Final Exam 5, 2nd Time - 76%

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is:

10 or fewer An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising. (QID: 1507275)

Over the past 10 years, the annual percentage returns for a mutual fund have been 7%, 8%, -9%, 8%, -4%, 5%, 6%, 8%, 10%, and 12%. What is the range of returns?

21 The range of a data set is the difference between the lowest and highest number. When the data points are arranged from the lowest to the highest, it becomes clear that the range is 21 (from -9 to +12). (QID: 1507029)

Which of the following choices is not considered a security?

A Treasury bond futures contract Under the Uniform Securities Act, futures contracts are not securities. However, options on commodity futures contracts are considered securities. Variable products (annuities and life insurance policies) and ADRs are also defined as securities.

A top-down approach to investing would generally include all the following, EXCEPT :

An analysis of a specific company's past stock price Analyzing the past stock price of a specific company is typical with doing technical analysis. However, when doing a top-down analysis, the first step is to identify economic trends, then identify specific sectors or industries that may benefit from that trend. Lastly, identify specific companies within a sector that may be affected by a specific economic trend. (QID: 1507285)

The Administrator may require the filing of advertisements related to which of the following securities?

An oil lease certificate of interest A certificate of interest is a security regulated by the Administrator along with its advertising. Advertisements sent to existing stockholders, as well as those related to investments issued by an insurance company, are exempt from filing. Also, mutual fund advertising is regulated by FINRA, not by a state Administrator.

A common investment strategy is dollar cost averaging. The objective of using this method of investment is the:

Average price of the securities purchased will be more than the average cost of the securities over a long period Dollar cost averaging involves investing the same amount of money, in the same securities, over a long period. The objective is that the average cost of the securities purchased should be less than the average price of the securities over that period, though a profit is not a guarantee. (QID: 1507496)

Which of the following terms is NOT specifically defined under the Uniform Securities Act?

Broker-dealer representative An agent is defined as a person who is employed by a broker-dealer or issuer to sell securities. There is no mention of the term broker-dealer representative. An investment adviser representative is a person employed by an investment adviser who provides investment advice. (QID: 1507269)

Which of the following investments would be MOST suitable for an estate account?

Commercial paper Estates are intended to last only for a short time (a year or two). The executor or administrator of the estate has a fiduciary responsibility to safeguard the estate's assets until they can be distributed to the heirs. Estates should generally invest only in short-term, safe, liquid assets such as money-market instruments. Money-market instruments include T-bills (not Treasury notes or bonds), commercial paper, and negotiable CDs. (QID: 1507277)

All of the following are characteristics of forward contracts, EXCEPT:

Delivery and settlement of the contracts occurs immediately A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery. (QID: 1507271)

According to the Investment Advisers Act, in order to register as an investment adviser with the SEC, which of the following choices is required?

File Part 1 and Part 2 of Form ADV In order to register as an investment adviser with the SEC, the applicant must file Part 1 and Part 2 of Form ADV with the SEC. Individual registration of employees with the SEC is not required. (QID: 1507507)

Which of the following is NOT TRUE regarding the characteristics of a real estate investment trust (REIT)? I. At least 90% of the income from a REIT must be derived from investing in real property II. At least 75% of the income from a REIT must be distributed to investors each year III. Any investment losses from a REIT are not passed through to investors IV. If sold to the public, the shares of a REIT must be registered with the SEC

I and II only REITs are required to generate at least 75% of their income from investing in real property—not 90%. Also, REITs are required to distribute at least 90% of their income to its shareholders each year—not 75%. For those REITs that are sold to the public, they must be registered with the SEC under the Securities Act of 1933. If a REIT incurs a loss, it is retained by the REIT and not passed through to the shareholders. (QID: 1507051)

All of the following are characteristics of futures contracts, EXCEPT: I. Most of the contract's terms are set by: II. The amount of the commodity being traded is standardized III. Prices are negotiated between the buyer and the seller IV. The buyer of a futures contract cannot be forced to take delivery

I and IV only A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument. Most of the contract's terms, such as the size of the contract, the point of delivery, the delivery month, and the grade of the underlying security or commodity are set by the exchange on which it trades. Although futures contracts may be offset, they differ from options because the buyer of futures contract may be forced to take delivery. (QID: 1507055)

Which TWO of the following statements are TRUE of the dividend discount model? I. The model is only used for large cap stocks II. It is used to determine a stock's value by predicting future dividends and discounting them back to present value III. If the value determined by the model is higher than the stock's current value, then it is undervalued IV. If the value determined by the model is higher than the stock's current value, then it is overvalued

II and III The dividend discount model (DDM) is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The basic idea is that if the value that is determined by the DDM is higher than the current value of the shares, then the stock is undervalued.

A soon-to-be-registered agent may take which of the following actions? I. Accept unsolicited orders II. Invite prospective clients to seminars III. Provide research reports to other agents for use with their clients IV. Cold-call potential clients and provide quotes

II and III only A broker-dealer may not allow an unregistered individual to act as an agent unless the agent is exempt. The soon-to-be-registered agent in this scenario may not accept orders, solicited or unsolicited, be compensated based on sales, or cold-call clients. Inviting clients to seminars and providing research to other agents are not considered activities associated with an agent. (QID: 1507038)

Which TWO of the following are NOT included in the adjusted gross income (AGI) of a customer? I. Salary, tips, and bonus II. Alimony support payments that are received from an ex-spouse III. Dividends received from stock IV. Interest received from a municipal bond investment

II and IV A client's federal adjusted gross income (AGI) consists of her taxable income. Examples of taxable income include a client's salary, tips, bonuses, and dividends. However, municipal bond interest and alimony payments received are tax-free (not a part of a person's AGI). (QID: 1507024)

Under the Uniform Securities Act, which of the following statements are NOT TRUE concerning an Administrator taking disciplinary action against a person? There must be written findings of fact and conclusions of law. The Administrator may take action against a person with or without the opportunity for a hearing. The Administrator does not need to provide the person with prior written notice. The Administrator's order may be appealed if the person files a petition in court within 90 days.

II, III, and IV only The Administrator must provide a person with prior written notice, an opportunity for a hearing, and written findings of fact and conclusions of law when taking disciplinary action against a person. The Administrator's order may be appealed if the person files a petition in state court within 60 days. (QID: 1507280)

Under the Uniform Securities Act, all the following are considered to meet the definition of agent, EXCEPT: I. A sales representative of a broker-dealer who sells only securities that are covered under a federal exemption II. An assistant to a sales agent who accepts orders when the agent is unavailable III. A subsidiary of a bank that is registered as a broker-dealer and sells non-exempt securities to the public IV. A broker-dealer that sells only exempt securities within the state

III and IV only By definition, a sales representative of a broker-dealer is an agent. This is true regardless of whether the securities being sold are covered under a federal exemption. Also, a sales assistant is considered an agent if she is authorized to accept client orders. Choices (III) and (IV) describe activities involving the broker-dealer (firm) and not an agent (individual). (QID: 1507040)

A client who recently retired, received a $100,000 lump-sum payout from his company's pension plan. His objective is to receive fixed monthly payments starting immediately. As the IA, you may recommend a(n):

Immediate, fixed annuity In an immediate annuity, payments begin after one payment period. For instance, if the client chose a monthly payout, the first payment will be made after one month. By choosing a fixed annuity, the insurance company guarantees the payouts, whereas with a variable annuity, payments are unpredictable. (QID: 1506829)

Jill has created a revocable trust to provide for the support of her adult child. The trust has generated $20,000 in income during the year and is invested in a wide variety of stocks and bonds. Which of the following statements concerning this trust is NOT TRUE?

Jill reduces her potential estate tax liability by the amount of the gains in the trust. A revocable trust must be established as a living trust since the donor retains control over the assets. This type of trust does not reduce the donor's potential estate tax liability. With an irrevocable trust, the donor loses control of the assets, but the assets will not be included as part of the donor's estate. This is the trade-off between the two types—retain control and potentially pay more taxes (revocable trust) or lose control and potentially pay less in taxes (irrevocable trust). (QID: 1507524)

All of the following risks are considered types of unsystematic risk, EXCEPT:

Market risk Remember, market risk is a form of systematic risk and cannot be avoided by securities investors. For example, if the overall stock market is declining, this will negatively affect all of the stocks in the market. Conversely, unsystematic risk is able to be reduced through appropriate diversification. (QID: 1507503)

If TopJob Advisers has limited discretionary authority over client funds, it is required to:

Prepare a balance sheet and file it with the Administrator If a registered investment adviser has discretionary authority over client funds or securities, it is required to file a balance sheet; however, the balance sheet is not required to be audited. An audited balance sheet is required to be created and filed if an adviser has custody or full discretion. (QID: 1507268)

The plan documents of a qualified retirement plan require that the investment manager purchase securities issued by the plan's sponsor. These are securities that a prudent investor clearly would not purchase. What is the only course of action that the investment adviser may take in order to avoid violating the fiduciary responsibility provisions of ERISA?

Refuse to purchase the securities ERISA states that a fiduciary must follow the terms of the plan documents unless these documents are inconsistent with ERISA. In this case, purchasing these securities would violate the prudent expert standard of ERISA. Thus, the plan documents are in conflict with ERISA and the investment adviser should not follow them. An adviser that did purchase the securities could be held liable for violating a fiduciary duty. (QID: 1507289)

According to federal law, which of the following would best describe what happens when a security is federal covered?

The issuer must register the security with the SEC only Federal covered securities are registered with, and regulated by, the SEC. A state Administrator does not have authority over any offering documents related to federal covered securities. Remember, federal covered securities are subject to business risk and are not automatically considered safe or investment-grade. (QID: 1507035)

Under the Uniform Securities Act, which of the following persons is required to register as an investment adviser?

The publisher of a financial periodical that responds to each subscriber with personalized investment advice Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. Of the choices given, the publisher is providing tailored investment advice and is therefore subject to registration. (QID: 1507491)

In order to determine the suitability of a potential investor for a limited partnership, which of the following forms would the client complete?

The subscription agreement Many states require potential partners to complete a subscription agreement, in order to determine their suitability as it relates to income, net worth, investment experience, and an understanding of investment risk. A certificate of limited partnership is filed by the general partner when setting up the partnership. The partnership agreement discloses the rights and duties of the partners. A private placement memorandum is given to investors in a private placement, in lieu of a prospectus. (QID: 1507031)

Which of the following choices would NOT meet the definition of an exempt transaction?

Transactions between an issuer and retail investors Any transactions by trustees involved in a bankruptcy--sheriffs, marshals, guardians, and other fiduciaries are considered exempt transactions. Unsolicited nonissuer transactions whether with retail or institutional investors and transactions executed by a bona fide pledgee are also considered exempt transactions. However, transactions between issuers and retail investors are not exempt from registration. A transaction between an issuer and underwriter would be an exempt transaction. (QID: 1507049)

All of the following statements are NOT TRUE, EXCEPT:

Variable life, as with whole life, has fixed premiums paid at fixed intervals. While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals. (QID: 1507499)