applies as a total among your Roth and your traditional IRA. So, if the maximum is $6,000 and you put $3,000 into your Roth, you could only put $3,000 into your traditional IRA. You could do a total of $7,000 if you were 50 or older. High income level and participation in an employer-sponsored plan will affect the amount you may deduct but not the amount you may contribute. Even though a married couple can have their own IRAs or set up a spousal IRA if one is nonworking, that doesn't reduce the amount that either spouse can contribute. U24LO1
One of your new clients has only been working for 3 years but is already interested in retirement planning. In order to be fully eligible for Social Security, the client must A) be at least age 62. B) have a minimum of 40 covered quarters of employment. C) have at least 40 years of employment. D) have minimum credited earnings of at least $20,000 per year.
B. Current Social Security requirements are a minimum of 40 covered quarters of employment (10 years). A covered quarter is a calendar quarter during which the worker earned a minimum amount ($1,300 in 2017) which is indexed and, therefore, would never be tested. Reduced retirement benefits may begin as early as age 62, but disability payments can begin much, much earlier, as long as there have been 40 covered quarters. There is no minimum annual earnings limit. U21LO5
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) the issuer must take "reasonable steps" to verify that all purchasers are accredited investors in a 506(c) offering, while no such obligation falls upon issuers in a 506(b) offering B) securities issued under Rule 506(c) are federal covered, while those under Rule 506(b) are not C) 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 D) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b)
B. Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered a federal covered security. U4LO3
A person who has no place of business in this state would not be considered a broker-dealer if he effects transactions in this state exclusively with all of the following except A) insurance companies. B) the issuers of the securities involved in the transaction. C) investment advisers. D) other broker-dealers.
The Uniform Securities Act excludes from the definition of broker-dealer, a person who has no place of business in this state if he effects transactions in this state exclusively with or through 1. the issuers of the securities involved in the transactions, 2. other broker-dealers, or 3. banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers. Please note that investment advisers are not included in this list. What is confusing is that the USA offers almost the exact same exclusion for investment advisers and that list includes other investment advisers as well as broker-dealers. U3LO2
Which of the following statements is (are) TRUE regarding the jurisdiction of the SEC under the Securities Exchange Act of 1934? 1. The SEC has jurisdiction over exchanges and SROs. 2. The SEC has jurisdiction over broker-dealers, investment advisers, and associated persons that are required to be registered under federal law. 3. The SEC has jurisdiction over banks and
1&2.The SEC was created by the Securities Exchange Act of 1934 and has the responsibility of administering all federal securities laws. The SEC has jurisdiction over exchanges, SROs, and all persons required to be registered under federal law. The SEC does not enforce state securities statutes, nor does it have jurisdiction over banks or savings and loans regarding their securities activities. Banking authorities, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation, and others, regulate banks and savings and loans. U3LO1
According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are TRUE? 1. It must be filed with the state Administrator. 2. A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, 6 or more months in advance. 3. Certain minimum business and education qualifications must be met before an investment adviser can file. 4. It may be used to satisfy the brochure requirements of the act.
2&4. An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC. In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement. A balance sheet must be submitted with Part 2 if the adviser receives "substantial" prepayments of fees. Part 2 may be used as an investment adviser's disclosure brochure to clients. U1LO5
All of the following are exempt securities under the Uniform Securities Act EXCEPT A) securities issued by a federal savings and loan association B) securities issued by a bank holding company C) securities issued by the Canadian government D) securities issued by a Canadian province
B. Securities issued by a bank are exempt. However, this answer refers to a bank holding company that is considered to be an ordinary company subject to state registration if not otherwise exempt. U4LO3
Under the provisions of the USA, all of the following transactions are exempt EXCEPT A) transactions by executors B) liquidation of a security pledged as collateral for a loan C) a transaction pursuant to an offer directed by the issuer to no more than 10 individual investors in the state within a 12-month period, as long as no payment is made D) transactions in preorganization certificates if no commission is paid, no subscriber makes any payment, and the number of subscribers does not exceed 10
C. A transaction pursuant to an offer by an issuer to no more than 10 noninstitutional persons in the state would qualify as a private placement and would be exempt. However, unlike a preorganization certificate, the subscribers do pay for their purchases. All the other transactions are exempt. U4LO3
Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has a client in State X, registration as an IAR would be required in State X. B) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. C) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. D) because Sharon's client is a bank, she does not have to register as an IAR in State X.
B. The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office. U2LO2
To register a sole proprietorship as an investment adviser in a state, the application for initial registration (Form ADV) must be filed with the appropriate party. This application must include all of the following EXCEPT A) a consent to service of process. B) the appropriate fees. C) a copy of the articles of incorporation for the business. D) any information to be furnished or disseminated to any client or prospective client.
C. Articles of incorporation only apply to corporations. Sole proprietorships are not incorporated. To register as an investment adviser in a state, Form ADV is filed with the Administrator or with a central registration depository designated by the Administrator. The application must include, among other things, a consent to service of process, appropriate fees, and the brochure or any other information that will be used to solicit clients. Sole proprietorships are not incorporated. U1LO5
When would an individual employed by an issuer to sell its stock to the public have to register as an agent? A) When the employer is a savings institution B) When the transaction is exempt C) When the employer is an insurance company D) When the employer is the U.S. Treasury
C. The question is not looking for the exemption - it wants to know when the individual must register. There are two instances where an individual employed by the issuer to sell its securities is not considered an agent. The first is when the issuer is one of 5 specific named cases. That list includes savings institutions (banks), and the federal governments of the United States and Canada, as well as any of their political subdivisions. The list does not include insurance companies. The second case is when the securities are being sold in an exempt transaction. From a practical standpoint, the most common case where this occurs is when the issuer makes a private placement of its shares. U3LO4
A securities trade is made. Under normal circumstances, all of the following would be noted on the order ticket EXCEPT A) the registered agent who accepted the order B) the time stamp of the time of order submission C) the name of the individual who transmitted the order D) the account number
C. Transmitting an order is a clerical function, and we don't put that on the order ticket. A typical ticket will include the account for which the trade is being made, the registered individual placing the order for the client, time stamps for entering and execution (or cancellation), execution price, and terms and conditions of the order (market, limit, etc.). U22LO6
