Practice Exam 1
As defined in the Uniform Securities Act, the term "offer" or "offer to sell" includes all of the following EXCEPT A) a loan with a stated interest rate payable upon demand B) an offer of convertible securities and warrants C) a purported gift of assessable stock D) an offer of a special stock dividend in return for additional payments
A loan is not a sale of a security for value and is explicitly excluded from the definition of "offer" or "offer to sell." Although a stock dividend is normally excluded from the terms "offer" and "sale," when additional payment is required, we now have an offer that must be accepted before there is a sale. An offer of a convertible bond or warrant is an offer of both the bond or warrant as well as the underlying stock. It is only a sale when the offer is accepted. The USA defines a purported gift of assessable stock as both an offer and a sale.
According to the Uniform Securities Act's rules for an investment adviser with custody of customer assets, which of the following statements are TRUE? A) The Administrator must give written approval before the adviser may hold customer assets in custody. B) Customer assets must not be commingled with assets of the investment adviser. C) An adviser who has discretion over customer accounts faces a higher net worth requirement than an adviser who has custody. D) Every three months, the adviser must send an itemized account statement to each customer whose assets are held in custody.
B&D Customer assets held in custody by an investment adviser must be segregated, and the adviser must send a statement every three months. The Administrator does not approve custodial accounts. If there is no rule prohibiting custody, the Administrator must be notified that the adviser has custody. Advisers with custody of customer assets have a higher net worth requirement than advisers with discretionary authority, not the other way around.
Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, what factors are considered in determining whether excessive trading has occurred? A) The length of time the account has been opened. B) The frequency of trading. C) The amount of trading. D) The financial condition of the account and the financial resources and goals of the client.
B-C-D In determining whether excessive trading has occurred, consideration must be given to the amounts and frequency of trading in view of the financial resources, investment objectives, and character of the client's account. All factors must be considered together and not individually. Frequent trading and trading large amounts are not wrong in and of themselves; they are permitted if suitable for that particular customer. The length of time the account has been opened would not be factor.
Which of the following is NOT required under ERISA Section 404(c)? A) Plan participants must have access to a broad range of investment alternatives. B) Individual accounts must be provided for each plan participant. C) All plan participants must have been employed by the plan sponsor for a minimum of 3 years. D) Each plan participant must have the ability to exercise independent control over assets in her account.
ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. To qualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have the right to exercise independent control over the account, and have a sufficiently broad range of choices to make the right of control meaningful. Section 404(c) has nothing to do with the employee's length of employment.
An analyst wishing to check on the most recent financial performance of an SEC-registered issuer would probably examine the:
Financial reporting is done on Forms 10-K and 10-Q; the former on an annual basis, the latter, quarterly. Therefore, the most recent information is going to be on the Form 10-Q.
Corp vs. Partnership & how the structure affects whether the IA needs to notify shareholders of insignificant member changes
If an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership, not for a corporation to shareholders
How are ISO's taxed?
In the case of ISOs, the difference between the exercise (or strike) price and the current market value is considered capital gains.
How are NSO's taxed?
In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee. Taxed as ordinary income.
A client profile is not complete without a family income statement. A typical one would include:
Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received and mortgage interest is money paid out. Credit card debt is a liability and autos are assets.
The Investment Advisers Act of 1940 addresses the issue of investment advisers (IA) maintaining custody of client funds and/or securities. In which of the following cases would that Act consider the IA to have custody? A) Possession of client funds or securities. B) Any arrangement under which the IA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the IA's instruction to the custodian. C) Any capacity that gives the IA or a supervised person legal ownership of or access to client funds or securities. D) Receipt of a check made out to a 3rd party.
One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a 3rd party other than the IA is not considered to be custody.
De Minimis Exception
Only for IA's, not for BD's An IA with no office in the state that has no more than 5 retail clients resident in the state within the past year.
Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk? A) Aggressive growth fund B) Money market fund C) Preferred stock fund D) High-yield bond fund
Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.
Sector Rotation aka
Segment Rotation
If the coupon rate on a bond increases, the duration of the bond will
The higher the coupon, the shorter the duration.
A family balance sheet would include:
assets and liabilities
To reduce a client's exposure to systematic risk in his equity portfolio, you would look at which of the following factors?
beta
With variable life insurance, AIR applies only to
the death benefit, not to cash value.
An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is: A) 12%. B) 4%. C) 5%. D) 20%.
Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $.50 (one quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for three months - one quarter. Multiply that by 4 to get the annual rate.
According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, all of the following practices are considered unethical for an agent EXCEPT: A) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. B) determining the quantity of a specific security to purchase once the client has designated that security and the action to be taken. C) receiving written discretionary authority from a client within 10 business days of first executing a discretionary trade with oral authority from the client. D) selling 3,000 shares of ABC at a price the agent determines is the best the client can get, without oral or written discretionary authority.
Discretionary authority must be received by agents in writing prior to any discretionary trading taking place in the account.
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from the: A) person named as executor of the estate. B) person with a durable power of attorney. C) person appointed as administrator of the estate. D) spouse.
Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor and a durable power of attorney is cancelled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.
Using the net present value method, a potential investment should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is:
NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a proposed investment is positive, it should be accepted. However, if NPV is negative, the investment should probably be rejected because cash flows will also be negative.
Standard deviation
Standard deviation measures security's volatility versus its own historical performance. Two-thirds of the time, a stock can be expected to generate a return within one standard deviation; 95% of the time, within two.
Reinvestment of mutual fund distributions has all of the following benefits EXCEPT: A) reinvestment of dividends at NAV. B) reinvestment of capital gains at NAV. C) compounding of returns. D) tax deferral until the acquired shares are sold.
Taxes on reinvested distributions are due in the year received.
The Administrator in Texas has jurisdiction over an offer of securities made: on a radio program originating in Texas. on a radio program originating in Oklahoma. in a newspaper circulated in Texas but published in Oklahoma.
The Administrator does not have jurisdiction over an offer made in a TV or radio broadcast that originated outside of the state. The same is true for a newspaper published outside the state. Only for media ORIGINATING from one's own state
The agent has committed an unethical business practice because the NASAA Model Rule dealing with advisers' brochures requires a 5-day penalty-free period when the brochure is not delivered at least 48 hours prior to entering into the contract. The firm and its agents cannot impose house rules that take away the client's rights.
The agent has committed an unethical business practice because the NASAA Model Rule dealing with advisers' brochures requires a 5-day penalty-free period when the brochure is not delivered at least 48 hours prior to entering into the contract. The firm and its agents cannot impose house rules that take away the client's rights.
Buy stops are entered above the market at the
@ the Resistance Level
Sell stops are entered below the market at the
@ the Support Level
Which of the following entities are considered to be exempt issuers under the Uniform Securities Act? State of Michigan. City of Calgary, Alberta. City of Birmingham, UK. Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC.
1-2 Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign national governments with which the US has diplomatic relations, but not their political subdivisions, are considered exempt issuers.
Which of the following best describes a 12b-1 fee?
A 12b-1 fee may be charged by mutual funds that do not charge the maximum permissible sales load. SEC Rule 12b-1 allows a mutual fund to serve as distributor of its own shares and charge a percentage of the average net assets for distribution and sales-related expenses.
Under the Investment Advisers Act of 1940, who of the following would be considered to be in the business of rendering investment advice? A) An individual who provides investment advice to family members, but receives no compensation. B) An accountant who provides investment advice to clients as an incidental part of the business. C) A financial planner who charges no fee for developing a financial plan, but takes commissions on recommended trades. D) An agent who receives no separate compensation for investment advice but who takes commissions on recommended trades.
A financial planner who takes commissions from a broker-dealer on recommended trades is considered to be compensated for giving advice and is therefore in the business of rendering investment advice. Agents and broker-dealers who do not charge separately for advice are excluded from the definition of investment adviser. Lawyers, accountants, teachers, and engineers are not considered to be in the business of rendering investment advice as long as any advice given is incidental to the practice of the profession.
LEAPS
Long term options
Protection of the investing public is one of the major objectives of the SEC. Much of the protection comes from the disclosure requirements enveloping the industry. Among the disclosure forms used is Form 13F. To come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over:
An institutional money manager, with at least $100 million in 13(f) securities under discretionary management, is required to file Form 13F. This form must be filed within 45 days of the end of the quarter.
Broker-dealers offering wrap fee programs must
Broker-dealers offering wrap fee programs must also have registration as an investment adviser. Under the USA, those individuals who solicit on behalf of an IA must register as IARs. Of course, the activities of any employee of any type, must always be under proper supervision.
Which of the following could accelerate a rise in a bull market?
Buy stop orders are placed above the market and as prices increase, the stops are hit creating additional buying.
Asset-based sales charges will generally be lowest when holding A) Class A shares B) Class D 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.
Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so would include
DIVERSIFICATION
Cash flow formula
Net income + depreciation expense for that year
Under the Investment Adviser's Act of 1940, which of the following is NOT true with regard to advertising? A) The advertisement may not refer to any formula, charting device, or graphing method without disclosing the difficulties or limitations in their use. B) The advertisement may not refer to specific past recommendations. C) The advertisement may not use testimonials from clients. D) The advertisement may not make offers of free service.
There is no prohibition against offers of free service, except that such offers must have absolutely no strings attached. Advertisements used by investment advisers may not use testimonials, specific past recommendations (though it may refer to all recommendations within a given period of time, provided a disclaimer is included stating there is no assurance that the same results will be obtained), or any formula, charting, or graphing device without disclosing the difficulties or limitations in their use; make offers of free service unless there is no obligation imposed on those who request it; or make false or misleading statements.
Active Technicians (AT) is a state-registered investment adviser. In their brochure supplement, they would include information relating to each of the following individuals EXCEPT A) those providing investment advice and having direct contact with retail clients in the state B) members of AT's board of directors who are active in the firm's business C) those exercising discretion over assets of clients in this state, even if no direct contact is involved D) those providing investment advice and having direct contact with institutional clients in the state
Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and members of the board of directors. Of course, if any of these individuals had direct client contact or exercised discretion, a supplement for them would need to be prepared.
Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? A) Client pre-payment of $1,000 of advisory fees, six months in advance B) Having temporary custody of a client's securities C) Depositing client funds in bank accounts accessible by the investment adviser
B "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees.
The Employment Retirement Income Security Act of 1974 (ERISA) is a: A) federal law establishing the Social Security system. B) federal law regulating many aspects of private retirement plans. C) state law regulating many aspects of private retirement plans. D) state law establishing a pension system for state employees.
The Employment Retirement Income Security Act of 1974 (ERISA) is a federal law that regulates many aspects of retirement plans established by employers in the private sector, It was enacted to help protect the rights of employees who participate in retirement plans. ERISA provides many of the rules that retirement plans must meet if they want to be considered qualified plans.
First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts. First Securities Advisers, Inc., has: A) violated the Uniform Securities Act by charging excessive advisory fees. B) not violated the prohibition against performance fees. C) violated the Uniform Securities Act by charging commissions in addition to advisory fees. D) violated the prohibition against charging performance fees.
First Securities Advisers Inc. has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable. The commissions charged by the affiliated broker-dealer have nothing to do with the question. The client would have to pay commissions wherever the transactions were executed.
