Practice Exam 73%

To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the solicitor. While the sales script used may be written by the promoter, making sure that its content is fair and reasonable is the responsibility of the investment adviser. Cash referral fees to promoters hired to solicit may be paid only in the case of impersonal advisory services. A) I and II B) II and III C) I and IV D) III and IV

All relationships between registered investment advisers and a promoter where compensation is involved must be in writing. It is important to note that compensation is defined as more than $1,000 over a 12 -month period. Making sure that the content of any scripts is fair and balanced is the responsibility of the investment adviser, regardless of who prepared them. Those subject to statutory disqualification ("bad actors") may not be used as solicitors if compensation is to be received. Cash referral fees to promoters are not restricted to impersonal advisory services.

The Uniform Securities Act prohibits broker-dealers from engaging in activity that has the effect of manipulating stock market prices. These would include: A) churning. B) selling unregistered nonexempt securities. C) matched orders. D) higher than reasonable commissions or markups.

Although all of these practices are prohibited, only matched orders are an attempt to manipulate market prices.

Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940? No registered investment company may commence a public offering with less than $1 million of capital. No investment company may own more than 3% of the voting stock of another registered investment company. No investment company may purchase portfolio securities on margin. A) I and III B) I and II C) II and III D) I, II, and III

Investment companies are restricted from owning more than 3% of the voting stock of another registered investment company. Unless an exception is stated, no margin purchases may take place for the fund's portfolio. The act requires an investment company to have a minimum of $100,000 in initial capital, not $1 million.

The antifraud provisions of the Uniform Securities Act would apply to all of the following except A) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. B) persons availing themselves of the de minimis exemption. C) newsletter publishers who do not give advice to subscribers on the subscriber's specific investment situation. D) a broker-dealer registered pursuant to the limited registration option available to Canadian broker-dealers and their agents.

The Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security. Even if one is exempt from registration due to meeting the de minimis exemption, or is excluded from the definition of investment adviser under the publisher's exclusion, the antifraud provisions still apply. The same is true for those Canadian securities professionals who do business in the United States by using the limited registration option available to them.

In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly permit immediate vesting of employer contributions. A) II and IV B) I and IV C) II and III D) I and III

The safe harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbor 401(k), which is one that is safe from top-heavy testing.

An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term: A) pension consultant. B) financial planner. C) investment counsel. D) senior adviser.

The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquiries about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) systematic risk B) business risk C) inflation risk D) liquidity risk

d. A portfolio of listed common stocks will have little to no liquidity risk, as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.

Form 13D

is not tested and deals with changes to holdings of corporate insiders.

Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was

An investor's total return percentage is calculated by adding together income plus capital gain (or loss) and dividing that total by the initial cost. The math looks like this: three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 which, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return; it is just another example of a question containing unnecessary information.

When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: age. attitudes. experience with investments. values. A) II and IV. B) I and III. C) I, II, and IV. D) I, II, III, and IV.

These are included in the list of non-financial considerations when constructing a client profile.

Form 13F

Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file. Those certain securities are 13(f) securities and the form used is 13F.

A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct? A) Bond B will be selling at a greater discount than Bond A. B) Both bonds will be selling at a discount. C) The issuer will attempt to call in Bond A. D) Bond B will be selling at a greater premium than Bond A.

When interest rates go down, bond prices will go up. As far as which bond will sell at the higher premium using the discounted cash flow method, it is clear that the bond with the longer duration will be worth more.

Form 112

is the FinCEN form for reporting large cash transactions.

Form ADV-E

is used for the independent examination of an IA who maintains custody