Mastery Exam

Which of the following is the holder of an American depositary receipt (ADR) likely to receive? A) Taxable dividends in U.S. dollars B) Tax-free dividends in U.S. dollars C) Taxable dividends in foreign currency D) Tax-free dividends in foreign currency

a

Which of the following stocks would be the least suitable for an aggressive risk tolerant investor? A) Large-cap in a counter-cyclical industry B) Mid-cap utility company C) Small-cap pharmaceutical company D) Large-cap international manufacturing company

b

One of the responsibilities of the fiduciary handling a qualified retirement plan is providing an investment policy statement. Which one of the following is not typically included in that document? A) Risk tolerance B) Investment selection C) Current income needs D) Investment objectives

b The investment policy statement is generally a written document that sets forth the objectives and constraints on a managed portfolio. Income needs and risk tolerance are included in determining the objectives and time horizon is a constraint. Investment selection is not stated in any policy, selections are made on the basis of the policy

Active government manipulation of the economy through tax and budget policies is referred to as A) supply side. B) monetarist. C) Keynesian. D) classical economics.

c

Which of the following offenses are grounds for the denial, suspension, or revocation of an issuer's registration? A) The registrant's underwriting fees are considered reasonable by the Administrator. B) Persons filing the registration statement engaged a third party to assist in the preparation of the registration statement. C) The registration statement was filed without the appropriate fees. D) The registrant engaged in business operations outside of the United States.

c

In the investment industry, the phrase 2 and 20% most commonly refers to A) the sales commission paid on an equity index annuity. B) the minimum acceptable return in a bull market. C) the fees charged by hedge fund managers. D) a strategy involving buying and selling options on the same underlying asset.

c Hedge funds are known for higher management fees. A typical example is 2% of the assets under management plus 20% of the profits.

A power of attorney is a legal document that conveys certain powers from one party to another. Which of the following will survive the mental incompetence of a client? A) Discretionary power B) Full power of attorney C) Durable power of attorney D) Limited power of attorney

c The purpose of a durable power of attorney is to grant authority to a third person who will be able to act in the event of illness or other capacity of the grantor. It does not survive death of either principal.

A general partner of a real estate DPP is bound by a fiduciary duty to the partnership. Which of the following activities would not be considered a conflict of interest for a general partner? A) Selling an office building that is owned by his wife to the partnership B) Accepting a short-term loan from the partnership C) Acting as an agent for a competing limited partnership D) Determining which accounting firm will prepare the partnership's annual tax filings

d

An index annuity has no cap on gains but guarantees a minimum return of 2.75% with a 75% participation rate. If the index being tracked increases by 12%, what is the rate of return to the investor? A) 12.00% B) 2.06% C) 7.40% D) 9.00%

d

A GTC (good-till-canceled) order is entered to buy 500 LMN at 24.35. By the close, the firm has acquired 100 shares at 24.25 and 200 at 24.35. The remainder is unfilled. What is the outcome? A) The customer must accept the execution for 300 shares, and the remainder of the order remains open until filled or canceled. B) The customer may reject the incomplete order unless the remainder can be filled within two business days. C) The customer may demand that the firm deliver the remaining shares at 24.35. D) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day.

a

A corporation may benefit by attaching warrants to a new issue of debt securities from A) a decrease in the company's interest costs. B) a decrease in the earnings per share. C) a decrease in the bond's rating. D) a decrease in the company's amount of debt service coverage.

a

An access person, as defined in the Investment Adviser Code of Ethics, must submit to the chief compliance officer (CCO) or other persons designated in the firm's code of ethics A) a holdings report no later than 10 days after the person becomes an access person. B) a transactions report no later than 10 days after the person becomes an access person. C) quarterly securities holdings reports within 30 days of the end of each quarter. D) quarterly securities transactions reports within 10 days of the end of each quarter.

a

For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A) cumulative. B) common stock C) participating. D) convertible.

a

Investment advisers must disclose any material disciplinary action to all current and prospective clients. The broadest definition of material would include any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years. Fines levied by any SRO require disclosure if they were in excess of A) $2,500. B) $10,000. C) $1,000. D) $5,000.

a

Sven purchased an American depository receipt (ADR) on a Swedish corporation. Based on the current price of the company's stock, the dividend yield is 2.5%. Sven hopes to hold the stock for several years and experience a capital gain. It would be true to state that Sven will A) pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. B) pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk. C) not pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk. D) not pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk.

a

When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a state-registered investment adviser in the state where the individual maintains a place of business, A) the investment adviser representative must give notification of the termination, and the state-registered adviser must give notification of the employment to the Administrator promptly. B) only the state-registered investment adviser must notify the Administrator. C) the investment adviser representative and the federal covered adviser must notify the Administrator promptly. D) only the investment adviser representative must notify the Administrator promptly.

a

The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following statements incorrectly states one of these changes? A) The standard of prudence is applied to each investment individually. B) Prudent investing requires that fiduciaries diversify their investments. C) The trade-off between risk and return in all investing is the fiduciary's central consideration. D) Delegation of trust investment and management functions is permitted, subject to safeguards.

a Before the Uniform Prudent Investor Act, the focus was on individual investment choices, making it very difficult to focus on the risk and return of the entire portfolio. Diversification's benefits have been firmly established, and the standard of prudence is now applied to any investment as part of the total portfolio rather than to that investment individually. Another key change was the ability to delegate the portfolio management decisions to others (who must be qualified).

Which of the following statements regarding a mutual fund are true? I. Class A shares have no front-end sales charge and no 12b-1 fee. II. Class B shares have a contingent deferred sales charge and a 12b-1 fee. III. Class A shares are generally not eligible for breakpoint reductions. IV. Class C shares are generally referred to as level load. A) II and IV B) III and IV C) I and III D) I and II

a Class B shares are sometimes called BACK END LOADED because they carry a contingent deferred sales charge. Their operating expenses are higher than those for Class A shares, usually because of higher 12b-1 fees. Class C shares have no front-end load and a level 12b-1 charge, hence, the term level load is used to describe them. Class A shares have a front-end sales charge, and if they have a 12b-1 fee, it is lower than that charged for Class B shares.

A bond's duration is A) a measure of a bond's price sensitivity to a change in interest rates. B) equal to the maturity of the bond in most cases. C) a time-weighted measure of a bond's sensitivity to credit and default risk. D) an explicit measure of the number of years to maturity.

a Duration measures the number of years it will take for the bond's interest payments to equal the investment in present value terms. It is also used to determine the volatility of a bond's price when interest rates change. The longer the duration, the greater the volatility for that bond. Zero-coupon bonds have the longest duration for any given maturity date because there is no current receipt of interest payments.

An investment adviser representative would be permitted to borrow money from which of the following clients? A) The Amalgamated Dock Workers Credit Union B) The investment adviser representative's father for graduate school tuition C) ABC Mortgage Brokers D) The XYZ Short-Term Bond Fund

a Securities professionals are quite limited in their ability to borrow money from clients. The prime exception is when the client is in the money-lending business, such as a credit union. Mortgage brokers do not lend money; they put borrowers and lenders together.

As part of a comprehensive financial plan, a registered investment adviser representative of All-Star Advisory Services recommends the purchase of several stocks from the inventory of All-Star's affiliated broker-dealer. Under the Investment Advisers Act of 1940, this activity A) requires the consent of and written disclosure to the client prior to completion of the transaction. B) requires advance written disclosure to the client. C) requires the written consent of the client. D) is prohibited.

a Unlike broker-dealers, prior ro completion of the transaction, investment advisers must obtain the CONSENT and make written DISCLOSURE to the client of the intent to act as agent or principal in any transaction with that advisory client.

For those following the capital asset pricing model (CAPM), the security market line (SML) uses all of the following except A) the standard deviation of the asset. B) the risk-free rate. C) the expected return of the asset. D) the beta of the asset.

a Unlike the CML, the SML does not include the standard deviation of the asset

For an investment adviser to advertise a proprietary technical-based formula for timing the market, disclosure must be made of the I. extent of difficulty involved in applying the formula. II. limitations of using the formula. III. recommendations based on the formula that generated profits in the previous year. IV. amount of experience the adviser has using the formula. A) I and II B) II, III, and IV C) I, II, III, and IV D) II and III

a disclose the difficulties and limitations

A FinCEN Form 112 would need to be filed when a client A) makes a cash deposit of $10,000 or more. B) makes a cash deposit in excess of $10,000. C) initiates a wire transfer in excess of $3,000. D) initiates a wire transfer of $3,000 or more.

b

Providential Asset Allocation Services (PAAS) is a covered investment adviser offering wrap free programs. As a result, PAAS must provide new clients with A) Form ADV Part 2A no later than entering into the advisory agreement. B) appendix 1 of Form ADV Part 2A no later than entering into the advisory agreement. C) Form ADV Part 2A unless there have been no material changes since the last brochure. D) appendix 1 of Form ADV Part 2A within 120 days after entering into the advisory agreement.

b

When investors tend to increase their investments in debt securities into those on the long end of the spectrum rather than those with short-term maturities, it generally leads to A) a positive yield curve. B) an inverted yield curve. C) a flat yield curve. D) long-term yields that greatly exceed short-term yields.

b

Which of the following statements regarding investment companies is true? A) The only two types of investment companies provided for in the Investment Company Act of 1940 are open-end and closed-end management investment companies. B) It is generally prohibited for an investment company registered under the Investment Company Act of 1940 to acquire more than 3% of the outstanding voting shares of another investment company. C) When investors sell or redeem their open-end fund shares, they receive the net asset value (NAV) as of the previous day's close. D) An investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares, or, if the investor prefers, open-end redeemable shares.

b

Which of the following statements is not true of Regulation SP? A) Consumers must be given an initial privacy notice. B) Customers must be given annual privacy disclosures on a separate piece of paper. C) Customers may be provided privacy information on internet pages. D) Consumers need not be given an annual privacy notice.

b A customer with an ongoing relationship must receive both an initial and an annual privacy notice. It may be included in other documents but must be clear and conspicuous. Consumers have a one-off relationship, so there is no requirement to provide them or formal customers with annual disclosures.

If a customer enters a market order to buy 100 shares of GFT, the trade will be executed at the A) highest bid. B) lowest offer. C) highest ask. D) lowest bid.

b A market order mandates that a trade must be executed at the best execution (price) that can be attained for the client The question is meant to test your knowledge on the difference between a bid and an offer and what an inside market is. The inside bid is the highest price a dealer is willing to pay someone who wants to sell this stock. The inside offer, usually referred to as the ask, is the lowers price made available by a dealer to those wishing to buy this stock.

One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) an UTMA account. B) a Totten trust. C) an irrevocable trust. D) a durable power of attorney.

b A totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts. Beneficiary names and/or percentages can be changed at will. An irrevocable trust cant be changed; there is no flexibility. In an UTMA account, once the money is allocated, the decision is irrevocable.

ERISA regulations apply to the retirement plans of which of the following? I. ABC Corporation, listed on the NYSE II. DEF Corporation, privately held among nine shareholders III. City of Detroit employee's retirement benefit plan IV. FBI employee's retirement benefit plan A) I only B) I and II C) I, II, III, and IV D) III and IV

b ERISA only applies to the private sector, not the public sector.

A client interested in fixed income is viewing different bonds with the same rating and a coupon of 5%. Using the discounted cash flow method, which bond should have the lowest market value? A) 12-year maturity when the discount rate is 3% B) 12-year maturity when the discount rate is 7% C) 6-year maturity when the discount rate is 7% D) 6-year maturity when the discount rate is 3%

b If the discount rate is HIGHER than the coupon rate, the present value (expected market price) will be BELOW par. When interest rates change, the LONGER the time to maturity, the GREATER the effect on the market price of a bond.

It would be most unusual to see which one of the following issued at a discount? A) Treasury bill B) Jumbo CD C) Zero-coupon bond D) Commercial paper

b Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

A popular strategy for income investors who wish to take advantage of potentially higher interest rates when reinvesting maturing securities is A) rebalancing. B) laddering. C) bulleting. D) barbelling.

b Laddering involves investing a sum at one time but with different maturities. As each bond (or CD) matures, it is reinvested at current rates and then becomes the longest maturity in the portfolio

An early distribution from a traditional IRA can avoid the 10% tax penalty in all of the following cases except A) reaching age 59½ . B) a QDRO. C) death. D) payments made under IRS Rule 72(t).

b The 10% early distribution penalty can be avoided through use of a qualified domestic relations order (QDRO) only in the case of a qualified plan, not an IRA

In order to qualify for the private fund adviser exemption, a domestic investment adviser must limit its assets under management in the United States to less than A) $100 million. B) $150 million. C) $25 million. D) $110 million.

b The Dodd-Frank Act replaced the old private adviser exemption with narrower exemptions for advisers that advise exclusively venture capital funds and advisers solely to private funds with less than $150 million in assets under management in the United States.

With regard to advisory clients, under the NASAA Brochure Rule Requirements for Investment Advisers, an investment adviser, unless qualifying for an exemption, must deliver A) at least 48 hours in advance of entering into the advisory contract, a copy of the adviser's brochure. B) within 120 days of the end of its fiscal year a free, updated brochure and related brochure supplements which include or are accompanied by a summary of material changes. C) a free, updated brochure and related brochure supplements every year even when there are no material changes. D) within 90 days of the end of its fiscal year a free, updated brochure and related brochure supplements which include or are accompanied by a summary of material changes.

b The rule calls for delivery within 120 days of the end of the fiscal year. The 48-hour rule is not mandatory; if the adviser waits until the signing of the advisory contract, there is a five-day penalty-free withdrawal privilege granted to the customer. If there are no material changes, delivery of an annual brochure is required. There is a 90-day requirement, but that is delivered to the regulators (the SEC for a covered adviser and appropriate states for a state-registered adviser)

Which of the following debt instruments pays no interest? A) T-bonds B) T-bills C) TIPS D) T-notes

b Treasury bills are always issued at a discount from their face value. At maturity, the investor receives par.

An individual walks into the office of a broker-dealer wishing to open a new account. Which of the following information would not be required on the new account form? A) Physical address B) Name of employer C) Marital status D) Citizenship

c

An investor's portfolio is heavily weighted in AA- and AAA-rated municipal bonds with an average maturity of 18 years. The client has the most exposure to A) business risk. B) default (credit) risk. C) interest rate risk. D) liquidity risk.

c

Holders of which of the following securities would be most likely to receive preemptive rights? A) Preferred stock B) Secured bonds C) Common stock D) Treasury stock

c

Under the Uniform Securities Act, which of the following is considered a place of business of a registered investment adviser representative? I. An office from which the representative regularly provides advisory services to clients II. A location published in a professional directory, indicated on business cards, or telephone book listing that identifies it as a place where the representative will be available to meet or communicate with clients III. A hotel or auditorium at which the representative has advertised to the public that he will be available to conduct advisory business at that site IV. A hotel meeting room identified only to current clients as a place the representative will be available to conduct advisory business A) I only B) I, II, III, and IV C) I, II, and III D) I and II

c

Under Section 401 of the Uniform Securities Act, the term agent does not include an individual who represents an issuer in effecting transactions in a security A) issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state. B) issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association. C) issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. D) issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state.

c An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is -Issued by and representing an interest in or debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. -Issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing; -any security issued or guaranteed by canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor; -a promissory note, draft, bill of exchange, or banker's 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, an receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or -any investment contract issued in connection with an employee's stock purchase, savings, pension, profit sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan It is not just any exempt security that qualifies the individual for the exemption, only the 5 listed above. A confusing point is that the individual is not an agent when the sales are made in any exempt transaction with no exemptions

When an investment adviser prepares a financial plan and distributes research reports prepared by several different third parties, which of the following statements is true? A) An adviser is required to disclose all sources of information used in making a recommendation to a client. B) An adviser is prohibited from distributing someone else's work. C) An adviser may not use specific research reports that are prepared by an outside third party without disclosure of the source. D) An adviser must disclose the source of any information used in making a recommendation to a client whenever requested by the client.

c If you distribute reports prepared by outside sources when generating investment recommendations, disclosure as to the source of those reports is necessary

An agent is conducting a seminar open to the public. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following would be prohibited? A) Distributing the prospectus for a mutual fund discussed during the seminar B) Having an economics professor from the local university speak about current economic trends C) Recommending that the attendees purchase shares of ABC, Inc. common stock, a local company D) Handing out her business card and a new account application

c Making a recommendation of a specific security at a public seminar is prohibited because there has been no suitability qualification of the attendees.

An investment adviser is considered to maintain custody of customer assets when A) customer funds and securities are kept by a non-affiliated broker-dealer. B) the investment adviser exercises discretion over an advisory account. C) the investment adviser receives a check for advisory fees. D) the investment adviser has a list of customer user names and passwords.

d

XYZ Securities is a broker-dealer based in Wisconsin with offices in no other state. In addition to its Wisconsin clients, XYZ has 30 retail customers living in Illinois. During the winter, if 10 existing customers vacation in Florida for up to seven weeks at a time, XYZ Securities is a broker-dealer in A) all states having enacted the USA. B) Wisconsin, Illinois, and Florida. C) Wisconsin only. D) Wisconsin and Illinois.

d

A registration statement has been filed using the process known as qualification. Under normal circumstances, this registration will become effective A) at noon of the 30th day after filing. B) once the appropriate filing fees have been paid, accompanied by a consent to service of process. C) when the SEC says so. D) when the Administrator says so.

d A unique characteristic of registration by qualification is that it is the only method where the effective date is declared by the Administrator

The National Securities Markets Improvement Act (NSMIA) allows state Administrators to A) impose state registrations and net capital requirements on federal covered investment advisers. B) accept filing fees on behalf of the SEC. C) require registered open-end investment companies wishing to offer securities in their state to coordinate their registrations with the SEC. D) enforce their antifraud provisions against federal covered securities.

d Antifraud provisions may be enforced by any regulatory agency or authority. If it has to do with securities, no one or nothing is exempt from the antifraud provisions. Registered investment companies do not register in the state but may be required to notice file and pay fees.

During the past year, the market price of KAPCO common stock increased from $47 to $50 per share. Over that period, KAPCO's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on KAPCO common stock is A) 4.26%. B) 6.34%. C) 2.13. D) 2.00%.

d The current yield of a stock is computed by dividing the annual dividend by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. 1/50 = 2%