9/1/1 practice quiz review

Louise Lawson, one of your high net worth clients, calls you and tells you her friend mentioned something about having to pay a special tax called AMT. When reviewing her extensive portfolio with her, you would explain that the only securities she is holding that could lead to an AMT issue are the

$100,000 of Atlanta Airport Revenue bonds due 1/2030 When an individual has tax preference items, AMT becomes an issue. One of the securities that generates preference income is a private activity bond, a revenue bond that is issued to benefit certain facilities such as airports, sports facilities and hospitals. School district bonds are GO bonds and those are not subject to AMT. Income from corporate securities, whether they be debt or equity, is never considered for AMT.

One of your clients owns an equity index annuity with a participation rate of 85% and a cap of 11%. During the past 12 months, the index used in the computation showed a gain of 12.80%. As a result, the client's account value was credited with a gain of

10.88% The client is entitled to participate in 85% of the 12.80% gain with a maximum (capped) limit of 11%. Computing 85% of 12.80% gives us 10.88% which is below the 11% cap.

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

A statement of the maximum and minimum proposed offering prices and maximum underwriting discounts and commissions must be on file with the Administrator for two full business days prior to the date the federal registration statement becomes effective. One of the requirements of coordination is that a statement of the maximum and minimum expected offering prices and maximum underwriting compensation must be on file with the Administrator for at least two full business days prior to the effective date.

You are meeting with a client and the discussion turns to life insurance. When asked about annual renewable term insurance, you would reply that it has A) an increasing premium, level face amount, no cash value B) a fixed premium, level face amount, no cash value C) a fixed premium, reducing face amount, little cash value D) an increasing premium, increasing face amount, no cash value

Annual renewable term life insurance has a level face amount, no cash value and, because the premium is based on the attained age, the premium increases each year on the renewal date.

What is the term used to describe a common stock issued below its par value?

Assessable. Assessable stock is a stock that is issued below its par or stated value. The issuer and/or creditors have the right to assess the shareholder for the deficiency. All stock issued today is nonassessable.

An investment adviser is analyzing 4 bonds of similar quality for a client. Bond A has a coupon of 6%, matures in 12 years, and is currently priced at 50. Bond B has a coupon of 8%, matures in 9 years, and is currently priced at 50. Bond C has a coupon of 4%, matures in 18 years, and is priced at 45. Bond D has a coupon of 12%, matures in 6 years, and is priced at 50. Based on NPV, which of these bonds represents the better value?

Bond C Because you don't have the proper calculator to do a real PV calculation, NASAA expects you to use the rule of 72. Remember, under that rule, dividing 72 by the interest rate tells you the number of years it will take for a deposit to double. Or, if you divide 72 by the number of years, it will tell you the interest rate required for a present deposit to double. Finally, a positive NPV is when you can buy the bond for less than its present value. So, let's look at all 4 choices. Bond A, at 6%, takes 12 years to double. That's exactly the time to maturity, so the PV of this bond should be approximately $500 (a quote of 50). The same is true of bonds B and D—their PV should be approximately $500 (72 ÷ 8% = 9 years; 72 ÷ 12% = 6). Because their price is the same as the PV, the NPV is zero. However, with bond C, 72 divided by 4% equals 18 years, so this bond also has a PV of approximately $500 (50), but it can be purchased for less than that: 45 ($450). Therefore, with an NPV of $50, bond C is the best value.

Under the USA, which of the following fits the definition of a sale?

Contract to dispose of a security. Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers.

Which of the following entities are considered to be exempt issuers under the Uniform Securities Act? State of Michigan. City of Calgary, Alberta. City of Birmingham, UK. Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC.

I and II. Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign national governments with which the US has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are exempt issuers, but, unregistered hedge funds are not, regardless of with whom their advisers are registered.

Which of the following is (are) TRUE regarding qualified pension plans? They must not discriminate. They must have a vesting schedule. They must be in writing. Every month the employer must update the current status of all accounts.

I, II and III. An employer must update the status of all employees at least annually, not monthly.

An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must: -notify the Administrator by close of business after the day of discovery. -file a report of its financial condition no later than close of business the day after notification. -include in the report of financial condition a statement as to the number of client accounts. -cease doing business.

I, II and III. As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts.

As enumerated in the USA, exempt securities would include those issued by -a sovereign foreign government with which the US maintains diplomatic relations -any credit union organized and supervised under the laws of this state -a corporation based in Toronto, Ontario whose common stock trades on the Toronto Stock Exchange -a promissory note, draft, bill of exchange, or bankers' acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization

I, II and IV Although securities issued by the Canadian government or any political subdivision are exempt, those issued by Canadian corporations would generally only be exempt if trading on U.S. exchanges as federal covered securities.

Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Mr. Kane to: - fail to make prompt delivery of certificates when requested by the customer - fail to obtain written authorization for a discretionary account prior to the first trade in that account - accept an order from a client's spouse without written trading authorization prior to receiving the order - share commissions with another agent registered with Garden City Securities

II and III This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.

Which of the following statements about plan fiduciaries under ERISA are TRUE? Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. Plan fiduciaries must ordinarily diversify plan investments. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties.

II and III. Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.

In cases of fraudulent sales practices or advice with respect to securities, state securities Administrators may: not take enforcement action against federal covered investment advisers. take enforcement action against federal covered investment advisers. not take enforcement action against state-registered investment advisers. take enforcement action against state-registered investment advisers.

II and IV. State securities Administrators have jurisdiction over any securities transaction or investment advice that involves fraud, whether or not the person involved is a federal covered investment adviser. If it involves a security, there are no exemptions from the Uniform Securities Act for fraud.

Which investment style does NOT take into consideration whether a specific security is under or overvalued?

The style known as indexing merely attempts to mimic the underlying index. Therefore, security selection is not based upon any fundamental (or technical) parameters, but only changes made to that index.

All of the following involve a sale over which the state securities Administrator would have jurisdiction EXCEPT:

a bona fide pledge of a foreign corporation's common stock for a loan. When a security is pledged for a loan, it is not a sale. A stock dividend is not a sale, provided nothing was given to the issuer in return for the shares. However, the sale of shares that were acquired as the result of a stock dividend is a sale. Contracts to sell are considered sales under the USA. A gift of assessable stock is considered a sale as the board of directors or creditors could assess the shareholders for future payments.

Under the USA, all of the following are exempt transactions EXCEPT: A) transaction executed by a trustee in bankruptcy. B) a sale of a primary offering registered with the SEC. C) unsolicited customer orders. D) isolated nonissuer transactions.

a sale of a primary offering registered with the SEC. In almost every instance, an issuer transaction-that is, one for the benefit of the issuer-will not be considered an exempt transaction. Exempt transactions include isolated nonissuer transaction; transactions between an issuer and an underwriter; transactions by an executor, Administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements.

All of the following statements regarding registration of broker-dealers under the Uniform Securities Act are true EXCEPT A) a successor firm is exempt from paying registration fees until the renewal date B) no broker-dealer can be required to meet financial requirements in excess of those of the SEC C) broker-dealers with discretion over client accounts may be required to post a surety bond D) a successor firm is exempt from filing a consent to service of process until the renewal date

a successor firm is exempt from filing a consent to service of process until the renewal date When one firm succeeds another, no fees are due until renewal date. However, the successor firm must file a consent to service of process at the time it registers. Broker-dealers with discretionary authority may be required to post a surety bond or maintain minimum net capital. However, no state can impose financial or recordkeeping requirements that exceed those of the SEC.

An analytical tool used to predict the future price of a common stock using projected dividends is the:

dividend discount model. There are two widely accepted forms of common stock price projection using dividends - the dividend discount model and the dividend growth model.

All of the following are characteristics of exchange-traded notes (ETNs) EXCEPT A) they can be bought or sold during normal trading hours on an exchange B) they are issued by financial institutions such as banks C) their value can be impacted by changes in the credit rating of the issuer D) each note is secured by a single specified asset

each note is secured by a single specified asset Exchange-traded notes (ETNs) are unsecured debt securities generally issued by financial institutions such as banks. Prices can be impacted by changes in the issuer's credit rating, even though the value of the underlying securities has not changed. Like exchange-traded funds (ETFs) or other exchange-traded products, they can be bought or sold during normal exchange trading hours.

Which of the following would meet the USA's definition of federal covered adviser? An investment adviser who A) serves as a consultant to pension funds with assets of $500 million B) is registered under section 203 of the Investment Advisers Act of 1940 C) does business on an interstate basis D) gives advice on federal covered securities

is registered under section 203 of the Investment Advisers Act of 1940 All investment advisers registered under the Investment Advisers Act of 1940 are federal covered advisers. Doing business in more than one state (interstate) does not necessarily mean that the investment adviser is required to register with the SEC. As long as the AUM is under $100 million, the adviser registers with the appropriate states. Pension consultants are eligible to register with the SEC once their AUM reached $200 million, but it is not mandatory.

An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when

receiving a check made payable to that broker-dealer Under the NASAA Model Rules, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded).​ Discretion is not custody and the method of compensation has nothing to do with custody. Don't confuse that with the case where the IA can debit the client's account for their fees - that would be custody, but whether the fees are hourly, performance-based, or any other method is no related to custody.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that

the CIP requires date of birth while the regulators only require proof of legal age The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT: A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment. B) the adviser may collect fees for investment advice and commissions for executing trades. C) the adviser must state that the client may be subject to certain limitations because of this arrangement. D) this practice is ethical if full disclosure is made to all clients.

the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment.

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:

the investment adviser is a financial institution in the business of loaning money. the investment adviser is also a broker-dealer. the client is an affiliate of the investment adviser. 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.

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts,

the schedule should be made available on the broker-dealer's public website without requiring any login or password Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.