Exam 7&8
Which of the following are characteristics of a money market mutual fund? 1. Shares are offered without a sales charge. 2. There is a redemption fee. 3. All purchasers must receive a copy of the prospectus. 4. The letter of intent must be signed within 16 months.
1&3. Money market funds are offered without sales loads or redemption fees. As with all mutual funds, a prospectus is required. U14LO10
Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A) compensation earned on dealings with clients B) the fact that any listed person has no formal education after high school C) the name, title, and telephone number of the individual supervising any listed person D) disciplinary information about material events within the past 10 years
A. It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed. U6LO4
An investment adviser is a member of the board of directors of a privately held corporation that has just gone public. The adviser would like to recommend the stock to several of his advisory clients. Which of the following statements are TRUE? 1. The adviser can do so without restriction. 2. The adviser must disclose the existence of a control relationship. 3. The adviser may base his recommendation on all information at his disposal. 4. The adviser must base his recommendation on publicly available information.
As a director of a public company, the adviser is an insider and must disclose this relationship to any clients that were recommended the stock. Further, as an insider, the adviser must be careful to base his recommendations on publicly available information or there would likely be a violation of the insider trading rules. U7LO5
Under all of the following circumstances, the USA requires investment advisers with no place of business in the state to register EXCEPT A) when an adviser with numerous clients in the state has not been subject to disciplinary action within any state within the last 10 years B) when an adviser only provides advice to registered investment companies C) when an adviser only provides investment advice to 401(k) plans with assets of $250,000 or more D) when an adviser has maintained assets of $100 million or more for 7 out of the last 10 years
B. An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered and does not have to register in a state, regardless of whether or not it has a place of business there. An adviser that provides advice only to 401(k) plans or other tax qualified employee benefit plans with $1 million in assets (not $250,000) is not required to register in a state in which it does not have a place of business. The assets of the adviser is not what determines becoming a federal covered adviser; it is assets under management and the determining factor is the AUM now, not the range over the previous 10 years. U1LO3
A grandparent wishes to contribute funds to an account for the benefit of the college education of a grandchild. In which of the following does the donor have the greatest amount of control over the assets in the account? A) A Coverdell ESA B) A Section 529 plan C) An UTMA account D) An UGMA account
B. It is the Section 529 plan that offers the greatest amount of control to the donor. In the case of the ESA, on the IRS form used to open the account, it states: "The 'responsible individual"' named by the depositor shall be a parent or guardian of the designated beneficiary." Unless we are told that the grandparent has been appointed as legal guardian, there is a lack of control. And, even then, one thing the "responsible individual" cannot do that the donor to a 529 plan can is take the money back. Although the grandparent could be named the custodian of the UGMA or UTMA account, the only authority there is to make the investment decisions and disbursements until the termination age of the account. U24LO6
An investment adviser is servicing a group of physicians and will offer a discounted fee to the doctors in that particular partnership. In what way would this be considered ethical? A) This would be permitted as long as each physician has a unique contract. B) This would be permitted as long as a disclosure is made in the IA's brochure that fees are negotiable. C) This would be permitted as long as the adviser is not a patient of any of the physicians in that group. D) This would be permitted if all the physicians had a minimum net worth of at least $1.5 million.
B. Item #5 on the Form ADV Part 2A asks about the adviser's fee schedule. The adviser can indicate what types of fees are charged and whether or not they are negotiable. In a manner similar to a mutual fund breakpoint, when a group, not formed for the purpose of investing, contracts with an investment adviser, the adviser may choose to consider it one very large client rather than several smaller ones. This will generally result in a reduction in the percentage charged. U6LO1
Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP) and receives a referral fee for each person who becomes a client of RIP. The practice A) would only be acceptable if the fee was nominal and not based on the size of the account. B) would only be acceptable if the fee was used to reduce the referring client's advisory fees. C) is acceptable because the referral fee is being paid to a registered investment adviser. D) is prohibited under any circumstance.
C. When a referral fee is paid to another registered firm, there is no problem. The only other requirement is that disclosure of this relationship and any additional cost possibly resulting from the referral fee must be made to each client who signs up with RIP as a result of the referral. U7LO1
The difference between present value and net present value represents A) the credit risk premium B) the discounted cash flow C) the internal rate of return D) the initial cash outlay
D When computing the net present value, we remember that the word net means that something must be subtracted. The number subtracted is the initial cost of the investment. U10LO1
You have a client who originally invested $25,000 into the ABC Growth Fund. Over the past 5 years, there have been no distributions and the value of the shares is now $35,000. If the client should ask about exchanging the entire holding for shares of the ABC Income Fund, you would explain A) the new shares would be acquired at the public offering price B) the new shares will have the same cost basis as the old ones C) that taking advantage of the exchange privilege results in taxes being deferred until the liquidation of the account D) there is a long-term capital gain of $10,000
D. The exchange privilege permits shares of one fund in the family (The ABC Fund Group) to be exchanged for shares of another at net asset value, not public offering price. However, for tax purposes, it is considered a sale and a purchase so there would be a capital gain realized on any difference between the cost basis and the proceeds. In this case, the new shares would have a new cost basis of $35,000. U14LO10
What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) Accept the certificate and send the customer a receipt within 24 hours of the delivery. B) Instruct the client to send the certificate to the transfer agent because you cannot accept it. C) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000. D) Accept the certificate and give the customer a receipt.
D. When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers. U7LO2
As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (net unrealized appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long-term capital gain rates on the appreciation whenever the stock was sold. U24LO4
Question ID: 1180621
Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) straight-line depreciation. B) accelerated depreciation. C) certain incentive stock options. D) excess intangible drilling costs.
Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerated depreciation, only one of which is a preference item. U21LO4
According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing? A) 60 B) 45 C) 30 D) 90
The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application. U1LO5
A bond with a par value of $1,000 and a coupon rate of 6%, paid semiannually, is currently selling for $1,200. The bond is callable in 6 years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) 20 payment periods B) Future value of $1,200 C) Present value of $1,030 D) Interest payments of $30
The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon will make $30 semiannual interest payments. With a 6-year call, there are only 12 payment periods, not 20. The present value is $1,200 and the future value is $1,030, the reverse of the numbers indicated in the answer choices. U13LO10
