Final # 6

Which of the following retirement plans is a non-qualified plan? A. 401(k) plan B. 457 plan C. Profit sharing plan D. Money purchase plan

A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers). These are non-qualified plans because they are discriminatory. They generally are only available, as an added benefit, to higher earning government employees.

Which of the following is considered to be non-public information about a customer? A. Customer medical information collected by a physician to be used by a life insurance company selling a variable annuity contract to that customer B. Customer names and addresses that a financial institution wishes to send a solicitation mailing obtained from property tax records of a wealthy town C. Customer telephone numbers obtained from the telephone book that will be used by an investment adviser to "cold call" potential new accounts D. Customer information collected by cookies in the financial institution's web-site that is aggregated and disclosed as aggregated information to marketing firms that pay for this information

A. Customer medical information collected by a physician to be used by a life insurance company selling a variable annuity contract to that customer Non-public personal information about a customer cannot be disclosed to a third party unless the customer permits such disclosure. Information obtained from a public source is "public" information and can be disclosed to others. Public sources of information include telephone listings and tax records. Aggregated customer account information is excluded from the definition of "non-public" information, since a specific customer cannot be identified. Note, as well, that medical information obtained by a physician examining a customer is "non-public" information that cannot be disclosed to others unless the customer permits.

An adviser opens a new account for a client. The client gives the adviser $20,000 in cash to open the account. The adviser: I must file a CTR report with FinCEN II must file an SAR report with FinCEN III in 15 days IV in 30 days

A. I and III Any deposits or withdrawals made in "cash" (not checks) that amount to over $10,000 over a 2-week window must be reported to FinCEN (Financial Crimes Enforcement Network - part of the Department of Treasury) within 15 days. This report is required even if there is no suspicion of illegal activity. Note that if there was suspicion of illegal activity, an SAR ("Suspicious Activities Report") would have to be filed as well. The customer cannot be told that the report is being filed.

An investment adviser representative recommends the purchase of DEFF stock to her client. DEFF is currently trading at $50 per share. The client is not terribly eager to make the investment, so the IAR tells the client that over the next 12 months, the adviser will repurchase the stock from the client at no less than $45 per share. This action is: A. a prohibited performance guarantee B. not a prohibited performance guarantee since the buyback price represents a loss to the client C. a repurchase agreement, as defined under State law, since the buyback price is established D. a round trip stock transaction

A. a prohibited performance guarantee

An investment adviser charges a fee equal to the greater of 1% of assets annually or $1,000. When examining the investment adviser, the Administrator would review this policy in relation to: A. accounts with balances under $20,000 B. accounts with balances over $20,000,000 C. accounts that give the adviser discretion D. new accounts as compared to existing accounts

A. accounts with balances under $20,000 NASAA rules prohibit investment advisers from charging "unreasonable fees," without actually stating what those are. A 1% fee is pretty reasonable - there are advisers that charge 2% or even 3% annual fees. The flat $1,000 fee also seems pretty reasonable, however a $1,000 annual fee charged on an account with $20,000 of assets amounts to a 5% annual fee - which is high. The question ignores the fact that most advisers with such a fee structure will not accept an account unless it has a minimum asset size - typically $50,000 or so of assets.

An investment portfolio indexed to the S&P 500 Index produced a return for the year of 12% with a beta of +1. Investment Manager "A" has an actively managed stock portfolio that produced at return for the year of 14.8% with a beta of 1.4. The "alpha" produced by Investment Manager "A" is: A. + 2% B. - 2% C. +2.80% D. -2.80%

B. - 2% Investment Manager "A" produced a 14.8% return by assuming 40% more "risk" as measured by beta than if the portfolio was invested in a benchmark stock index with a beta of 1. To compare "apples with apples," a portfolio with a beta of 1.4 should return 1.4 times the benchmark index return of 12% = 1.4 x 12% = 16.80%. This manager produced a return of 14.8%, so the "alpha" (value of the active manager's expertise over investing in an index fund) is actually negative. This manager did worse, producing a negative alpha of -2%.

When the market price of ABCD stock is at $48, a customer places a buy stop limit order at $50. The next trades in the stock occur in sequence at: 51...52....53....49....48 The first trade where execution could occur is: A. 48 B. 49 C. 52 D. 53

B. 49 A buy stop limit order is triggered in a rising market. It is most often used to stop a loss on an existing short stock position. Once the market trades up to 50 or higher, the order is triggered and becomes a limit order to buy at $50, meaning buy at $50 or lower. The very first reported trade of $51 elects the order because the market moved from $48 to $51 and went right through the stop price of $50. The order now becomes a limit order to buy at $50, meaning that the customer does not want to pay more than $50 to buy. The next trade of $52 is too high; the following trade of $53 is too high; and the next trade of $49 is the first one that meets the customer's limit (buy at $50 or lower). This is the first trade where the order could be filled.

The Internal Rate of Return computation assumes that cash flows will be reinvested at the: A. Real Interest Rate B. Internal Rate of Return C. Risk Free Interest Rate D. Nominal Interest Rate

B. Internal Rate of Return nternal Rate of Return is the true compound rate of return generated by an investment (basically the same as the yield to maturity). Implicit in the formula is that any cash flows generated are reinvested at the "IRR."

A registered representative is appointed as a trustee to manage the assets on behalf of a beneficiary. The State where the trust is established only permits investments in government guaranteed bonds or investment grade corporate bonds. The limitations placed on the investments made by the trustee are established by the: A. Prudent Man Rule B. Legal List C. Uniform Securities Act D. Investment Advisers Act of 1940

B. Legal List Review this concept Print this question The best answer is B. Each State usually has a "prudent man rule" that applies to fiduciaries that manage assets for beneficiaries. However, many States go beyond this and establish a "Legal List" of permitted investments for fiduciaries. The legal list typically consists of ultra-safe securities - generally U.S. Government bonds, government agency bonds, and AAA rated corporate and municipal securities.

Under the Investment Advisers Act of 1940, which of the following statements is FALSE about the acceptance of prepaid advisory fees by an investment adviser? A. The fees must be detailed in writing in the advisory contract B. The fees cannot amount to more than 6 months' payment in advance C. Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" D. A refund of prepaid fees must be given if the contract is cancelled prematurely

B. The fees cannot amount to more than 6 months' payment in advance Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but remember that under the Statement of Policy on unethical practices, adviser fees must be similar to those charged by other advisers for comparable services. If an adviser accepts $1,200 or more of prepaid fees, for 6 months or more of service in advance, then a balance sheet must be included in the "Brochure" given to customers (the "Brochure" is Part 2A of Form ADV). Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

An individual is considering leasing a new automobile. Which quantitative method is used to calculate the monthly payment? A. Rule of 72 B. Time value of money C. Net present value D. Internal rate of return

B. Time value of money

The formula V ='P' (1 + r)n is used to compute an investment's: A. present value B. future value C. internal rate of return D. standard deviation

B. future value This is the formula for compound interest - which determines the "future value" of an investment, compounded with interest over time. "P" is the "original" principal amount; "r" is the interest rate; "n" is the number of years. For example, $1,000 invested at 10% interest for 3 years has a future value of: $1,000 (1.10)3 = $1,000 x 1.331 = $1,331 at the end of the 3rd year.

The Net Present Value of an investment is lower than "0." This means that the: A. rate of return from the investment is greater than the discount rate used in the computation B. rate of return from the investment is lower than the discount rate used in the computation C. investment will produce a return that is greater than the rate of inflation D. investment will produce a return that is lower than the rate of inflation

B. rate of return from the investment is lower than the discount rate used in the computation Net Present Value takes all the cash flows that will be generated by an investment and discounts them back to their "present value." The rate of interest used to discount the cash flows to be received is the current market rate of interest. •If the computation results in an NPV of "0," then the rate of return of the investment equals the discount rate used. •If the computation results in an NPV of more than "0," then the rate of return of the investment exceeds the discount rate used. •If the computation results in an NPV of less than "0," then the rate of return of the investment is lower than the discount rate used. The computation has nothing to do with the inflation rate.

Under the Uniform Securities Act, which of the following actions by an agent is (are) prohibited during a sales presentation? I Predicting specific future investment results II Omitting non-essential information III Omitting facts that can influence the investment decision

C. I and III only An agent cannot predict specific future investment results, since he has no basis for knowing what will happen in the future. Omitting facts that can influence an investment decision is prohibited, since these facts are "material." Omitting non-essential information is acceptable, since it is not needed to make an informed investment decision.

Which of the following are risks of investing in a Real Estate Limited Partnership (RELP)? I Business risk II Liquidity risk III Regulatory risk IV Reinvestment risk

C. I, II, III Limited partnerships are illiquid - they do not trade and a limited partner can only sell his or her unit with general partner approval. So liquidity risk is a major issue. Because these are tax shelters that use provisions of the tax code to reduce tax liability, owners of limited partnerships face increased risk of tax audit; and also are subject to regulatory risk, which is the risk of tax law change. There are no dividends or interest payments received that must be reinvested, so there is no reinvestment risk. However, business risk is another big issue here - because the business venture may fail.

What of the following would be included in the evaluation of a viatical or life settlement? I Life expectancy II Amount of discount III Availability of investors IV Escrow agent for the settlement transaction

C. I, II, III The escrow agent used in the transaction is not a consideration as to the price paid for the viatical settlement. The escrow agent is an independent intermediary in the transaction, making sure that once full payment is received from the buyer of the policy, that the executed documents completed by the viator transferring ownership are given to the purchaser of the policy.

Which of the following would NOT be included in Adjusted Gross Income on a tax return? I Social security payments II Municipal bond interest III Distributions from non-qualified retirement plans attributable to cost basis IV Distributions from mutual funds subject to Subchapter M

C. II and III Adjusted gross income on a tax return includes all sources of taxable income, including wages, commissions, royalties, alimony, social security payments, pension plan payments (except for payments attributable to the cost basis in non-qualified plans), investment income (and this includes mutual fund distributions) and capital gains. Excluded from Adjusted Gross Income is municipal bond interest (which is not federally taxable) and retirement plan distribution amounts from non-qualified plans attributable to the cost basis (non-deductible investment dollars) in the plan.

All of the following would be considered to be securities information processors under the Securities Exchange Act of 1934 EXCEPT: A. NYSE TRF B. Pink Sheets C. The Wall Street Journal D. NASDAQ TRF

C. The Wall Street Journal Securities information processors (SIPs) collect and disseminate price quotes and transaction prices in non-exempt securities. Each exchange has a "TRF" - a Trade Reporting Facility - that is a registered SIP. The NYE TRF reports trades of NYSE listed stocks, wherever the trade occurred. The NASDAQ TRF reports trades of NASDAQ-listed stocks, where the trade occurred. The Pink Sheets is an SIP that distributes bid and ask quotes for over-the-counter stock issues, as does the OTCBB - the Over-The-Counter Bulletin Board. General circulation newspapers are not defined as securities information processors that must register with the SEC under the Securities Exchange Act of 1934.

ADAP Advisers is offered a large block of ACME stock (a NYSE-listed issue) by an institutional investor at a 20% discount to the current market price, if ADAP Advisers is willing to buy the block that day. Which statement is TRUE if ADAP purchases the block for its own account rather than for its customers? A. This action is prohibited without exception, since ADAP Advisers is benefiting at the expense of its customers B. This action is permitted if ADAP Advisers rebates any profit that it earns to its customers when it sells the block C. This action is permitted if the purchased stock is not a suitable investment for ADAP's customers D. This action is permitted if the block is purchased in the Third Market during the hours that the NYSE is closed

C. This action is permitted if the purchased stock is not a suitable investment for ADAP's customers Investment advisers have a fiduciary responsibility to their customers and must always put their customers' interests first. Since this block of stock is being offered to the adviser at a substantial discount, the adviser must buy the stock for its customers - but only if the stock is a suitable investment for these customers

A mutual fund is offered with no up-front sales charge and no contingent deferred sales charge. It charges 50 basis points of 12b-1 fees annually. The fund publishes an advertisement stating that: "This is a no-load fund." Which statement is TRUE? A. The statement is true as presented B. This statement is misleading because no-load mutual funds cannot charge 12b-1 fees C. This statement is misleading because a no-load fund cannot charge more than 25 basis points of 12b-1 fees D. This statement is misleading because mutual funds are not permitted to advertise themselves as no-load funds

C. This statement is misleading because a no-load fund cannot charge more than 25 basis points of 12b-1 fees A mutual fund is not permitted to advertise itself as a "no-load" fund if it charges 12b-1 fees of more than .25% (25 basis points) annually. 12b-1 fees are charges against net asset value that pay for the cost of soliciting new investment to the fund, and they can be used to compensate salespersons that sell the fund's shares.

If the writer of an equity put contract is exercised, the writer MUST: A. deliver cash in 1 business day B. deliver stock in 1 business day C. deliver cash in 3 business days D. deliver stock in 3 business days

C. deliver cash in 3 business days If the writer of an equity put contract is exercised, he is obligated to buy the stock at the strike price (paying cash) from the holder of the put. Settlement is 3 business days after exercise date - this is a regular way stock trade.

A new client with no other investment assets has just come into an inheritance of $500,000 of ABCD stock, a blue chip company listed on the NYSE. As the adviser to this customer, your IMMEDIATE concern should be: A. whether the company is a candidate for delisting B. the possibility that the value of ABCD stock may decline sharply C. the lack of diversification of the customer's investment D. whether the customer paid any estate tax liability due

C. lack of diversification in the clients account. This is the client's sole investment. Because this is a blue chip company, it is not likely to be delisted. It is also not likely to suffer a sharp price decline, though this could occur. The immediate concern should be the customer's lack of diversification. If the customer were to sell a portion of the ABCD stock and reallocate it to other investments, the client will reduce overall risk.

The primary risk associated with holding a long-term U.S. Government STRIP is: A. liquidity B. deflation C. purchasing power D. credit

C. purchasing power A STRIP is a long-term U.S. Government zero-coupon bond (a bond that has been "stripped" of coupons). Such a bond has no credit risk and is easily traded so there is no liquidity risk. If there is deflation and market interest rates fall, this bond will increase in value. If there is inflation, market interest rates will rise, and the bond will decrease in value. This is the primary risk associated with holding STRIPS - inflation or purchasing power risk.

Which statement is FALSE about Exchange Traded Funds (ETFs)? A. ETFs are registered under the Investment Company Act of 1940 B. ETFs are typically structured as open-end management companies C. ETFs hold the underlying shares of companies included D. ETFs permit individual investors to buy creation units

D. ETFs permit individual investors to buy creation units ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Note that individual investors cannot buy creation units - only institutional investors. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

The Administrator, in regards to the registration of securities, may: I impound the proceeds from the sale of the securities until the issuer receives a specified dollar amount II require the filing of original copies of confirmed subscription agreements III require the delivery of a prospectus

D. I, II, III Regarding registration of securities in a State, the Administrator is empowered to impound the proceeds of the sale of the securities until a specified dollar amount is sold (this is typical for so-called "all or none" underwritings, where, if the entire issue is not sold, the deal is canceled). The Administrator can require the filing of original copies of confirmed subscription agreements (these are completed by customers who wish to "subscribe" to the new offering of securities); and can require that a disclosure document (prospectus) be provided to customers.

Under NASAA rules, which of following are unethical practices when recommending a mutual fund to a customer? I Recommending a letter of intent if the customer does not have the immediate funds to reach a breakpoint II Not disclosing to a customer the sales charge discount if a purchase is made at the breakpoint level III Not disclosing to a customer that dividends can be automatically reinvested without any sales charge imposed IV Recommending the purchase of shares which results in the customer simultaneously holding shares in different investment company portfolios with similar investment objectives

D. II and IV A way that an agent could maximize his or her compensation would be to recommend that the customer buy mutual fund shares with similar objectives in different fund families, so that the customer does not reach a breakpoint (Choice IV). This is an unethical practice. There is no requirement to make the customer aware of automatic dividend reinvestment when recommending mutual funds.

Under the Uniform Securities Act, which of the following are allowed forms of investment adviser compensation? I Charging a flat fee only if the portfolio increases in value II Charging an hourly rate which includes the time it takes to get to the client's office and back III Charging a fee based upon a fixed percentage of assets under management IV Charging a flat fee per year regardless of the portfolio size

D. II, III, IV Fees based upon a percentage of assets under management and flat fees (including hourly and annual fees) are permitted as long as the details are fully disclosed to customers. Performance fees are prohibited.

Which is a portfolio management "style?" A. Dollar cost averaging B. Sector rotating C. Diversification D. Indexing

D. Indexing The management "styles" are basically active asset management (the manager selects the specific investments) or "passive" asset management, where the manager uses index funds as the investment vehicle. The other 3 choices are asset management techniques, as opposed to asset management styles.

Rebalancing of a client portfolio based on shifting values of different asset classes is called: A. passive asset allocation B. strategic asset allocation C. efficient asset allocation D. dynamic asset allocation

D. dynamic asset allocation Dynamic asset allocation is really just another name for "Tactical Asset Allocation." Once the basic asset allocation percentages are set in a portfolio composition using strategic asset allocation (this sets the basic "strategy" based on the client's investment objective, age, risk tolerance, investment time horizon, other investment holdings, etc.), the manager can "dynamically" alter the percentages, within specified limits, to take advantage of current asset valuations.

An investment adviser representative has been reviewing the likelihood that an equity investment will produce the desired return. He has determined that the mean return on the investment is 20%, with a 15% standard deviation, and a 95% probability of occurrence. This means that he would expect the range of returns to be approximately: A. 5.00% - 35.00% B. 17.00% - 21.10% C. 4.75% - 33.25% D. 16.15% - 20.05%

A. 5.00% - 35.00% A 15% standard deviation means that the investment return can vary plus or minus 15% from the mean (average) return over the course of a year. With a 20% average (mean) return, it might fall as low as 5% (20% - 15% deviation); or it might rise as high as 35% (20% + 15% deviation). The probability of the return falling in this range is 95%. This has nothing to do with the actual calculation of the range of returns.

All of the following are defined as investment advisers who have been compensated under SEC Release IA-1092 EXCEPT a(n): A. estate planner receives a fee for setting up an investment trust for a client B. financial planner who receives a fee for providing a master financial plan without rendering specific investment advice C. insurance agent who receives a commission for selling life insurance that was part of an overall financial plan for which there was no charge to the client D. investment newsletter that charges a subscription fee for reports issued on specific securities

A. estate planner receives a fee for setting up an investment trust for a client

A corporate investor may exclude from taxation, part of: I Cash dividends received from common stock investments II Cash dividends received from preferred stock investments III Interest received from convertible bond investments IV Interest received from non-convertible bond investments

B. I and II Corporate investors may exclude 70% of dividends received (both common and preferred) from taxation. Interest income received is 100% taxable (unless it is tax free municipal interest income).

What constitutes "taking custody" under the NASAA rule for investment advisers? A. An employee of an advisory firm who is given discretionary authority to trade the account by a client B. A client who signs a power of attorney, giving the adviser the right to trade on the client's behalf C. An employee of an advisory firm acting as a trustee for a firm D. An introducing broker-dealer receiving checks made out to the carrying broker-dealer that are to be deposited at a broker-dealer

C. An employee of an advisory firm acting as a trustee for a firm Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Finally, having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have access to client funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

Which of the following is NOT a benefit of making an investment in an emerging markets fund? A. Diversification B. Liquidity C. Higher investment yield D. Reduced investment risk

C. Higher investment yield

Under IA-1092, a person is "in the business" of rendering investment advice if that person: A. advertises that it gives advice B. is compensated for giving advice about securities C. regularly gives advice about securities D. all of the above

D. All of the above IA-1092 states that if a person is in the business, then he or she must register as an investment adviser.

A trader liquidates a single stock position and invests the proceeds in a stock index fund. The trader has reduced: A. Market risk B. Inflation risk C. Liquidity risk D. Business Risk

D. Business Risk The best of the choices is that this trader is reducing business risk. Since this trader is liquidating a single stock position, and investing the proceeds in an index fund (which is diversified), the trader is reducing the unsystematic risk or business risk inherent in a single stock position. Market risk is the risk that the market will drop and takes all stocks with it. This is a risk that cannot be diversified away.

An investment adviser is permitted to borrow money from which of the following clients? I An affiliated bank II An unaffiliated bank III An affiliated broker-dealer IV An unaffiliated broker-dealer

D. I, II, III, IV

Under the Investment Advisers Act of 1940, if the SEC suspends or revokes the registration of an investment adviser, an appeal may be filed: I in State Court II in Federal Court III within 30 days IV within 60 days

D. II and IV If the SEC suspends or revokes an adviser's registration under the Investment Advisers Act of 1940, an appeal may be filed in Federal Court within 60 days.

An agent is registered in State Y. The agent accompanies a customer to State Z on a golf outing, where the agent makes an offer of securities to the customer. Which statements are TRUE? I State Y has jurisdiction over the offer of securities II State Z has jurisdiction over the offer of securities III The agent may qualify for a de minimis exemption in State Y IV The agent may qualify for a de minimis exemption in State Z

D. II and IV Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: originates in the Administrator's State; is directed into the Administrator's State; or is accepted in the Administrator's State.Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. In this scenario, the "vacationing" exclusion does not apply because it ONLY applies when an agent registered in another State makes an offer into a State where the customer is vacationing. It does NOT apply if both the agent and the customer are both in another State, where the offer is made.

The Prudent Investor rule prohibits investments in: I Futures II Options III Speculative Stocks

D. None of the above The Prudent Investor Rule does not detail the types of investments to be made, nor does it specify that only securities are permitted investments. When investing under the rule, investments must be managed in the way that a prudent investor would.