Series 66
Which of the following measures the risk-reward trade-off? A) Sharpe ratio. B) Alpha. C) Correlation. D) Standard deviation.
A
When an analyst subtracts the inventory from a company's current assets and divides the remainder by the current liabilities, the result is the: A) quick ratio. B) working capital. C) current ratio. D) net worth.
A The quick ratio, sometimes called the acid-test ratio, is computed by taking a company's current assets minus the inventory and then dividing that by the current liabilities.
A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $4,500. B) $6,500. C) $10,000. D) $1,500.
B All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. Reinvested capital gains are not part of a trust's DNI.
Many corporations make available dividend reinvestment plans for their shareholders. Among the benefits of using DRIPS are: avoiding taxation until the shares are sold. discounts from the current market price. reduced or eliminated commissions. the ability to add additional funds to the dividend. A) I and II. B) III and IV. C) I and IV. D) II, III and IV.
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Most states have replaced the Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. One of the major advantages of UTMA is: A) UTMA accounts are not subject to the "kiddie" tax. B) greater flexibility in the choice of investments. C) reduced fiduciary exposure to the custodian. D) the assets in the account are not part of the donor's estate.
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A QTP is: A) a form of trust designed to reduce estate taxes. B) a qualified tuition plan, such as found in Section 529 of the Code. C) a quarterly term premium paid to keep a life insurance policy in force. D) a qualified tax plan, such as found in Section 401(k) of the Code.
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A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called a(n): A) flexible premium variable life insurance policy. B) scheduled premium variable life insurance policy. C) fixed premium variable life insurance policy. D) universal life insurance policy.
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According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with SEC by interested persons when their ownership of a reporting security exceeds: A) 10%. B) 2%. C) 15%. D) 5%.
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Alimony is unearned income, but is taxable income.
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Due to a downturn in the market, Kendall Advisers, a firm registered only in the state of Minnesota, lays off a registered investment adviser representative. In this case, who would notify the state Administrator of the termination? Kendall Advisers. The registered investment adviser representative. A) II only. B) Either I or II. C) Both I and II. D) I only.
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Guaranteed cash value is a standard feature found in which of the policies listed below? A) Term life. B) Variable life. C) Whole life. D) Whole life and variable life.
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If an agent's license is enjoined by the Administrator: A) a court of competent jurisdiction has found her guilty as charged. B) she is prohibited from acting as an agent pending the results of a hearing. C) she has to retake the examination to reinstate her license. D) her license is suspended and pending appeal.
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Mr. I. M. Wealthy founded a computer company and owns a substantial block of stock with a very low cost basis. Which of the following statements are true regarding the disposition of Mr. Wealthy's stock? If it is given away, the recipient of the gift assumes Mr. Wealthy's cost basis. If it is given away, the recipient of the gift receives a stepped-up basis to the market value as of the date of the gift. If it is inherited, the beneficiary will assume Mr. Wealthy's cost basis. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of Mr. Wealthy's death. A) II and IV. B) II and III. C) I and III. D) I and IV.
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Standard deviation is best described as: A) a standard measure of excess return. B) the average deviation of returns from their mean return. C) the average deviation of returns from a benchmark, such as the S&P 500. D) a measure of relative dispersion of returns.
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The term "omitting prospectus" refers to: A) a preliminary (red herring) prospectus. B) a prospectus for which SEC would issue a deficiency letter. C) a prospectus for which, subsequent to the effective date, SEC determines material information was omitted. D) communications under Rule 482 of the Securities Act of 1933.
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Under which of the following structures is it likely to have the largest number of owners? A) Limited liability company. B) Sole proprietorship. C) JTWROS. D) S corporation.
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Which of the following measures the risk-reward trade-off? A) Sharpe ratio. B) Alpha. C) Correlation. D) Standard deviation.
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According to the Investment Advisers Act, a notice offering advisory services that appears in a publication, on radio, or on TV is considered an advertisement if offered to more than: 1 person 5 persons 10 persons 35 persons
A Communications through the public media offering investment advisory services, including analyses or reports, are considered advertising if addressed to more than one person.
The valuation method that will provide the most accurate representation of the true return of a mortgage-backed security is: Discounted cash-flow yield Yield to average life Yield to maturity Effective duration
A Discounted cash-flow yield is considered to be more accurate than other yield valuations when it comes to a mortgage-backed security. That is because the cash flows of a mortgage-backed security are not uniform and occur at various times over its life. Discounted cash-flow yield, when analyzed under different interest-rate scenarios, can provide greater insight into the performance of a mortgage-backed security.
A client purchases a 2% TIPS and the CPI is 3%. Which TWO of the following statements are TRUE? The client will receive a 2% coupon rate. The client will receive a 5% coupon rate. The client will receive a 2% return on the principal. The client will receive a 5% return on the principal. I and III I and IV II and III II and IV
A Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. This fact makes choice I correct. The principal amount upon which interest is paid will vary based on the CPI. Because the principal is adjusted for inflation, the return will still be 2% on the principal; however, that principal may be higher or lower than par because of the adjustments. This fact makes choice III correct. The Treasury does pay the greater of par or the adjusted principal value upon maturity of the TIPS. They are usually purchased as protection against inflationary or purchasing-power risk
According to the Investment Advisers Act, a successor adviser may file an amendment instead of a new application under which of the following circumstances? A change in the state of incorporation A change in the partnership A change from a partnership to a corporation I and II only I and III only II and III only I, II, and III
D A successor adviser can file an amendment to an original investment adviser registration in lieu of filing a new application if the changes relate to a: Form of organization State of incorporation Partnership
Broker-Dealer X is registered as an investment adviser in State A. Some of Broker-Dealer X's clients are not advisory clients. Broker-Dealer X would like to sell stock from its own account to a nonadvisory client. Which of the following statements is TRUE? Prior to the completion of this transaction, X must notify all its advisory clients that it is acting in a principal capacity Prior to the completion of this transaction, X must notify the client that it is acting in a principal capacity and then obtain the client's written consent A firm that is dually registered as a broker-dealer and investment adviser must operate under the same rules for all clients, whether advisory or not The rule regarding principal transactions by advisers does not apply in this case since X is acting solely as a broker-dealer and not as an investment adviser
D Normally, an investment adviser that wishes to act as a principal for its own account must: Disclose the capacity in which it is acting prior to the completion of the transaction, and Obtain the client's written consent. However, this rule does not apply to broker-dealers when they are not acting as investment advisers, as is the case in this question.
An IAR has recommended a convertible debenture to a client, with a market value of $1,200. The bond is convertible at $20. If the preferred stock of the company is currently trading at $22 per share, what is the parity price of the bond? $1,100 $440 Par value It cannot be determined
D Since the question only gives the price of the preferred stock, not the common, parity cannot be determined. Sometimes regulatory examinations ask trick questions much like this one. The best way to solve a question like this is to read the question closely, often twice, to confirm that you have considered all the details provided.
When determining whether to grant or revoke registered status of any person, what actions may be taken by the Administrator? Limit or restrict the functions or activities of the registrant Waive the examination requirement Cancel registration if the registrant cannot be located after a reasonable search I and II only I and III only II and III only I, II, and III
D The Administrator is given the authority to take all these actions.
10-K - Audited financial report that is filed annually with the SEC. 10-Q - Filed with the SEC quarterly. 8-K - Material information filed with the SEC when it occurs.
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A company's officers and directors, and any owners of more than 10% of the company's equity securities must register within 10 days. Trades are reported within 2 business days. They may not keep short-swing profits (earned on stock held less than 6 months).
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Capital gains only occur when a stock is sold. If a stock increases $10 in value, but is not sold, then it is still not a gain. Watch this for the test.
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If requested, a hearing must be held within 15 days.
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If violations have occured (or may occur), the Administrator may issue a cease and desist order the orders may be appealed in state court within 60 days.
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Owners of more than 5% of a company's equity must file Schedule 13D(gives people information on the company). If exercising discretion over $100 million in securities, institutional investment mangers must file Schedule 13F quarterly.
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Present Value = How much would need to be invested today to have a future value of $4,000 in 3 years assuming an 7% return. Future Value = How much will $10,000 invested today be worth in 2 years, assuming an 8% return compounded semi-annually.
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Regulation A (Small Issue Exemption 5mil over 12m) the disclosure document is not a prospectus, it is an Offering Circular. Regulation D (Private Placement) the disclosure document is not a prospectus, it is an Offering Memorandum.
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Schedule K-1 is used to report a partner's distributed share of income at year-end.
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Statue of limitations - three years from the occurrence or two years from the discovery, whichever comes first. If a registered person realizes he has effected an improper sale, he may offer to buy back the security, plus interest, minus any income received. The customer has 30 days to respond; if he fails to respond, he waives his right to sue. For fraud there is a five-year statue of limitations. Statue of Limitations on Federal Securities Acts like the 33 is three years from occurrence or one year from discovery, whichever comes first.
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When opening a custodial account for someone who is mentally incompetent or a minor, the Certificate of Incumbancy cannot be older than 60 days.
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When making a customer profile, one of the documents created is a balance sheet. Among other items, your client's balance sheet would include: A) assets. B) salary or wages. C) interest expense. D) accumulated depreciation.
A A balance sheet, whether for an individual, a family, or a business, is a listing of assets and liabilities. Interest expense and salary go on the income statement. Accumulated depreciation is a balance sheet item, but only for a business.
Which of the following statements relating to trusts is CORRECT? A) A simple trust is required to distribute all of its income in the year earned. B) A simple trust may distribute principal during the year. C) A complex trust may only distribute principal during the year in which the trust terminates. D) A complex trust is required to distribute all of its income in the year earned.
A A simple trust is one that is required to distribute all accounting income in the year earned, has no charitable beneficiaries, and does not distribute principal in the current year. A complex trust is one that is allowed to accumulate income, has a charitable beneficiary, or distributes principal. All trusts are complex in their final year because all principal must be distributed when the trust terminates.
Which of the following statements is TRUE of an investment adviser that maintains custody of client funds or securities? It must initiate Form ADV-E. It must complete Form ADV-W. It must arrange for an independent public account to audit these assets on a regular basis at least every three years. Choices (a) and (c) are both correct.
A All registered investment advisers who have custody of client securities or funds must have an independent public accountant to conduct surprise audits of these assets at least once every calendar year. The adviser also must initiate Form ADV-E and give it to the accountant, who then submits it to the regulators with a copy of the audit report attached. Form ADV-W must be filed by advisers that want to withdraw their registration or register with a different regulator.
An agency cross transaction can be described as: A) a transaction where a person acts as both an investment adviser and broker/dealer in the same transaction. B) a sale of securities between different agencies of the federal government. C) a sale of a security owned by a broker/dealer to the general public. D) a transaction between an issuer and a broker/dealer.
A An agency cross transaction occurs when an investment adviser acts as both adviser and broker/dealer and requires prior written approval from the client and special reporting requirements. The adviser cannot recommend the transaction to both parties, only one side or the other.
Under the Uniform Securities Act, all of the following securities are exempt from registration EXCEPT: A) stock issued by a local manufacturer. B) bank stocks. C) public utility stocks. D) bonds issued by the German government.
A Corporate stock sold publicly in the state is not exempt from registration. Commercial bank stocks, public utility securities, and foreign government debt (of countries with which the U.S. has diplomatic relations) are all exempt securities. A bank holding company's stock must be registered unless exempt, for instance, by virtue of listing on the NYSE or other regulated exchange.
Which of the following best describes that which secures a debenture issued by an industrial corporation? A) The assets of the issuing company. B) The assets of a company other than the issuing company. C) The mortgages and real estate of the issuing company. D) The securities of the issuing company.
A Debentures are general obligations of the issuing company. They are actually backed by the assets of the company. Prior claims to those specific assets by secured debt issues take precedence over the debentures.
Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) An agent sells Canadian treasury bonds to an individual client. B) A bank liquidates the securities pledged as collateral for a loan that has gone into default. C) The sale of LMNO common stock, listed in the Pink Sheets, to an insurance company. D) The sale of an unregistered nonexempt security to an individual client at that client's request.
A Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.
Which of the following attributes of common stock best describes why internal rate of return (IRR) is not generally used to determine the return on common stock? A) Uneven cash flows, no maturity date and price. B) Uneven cash flows. C) Common stock does not have a net present value. D) Uneven cash flows and no maturity.
A Internal rate of return (IRR) best measures investments with a known price and maturity. The internal rate of return is the discount rate that makes the future value of an investment equal to its present value. The yield to maturity on a bond is actually its internal rate of return.
One of the respects in which the USA treats investment adviser representatives differently than investment advisers is that IARs: A) employed by federal covered advisers must register in each state in which they maintain a place of business whereas the IA registers only with the SEC. B) may be permitted to share in the profits and losses in a client's account whereas IAs never can. C) exercising discretion in client's account may be required to post a surety bond whereas IAs generally do not require bonding. D) are always individuals whereas no individual can register as an IA.
A Investment adviser representatives employed by federal covered investment advisers must register as IARs in each state in which they have a place of business. Federal covered advisers register only with the SEC, not with any states. There are a number of individually registered IAs, and neither IAs nor IARs are permitted to share in profits and losses in customer accounts. Both IAs and IARs may be required to post surety bonds if they exercise discretion in client accounts.
A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is TRUE? A) It is permitted if provided for in the underlying documentation. B) It is permitted if the fiduciary shares in the profits or losses. C) It is not permitted. D) It is permitted if the fiduciary observes the prudent investor rule.
A Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.
An investment adviser (IA) is deemed to be maintaining custody under the USA when: A) client securities are held at the investment adviser's principal office. B) client funds are kept by a broker/dealer affiliated with the investment adviser. C) the adviser maintains a net worth of not less than $35,000 or has a surety bond in that amount. D) the adviser has been granted discretion over the account.
A Possession of a client's securities is considered custody. Although an IA must maintain a minimum net worth of $35,000 (or a surety bond in that amount) if custody is maintained, the mere fact that the IA has that level of net worth does not mean that custody is involved. The USA considers that funds and securities held at an affiliated broker/dealer are not under the custody of the IA.
Under the Securities Exchange Act of 1934, which of the following is TRUE regarding the jurisdiction of the SEC over a person who violates the rules of the Municipal Securities Rulemaking Board? A) The SEC has the authority to investigate such violations unless the person is a financial institution. B) The SEC has the authority to investigate such violations only if the person is a financial institution. C) Only the MSRB has the authority to investigate violations of its rules. D) The SEC has the authority to investigate such violations even if the person is a financial institution.
A The SEC is charged with administering the federal securities laws, under which the Municipal Securities Rulemaking Board (MSRB) exists. So the SEC has jurisdiction over the MSRB. However, financial institutions come under the jurisdiction of banking regulatory authorities.
Yesterday Cedric, an investment advisory client of Ralph, brought in a common stock certificate for 100 shares of Scottish Wool Company. Cedric inherited the shares from a relative and would like Ralph to have someone appraise the security. If Ralph still has the certificate in his possession today, which of the following statements is TRUE? The investment advisory firm is deemed to have custody Ralph must return the certificate to the customer by the end of the day If Ralph returns the certificate within three business days of receiving it, the firm is not considered to have custody If the value of the securities is less than $10,000, the firm is not considered to have custody
A The custody rule (in the Investment Advisers Act) states that custody includes the possession of client funds or securities, unless the firm receives the securities inadvertently and the securities are returned to the sender promptly (within three business days of receiving them). In this case, Ralph's acceptance of the securities was not inadvertent. The firm has custody.
Using the following information, compute the real rate of return for an investor holding the ABC Corporation's 20-year bond: Coupon rate 5%, paid semi-annually Rating Aa Maturity date December 1, 2016 CPI 2% Par value $1,000 Purchase price 90 Call date December 1, 2013 Call price 101. A) 3.56%. B) 5.00%. C) 4.50%. D) 2.50%.
A The real rate of return is the actual return (income received divided by the purchase price) less the inflation rate as measured by the CPI. In this example, the bond pays $50 per year on an investment of $900. That is an actual return of 5.56%. Subtracting the CPI of 2% gives us an inflation-adjusted, or real, rate of return of 3.56%.
A client purchased 100 shares of XYZ at $25 per share. Ten years later, the stock was sold for a price of $100 per share. What is the approximate annual growth rate of the client's investment? 14% 22% 30% 300%
A To answer this question without using a complex financial calculator, use the Rule of 72. This rule allows us to calculate the annual compounded growth rate that it would take for funds to double in value, given a specific number of years. The rule also tells us how many years it will take for funds to double in value, given the annual compounded growth rate. In this example, the investor purchased $2,500 worth of XYZ. Ten years later the investment had increased to $10,000. This means the investment doubled twice in ten years ($2,500 to $5,000, and from $5,000 to $10,000). In other words, the investment doubles once every five years. Using the Rule of 72, divide 72 by 5 to determine the annual growth rate. 72 / 5 = 14.4% which is rounded to 14%.
Which of the following would fall under the USA's definition of exempt transaction? A) An issuer sells a new issue to a broker/dealer B) A real estate partnership sells interests to the public with no commission charge C) An investment adviser purchases securities from the issuer D) An agent accepts an order from a client after having sent a research report dealing with that security.
A Transactions between issuers and broker/dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is as the result of the research report.
Which of the following describe differences between variable and universal variable life insurance? Variable life insurance has a minimum guaranteed death benefit, whereas universal variable life insurance does not. Universal variable life insurance typically provides a higher death benefit than variable life insurance. Variable life insurance provides no inflation protection for the death benefit, whereas universal variable life insurance does. Variable life insurance requires scheduled premium payments, whereas universal variable life insurance permits flexible premium payments. A) I and IV. B) I and II. C) II and III. D) III and IV.
A Variable life insurance provides a minimum guaranteed death benefit because some of the premium goes into the general account and some goes into a separate account. With universal variable life insurance, the entire premium goes into a separate account, so that no guaranteed death benefit is provided, beyond a very small amount designed to meet funeral expenses. Variable life has a scheduled premium payment for the life of the contract. Universal variable life is far more flexible, though there are minimum payments that must be made. Both provide inflation protection for the death benefit.
When a person acquires ownership of more than 5% of a voting class of a company's equity securities registered under the Securities Exchange Act of 1934, he is required to file a: Schedule 13D Schedule 13F Form 8-K Schedule H
A When a person acquires ownership of more than 5% of a voting class of a company's equity securities registered under the Securities Exchange Act of 1934, he is required to file a Schedule 13D with the SEC. Schedule 13D is commonly referred to as a beneficial ownership report.
Jim and Tammy decide to start a new broker-dealer and establish themselves as the sole shareholders. What facts may be used by the Administrator as grounds for denying their application? Six years ago, Jim pled guilty to one felony count of criminal trespassing. Eight years ago, Tammy's agent license was suspended for one month. Jim's liabilities currently exceed his assets and he is having trouble paying his bills. Jim and Tammy both lack extensive experience in operating a brokerage firm. I only I and III only I, II, and III only I, II, and IV only
A When an application is made for a broker-dealer license, the application may be denied based on the history and condition of the applicant (the broker-dealer) or its controlling persons (Jim and Tammy), officers, or directors. The fact that Jim was convicted of a felony within the last ten years could result in denial of their application. If the applicant is currently subject to a suspension, the application could be denied. However, Tammy's suspension has ended. Insolvency could also be used as grounds for denial, but the Administrator must find that the broker-dealer is insolvent, not an individual controlling person. Lack of experience alone may not be used as grounds for denial.
According to the Investment Advisers Act of 1940, an advisory fee that increases and decreases based on the performance of a portfolio compared to a benchmarking index is called a(n): Participation fee Fulcrum fee Incentive fee Pay for Performance fee
B A fulcrum fee is averaged over a specific period. It increases and decreases proportionately with the investment performance of a client's account, in relation to the investment record of an appropriate index of securities. If the client's account outperformed the index, the adviser would be entitled to an additional fee. If the client's account underperformed the index, the fee would be reduced.
A registered investment adviser provides safekeeping of securities as part of its client services. Which of the following statements are TRUE regarding the safekeeping services provided by the firm? The securities may be held in a vault maintained by the firm. The securities must be deposited with a qualified custodian. A notice must be sent to the clients indicating the secure location or custodian of the securities. Annual statements must be sent to each client of the investment adviser. I and II only II and III only I, II, and III only II, III, and IV only
B According to Rule 206(4)-2 of the Investment Advisers Act, it is a deceptive trade practice to have custody of client cash and securities unless a qualified custodian maintains those funds and securities. When an account is opened with a qualified custodian, the client must be informed of the name and address of the custodian. Account statements must be sent at least quarterly.
Under the Uniform Securities Act, when an IAR acting in the capacity of trustee of a family trust executes a transaction on behalf of the trust, it is A) an exempt security B) a nonexempt transaction C) an exempt transaction D) a violation of the trustee's fiduciary responsibility
B Among the list of exempt transactions is those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question.
A federal covered adviser has offices in every state. One of its IARs splits his time between the NYC and NJ offices and has 10 non-institutional clients in CT and 8 in PA. Where must the IAR register? A. With the SEC B. In NY and NJ only C. In NY, NJ, CT, and PA D. In all 50 states
B Because the IAR is employed by a federal covered adviser, he is only required to register in a state in which he has an office (NY and NJ). If he has no office in a state, no registration is required in the state regardless of how many clients he has there.
There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be: A) limited liability. B) ease of formation. C) substantial capital can be raised with little effort and low cost. D) taxation at a lower rate than a corporation.
B Compared to a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no tax - it is passed on to the partners, to be taxed at a rate that might exceed the corporate tax rate. Corporations are the entity for raising a lot of capital.
A client is seeking a yield of 6.8%. An investment adviser has located two bonds with similar credit quality, duration, and the client s desired yield. After performing discounted cash flow analysis on each bond, the adviser has determined that Bond A is trading at a discount to its present value, while Bond B is trading at a premium to its present value. Which of the following statements is NOT TRUE? Bond A is priced attractively and should be purchased. Bond B is priced attractively and should be purchased. The investor will earn an annual interest rate greater than 6.8% on Bond B. The investor will earn an annual interest rate greater than 6.8% on Bond A. I and III only II and III only II and IV only II, lll, and IV only
B Discounted cash flow (DCF) analysis evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond. (The investor would be overpaying for the bond.)
Under SEC rules, Form 8-K must be filed: A) within ten business days of the event. B) within four business days of the event. C) promptly. D) within 15 business days of the event.
B Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is four business days.
An investment adviser renews its registration with the SEC by filing: A) an annual audited balance sheet. B) an annual updating amendment. C) Forms ADV Part 1 and Part 2. D) a certificate of good standing along with the renewal fee.
B Investment advisers renew their registration with the SEC by filing an annual updating amendment within 90 days (including weekends and holidays) of the end of their fiscal year. An important part of the annual updating amendment is the computation of assets under management (AUM) which confirms the adviser's continued eligibility for SEC registration.
Which of the following statements regarding private securities transactions by state-registered investment advisers is TRUE? Reports must be made to the state Administrator within 10 business days from the end of the month Reports must be made to the state Administrator within 10 business days from the end of the quarter Reports must be made to the state Administrator within 30 calendar days from the end of the quarter Reports are not required to be sent to the state Administrator
B Reports must be made to the state Administrator within 10 business days from the end of the quarter in which the transaction occurred. A total of four such reports may be required in a calendar year.
Under Rule 147, securities sold within the borders of one state are exempt from State registration Federal registration State and federal registration None of the above
B Rule 147, also known as Intrastate Offerings, are exempt from federal registration. However, state registration may be required.
Which of the following statements is TRUE regarding the Consent to Service of Process? It must be renewed every year. It is used for receiving and processing noncriminal complaints. Filing is optional. None of the above
B The Consent to Service of Process appoints the state Administrator to serve as the applicant's attorney for the purpose of receiving and processing noncriminal complaints. It is required of all registrants when they file for registration in a state.
Registering as a federal covered investment adviser generally requires the filing of a number of different forms. Which of the following forms would describe the form of business entity under which the IA is operating? A) Form ADV Part 2A. B) Form ADV Part 1A. C) Form ADV Appendix 1. D) Form ADV Schedule E.
B The Form ADV Part 1A contains the details of most interest to the authorities with whom the IA is registering, including the type of business formation. The Form ADV Part 2A may be used to satisfy the IA's brochure delivery requirement and, as such, contains most of the consumer-related information.
If an agent of a broker-dealer is granted a durable power of attorney, which of the following statements are TRUE? The broker-dealer is considered to have discretion over the client's account. The broker-dealer is considered to have custody of the client assets. The client must be an institution. The agent has the authority to manage the grantor's finances if that person becomes incapacitated. I and IV only I, II, and IV only II and III only I, II, III, and IV
B The durable power of attorney gives someone else the power to manage the grantor's financial affairs if that individual becomes incapacitated. The agent of the broker-dealer may make financial decisions on behalf of the grantor (discretion) and may withdraw funds from the account for the benefit of the grantor (custody). A regular power of attorney terminates if the grantor becomes incapacitated.
When reviewing a corporation's financials, an agent would find which of the following items on the balance sheet? Cost of goods sold EBIT (earnings before interest and taxes) Taxes paid Accounts payable II only IV only II and III only I, II, III, and IV
B The only item listed that is included on the balance sheet is choice (IV). All the other choices are found on the income statement. On your exam, you would need to be able to contrast items that are found on a balance sheet, such as accounts payable, accounts receivable, shareholders' equity, and good will, with items found on an income statement.
A client has $20,000 to invest, a 10-year time horizon, and a desire to have $50,000 at the end of the investment period. The rate of return that must be earned to arrive at $50,000 is called the: Expected return Internal rate of return Current yield Future return
B The rate of return that a sum P0 (present value) must earn over n periods to produce a final (future) value of Pn is the internal rate of return. It is represented by the quantity r in the basic time value of money equation: Pn = P0(1 + r)n A calculator is normally used to calculate the internal rate of return, since it is difficult to compute manually.
All of the following are exempt transactions EXCEPT: A) unsolicited, nonissuer transactions. B) commercial paper with a maturity of no longer than 270 days. C) the sale of securities to a closed-end investment company. D) isolated, nonissuer transactions.
B This question deals with transactions. While all of the items listed are exempt, commercial paper is an exempt security, not an exempt transaction.
Under the Securities Act of 1933, which of the following is (are) exempt from registration requirements? Stocks and bonds issued by insurance companies. Fixed annuities and other fixed insurance contracts. Securities issued by foreign governments. A) III only. B) II only. C) I only. D) II and III.
B Under the Securities Act of 1933, securities issued by insurance companies and foreign governments and securities listed on certain exchanges, which are exempt under the Uniform Securities Act, are not exempt under the Securities Act of 1933. There are differences between the two laws that must be understood. Under the Securities Act of 1933, insurance company stocks and bonds are not exempt, but fixed insurance contracts are exempt.
Which TWO of the following types of insurance have fixed premiums? Whole life insurance Universal life insurance Variable life insurance Variable universal life insurance I and II I and III II and IV III and IV
B Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.
Net long-term capital gains are taxed as ordinary income at the individual's tax bracket, up to a maximum of: 10% 20% 25% 35%
B When an investor has both net long-term gains and net short-term losses, these two figures must be netted. If the result is a net long-term capital gain, it is taxed as ordinary income at the individual s tax bracket, up to a maximum of 20%.
All of the following types are forms of qualified retirement plans, EXCEPT: 401(k) plans 403(b) plans 457 plans Profit-sharing plans
C A 457 plan is a form of nonqualified deferred compensation plan available to some state, local, and nonprofit organization employees.
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63. The trade was executed at: 18.25 18.38 18.50 18.63
C After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price.
Under the Uniform Securities Act, all the following transactions are classified as exempt, EXCEPT: Transactions in equity securities between an issuer and an underwriter The pledge of securities to collateralize a loan The sale of U.S. government securities to a public customer Unsolicited transactions in nonexempt securities
C Choices (a), (b), and (d) are exempt transactions, whereas choice (c) is an exempt security, but not an exempt transaction.
When calculating a fixed-income security's discounted cash flow, which of the following statements is TRUE? A bond trading at a discount to its discounted cash flow value is overvalued. A bond trading at a premium to its discounted cash flow value is undervalued. Discounted cash flow calculations can determine fair market values for a fixed-income security. Discounted cash flow ignores current interest rates of comparably priced bonds.
C Discounted cash flow analysis is a way of estimating the fair market value of an investment based on its projected cash flows. If the market price of a bond is trading at a price greater than the value predicted based on the discounted cash flow calculation, it is overvalued. If the market price of a bond is trading at a price less than predicted by DCF, then it is undervalued. The DCF calculation takes into consideration the current interest rates found in the market for bonds of similar maturities and risk.
Which of the following choices is NOT a characteristic of equity-indexed annuities? A guaranteed minimum rate of return A rate of return that varies along with the underlying index A rate of return that is determined by the subaccounts that the contract owner selects A return that is less than that of the underlying index
C In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate returns may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked; however, it will always be lower than the return on the index.
Under the Investment Advisers Act of 1940, which of the following statements is TRUE regarding jurisdiction for offenses? Generally, federal courts have no jurisdiction if a civil lawsuit based on the Advisers Act is filed in a state court. If the SEC wished to obtain an injunction or seek a civil penalty against an adviser, it would file a case in the federal court having jurisdiction over the place where the violation occurred. An adviser that wished to appeal an SEC order would file a motion in the US Court of Appeals. A) I and II. B) I, II and III. C) II and III. D) I and III.
C Jurisdiction for violations of the Advisers Act lies with the federal courts. Federal courts have concurrent jurisdiction with any state court in which a case involving a violation of the Advisers Act is filed. Persons who wish to appeal SEC orders must do so in the US Court of Appeals serving the district in which the original case was tried.
A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is: a sole proprietorship. an LLC. a C corporation. an S corporation. A) I and III. B) II and III. C) II and IV.
C Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability, but has no flow-through.
The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? Agents. Broker/dealers. Investment Advisers. A) I and III. B) I and II. C) II and III. D) I, II and III.
C Only broker/dealers and investment advisers are required to maintain financial records. Agents must maintain sales records but there are no financial inspections of agents or investment adviser representatives as there are with broker/dealers and advisers.
Your customer has a Coverdell Education Savings Account for each of 4 preteen daughters, Using the 2012 contribution limits, what is the maximum amount of pretax contributions that he can make to each ESA? A) $2,000. B) $500. C) $0. D) $8,000.
C Pretax contributions cannot be made to Coverdell ESAs. The customer is allowed to make a $2,000 after-tax contribution annually for each student until their 18th birthday.
Under the Investment Advisers Act of 1940, which of the following statements is/are TRUE concerning an investment adviser's use of a solicitor? The cash fee paid to a solicitor must be disclosed. A partner, officer, director, or employee cannot perform solicitation activities. The solicitor must provide the client with a separate written disclosure that sets forth the solicitor's relationship with the adviser and any differential in advisory fees charged over the adviser's usual fees. The adviser must receive from the client a signed acknowledgment of receipt of the solicitor's written disclosure brochure.
C Some advisers pay solicitors to obtain clients. If the services of a solicitor are used, various disclosures must be made to the client. In addition to ADV Part 2, there must be a separate solicitor disclosure document that describes the solicitor's relationship to the adviser and the terms of solicitor compensation. Partners, officers, directors, and employees may perform solicitation activities as long as this fact is disclosed.
Those investors, who believe markets are perfectly efficient, may use a passive strategy in which the asset mix of a portfolio is altered on a periodic basis. This strategic asset allocation approach is known as: Tactical asset allocation Sector rotation Systematic rebalancing Buy-and-hold
C Systematic rebalancing is a passive or strategic asset allocation strategy that advocates rebalancing a portfolio on a periodic basis. Tactical asset allocation is used to identify and buy into sectors that are anticipated to outperform the market. As the assets change in value, the portfolio may then be rebalanced frequently in anticipation of market events. A buy-and-hold strategy is a passive approach that doesn't rebalance an investor's portfolio.
The de minimis registration exemption for investment advisers under the Investment Advisers Act would apply if the adviser: Does not hold itself out as an investment adviser, has no more than five clients within 12 months, and no client is a registered investment company Had no place of business within the state, did not direct communications to more than five clients in the state within a 12-month period, and no client is a registered investment company Does not hold itself out as an investment adviser, had fewer than 15 clients in the previous 12 months, and no client is a registered investment company Had no place of business within the state, did not direct communications to more than 12 clients in the state within a 12-month period, and no client is a registered investment company
C The de minimis exemption for investment adviser registration applies to both the Investment Advisers Act and the Uniform Securities Act. The Investment Advisers Act specifies fewer than 15 clients within the previous 12 months, while the Uniform Securities Act has a limit of no more than five clients over the previous 12 months.
Under the Uniform Securities Act, each of the following statements regarding a sale, an offer, or an offer and sale is true EXCEPT: A) any security given or delivered, with or as a bonus for any purchase of securities, is considered to have been offered and sold for value. B) every sale or offer of a warrant or stock right to purchase or subscribe to another security, is considered to include an offer of the other security. C) a bona fide pledge is considered an offer and sale. D) a purported gift of assessable stock is considered to involve an offer and sale.
C The term "sale" does not include a bona fide pledge. It does, however, include securities given as a bonus with a purchase and gifts of assessable stock because the owner of the stock may be called on to produce additional money. Sales of rights or warrants are considered sales of the underlying security.
Which of the following transactions are exempt? XYZ Corp., a local manufacturing firm, sells its common stock to several local individual accredited investors on an infrequent or isolated basis. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation's 5-year fixed income securities, rated AAA by Standard & Poor's, on a regular basis to selected members of his large retail client base. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation's securities to a high-net worth client on an unsolicited basis. Alexander Wimpton had his sizable portfolio of stocks and bonds sold by the administrator of his estate upon his death. A) I and IV. B) I and II. C) III and IV. D) II and III.
C Unsolicited secondary market transactions and those made by an estate's executor are exempt transactions; the net worth of the client is immaterial. While the AAA bonds may be an exempt security, soliciting regular transactions (unless with institutional buyers) is not an exempt transaction. XYZ Corp., a local manufacturing firm, is an issuer of the common stock. Had it been a non-issuer transaction on an isolated basis, the transaction would have been exempt and the accredited investor status of the clients is meaningless here.
The NASAA Statement of Policy on Dishonest and Unethical Business Practices of Broker/Dealers and Agents includes prohibitions against certain practices designed to manipulate market prices of securities. Activities that would fall within the spectrum of the prohibitions would be Churning customer accounts. Guaranteeing customers against loss. Wash trades. Entering matched buy and sell orders to attract attention to the security. A) II and III. B) I and II. C) III and IV. D) I, II, III and IV.
C Wash trades and matched orders are two of the most common forms of market manipulation cited by NASAA in their investigations. Churning and guaranteeing customers against loss, although prohibited practices, are not considered to be market manipulation.
Which of the following types of businesses would probably be LEAST affected by an increase in interest rates? Manufacturing Utilities Cosmetics Automotive
C When interest rates are rising, industrial corporations that market big-ticket items, and utilities, which are heavy borrowers, would be adversely affected. Cosmetic companies, due to the nature of the business and the low cost of their products, are not affected by rising interest rates.
Under which of the following circumstances will the payout from a variable annuity increase? The rate of inflation exceeds the AIR. The performance of the separate account exceeds the rate of inflation. The performance of the separate account exceeds the AIR. The performance of the separate account for the current period exceeds the performance of the separate account for the previous period.
C Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.
ABC Securities is a broker/dealer registered with the SEC and domiciled in Missouri. ABC Securities would not be defined as a broker/dealer in Nebraska under the Uniform Securities Act if it had no offices in Nebraska and: its only clients were insurance companies. it had contact with fewer than 6 Nebraska residents in any 12-month period. its only solicitation of Nebraska residents was through radio advertisements originating in Missouri but received in Nebraska. it occasionally engaged in firm commitment underwriting with issuers based in Nebraska. A) II and III. B) I and II. C) III and IV. D) I and IV.
D A broker/dealer with no office in the state is not defined as a broker/dealer in that state if its only business is with institutions, other broker/dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state.
All of the following are exempt transactions EXCEPT a(n): A) client, on his own initiative, requesting a transaction in a security that is not registered in the state. B) pledgee liquidating securities that were put up as collateral for a loan that has now gone into default. C) administrator of an estate selling securities to liquidate the estate's assets. D) certified financial planner selling NYSE-listed securities to numerous high net worth individual clients.
D A certified financial planner selling NYSE-listed securities to numerous individual clients, regardless of their net worth, might be engaged in a nonexempt transaction, not an exempt transaction. This would not be true if the financial planner's clients were all financial institutions rather than individuals. Transactions by an administrator and an executor are exempt transactions, as are unsolicited nonissuer transactions. When securities that have been pledged as collateral for a loan, if that loan goes into default, the liquidation of that collateral is an exempt transaction.
Under the Uniform Securities Act, an employee of a municipal issuer selling securities to the public is considered: An agent of the issuer and is subject to registration An agent of the issuer and is not subject to registration An agent of a broker-dealer Not an agent
D A person representing a municipal issuer is not considered an agent and would not be subject to registration. If the securities were not exempt, the employee would be subject to registration.
Your firm, which is located in State Y, has been hired to evaluate the investment manager of a pension plan in State Z and make recommendations as to whether to keep the manager or hire a new one. Under the Uniform Securities Act, does your firm meet the definition of an investment adviser? It does, because a fee is being charged for your services as a consultant. It does not, because you are not making investment decisions on the portfolios. It does, because you are advising the pension plan owner and not the participants. It does not, because in this situation your firm is excluded from the definition of an investment adviser.
D Advisers with no place of business in a state and whose clients are only pension plans are excluded from the definition of an investment adviser under the Uniform Securities Act.
An unsuitable transaction was initiated by an agent in Nebraska with a customer who lives in Kansas. The transaction took place in Oklahoma, where the customer was visiting a relative. Under the Uniform Securities Act, which Administrators have authority over the transaction? The Nebraska Administrator The Kansas Administrator The Oklahoma Administrator I and II only I and III only II and III only I, II, and III
D All of the Administrators could have authority over the transaction since each state's jurisdiction was crossed.
If a federal covered adviser changes its fee: The investment adviser must file an amended ADV Part 2 with the state Administrator The investment adviser must file an amended ADV Part 2 with the SEC The new fee must be reflected in the Brochure All existing clients must be advised I, II, and III only I, II, and IV only II, III, and IV only I, II, III, and IV
D All of the statements listed are correct concerning the actions a federal covered adviser is required to take if the fees charged to clients are changed.
In portfolio theory, the alpha of a security or a portfolio is: A) the portfolio's average return in excess of the risk-free rate divided by the standard deviation in returns of the portfolio. B) a measure of the variance in returns of a portfolio divided by its average return. C) the risk of the portfolio associated with the macroeconomic factors that affect all risky assets. D) the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved.
D Alpha is the difference in the expected return of the portfolio, given the portfolio's beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the macroeconomic factors that affect all risky assets is systematic risk. The portfolio's average return in excess of the risk-free rate divided by the standard deviation in returns of the portfolio is the Sharpe ratio or measure. The measure of the variance in returns of a portfolio around its average return is the standard deviation.
Rule 501 of the Securities Act of 1933 creates a category of person known as an accredited investor. Included in that definition would be all of the following EXCEPT: A) pension plans. B) banks. C) insurance companies. D) investment adviser representatives.
D Although the individual IAR might personally qualify as an accredited investor, the rule does not offer a blanket inclusion to those securities professionals.
Which of the following statements best describes an equity-indexed annuity? It is a variable annuity that tracks a major index It is a variable annuity that guarantees a minimum return It is a fixed annuity that mirrors the performance of a designated index It is a fixed annuity that offers the potential for greater returns
D An equity-indexed annuity is a type of fixed (nonvariable) annuity. There is no SEC registration requirement for these contracts. The owner receives a guaranteed minimum interest rate. The upside potential exists since the rate of return is tied to an index such as the Standard & Poor's (S&P) Index. If the index underperforms, the client receives the minimum rate. If the index performs well, investors will receive the indexed return up to a maximum capped rate
Under the Uniform Securities Act, which of the following statements is TRUE regarding the Administrator's power to deny or revoke an exemption? A) The Administrator may not revoke the exemption of securities issued by a nonprofit corporation. B) The revocation may apply to a period prior to the date on which the revocation order was issued. C) In a proceeding to revoke an exemption, it is assumed that the exemption applies and the Administrator must prove that it does not apply. D) An order revoking an exemption may be issued without prior notice to the persons affected.
D An order revoking an exemption, sometimes referred to as a summary order, may be made effective without prior notice. The injured party may request a hearing in writing, which must be granted within 15 business days of receipt of the request. No denials or revocations may be made on a retroactive basis. The Administrator does have the power to revoke the exemption granted to securities issued by nonprofit entities. In any proceeding, the burden of proving an exemption is on the person claiming it, not the Administrator.
Which of the following statements are NOT TRUE regarding a comparison of strategic versus tactical asset allocation? Strategic asset allocation focuses on the client's investment objectives and risk tolerance, while tactical asset allocation focuses on economic and market conditions. Strategic asset allocation has a long-term outlook, while tactical asset allocation encompasses short-term decisions. Unlike strategic asset allocators, tactical asset allocators believe that investors can time the market. None of the above
D Asset allocation based on a client's risk tolerance and investment objectives is called strategic asset allocation. In theory, it is the best mix of assets, given the client's goals and level of risk aversion, giving it a long-term outlook. Strategic asset allocators tend to view the market as efficient and market timing as ineffective. By contrast, those who believe securities markets are not perfectly efficient may try to use an active strategy to alter the portfolio's asset mix, to take advantage of anticipated economic events. This market timing approach is sometimes called tactical asset allocation.
A whole life insurance policy would be most appropriate for which of the following individuals? A 65-year-old man, whose objective is to accumulate enough money to pay for an elaborate funeral A 72-year-old grandmother who wants to insure that funds will be available for her grandchildren's education A 27-year-old single man who wants to pay the lowest premium for his life insurance A married 29-year-old woman with a successful career and two small children who is concerned about their future if she should die before they reach adulthood
D Based on the individual's age, and objectives, a whole life insurance policy is most appropriate for the married 29-year-old woman
Investors often use financial futures to hedge portfolios against which of the following types of risk? Business risk Political risk Event risk Market risk
D Buyers and sellers of financial futures are often trying to hedge portfolios against interest-rate risk, exchange-rate risk (also called currency risk), and market risk. Business risk is the possibility that certain circumstances will affect the profitability of a company. Political risk is usually high in emerging markets and is the risk of losing money due to changes is a foreign country's government or regulatory environment. Financial futures cannot protect against these types of risks.
Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: no contract may be terminated with more than 60 days notice in writing. the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis. unless a specific exemption applies, the fund may not engage in margin trading. the contract must be in writing. A) II and IV. B) II and III. C) I and III. D) I and IV.
D Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract.
Empire State Financial Advisers' sole office is located in New York City. Empire has only one client, the New York State Triple Tax Free Municipal Bond Fund. Empire exercises discretion over the investments of the fund, and also performs safekeeping services for the fund. Which of the following statements is/are TRUE? Empire must register with New York State as an investment adviser. Empire must meet the minimum net worth requirement of the Uniform Securities Act or New York State, whichever is higher, since it has discretion over a client's funds. Empire must meet the minimum net worth requirement set by the Uniform Securities Act or New York State, whichever is higher, since it maintains custody of a client's funds and securities. Empire does not need to post a bond or meet net worth requirements because there are no such requirements under the Investment Advisers Act. I only I and II only I, II, and III only IV only
D Empire is acting as an investment adviser for the New York State Triple Tax Free Municipal Bond Fund, which is an investment company under the Investment Company Act of 1940. Empire, by definition, is a federal adviser subject to registration with the SEC (not New York State). There are no net worth requirements under the Investment Advisers Act.
Under the Investment Advisers Act of 1940, which of the following statements are TRUE? Part 2 of Form ADV may be used to satisfy the brochure requirement. Advisers who have custody of clients' securities or require prepaid fees in excess of $1,200, 6 months or more in advance are required to provide certified balance sheets to their clients. Advisers with $110 million or more in assets under management must be SEC registered and are exempt from state registration. It is misleading and prohibited for an adviser to use RIA or R.I.A. after his name. A) I, II, III and IV. B) III and IV. C) II, III and IV. D) I, III and IV.
D For advisers covered under federal law, the balance sheet is only required when demanding, or accepting substantial prepayments, but not for custody. RIA is not a legal designation and may not be used. The same is true for an investment adviser representative using the initials, IAR. If you are a CPA, CFP, CLU, etc. or have an MBA, PhD., you may use them. ADV Part 2 may be used to meet the brochure requirement under the Investment Advisers Act.
Form 8-K must be filed by: A) registered foreign issuers. B) registered broker/dealers. C) ADRs. D) registered domestic issuers.
D Form 8-K filings are required for domestic issuers, registered under the Act of 1933, to report newsworthy events to the SEC. Foreign Issuers, ADRs, as well as broker/dealers, are exempt from having to file.
Mary Baker operates an investment advisory company. Eight years ago, she was the subject of an SEC investigation involving improper actions between her customers and herself. Under the Investment Advisers Act of 1940, Mary's obligation to her clients is to: disclose to prospective clients that she was the subject of a proceeding and the proceeding's outcome. make disclosures regarding the case only if the prospect becomes a client. disclose all details of both her actions and the outcome of any proceedings. A) I and III. B) I, II and III. C) II only. D) I only.
D If an adviser has been the subject of a material criminal, civil, or regulatory action within the past ten years, that fact must be disclosed to all clients and prospective clients. Disclosure must be made at least 48 hours before signing any contract, or it may be made immediately before signing, provided that the contract gives a 5-day cancellation clause with no penalty. The adviser is not required to give the details of her actions, only the outcome of any proceedings resulting from said actions.
Which of the following situations would NOT require an adviser to provide customers with an annual audited balance sheet? Having custody of client assets Receiving substantial prepayment of advisory fees Having full discretionary power over the client's account None of the above
D Investment advisers who have custody of client assets, or who receive substantial prepayment of advisory fees, or who have full discretion over client accounts, are required to provide an audited annual balance sheet to their clients.
Which of the following investments are prohibited under the UPIA? Speculative option positions Penny stock investments Junk bonds None of the above
D No type or class of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and makes an assessment as to the risk/reward trade-off of the investments selected when determining if an asset mix is acceptable for a given account. The standard of prudence is applied to the whole portfolio as opposed to individual investments.
Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend? A GTC order to sell 100 XYZ at $50 A GTC to buy 100 XYZ at $50 stop A GTC to buy 100 XYZ at $50 A GTC to sell 100 XYZ at $50 stop I and II II and III II and IV III and IV
D Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are placed below the current market at the time of entry are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC buy limit and sell stop orders are entered below the market, and are reduced on the ex-dividend date.
Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock. A) I, II and III. B) I and II. C) I only. D) I, II, III and IV.
D S corporations must not have more than 100 stockholders and each stockholder must be a citizen or resident of the United States. The corporation can only have one class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all of the other choices are correct and there is no way to select them without this one.
An investor purchases 100 shares of DEF common stock at a price of $40 per share. The investor sells the shares for $42 per share exactly 4 months later. The annualized rate of return is closest to: A) 5%. B) 2%. C) 20%. D) 15%.
D The approximate annualized return is calculated by taking the holding period return and multiplying it by the annualization factor. In this case, the investor profited by $2 on an investment of $40, or a 5% return. However, this was earned in a 4-month period, 1/3 of a year. Therefore, the 5% is multiplied by 3, resulting in an annualized rate of 15%.
During the first quarter, TJG common stock paid a $.75 dividend. The stock's price fell from $75 per share at the beginning of the quarter to $67.50 per share at the end of the period. Based on these results, what is the stock's annualized total return? 2% -9% -10% -36%
D The total return for a security is found by taking the ending value minus the beginning value plus any income. In this example, the ending value of the stock was $67.50 minus the beginning value of $75.00 plus $0.75 in dividends. Dividing this sum by the beginning value of $75.00 will equal a 9% loss for the quarter. Multiplying this by four quarters will equal an annualized loss of 36%.
A method of valuing an investment, particularly debt securities, by calculating what future cash returns will be worth at the time they are received, based on estimates of future inflation and interest rates is known as A) dividend discount model B) yield to maturity C) net present value D) discounted cash flow
D This is the basic definition of discounted cash flow, a useful tool in determining the value of debt securities.
Which of the following is not related to the variability of a portfolio's returns? A) Security selection. B) Market timing. C) Asset allocation. D) Total return.
D Total return is a measurement of the investor's return on the portfolio. It has nothing to do with market variability, which is a more complicated way of stating market risk.
Mandy is an employee of the Indiana Toll Authority. Her boss, a high ranking official with the municipality, asks her to help sell the municipality's revenue bonds to some institutional clients as well as a few retail investors. How is this situation viewed by the USA? Mandy avoids meeting the definition of an agent if she sells the securities only to institutional investors. Mandy meets the definition of an agent if she sells the securities to any retail investors. Mandy meets the definition of an agent since she is selling the municipal securities to individual retail investors. Mandy does not meet the definition of an agent under any circumstances.
D Under the Uniform Securities Act, an agent is any individual (other than a broker-dealer) who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. Excluded from the definition is an individual who represents an issuer in effecting transactions in certain exempt securities or who represents an issuer in exempt transactions. Since Mandy is representing an issuer and selling a certain type of exempt security (securities issued by municipalities), she would not meet the definition of agent under any circumstances (whether selling to institutional and/or retail investors).
Which of the following statements concerning universal life insurance are CORRECT? Universal life has flexible premiums. Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. The death benefit can fluctuate, but never below the guaranteed minimum face amount. Cash values can fluctuate and may even fall to zero. A) III and IV. B) II and III. C) I and II. D) I and IV.
D Universal life features flexible premiums that add to the cash value account although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies.
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A) send a copy of its brochure to all clients within 90 days of the end of its fiscal year B) send a copy of its brochure within 7 days of receiving a request from a client C) send a copy of its brochure to all clients within 60 days of the end of its fiscal year D) send a copy of its brochure to all clients within 120 days of the end of its fiscal year
D Whether a state or federal covered investment advisers, a copy of the IA's brochure, assuming there have been material changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.
Under the Investment Advisers Act of 1940, an investment adviser that operates in only one state has no private funds as clients, and restricts advice only to securities not listed on a national stock exchange: A) must file as an associate under the act. B) is exempt from both state and federal registration. C) must register under the act. D) is exempt from registration with the SEC under the act.
D While not excluded from the definition of investment adviser, some advisers are exempt from the requirement to register with the SEC. These include investment advisers whose clients are all residents of the state in which the adviser maintains its principal office and that confine their advice to securities not listed with a national exchange or that enjoy unlisted trading privileges on a national exchange; investment advisers whose clients are limited to insurance companies; and as long as none of their clients are private funds.