Exam 3&4
An agent for a broker-dealer receives a buy order from an investment advisory firm on behalf of its clients. The order is to purchase 5,000 shares of XYZ common stock at the market. The adviser informs the agent that once the purchase is completed, the account numbers and quantities for each individual client will be supplied. The buy is completed, but at various prices. How is the order allocated to the adviser's accounts? A) A first-in, first-out (FIFO) method is used. B) The most favorable prices are allocated to the adviser's clients purchasing the largest quantities. C) The order is reallocated to the investment adviser's clients by using the average cost basis. D) The trade cannot be accepted and must be moved to the broker-dealer's errors account.
C. This is not an uncommon practice where an investment adviser has the ability to direct clients' orders to a specific broker-dealer. In many instances, the adviser will be purchasing (or selling) the same security for a number of different clients and, rather than turning in a large number of small orders, enters the trade as one large order. If, as in this case, the order is filled at different prices (particularly prevalent today with decimal pricing), then both state and federal rules require that an average price method be used. U7LO
ABD Corporation's income statement reports net sales of $100 million, cost of goods sold of $60 million, administrative costs of $20 million, and interest on debt of $5 million. Based on this information, ABD's gross margin is A) 35%. B) 40%. C) 20%. D) 15%.
Gross margin is computed by subtracting the cost of goods sold (COGS) from the net sales (or revenues) and dividing the remainder by the net sales. In this case, the computation is $100 million minus $60 million which equals $40 million and then dividing that by the $100 million resulting in a gross margin (or margin of profit) of 40%. Administrative costs and interest are not included in COGS. U10LO7
Bill will put money into stocks only if he expects that stock returns, over time, will outpace bond returns by some amount that compensates him for the added volatility of owning stocks. This reflects A) time premium B) option premium C) premium priced bonds D) risk premium
Investors will put money into stocks only if they expect that stock returns, over time, will outpace bond returns by some amount that compensates them for the added risk of owning stocks. This extra return from stocks is known as risk premium-literally, the premium an investor receives in exchange for owning a riskier, more volatile instrument. U23LO2
Which of the following would be deemed to be an assignment of an investment adviser's contracts? 1. All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc. 2. The Lucky Seven Partnership is an investment adviser with 7 partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. 3. Albert is an investment adviser. His clients' accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan.
It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment. U6LO4
Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes? A) Class T shares B) Class A shares C) Class B shares D) Class C shares
Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class T shares always have a 12b-1 charge. U14LO4
Under the Uniform Securities Act, the term broker-dealer would include A) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period B) a trust company C) an issuer distributing its own common stock offering D) an agent registered under the act who from time to time sells stock from personal inventory
A. Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for broker-dealers. A person is exempt from the definition of broker-dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients who are not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker-dealer. U3LO2
One reason for including commodities in an investment portfolio is because they have a high correlation to A) the inflation rate. B) the U.S. dollar. C) the bond market. D) the stock market.
A. Commodity prices tend to have a high correlation with the inflation rate. As inflation goes up, the value of the dollar generally falls. The relationship is inverse, a characteristic of negative correlation. As inflation increases, interest rates invariably do the same leading to a decrease in bond prices. Stock prices have a random correlation to commodities, generally negative. U17LO7
An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except A) a registered investment company. B) a charitable foundation. C) a university endowment fund. D) a single parent.
A. This is a bit sneaky. In order for an investment adviser to enter into an advisory contract with an investment company, the adviser must be SEC registered (federal covered). Federal covered investment advisers are never registered in any states. U18LO1
If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when A) the rating of the security has just been upgraded B) the current market price is below the PV C) the current market price equals the PV D) the current market price is above the PV
B. Those who use the DCF to value a security would recommend purchasing when the current market price is below the PV—that is, when the NPV is positive. U10LO1
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered a prohibited practice for a broker-dealer to A) maintain an office in the state, but fail to register with the Administrator B) have a history of repeatedly delaying the delivery of securities to its customers C) inform customers that past performance is no guarantee of future results D) fail to maintain the required net capital
B.Broker-dealers are obligated to make prompt delivery of securities to their clients. Failing to maintain the required net capital and failing to register are violations of the law, not prohibited business practices. U7LO4
Greater Wealth Managers, (GWM) is an investment adviser registered in States A, B, C, and D. They have recently hired an individual to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A) no registration is required, because this individual is not rendering investment advice B) registration as an investment adviser representative and as an agent is required for this individual C) no registration is required, because this individual is not rendering investment advice and is being closely supervised D) registration as an investment adviser representative is required for this individual
D. Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs. U7LO1
An agent registered in one state may solicit business in another state, provided A) both the agent and the employing broker-dealer are properly registered in the other state B) the agent's firm is properly registered in the other state C) the agent was previously registered with a different firm in the other state D) the agent applies for registration in the other state
An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available. U3LO5
The owner of a fixed annuity is protected against A) loss of money due to early death. B) purchasing power risk. C) inflation risk. D) longevity risk.
Because a fixed annuity promises a fixed monthly payment for life, longevity risk is not a concern. However, the fixed payments are subject to purchasing power risk, also known as inflation risk. One other risk is that of dying after only receiving payments for several months after having chosen the life only option. U15LO2
A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed in the summary of material changes in the annual updating amendment to the SEC B) disclosed promptly to all customers by amending the brochure C) disclosed promptly to the Administrator of the state where the IA maintains its principal office D) disclosed promptly only to those customers who will be affected by the change through an amended brochure
D. Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure. U6LO4
Sally is registered as an agent with ABC Securities Co., a major brokerage house with offices in most states. ABC has recently introduced a fee-based asset management program and has asked Sally to devote one hour per day soliciting her existing clients for this program. Under the USA, Sally would be required to obtain registration as a registered investment adviser representative.....
Once ABC Securities Co. begins offering a fee-based asset management program, it loses its exclusion from the definition of investment adviser. One could assume that a national firm like this would probably become a federal covered adviser. If Sally wants to solicit anyone, existing clients or not, for this type of program, she could not do so until registered as an investment adviser representative. U2LO1
Which of the following statements concerning equity securities is not correct? A) Equity securities provide a residual claim, after payment of all obligations to fixed-income claims, on the income and assets of a corporation. B) Common stock is an equity security representing an ownership interest in a corporation. C) Preferred stock is an equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings. D) Equity securities represent a lending interest in a corporation.
D. Equity securities represent an ownership interest in a corporation. Preferred stock, as a senior security, has a claim ahead of common, but behind debt securities. U12LO1
Which of the following statements is NOT true? A) The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus. B) Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares. C) Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days. D) Open-end investment companies must have a minimum of $1 million in assets to have a public offering.
D. Minimum assets are 100,000
The Investment Advisers Act of 1940 requires every registered investment adviser to have a chief compliance officer (CCO). This individual would be responsible for ensuring compliance with the firm's Code of Ethics by all of these EXCEPT A) investment adviser representatives who are independent contractors B) investment adviser representatives employed by the firm C) clerical and ministerial employees of the firm D) a nonaffiliated broker-dealer through whom the majority of the firms trades are executed
D. The CCO is responsible for compliance with the firm's Code of Ethic by every employee, registered or not, and any nonemployee who is registered with the firm, such as independent contractors. Broker-dealers the investment advisory firm uses for trade execution are beyond the scope of the IA's supervision. U1LO6
An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) within 48 hours B) when informed by the Administrator that the representative's registration is effective C) immediately D) when informed by the investment adviser that the representative's registration is effective
Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual. U2LO3
If you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about A) TIPSs. B) ETNs. C) ETFs. D) REITs.
The calculated value, called the indicative value or closing indicative value for ETNs, is calculated and published at the end of each day by the ETN issuer. U17LO3
A client owns an investment-grade bond with a coupon of 5% that is priced to yield 6.7%. If similarly rated bonds are being issued today with coupons of 7%, it would be expected that the client's bond has a negative net present value....
With a discount rate of 7% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 5% coupon rate will be selling at a discount (interest rates up, prices down). We are told that this bond is offering a yield of 6.7%, which is less than the current market rate. Because a present value computation using a 6.7% rate would reflect a higher value than a 7% rate (the higher the discount rate, the lower the value), that would mean that the bond can be purchased at a price above its present value. Anytime that occurs, the instrument has a negative net present value (the difference between the price and the present value). U10LO1
