series 65 oct 18
A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend? A) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds B) A government bond fund C) A diversified open-end investment company concentrating in small-cap stocks D) A high-yield bond fund
A) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.
A client profile is not complete without a family income statement. A typical one would include (I) dividends (II) credit card debt (III) autos (IV) mortgage interest A) I and IV B) III and IV C) II and III D) I and II
A) I and IV Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received, and mortgage interest is money paid out. Credit card debt is a liability and autos are assets.
A portfolio that is primarily invested in corporate bonds would be subject to (I) credit risk (II) interest rate risk (III) opportunity cost (IV) purchasing power risk A) I, II, III, and IV B) I and II C) II and IV D) I, II, and IV
A) I, II, III, and IV Unless the security is a U.S. government bond, all bonds have credit risk. Including government bonds, they all fluctuate with changes in the interest rates and lose value due to inflation. Opportunity cost is the risk taken by choosing to invest in a lower-risk investment rather than attempt the higher returns that historically have been earned through investment in equities.
Of the following securities, which is most commonly recommended to fund a child's college education? A) Zero-coupon Treasury bonds B) Municipal bonds C) Treasury bills D) Investment-grade corporate bonds
A) Zero-coupon Treasury bonds Zero-coupon bonds, particularly those carrying the guarantee of the U.S. Treasury, are a favored investment vehicle for saving for a child's higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future. LO 2.j
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) does not have to be registered in the state as long as the only participants are the existing customers without their friends. B) must be registered in this state because the advice being given is specific rather than general. C) must not receive any compensation, direct or indirect. D) does not have to be registered in the state because, as a representative of a covered adviser, registration is required only in those states where a place of business is maintained.
A) 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.
Flexible premium payments are a feature of A) universal variable life B) variable life C) term life D) whole life
A) universal variable life Only universal and universal variable life policies have flexible premium payments.
Myla is retiring in two years and will need income. Which of the following mutual fund types would most likely be the least desirable for her? A) A balanced fund B) A special situation fund C) A growth and income fund D) A bond fund
B) A special situation fund Special situation mutual funds are risky and would not usually be considered suitable for a potential retiree. First of all, the nature of those funds is such that they generally do not produce regular income (one of Myla's stated objectives). Secondly, with a relatively short time horizon, recommended investments should be those that tend to have greater price stability.
XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return? A) Corporate bond with a 6.75% coupon B) ABCD, Inc. preferred stock paying a 6% dividend C) REIT paying a 6.5% dividend D) Municipal bond with a 5% coupon rate
B) ABCD, Inc. preferred stock paying a 6% dividend The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%.
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is true? A) The investment no longer qualifies for a breakpoint. B) The agent should remind the customer of the letter of intent that was signed 12 months ago. C) Shares held in escrow will be liquidated at the appreciated value. D) The letter of intent is considered fulfilled.
B) The agent should remind the customer of the letter of intent that was signed 12 months ago. The letter of intent (LOI) is not satisfied by the price appreciation of the shares. An LOI must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the LOI. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed.
Publicly traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Disclaimer of opinion B) Unqualified opinion C) Adverse opinion D) Qualified opinion
B) Unqualified opinion An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. Note: This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts. First Securities Advisers, Inc., has A) violated the Uniform Securities Act by charging excessive advisory fees. B) not violated the prohibition against performance fees. C) violated the Uniform Securities Act by charging commissions in addition to advisory fees. D) violated the prohibition against charging performance fees.
B) not violated the prohibition against performance fees. First Securities Advisers, Inc., has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable. The commissions charged by the affiliated broker-dealer have nothing to do with the question. The client would have to pay commissions wherever the transactions were executed. LO 13.e
Owners of private activity municipal bonds might find themselves A) taking an extraordinarily high risk. B) subject to the alternative minimum tax. C) receiving less interest than with a similar GO bond. D) in violation of MSRB rules if proper disclosures are not made.
B) subject to the alternative minimum tax. The interest on private activity municipal bonds (used for things like airports, student housing, etc.) is exempt from federal taxation but is considered a preference item for the AMT.
One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is A) term life. B) universal life C) variable life. D) whole life.
B) universal life A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values.
Under Rule 144, which of the following sales are subject to volume limitations? (I) Control person selling registered stock held for one year (II) Control person selling restricted stock held for two year (III) Nonaffiliate selling registered stock held for one year (IV) Nonaffiliate selling restricted stock held for two year A) II and IV B) I and II C) I and III D) III and IV
B) I and II Control persons are always subject to volume limitations.
A pension consultant who advises corporate retirement plans with assets of $135 million must register with which of the following? A) Both the state and the SEC B) The state C) Either the state or the SEC D) SEC
B) the state Under the Dodd-Frank bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.
Which of the following statements would not be allowable under the rules regarding an investment adviser's contract? A) "My hourly charge is $300." B) "I charge 1% per year on the value of your assets, plus any commissions I earn on sales done through me." C) "If you make money, I make money because my compensation is based on how well your account performs." D) "I charge a flat fee of $1,500 per year."
C) "If you make money, I make money because my compensation is based on how well your account performs." Unless an exception is stated in the question, performance-based fees are never permitted. As long as disclosed, fees plus commissions on transactions is an allowable form of compensation.
Which of the following is an improper activity under the Uniform Securities Act? A) An investment adviser charges two customers two different fees for a similar service. B) An investment adviser charges a customer a fee for advice leading to the sale of a security, receives a commission on the sale, and discloses the amount of the commission to the customer. C) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer. D) An investment adviser collects a commission on the sale of insurance products that he recommended, disclosing that a commission would be earned.
C) A dealer charges commissions for securities it sells from its inventory and discloses the amount of the commission to the customer. Dealers who act as principals in transactions charge markups, not commissions. The adviser can charge customers different fees for similar services without violating the Uniform Securities Act. Although not as common as it used to be, investment advisers can earn both an advisory fee and a commission, but the adviser must be sure to make appropriate disclosure to the customer.
For a trust account not seeking appreciation, which of the following would be recommended? A) Common stock, preferred stock, and debentures B) Common stock in small, highly profitable companies C) Highly rated, fixed-income securities D) Large-cap common and preferred stocks
C) Highly rated, fixed-income securities The only choice that is prudent and does not have a goal of appreciation is the purchase of highly rated, fixed-income securities.
The Investment Company Act of 1940 does which of the following? A) Regulates the secondary market B) Governs the issuance of new issues C) Prescribes procedures for the establishment of investment companies D) Sets rules for the registration of investment advisers
C) Prescribes procedures for the establishment of investment companies The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulations to ensure that investors are fully informed and fairly treated by the management of investment companies. It is the Investment Advisers Act of 1940 that regulates investment advisers.
Washington, Adams, and Jefferson, Inc., (WAJI) is an investment adviser whose principal and only office is in Alexandria, VA. WAJI's sole business is advising institutional investors. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A) Rutherford cannot register as an IAR of WAJI because providing advice exclusively to institutions exempts the firm from registration. B) Rutherford is exempt from registration because his only clients are institutions. C) Rutherford must register as an IAR of WAJI with the State of Virginia. D) Rutherford is exempt from registration because he has fewer than six retail clients.
C) Rutherford must register as an IAR of WAJI with the State of Virginia. Regardless of whom the clients are, Rutherford has a place of business in Virginia and that requires registration with the Administrator as an IAR. If WAJI does business in other states where it does not have a place of business, it is exempt from registration because the only clients are institutions. If WAJI is not registered in the state, Rutherford can't register as their IAR. The de minimis exemption for fewer than six retail clients only applies when there is no place of business in the state.
Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 50% large-cap common stock fund B) a 50% municipal bond fund, 40% government bond fund, 10% money market fund C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund
C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk.
All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 except A) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities. B) investment advisers whose only clients are insurance companies. C) investment advisers with $110 million or more in assets under management. D) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million.
C) investment advisers with $110 million or more in assets under management. Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the United States reaches $150 million.
When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have time value while warrants have intrinsic and time value. B) rights have intrinsic and time value while warrants only have intrinsic value. C) rights have intrinsic and time value while warrants only have time value. D) rights have intrinsic value while warrants have intrinsic and time value.
C) rights have intrinsic and time value while warrants only have time value. At the time of issuance, preemptive rights always offer the stock at a price below the current market, thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value.
The main benefit that scheduled premium variable life insurance has over whole life insurance is A) a lower sales charge. B) the availability of policy loans. C) the potential for a higher cash value and death benefit. D) an adjustable premium.
C) the potential for a higher cash value and death benefit. Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy. Scheduled premium is just another way of saying fixed premium, a characteristic of whole life as well. Policy loans against the cash value are permitted in both policies with the cash value in the whole life being guaranteed. There is a maximum allowable sales charge on variable life policies (9% of total premiums paid over a 20-year period). The term sales charge is not used with whole life.
Under the USA, an individual is an agent in all of the following cases EXCEPT: A) when selling shares on behalf of a non-exempt issuer in a non-exempt transaction. B) when acting on behalf of the broker-dealer's customer to find a buyer for the client's stock. C) when receiving a salary as a part of ongoing duties of his employment responsibilities for selling shares of his employer's stock to employees. D) when placing shares of a security listed on the NYSE in a client's portfolio as a result of an unsolicited order.
C) when receiving a salary as a part of ongoing duties of his employment responsibilities for selling shares of his employer's stock to employees. An individual employed by an issuer may sell the issuer's securities to employees without registering as an agent as long as there is no sales related compensation.
ABD Corporation's income statement reports net sales of $100 million; cost of goods sold, $60 million; administrative costs, $20 million; and interest on debt, $5 million. Based on this information, ABD's gross margin is A) 35% B) 15% C) 20% D) 40%
D) 40% Gross margin, sometimes referred to as gross profit on the exam, is computed by subtracting the cost of goods sold (COGS) from the net sales (or revenues) and dividing the remainder by the net sales. In this case, the computation is $100 million minus $60 million, which equals $40 million, and then dividing that by the $100 million resulting in a gross margin (or margin of profit) of 40%. Administrative costs and interest are not included in COGS.
The Investment Advisers Act of 1940 lists several specific exclusions from the definition of investment adviser. Which of the following are included in that listing? A) Pension consultants B) Publishers of investment newsletters distributed based on market events. C) Sports or entertainment representatives D) Attorneys for whom providing investment advice is incidental to the practice of their profession
D) Attorneys for whom providing investment advice is incidental to the practice of their profession Attorneys qualify for a professional exclusion if the advice they render is solely incidental to the practice of their profession. They are part of the LATE group exclusion. To qualify for the publisher exclusion, the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry. Sports or entertainment representatives and pension consultants were added to the definition of investment adviser through Release IA-1092 in 1987.
Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser who has custody of clients' securities or funds must do which of these? (I) Keep funds deposited in accounts containing only client funds. (II) Be subject to a surprise audit performed at least annually by an independent accountant. (III) Send clients statements at least once every three months showing balances. A) II and III B) I and III C) I and II D) I, II, and III
D) I, II, and III When advisers have custody of clients' securities or funds, they must abide by the following rules: Securities must be segregated and identified by clients and kept safe. Client funds must be deposited into bank accounts that contain only the client funds, and the adviser must be named trustee. Records of all funds, securities, and transactions affecting clients' accounts must be kept. Clients must be sent notice of the location of funds and securities and any changes that take place there. Clients must receive a quarterly statement showing all funds and securities in the adviser's possession and any transactions that have taken place. The adviser must arrange for a surprise audit by an independent public accountant of all securities and funds in the adviser's custody each year.
Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Unregistered stock acquired by a corporate affiliate in a stock option program B) Unregistered stock acquired by a nonaffiliate under an investment letter C) Stock acquired by a corporate affiliate in a private placement D) Stock acquired on the NYSE by a corporate affiliate
D) Stock acquired on the NYSE by a corporate affiliate The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.
The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to A) deliver a copy of the registration statement no later than with confirmation of the sale. B) deliver a preliminary (red herring) prospectus prior to the sale. C) be properly registered prior to making the offer. D) deliver an effective (final) prospectus no later than with confirmation of the sale.
D) deliver an effective (final) prospectus no later than with confirmation of the sale. The Securities Act of 1933, sometimes referred to as the paper act, requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the people act, (the Securities Exchange Act of 1934).
An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for two to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A) should pack her bags and leave the firm before the compliance department learns of her actions. B) should only sell what is suitable for the client based on all available information. C) will probably be disciplined for failure to disclose the potential conflict of interest. D) should pack her bags for the trip; she earned it.
D)should pack her bags for the trip; she earned it. The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client, and if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable.
