Final Exam 05 - 80%

A top-down approach to investing would generally include all the following, EXCEPT :

An analysis of a specific company's past stock price. Analyzing the past stock price of a specific company is typical with doing technical analysis. However, when doing a top-down analysis, the first step is to identify economic trends, then identify specific sectors or industries that may benefit from that trend. Lastly, identify specific companies within a sector that may be affected by a specific economic trend. (QID: 1507285)

A limited partnership sells an asset for a capital gain in the current year; however, the gain is distributed to the partners in the following year. What is the tax consequence of the gain?

As a capital gain in the year it is realized by the partnership The key to this question is to recognize that there is only one answer that recognizes the result as a capital gain. Any capital gains that are realized by the partnership are taxed to the partners in the year in which the gain is incurred, not when the distribution is made to the partners. When a partnership generates income, a tax liability is created for the partners in the year in which it is generated. All sources of partnership income are reported to the partners on Schedule K-1. Capital gains can be classified as either short-term or long-term. (QID: 1507512)

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is:

10 or fewer An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising. (QID: 1507275)

Which of the following terms is NOT specifically defined under the Uniform Securities Act?

Broker-dealer representative An agent is defined as a person who is employed by a broker-dealer or issuer to sell securities. There is no mention of the term broker-dealer representative. An investment adviser representative is a person employed by an investment adviser who provides investment advice. (QID: 1507269)

Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals?

Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent's activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients. (QID: 1507511)

Jerry is a successful divorce attorney in your community. Based on a favor you did for him involving one of his cases, he offers to send brokerage business to your firm but asks that you provide him with duplicate confirmations and statements on all clients he refers. What is the best practice in this situation?

Duplicate statements may not be sent unless you obtain written consent from each client As a general rule, an adviser may share account information only with the customer's written consent. Advisers may, however, be required to provide information if legally bound to do so, e.g., as a result of a court order or an official request by a governmental authority such as the IRS. The Reg. SP Avoidance Waiver is a fictitious document.

Which of the following is NOT TRUE regarding the characteristics of a real estate investment trust (REIT)? I. At least 90% of the income from a REIT must be derived from investing in real property II. At least 75% of the income from a REIT must be distributed to investors each year III. Any investment losses from a REIT are not passed through to investors IV. If sold to the public, the shares of a REIT must be registered with the SEC

I and II only REITs are required to generate at least 75% of their income from investing in real property—not 90%. Also, REITs are required to distribute at least 90% of their income to its shareholders each year—not 75%. For those REITs that are sold to the public, they must be registered with the SEC under the Securities Act of 1933. If a REIT incurs a loss, it is retained by the REIT and not passed through to the shareholders. (QID: 1507051)

Which TWO of the following statements are TRUE of the dividend discount model? I. The model is only used for large cap stocks II. It is used to determine a stock's value by predicting future dividends and discounting them back to present value III. If the value determined by the model is higher than the stock's current value, then it is undervalued IV. If the value determined by the model is higher than the stock's current value, then it is overvalued

II and III The dividend discount model (DDM) is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The basic idea is that if the value that is determined by the DDM is higher than the current value of the shares, then the stock is undervalued. QID: 1507519

Under the Uniform Securities Act, the sale of limited partnership interests to a bank is exempt from: I. The antifraud provisions II. The registration requirements III. The filing requirement for advertisements

II and III only Any sale of securities to an institution (e.g., a bank) is considered an exempt transaction under the USA. This exempts the securities from registration and any related advertising from being filed with the Administrator. However, no person, security, or transaction is exempt from the antifraud provisions of the Uniform Securities Act. (QID: 1507046)

Under the Uniform Securities Act, which of the following statements are NOT TRUE concerning an Administrator taking disciplinary action against a person? I. There must be written findings of fact and conclusions of law. II. The Administrator may take action against a person with or without the opportunity for a hearing. III. The Administrator does not need to provide the person with prior written notice. IV. The Administrator's order may be appealed if the person files a petition in court within 90 days.

II, III, and IV only The Administrator must provide a person with prior written notice, an opportunity for a hearing, and written findings of fact and conclusions of law when taking disciplinary action against a person. The Administrator's order may be appealed if the person files a petition in state court within 60 days. (QID: 1507280)

Which of the following is NOT a type of systematic risk?

Liquidity risk Liquidity risk is an example of unsystematic or diversifiable risk. Systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline. The decline in the bond market is essentially tied to the market's anticipation of Federal Reserve Board action (i.e., raising interest rates).

Currently, the price of gold is increasing as the price of Treasury bills is declining. These two assets are considered:

Negatively correlated When two investments are moving in the opposite direction, they are said to be negatively correlated. Those that move in the same direction are correlated. Those that show no pattern of correlation are uncorrelated. (QID: 1507493)

An investor lives in New Jersey and is opening a 529 college savings plan that's sponsored by the state of Montana for his daughter's benefit. His initial contribution is $75,000. Which of the following statements is TRUE?

Neither the investor nor his daughter will be liable for gift taxes on the $75,000 contribution. The investor may contribute up to $75,000 at one time to his daughter's 529 plan without incurring federal gift taxes. The IRS allows donors to aggregate five years' worth of gifts under the annual gift exclusion ($15,000) into one lump-sum contribution (5 x $15,000). Some states do allow donors to deduct a portion of contributions made to 529 plans from their state income taxes, but only if the donor contributes to a plan that's sponsored by his home state. (QID: 1507053)

According to the Investment Advisers Act of 1940, access persons must submit their personal security holdings reports by:

No later than 10 days after becoming an access person; then at least every 12 months thereafter. According to the Investment Advisers Act of 1940, access persons include officers, directors, partners and other supervised persons who have access to non-public information. They are required to submit their personal securities holdings reports no later than 10 days after becoming an access person; then at least once every 12 months thereafter. Personal security transactions by an access person must be reported no later than 30 days after the end of each calendar quarter. (QID: 1507047)

The plan documents of a qualified retirement plan require that the investment manager purchase securities issued by the plan's sponsor. These are securities that a prudent investor clearly would not purchase. What is the only course of action that the investment adviser may take in order to avoid violating the fiduciary responsibility provisions of ERISA?

Refuse to purchase the securities ERISA states that a fiduciary must follow the terms of the plan documents unless these documents are inconsistent with ERISA. In this case, purchasing these securities would violate the prudent expert standard of ERISA. Thus, the plan documents are in conflict with ERISA and the investment adviser should not follow them. An adviser that did purchase the securities could be held liable for violating a fiduciary duty. (QID: 1507289)

If a portfolio manager is focused on keeping a client's assigned asset allocation properly balanced over the long term, she is using a:

Strategic asset allocation strategy Strategic asset allocation attempts to maintain the assigned allocation over a long period and is more passive in nature than a tactical asset allocation strategy. Portfolio rebalancing does not describe a strategy; instead, it is the adjustment of a portfolio in preparation for an investment strategy. Laddering is considered diversifying a bond portfolio by staggering the maturity dates of the bonds in an attempt to manage interest-rate risk. (QID: 1507284)

If a portfolio manager has a diversified portfolio of large-cap stocks, it would use index options to reduce which of the following risks?

Systematic risk If a portfolio manager wants to hedge a diversified stock portfolio from systematic (market) risk, it could buy puts or sell call options on the index. If the market declines as a whole, the puts would provide the best hedge by becoming more valuable and would offset the risk. In the event the overall market declines, the call options would provide only limited protection through the collection of the premium on the expiring call options. (QID: 1507517)

Doug's portfolio is currently allocated in the following manner: 60% stocks, 30% bonds, and 10% cash. However, Doug believes that significant correction is imminent in the stock market since the Federal Reserve Board is going to raise interest rates. Doug decides to change his allocation to 30% stocks, 30% bonds and 40% cash. Doug's reallocation decision is an example of which of the following types of investing?

Tactical asset allocation This is an example of tactical asset allocation. Tactical asset allocation involves changing the balance in a portfolio (shifting the percentages so one asset class is more or less heavily represented) in anticipation of changing market or economic conditions. In contrast, strategic asset allocation assumes that the markets are efficient and it is impossible to time the market in this fashion. (QID: 1506826) (Note to self: "Strategic" asset allocation is "set" or "static")

According to federal law, which of the following would best describe what happens when a security is federal covered?

The issuer must register the security with the SEC only Federal covered securities are registered with, and regulated by, the SEC. A state Administrator does not have authority over any offering documents related to federal covered securities. Remember, federal covered securities are subject to business risk and are not automatically considered safe or investment-grade. (QID: 1507035)

Under the Uniform Securities Act, which of the following persons is required to register as an investment adviser?

The publisher of a financial periodical that responds to each subscriber with personalized investment advice. Federal covered advisers and trust companies are NOT subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. Of the choices given, the publisher is providing tailored investment advice and is therefore subject to registration. (QID: 1507491)

In order to determine the suitability of a potential investor for a limited partnership, which of the following forms would the client complete?

The subscription agreement Many states require potential partners to complete a subscription agreement, in order to determine their suitability as it relates to income, net worth, investment experience, and an understanding of investment risk. A certificate of limited partnership is filed by the general partner when setting up the partnership. The partnership agreement discloses the rights and duties of the partners. A private placement memorandum is given to investors in a private placement, in lieu of a prospectus. (QID: 1507031)

A client with a net worth of $2,500,000 has $300,000 in funds managed by an investment adviser. The investment adviser normally charges 1% of the assets under management but will waive the fee if the performance of a client's account does not attain a certain level of capital appreciation. According to the Investment Advisers Act, which of the following statements is TRUE?

This provision is allowed if the client signs the contract This case is an example of a contingent fee, which generally includes any arrangement in which the adviser's fee depends on attaining a specific level of capital gains or appreciation (or avoiding capital losses or depreciation). The SEC considers contingent fees a type of performance fee, which are generally prohibited in advisory contracts. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser, or clients who have a net worth in excess of $2,000,000. Since the client has a net worth of $2,500,000, she would qualify for this exception. (QID: 1507272)