66 Incorrect Q 8/27
A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Complex trust B) Simple trust C) Charitable lead trust D) Charitable remainder trust
A) Complex trust Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.
Which of the following would probably not be an attractive investment during periods of rising inflation? A) Real estate B) Oil stocks C) Corporate bonds D) Gold
C) Corporate bonds Interest rates tend to increase with inflation. Rising interest rates cause the values of all fixed-income securities to decline. That is why bonds are not an attractive investment during periods of inflation. Values of real estate, gold, and natural resources tend to rise with inflation.
If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in which of these? GOs Equity securities Corporate bonds REITs A) I and II B) II and III C) I, II, III, and IV D) I only
C) I, II, III, and IV A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.
Your client's wife retired as a third grade teacher in 2019. She was covered under the school system's 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 73 date? A) RMDs may be deferred only if the current employer offered a 403(b) plan. B) RMDs may never be deferred for those who were participants in a 403(b) plan. C) RMDs may be deferred only from the plan sponsored by the current employer. D) RMDs may be deferred as long as the individual is employed on a full-time basis.
C) RMDs may be deferred only from the plan sponsored by the current employer. The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were two different school systems with 403(b) plans.
Which of the following is a motivation for creating structured products? A) Structured products reduce costs to issuers. B) Structured products are less expensive for investors to buy and trade. C) Structured products improve market completeness. D) Structured products improve profits for broker-dealers.
C) Structured products improve market completeness. The primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer.
Federal covered securities, as defined under the Uniform Securities Act, A) must be registered with the SEC before they can be offered in the state B) must be registered in the state before they can be offered within the state C) would not include securities senior to a common stock listed on the NYSE D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940
D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered.
An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A) must notify the client that the recommendation was based on the broker-dealer's research document. B) must share the commission with the broker-dealer that prepared the research document. C) must provide the client with a copy of the research document. D) need not disclose the source of the information.
D) need not disclose the source of the information. If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as support for its own recommendation to its client, it does not have to disclose this information.
It would not be considered a prohibited or unethical business practice for a federal covered investment adviser to A) use an endorsement from a bona fide client with the proper caveat that this individual's results may not be typical, and it is possible they may not be reproduced in the future. B) charge a performance-based fee to an individual who meets the SEC's accredited investor standard detailed in Rule 501 of Regulation D. C) pay a nominal fee, based on account size, to certain professionals as a way of thanking them for client referrals. D) pay a nominal fixed fee to unrelated third parties as a way of thanking them for endorsements.
D) pay a nominal fixed fee to unrelated third parties as a way of thanking them for endorsements. Referrals from unaffiliated third parties are considered endorsements under the investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect. Compensation for endorsements cannot be scaled based on the size of any referred account. That would be considered asset-based compensation and would require registration as an IAR. Bona fide clients give testimonials; it is only unrelated third parties who give endorsements. In order to charge a performance-based fee, investors must have a net worth in excess of $2.2 million, while they can meet the accredited investor standard when their net worth exceeds a much lower amount: $1 million.
Under the Uniform Securities Act, a guaranteed security is protected by someone other than the issuer against loss of all of these except A) dividends on equity securities. B) principal repayment at maturity on debt securities. C) interest on debt securities. D) principal on equity issues.
D) principal on equity issues. Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not protect against market loss. Please note that capital gains are never included in this type of guarantee.
Registering with a state Administrator is required for which of these? I. An adviser who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publications of general and regular circulation II. Investment adviser representatives of federal registered advisers who have natural person clients and have a place of business in the state III. An investment adviser who has no place of business in the state and has five advisory clients in the state IV. A person who is an officer of a federal registered investment adviser who has no natural person clients A) II only B) I, II, III, and IV C) I only D) II and III
A) II only Under federal law, publishers of bona fide newspapers, magazines, and financial publications of general and regular circulation are excluded from the definition of an investment adviser. Under state law, the publication of investment advice that is not based on the specific investment situation of each client excludes the publisher from the definition of an investment adviser. Based on these definitions, the publisher of an investment advisory newsletter providing only impersonal investment advice available only on a subscription basis is not required to register under federal or state law. The investment adviser representatives of a federal registered adviser are required to register in each state in which they have a place of business. The Uniform Securities Act provides a de minimis standard exemption from state registration for advisers who have no place of business in a state and have fewer than six clients residing in the state. A person employed by and supervised by a federal registered investment adviser who is not an investment adviser representative with natural person clients (as defined by federal law) is not required to register with state Administrators.
Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employee pension fund with assets of $4 billion. What are this firm's registration requirements? A) It may choose to register with either the D.C. Administrator or the SEC. B) It can only register with the SEC because the District of Columbia is not a state. C) It must register with the SEC because the AUM is so high. D) It does not have to register because its only client is the U.S. government.
A) It may choose to register with either the D.C. Administrator or the SEC. Under the provisions of the Dodd-Frank Act of 2010, pension consultants providing advisory services to employee benefit plans having at least $200 million of assets may register with the SEC (even though the consultant does not itself have those assets under management). JAW's only client has $4 billion in assets, well in excess of the minimum of $200 million required to allow the firm to choose between state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.
Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 in 2023 from his IRA. However, a distribution of only $8,000 has been made. Assuming that Jason does not correct the problem, what is the dollar amount of penalty that may be assessed in this situation? A) $2,000 B) $500 C) $4,000 D) $200
B) $500 The penalty for failure to make the correct amount of required minimum distribution is 25% of the difference between the minimum required amount and the actual distribution. In this case, this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0 reduced the penalty to 25% or even as low as 10% if promptly corrected.
One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation? A) A deferred annuity B) A donor advised fund C) A Roth IRA D) A Section 529 plan for grandchildren
B) A donor advised fund A donor-advised fund operates as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. As such, contributions to the fund will generate a current tax deduction for the customer. Section 529 plans offer tax-deferred growth but not a current tax deduction. Roth IRAs offer the potential of tax-free income, but current contributions are not tax-deductible. A deferred annuity means the earnings in the account are deferred until the money is withdrawn. Once again, there is no current tax benefit. Remember, every annuity on the exam is nonqualified unless something in the question indicates otherwise.
Which of the following is (are) advantages of irrevocable insurance trusts? Provide estate liquidity. Insurance proceeds are removed from the estate of the insured for tax purposes. The insured has the flexibility to alter the trust arrangements. Once set up, no changes may be made. A) I and III B) I and II C) III and IV D) II and IV
B) I and II As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate, thereby saving estate taxes. The trust is irrevocable—no changes can be made, and this is one of the few disadvantages.
Bachelier and Louis Associates, BALA, is an investment adviser registered in States W, X, and Y. BALA is completing the Form ADV to register in State Z. Which of these would be automatically registered as an investment adviser representative in State Z simultaneously with BALA's effective registration? A) Janice, the director of the company's information technology (IT) department B) Louise, vice president of the company's sales department C) Wilson, the company's legal counsel D) Thomas, an IAR currently registered in States W, X, and Y
B) Louise, vice president of the company's sales department The Uniform Securities Act provides that registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. Supervising the sales department requires the individual to be an IAR. As an officer, Louise is listed on Form ADV and receives the automatic registration in the new state. This is limited to those IARs who are in these specific positions or who are performing these functions. There is no reason for the head of an investment adviser's IT department to be an IAR.
Your customer owns 1,000 shares of the XYZ $100 par 5½% callable convertible preferred stock convertible into four shares of XYZ common stock at $25. What should she be advised to do if the board of directors were to call all the preferred at 106 when the XYZ common stock is trading at $25.50? A) Hold the preferred stock to continue the 5½% yield. B) Present the preferred stock for the call because the call price is $4 above the parity price. C) Convert her preferred stock into common stock because it is selling above parity. D) Place irrevocable instructions to convert the preferred stock into common stock and sell short the common stock immediately.
B) Present the preferred stock for the call because the call price is $4 above the parity price. If the preferred stock is called, the client will receive $106 per share or $106,000. Tendering the preferred stock will provide the highest value. The value of converting the preferred stock into four shares of common is worth $102 (4 × $25.50 = $102), which is less than the call value of $106. On the 1,000 shares, this is a $4,000 difference. The dividends will cease on the call date if the preferred stock is held beyond the call date.
When communicating with clients, which of the following designations may not be used? A) CFP® B) RIA C) MBA D) CLU®
B) RIA The initials RIA do not represent a specific designation and may not be used in communications with clients. Registered investment adviser is the proper term. The other designations are permitted, assuming, of course, that they were earned.
A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) The new spouse is entitled to more benefits than the ex-spouse. B) She is entitled to the same Social Security benefits as the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to splitting the benefits with the ex-spouse.
B) She is entitled to the same Social Security benefits as the ex-spouse. When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.
Which of the following would not be considered evidence of custody of a client's funds or securities? A) Client funds and securities are kept at a qualified custodian. B) The investment adviser has discretionary authority over the client's account. C) The adviser writes checks on the client's account to pay for the client's securities. D) The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made.
B) The investment adviser has discretionary authority over the client's account. Custody means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.
To which of the following situations does the transaction exemption apply? A) City of Chicago bond offering B) The sale of an estate's holding of IBM shares by an executor C) Canadian government bond offering D) Offering an unregistered security to a maximum of 12 individual customers in a 10-month period
B) The sale of an estate's holding of IBM shares by an executor An exempt transaction relieves the security from any state advertising or registration requirements. Transactions by executors and estate administrators are examples of exempt transactions. Municipal and government bonds are exempt securities, and whether or not they are exempt transactions depends on to whom or how they are sold (that information is not given in this question). The sale of the unregistered stock is not an exempt transaction (private placement) because the USA only permits offers to a maximum of 10 noninstitutional investors over a 12-month period.
As the correlation between any 2 assets decreases, A) the standard deviation of the portfolio increases B) the benefits of diversification increase C) the benefits of diversification decrease D) greater risk is assumed
B) the benefits of diversification increase One of the best ways to increase the benefits of portfolio diversification is to add assets that are negatively correlated.
Regarding the treatment of estates by the IRS, it would not be correct to state any of the following except A) estates may be valued either at date of death or 9 months later using the alternative valuation option. B) the maximum tax rate on estates is the same as that on gifts. C) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion. D) income received by the estate is reported on Form 1040.
B) the maximum tax rate on estates is the same as that on gifts. The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; nine months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.
An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is A) $32.50. B) $28.25. C) $325.00. D) $282.50.
C) $325.00. The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325.
Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 20 B) 10 C) 45 D) 30
C) 45 In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date. On the other hand. when it comes to state registration, the registration of all securities professionals becomes effective at noon on the 30th day after the filing of a complete application. Remember, federal covered advisers never register with any state; they only register with the SEC.
Which of the following statements about balance sheets are true? Balance sheets provide a snapshot of a company's financial position on a given date. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. Balance sheets provide a record of a company's earnings over a given period. A) I, II, and III B) II and III C) I and II D) I and III
C) I and II A balance sheet shows a company's assets, liabilities, and stockholders' equity on a specific date. The financial statement that reflects a company's operating activities and earnings over a period of time is the income statement.
The term sale includes which of the following? A contract of sale A contract to sell The disposition for value of an interest in a security A warrant (for common stock of the issuer) given with the purchase of a bond A) II and III B) I, III, and IV C) I, II, III, and IV D) I and III
C) I, II, III, and IV Sale, used interchangeably with sell, is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. The sale of a corporate bond is a sale with or without a warrant attached and involves the disposition of an interest in a security of the issuer. Because the distribution of the warrant is conditional upon the purchase of the bond, the acquisition of the warrant is considered to be a sale.
Which of the following financial statement entries is eliminated when calculating the quick ratio? A) Cost of goods sold B) Accounts receivable C) Inventory D) Notes payable
C) Inventory The quick ratio (sometime referred to as the quick asset ratio or the acid test ratio) is calculated by subtracting the current liabilities from the quick assets. The quick assets are all of the current assets with the exception of the inventory. Cost of goods sold is an income statement item and is irrelevant here.
Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that A) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age. B) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater. C) Mary is not entitled to any of Charlie's Social Security benefit. D) Mary is entitled to full spousal benefits because they were married for at least 10 years.
C) Mary is not entitled to any of Charlie's Social Security benefit. When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in A) States A and C. B) States B and C. C) States A and D. D) States A, B, and C.
C) States A and D. In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).
Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) a growth stock. B) an S&P 500 Index fund. C) a corporate bond. D) an apartment building.
C) a corporate bond. Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency, and investors in growth stocks anticipate long-term capital gains, which are taxed at a lower rate than ordinary income.
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 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 as long as the only participants are the existing customers without their friends. D) must not receive any compensation, direct or indirect.
C) does not have to be registered in the state as long as the only participants are the existing customers without their friends. 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. In this case, if the friends of the existing customers were permitted to attend, Gervaise would most likely have to register.
The portfolio of a client of an investment adviser began the year with a market value of $1.2 million. Sixty percent of the portfolio was in equities, thirty percent in bonds, and the remainder in cash. It was a good year for equities and, at the end of the year, the total value of the account was $1.5 million. This resulted in the portfolio manager liquidating approximately $100,000 of stock and placing the money into bonds. Given this information, it is most likely that this manager's investment style is A) contrarian. B) rebalancing. C) strategic asset management. D) tactical asset management.
C) strategic asset management. Strategic asset management, which is basically a passive strategy, views the market on a long-term basis. The manager does recognize that, over the period of one year, market and economic changes can result in managed portfolios becoming out of balance. Although we do not know the actual numbers, the fact that the manager is selling stock and buying bonds indicates that the portfolio mix no longer matches what was originally designed. Bringing the portfolio back into balance is the process of rebalancing. So, why isn't rebalancing a correct choice? It is not correct because rebalancing is not a management style; it is a feature of the strategic or passive style of portfolio management. Tactical asset management, a good example of which is market timing, looks at the short run changes and moves in and out of positions as necessary. That results in buying and selling far more frequently than once per year. The contrarian style is doing the opposite of what the majority does. That is, contrarians are selling when others are buying and vice versa.
One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate A) which investment style to be used for managing the portfolio B) the ability to decide on the specific securities to be acquired C) the amount and timing of distributions D) the selection of different managers for different asset classes
C) the amount and timing of distributions The UPIA allows a fiduciary to delegate the investment decisions to a qualified third party. Determining distribution amounts and timing is not part of portfolio management and can only be done by the fiduciary (trustee).
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) 22.2% B) 64.3% C) 40% 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 be shown that way on the exam.
A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true? A) Material changes to wrap fee programs must be filed promptly with the Administrator. B) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end. C) Information in Appendix 1 of Form ADV, Part 2A must also be contained in client disclosure documents. D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.
D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV, Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.
Howard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) States P, D, M, and O. B) States D and M. C) State P. D) States P, D, and M.
D) States P, D, and M. Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintain a place of business, as well as any other state in which they serve more than five retail clients (the de minimis exemption). With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded, so registration is required there. The fact that the IA's principal office is in State O has no bearing on Howard, and with only one retail client there, he qualifies for the de minimis exemption.
Which of the following statements regarding grantor trusts is not correct? A) If the grantor has the power to revoke the trust, he is treated as the owner of the trust. B) If the grantor can receive income from the trust, he is treated as the owner of the trust. C) If the grantor can control the beneficial enjoyment of the trust, he is treated as the owner of the trust. D) The grantor may be taxed on trust income only if the grantor actually received the income.
D) The grantor may be taxed on trust income only if the grantor actually received the income. The first step in answering this question is to recognize that it is looking for the incorrect statement (not correct). The key to the taxation on a grantor trust is the matter of control. As long as the grantor has the power to determine the beneficiary or to revoke the trust, the grantor is taxed on the trust's income. Obviously, if the income is paid to the grantor, there is tax liability. But, even when the grantor does not actually receive the income and controls who does, it is considered constructive receipt, and it is the grantor's tax liability.
