65 Unit 1 Questions
Gift & Estate Tax - Maximum tax rate for both is?
40%
Which of the following are securities under the Uniform Securities Act? A)A variable annuity. B) A subscription right to purchase common stock. C) A condominium purchased solely as a place of residence. D) Certificate of interest or participation in an oil, gas, or mining partnership.
A,B,D Securities include stocks, bonds, notes, certificates of interest in any profit-sharing agreement or participation plan (oil, gas, mining, lease, or real estate partnerships), preorganization certificates or subscription agreements, certificates of deposit for a security, evidence of indebtedness, warrants, rights, or options, variable annuities, commodity options, and multi-level distributorships. Excluded from the definition are insurance contracts, endowments with fixed benefits, fixed annuities, Keogh or IRA plans, written confirmations of a trade, futures contracts, real estate held as a personal residence, currencies, precious metals, and collectibles.
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees?
Account closing fees It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers.
Trade confirmations sent by broker-dealers to their customers must always include A) the current market price of the security traded B) the amount of commission charged C) the tax identification number of the customer D) the amount of markup or markdown charged
B Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.
Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? A) An adviser who exercises discretion in client accounts. B) An adviser who maintains custody over client funds and securities. C) An adviser who maintains less than $35,000 in net worth. D) An adviser who, 6 or more months in advance, collects prepaid fees of more than $500.
B & D The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees.
Which of the following is NOT classed as a security under the Uniform Securities Act? A) Heating oil futures B) Options on stocks. C) Bonds issued by a foreign country. D) Stocks.
Commodity futures on items such as gold, silver, wheat, heating oil, and pork bellies are not securities.
Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT A) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM B) Grand Visions Advisers, a sole proprietorship with $104 million in AUM C) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states D) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board
Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: 1. pension consultants once their AUM reach $200 million; small and mid-size advisers who would be required to register in 15 or more states; and 2. those advisers with at least $100 million in AUM, but not $110 million in AUM 3. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.
In response to an evolving marketplace, the SEC, through Release IA-1092, expanded the coverage of the definition of investment adviser to include A) broker-dealers offering wrap fee programs and financial planners B) broker-dealers offering wrap fee programs and life insurance agents C) life insurance agents and pension consultants D) financial planners and pension consultants
D SEC Release IA-1092 added financial planners, pension consultants, and sports and entertainment representatives to the list of potential IAs. Unless the life insurance agent is offering investment advice, the agent does not meet the definition of investment adviser. The Release did not address wrap fee programs because the exclusion for broker-dealers is part of the Investment Advisers Act of 1940; once special compensation in the form of wrap fees is received, the exclusion is lost.
Do solicitors need to register as IAR's under Federal vs. State law?
Federal: No State: Yes, regardless of whether they're not rendering investment advice
Registration under USA for federal covered IA's?
IAR's only need to register if they have a PLACE OF BUSINESS in the state
On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions are required for Alpha?
If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.
CPI
Lagging indicator
S&P Market
Leading Indicator
A Form K-1 would be used for tax reporting to the owners by which of the following business entities? - Sole proprietorship - S corporation - C corporation - LLC
Legal entities that pass through income or loss use the Form K-1 to indicate the amount of that income or loss attributable to the individual shareholder/member/partner. Sole proprietorships generally complete Schedule C of the individual Form 1040, and C corporations are taxed themselves by filing a Form 1120 (S corporations file a Form 1120s along with a K-1 for each shareholder).
Which of the following would NASAA consider to be a substantial prepayment of fees? A) $500 covering the next six months B) $600 covering the next calendar quarter C) $1,000 covering the next month D) $600 covering the entire contract year
NASAA defines a substantial prepayment of fees to be MORE than $500, six or more months in advance.
Oral discretion IA's vs. BD's
Oral discretion is only permitted for investment advisers and their representatives, (never broker-dealers or agents), during the first 10 business days after the initial discretionary transaction in the account.
Assets vs. Liabilities: Pre-paid expenses & Deferred Tax Credits?
Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.
Gift Tax and Estate Tax are taxed how?
Progressive - differs based on the amount gifted
IA's using testimonials in advertising (State and Federal Law vs. FINRA)
Testimonials promoting investment advisers' services are prohibited under both state and federal law, regardless of whether a spokesperson receives compensation. This is in contrast to FINRA (NASD) rules, which do permit testimonials as part of advertising as long as proper disclaimers are made.
Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA's principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC's pay-to-play rule, A) WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years B) WCA could be subject to disciplinary action C) WCA would be prohibited from rendering any advisory services to any agency of State L for 2 years D) WCA's contribution is within the de minimis limitation because their principal office is located in State L
The SEC's pay-to-play rule prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision), for 2 years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. Please note that the advisory relationship can continue, just without any compensation. The de minimis exemption of $350 applies to an individual, as long as that person is eligible to vote for the candidate ($150 if he is not), but it never applies to the firm.
The annual updating amendment to Form ADV must be filed within
The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal year end.
Which of the following is (are) required to register with a state Administrator? a) Investment adviser representatives of federal covered advisers who have natural person clients and have a place of business in the state b) A person who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation c) An investment adviser registered in a different state and who has no place of business in the state, but has had fewer than 6 individual advisory clients in this state during the previous 12 months d) A person who is an officer of a federal covered investment adviser and does not function as an investment adviser representative
The investment adviser representatives of a federal registered adviser are required to register in each state in which they have a place of business. Under state law, the publication of investment advice that is not based on the specific investment situation of each client excludes the publisher from the definition of an investment adviser. Based on this definition, the publisher of an investment advisory newsletter providing only impersonal investment advice available only on a subscription basis is not required to register with the Administrator. The Uniform Securities Act provides a de minimis standard exemption from state registration for advisers who have no place of business in a state and have fewer than six clients resident in the state over a 12 month period. A person employed as an officer of a federal covered investment adviser who does not function as an investment adviser representative is not required to register with state Administrators. Note: the automatic registration of officers, partners, and directors only applies to those individuals performing the functions of an investment adviser representative.
Gross Estate vs. Adjusted Gross Estate vs. Taxable Estate
The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Mr. Wright possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses.
Which of the following vehicles make use of the unified estate tax credit? i) bypass trust. ii) generation skipping trust. iii) living trust. iv) simple trust.
The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Mr. Wright possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses.
Agent registration if under an Issuer vs. a Broker Dealer
Under the USA, an agent is defined as an individual who represents a broker-dealer selling any type of security, whether that security is exempt or nonexempt. Individuals who represent issuers in trading exempt securities or exempt transactions are not defined as agents. An individual who represents an issuer selling nonexempt securities is an agent and must be registered.
Emmet opened an investment advisory service 3 years ago and raised $50 million in capital from family, friends, and contacts and then closed to new investors. If Emmet's stock picks expanded assets under management to $110 million, Emmet:
When the annual updating amendment filed by a state-registered investment advisory firm indicates that the $110 million threshold has been reached, the firm has 90 days to register with the SEC.
Which of the following statements is (are) TRUE concerning wrap fee programs under the Uniform Securities Act? -Wrap fee disclosure documents must be filed with the Administrator. -Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. -Amendments must be filed promptly with the Administrator if the disclosure document becomes inaccurate in any material way. -The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A.
Wrap fee disclosure documents must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Amendments must be filed promptly with the Administrator if the disclosure document becomes inaccurate in any material way. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end.
alternate valuation date
alternate valuation date, the value per share is the value at the date six months after death, unless the property is sold prior.
Gift Tax Exemptions?
$14k per year per person to an individual; $28k per person to a married couple
Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches?
$150 million
Lifetime Gift Exemption?
$5.6M; $11.2M joint
Registration under USA for state registered IA's?
- Place of Business - & De Minimis Exemption
What are the SIX items NOT considered securities under the USA?
1) Collectibles 2) Condominiums used as personal residence 3) Commodities (precious metals & grains) + futures contracts 4) Currency 5) IRA's & Keogh Plans 6) Insurance or Endowment policy or Annuity contract where there's a promise of a fixed sum of money
Under the Investment Advisers Act of 1940, the following are excluded from the definition of investment adviser:
1) banks or bank holding companies 2) publishers of bona fide publications of general and regular circulation, such as newspapers and magazines; 3) persons advising about government issues; 4) and persons whose advice is incidental to their profession and for which they receive no separate compensation. (LATE: Lawyers, Accountants, Teachers & Engineers)
Agents & Discretion & Surety Bonds
Agents who exercise discretion may need a surety bond, but not a minimum net worth.
What is the distributable net income (DNI) for a trust?
All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI.
Which of the following would not be an issuer? A) a corporation selling certificates of interest in a mining lease. B) an investment company. C) a governmental agency borrowing money for short-term needs. D) a partnership selling partnership interests.
Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.
A US citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports a:
An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability.
Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply (applies)? A) The board of directors has sole approval authority. B) The majority of the outstanding shares has sole approval authority. C) Both the board and the majority of outstanding shares must approve it. D) A distribution plan must be written.
C & D For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares as well as a majority of the board of directors, including a majority of directors classified as outside directors.
All of the following statements regarding registration of broker-dealers under the Uniform Securities Act are true EXCEPT A) broker-dealers with discretion over client accounts may be required to post a surety bond B) a successor firm is exempt from filing a consent to service of process until the renewal date C) no broker-dealer can be required to meet financial requirements in excess of those of the SEC D) a successor firm is exempt from paying registration fees until the renewal date
When one firm succeeds another, no fees are due until renewal date. However, the successor firm must file a consent to service of process at the time it registers. Broker-dealers with discretionary authority may be required to post a surety bond or maintain minimum net capital. However, no state can impose financial or recordkeeping requirements that exceed those of the SEC.
