Quiz 3

Which of the following choices is guaranteed in an equity-indexed annuity? a. A minimum rate of return b. A rate of return adjusted for inflation c. The participation rate d. 100% of the owner's premium payments

In an equity-indexed annuity, the insurance company guarantees a minimum rate of return (typically 87.5% of the premium payments plus 3%).

If a company registers its offering with a state Administrator using coordination, it would also file a registration statement under which federal act? a.The Securities Act of 1933 b.The Securities Exchange Act of 1934 c.The Investment Company Act of 1940 d.None of the above, since it would be an exempt transaction

a. The Securities Act of 1933 Under the Uniform Securities Act, registration by coordination is generally used for initial public offerings (IPOs). New issues, including IPOs, are required to register with the SEC under the Securities Act of 1933.

An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss? a. $500 loss b. $500 profit c. $900 loss d. $900 profit

a. $500 loss If the stock is put to the writer, he would be required to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600).

An IAR is experiencing financial difficulties and asks one of his clients for a loan. After the client tells the IAR that she does not have any funds available to loan, the IAR recommends that the client sell some of her securities holdings and then lend him the money. According to the Uniform Securities Act, the IAR has: a. Acted in an unethical manner and violated his fiduciary duty b. Churned the client's account c. Commingled the client's assets with his own d. Converted the client's cash for his own use

a. Acted in an unethical manner and violated his fiduciary duty. These actions are unethical and possibly illegal. However, since the IAR is not recommending that the client trade excessively in an effort to generate commissions, this is not a case of churning. Additionally, it is not commingling or conversion since the customer being asked to lend money to the IAR.

An investment adviser is registered in State A and transacts business through a broker-dealer that is registered in State A and with the SEC. What may the Administrator in State A require the broker- dealer to file with its office? a. Copies of all financial statements that are required by the SEC b. Its personal financial statements if it is owned as a sole proprietorship c. Copies of all of its tax returns for the past six years d. Its personal tax return for the past year if it is owned as a sole proprietorship

a. Copies of all financial statements that are required by the SEC. State Administrators may not require broker-dealers to provide more documentation than what is required under federal (SEC) guidelines

If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the: a. Current ratio b. Acid-test ratio c. Inventory turnover d. Debt-to-equity ratio

a. Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes inventories and usually is for a one- to three-month period

An advisory client is discussing the purchase of AA-rated, 15-year municipal bonds with his adviser. The bonds offer a coupon rate of 3.2% and can be purchased at a small premium to par. The adviser is not certain if the bonds are trading at an advantageous price. Which calculation would provide the BEST method of determining whether the bonds should be purchased? a. Discounted cash flow b. Yield to maturity c. Real interest rate d. Weighted average cost of capital

a. Discounted cash flow Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.

Two months ago, Jason, one of your agents, put five of his clients in an in-state-sponsored mutual fund under a Section 529 plan for their children's college education. They each have a $100-per-month payroll deduction set up at their place of employment. Last week, Jason called each of them and convinced them to roll over their holdings into a prepaid tuition plan while continuing their payroll deductions. Yesterday, he called them again to sell them on a rollover to a new Coverdell Education Savings Account that your firm is offering. What is wrong with this course of action on the part of the registered rep? I. It suggests excessive activity and may be considered churning the accounts II. A 529 plan cannot be rolled over into a Coverdell ESA III. There is no violation since all the plans are different IV. There is no problem since the investments are made through payroll deduction a.I and II only b.I and III only c.II and III only d.III and IV only

a. I and II only Since three different investments were suggested within a two-month period, this could be considered excessive activity (churning the accounts), especially if the investments were in mutual funds. Additionally, the provisions of Section 529 plans provide for a rollover without a change of beneficiary only once within a 12-month period, but not into a Coverdell ESA.

Which of the following statements are TRUE of both variable life insurance and variable annuities? I. The investment risk is borne by the contract owner. II. The product must be sold with a prospectus. III. Partial surrenders are first treated as a tax-free return of principal. IV. If the contract owner dies, the beneficiary receives any proceeds tax-free. a. I and II only b. III and IV only c. I, III, and IV only d. I, II, III, and IV

a. I and II only Although partial surrenders of variable life insurance policies are first treated as a return of principal up to the amount of basis, variable annuities are subject to interest-first taxation. Only life insurance proceeds pass to beneficiaries tax-free. Beneficiaries of variable annuity contracts are taxed on the proceeds in the same manner as the annuitant.

Which TWO of the following financial products would be defined as derivatives? I. Collateralized mortgage obligations II. Commercial paper III. Call options IV. Corporate high-yield bonds a. I and III b. I and IV c. II and III d. II and IV

a. I and III A derivative is a financial product that derives its value from movements in another financial product. If the price of the underlying security changes in value, the price of the derivative will fluctuate. For example, a CMO is a security backed by other mortgage-backed securities. If changes occur to the prices of these securities due to fluctuating interest rates and other factors, the price of the CMO will change. The price of an option contract is based on changes in the underlying security. A call option provides the holder the right to buy a security at a specified price. If the underlying security increases in value, the value of the call option will rise.

What type of risk does NOT apply to the holder of a zero-coupon bond? a. Reinvestment risk b. Credit risk c. Purchasing-power risk d. Market risk

a. Reinvestment risk Zero-coupon bonds are issued at a discounted price and do not pay semiannual interest. Since there are no interest payments to reinvest, the bond has no reinvestment risk. When investing in fixed-income securities, one of the uncertainties is whether interest rates will allow the investor to realize the total return that was calculated at the time of the investment (i.e., the yield-to-maturity). Although zero-coupon bonds do not have reinvestment risk, but they do have credit risk, market risk, and extreme interest-rate risk since the bond's duration will equal its years to maturity.

When determining the risk premium on an investment, an investor would analyze the difference between: a. The total return and the risk-free rate of return b. The mean return and dollar-weighted return c. The total return and annualized rate of return d. The coupon rate of a bond and current interest rates

a. The total return and the risk-free rate of return. Total return - risk-free rate of return = risk premium. The risk premium is the amount of return earned in excess of the risk-free rate of return (i.e., the return on a T-bill).

According to the Investment Advisers Act of 1940, an IAR's personal securities transactions involving which of the following securities are subject to the reporting requirement? a.Corporate stocks and bonds b.Shares of a unit investment trust (UIT) c.Shares of money-market mutual funds d.U.S. government securities

a.Corporate stocks and bonds Personal securities transactions involving the following securities are excluded from the reporting requirements: • Direct obligations of the U.S. government • Money-market instruments • Shares of money-market mutual funds • Shares of unit investment trusts • Shares of other types of mutual funds provided the adviser is not the underwriter or adviser to the fund There is no exclusion provided for transactions involving corporate bonds.

If a new investment advisory firm is created and registered with the SEC, which of the following statements would be TRUE? a.It may not register unless it has $100 million or more under management b.It must register with both the SEC and the Administrator c.It may not register with the SEC until it has been in business for one year d.It may register with the SEC at any time without restriction under the Investment Advisers Act of 1940

a.It may not register unless it has $100 million or more under management. Under the Investment Advisers Act of 1940, advisers that manage assets of $100 million or more generally register with the SEC and are referred to as federal covered advisers. IAs are not required to register with both the state and federal regulators and there is no one-year business requirement. The SEC has created a buffer for investment advisers with assets under management (AUM) between $90 million and $110 million and clarifies with whom they should be registered. An adviser may register with the SEC once it reaches AUM of $100 million. However, an adviser must register with the SEC if it has AUM of $110 million or more. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. This means that a mid-sized adviser that is currently registered with the SEC may remain registered with the SEC if it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level.

Under the Securities Act of 1933, which of the following would MOST LIKELY be included in the definition of an underwriter? a. An agent b. A broker-dealer c. An investment adviser representative d. An issuer

b. A broker-dealer A broker-dealer is considered an underwriter when it helps issuers raise capital through the sale of their new issues. Agents (of broker-dealers) and investment adviser representatives (of investment advisers) are the individual employees of their respective firms and are, therefore, not considered broker-dealers.

Which one of the following investments trade independently from its net asset value (NAV)? a. Open-end fund b. Closed-end fund c. Variable annuity d. Unit investment trust (UIT)

b. Closed-end fund Mutual funds (open-end funds), unit investment trusts, and variable annuities are priced based on their net asset values. A closed-end investment company share may sell at, above, or below its net asset value since it trades on the stock exchange.

Mary has a traditional IRA. She just celebrated her seventy-third birthday. She must withdraw the required minimum distribution (RMD) not later than: a. April 1 of the following year b. December 31 of the current year c. The end of five years d. The end of 10 years

b. December 31 of the current year Since Mary was required to withdraw the Required Minimum Distribution by April 1, after she turns 70 1/2, subsequent RMDs must be withdrawn by December 31 each year

One of the main differences between futures contracts and forward contracts is that: a. Forward contracts do not involve commodities b. Forward contracts may not be offset without permission c. Futures contracts are always used to speculate d. An investor may not be short a futures contract

b. Forward contracts may not be offset without permission. One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.

An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order to comply with the law, the investor must: a.Be an accredited investor b.Have assets under management of at least $1 million or a net worth of more than $2.1 million c.Have an existing brokerage account with an affiliated firm d.Be identified as an institutional investor

b. Have assets under management of at least $1 million or a net worth of more than $2.1 million. Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that has $1 million of assets under management with the adviser or a net worth of more than $2.1 million. It is important to recognize that being considered an accredited investor does not satisfy the levels necessary to be considered a qualified client. Under Regulation D of the Securities Act of 1933, an accredited investor is a person with annual income of at least $200,000 or a net worth of at least $1 million. For qualified clients, the $1 million is the assets under management requirement; however, for accredited investors, the $1 million is the net worth requirement. Also note, the net worth does not include the person's primary residence or any associated mortgage.

Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state? I. Foresight limits its practice to wealthy individual investors with $1 million or more in net assets who are domiciled in New Mexico. II. Foresight only advises government entities. III. Foresight solicits its services to eight retail customers in New Mexico. IV. Foresight has assets of $103.4 million under management. a.I and II only b.I and III only c.III and IV only d.I, III, and IV only

b. I and III only Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I. ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk II. ETFs may be sold short and ETNs may not III. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV. ETNs have a maturity date and ETFs do not a.I and III b.I and IV c.II and III d.II and IV

b. I and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.

Which TWO of the following statements are TRUE regarding non-qualified annuities? I. There is a 10% penalty on any taxable withdrawals that are taken before age 59 1/2 II. There is no 10% penalty on any taxable withdrawals that are taken before age 59 1/2 III. Distributions must begin by age 70 1/2 IV. There is no required minimum distribution at age 70 1/2 a.I and III b.I and IV c.II and III d.II and IV

b. I and IV Non-qualified annuities are funded with after-tax (non-deductible) contributions. If funds are withdrawn before age 59 1/2, the earnings portion will be subject to taxation and a 10% penalty. However, since non-qualified annuities are funded after-tax, the IRS does not require distributions to begin at age 70 1/2.

While attending an investment symposium, an investment adviser representative overhears a phone conversation of the keynote speaker. The conversation centers on regulatory problems of a publicly traded company. The representative knows the information is not public. Which of the following actions by the representative would be acceptable? I. The representative informs the compliance officer of his firm about the conversation. II. The representative may ask the speaker about the company during a question-and-answer period and then inform his clients. III. The representative may include his thoughts about the company within his personal blog. IV. The representative may not enter trades for his own account based on the information, but may accept unsolicited trades by his clients. a. I and II only b. I and IV only c. II and III only d. All of the above

b. I and IV only The representative may inform his compliance officer of the information. Additionally, the representative should accept unsolicited orders from his clients. The representative could ask the keynote speaker about the subject company, but the response by the speaker would not be viewed as widely (publicly) disseminated. Therefore, it would not be acceptable for the representatives to inform clients about the information overheard in the speaker's phone conversation. Publishing his personal thoughts about the company in a blog is not acceptable.

According to SEC Release 1092, an attorney is excluded from the definition of an investment adviser in all the following circumstances, EXCEPT: I. The attorney charges a separate fee for investment advice and offers these services only to existing legal clients II. The attorney's website indicates that he is available to offer investment advice on any judgments that his clients win III. The investment advice being offered by the attorney is incidental to his law practice IV. The income that the attorney generates from providing investment advice is less than 1% of his gross income a.I and II only b.I, II, and IV only c.III only d.III and IV only

b. I, II, and IV only According to SEC Release 1092, lawyers, accountants, teachers, and engineers are excluded from the investment adviser definition, as long as the advice being provided is incidental to their professional activities (Choice III). The advice being provided by the professionals is not considered to be incidental if they charge a separate fee for the investment advice (Choice I) or advertise publicly that they provide investment advisory services (Choice II). Choice (IV) indicates the attorney derives less than 1% of his gross income from investment advice, but there is no dollar amount or percentage of income that is identified as incidental service. If an attorney is involved in the activities that are referenced by choices I, II and IV, he is required to register his business as an investment adviser.

When considering the suitability of investment advice, which of the following statements is NOT TRUE? a. The suitability of investment advice is determined by the appropriateness of the advice for that particular client, not the profitability of the client's account b. If a client refuses to supply complete information about her financial resources, the adviser may assume she has other assets that have not been disclosed c. IARs should document their inquiry into the client's financial background and investment objectives by completing a data-gathering form d. Counseling a client to choose very conservative investments is not always a defensible approach to providing investment

b. If a client refuses to supply complete information about her financial resources, the adviser may assume she has other assets that have not been disclosed. Providing the same advice to all clients (even when recommending conservative investments) is rarely suitable. Investment advice should be suitable for each client's objectives and risk tolerance. For some clients, more aggressive investments that provide long-term growth may be more appropriate than more conservative strategies. If a client refuses to disclose fully her assets, an adviser must assume that the only assets the client has are those that have been disclosed.

According to the USA, if an investment adviser wants to charge a fee based on the average value of a client's portfolio, the fee: a. Is prohibited unless permitted by the Administrator b. Is permitted unless prohibited by the Administrator c. Is always permitted d. Is always prohibited

b. Is permitted unless prohibited by the Administrator Asset-based fees are one of the most common methods that investment advisers use to charge their clients. Under the Uniform Securities Act, these types of fees are allowed provided they have stated time periods. Since Administrators may create rules prohibiting any type of fee, it would be incorrect to state that they are always permitted.

An adviser could recommend the purchase of a bond to a client, if its: a.Present value is less than its current market value b.Present value is more than its current market value c.Net present value is less than zero d.Future value is less than its current market value

b. Present value is more than its current market value. In evaluating the value of fixed-income securities, one method is discounted cash flow (DCF). Each future cash flow (interest payments and principal) is discounted to its present value and the present value of each cash flow is combined to determine the bond's present value. If the present value of future cash flows is less than the current market value of the bond, the investor would be paying a premium to acquire the bond and the net present value would be less than zero. If the current market value of the bond is less than the bond's present value, the bond can be purchased at a discount to its present value resulting in a net present value greater than zero. The future value of an investment is not considered in the DCF calculation.

When trading authorization is granted to a third-party for accounts held at an investment adviser, NASAA's model rules state that: a. Only verbal authority is required because the firm is limited to exercising time and price discretion b. Written authority is required for third party trading c. Written authority is only required if the transactions are executed in a margin account d. Only written authority is required if the firm is already authorized by NASAA to trade on behalf of its clients

b. Written authority is required for third party trading. Third-party trading authorization must always be in written form. Investment advisers may act in a discretionary capacity based on verbal authorization for up to 10 days, but thereafter written authorization is required.

If a member firm has written procedures which allow for the borrowing and lending of funds between agents and customers, in which of the following situations is an agent NOT allowed to borrow from a customer? a.If the customer and the agent are both registered with same firm b.If the loan is based on a verbal agreement that the agent has with a non-registered person and the agent repays the loan in full c.If the customer is a member of the agent's immediate family d.If the lending arrangement is based on a business relationship that exists outside of the broker-customer relationship

b.If the loan is based on a verbal agreement that the agent has with a non-registered person and the agent repays the loan in full. A person who is associated with a member firm in any registered capacity may NOT borrow money from or lend money to a customer of the firm unless the firm has an existing written policy which allows the practice and one of the following criteria is met: • The customer is a registered person with the same firm • The customer is an immediate family member • The loan is based on a business relationship that exists outside of the broker-customer relationship • The customer is a financial institution that regularly engages in the business of providing credit, financing, or loans Choice (b) is the answer because even if the agent repays the loan plus interest, it is considered a violation if the customer is not on the narrow list of permitted persons.

Precision Investment Partners is a broker-dealer registered in Tennessee. A recent restructuring at the firm caused a significant portion of the information on the firm's last application filed with the Administrator to no longer be valid. What action must the firm take to be in compliance under the USA? a.Precision must cease doing business until a new application is filed and approved by the Administrator b.Precision must file an amendment to its application promptly c.Precision should call the Administrator, but is not required to update its application until the firm's annual licensing renewal date d.Since Precision is already registered in Tennessee, it has a 90-day grace period to amend its application, provided the firm is in compliance with all current state securities laws

b.Precision must file an amendment to its application promptly. According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.

A company has entered into bankruptcy and is in the process of being liquidated by the trustee. When one of the company's buildings is sold, its current value is greater than the outstanding loan that is collateralized by the building. What will the trustee do with the excess funds? a.Distribute the excess funds to the secured creditors b.Use the excess funds to pay the company's general creditors c.Distribute the proceeds to the stockholders as a capital gain d.Distribute the proceeds to the stockholders as income

b.Use the excess funds to pay the company's general creditors. The key to this question is to recognize that it is asking about the use of the excess funds. For example, if the corporation's building is being used to collateralize a $30 million loan, but it is sold at its current value of $37 million, there are excess funds of $7 million. After paying the secured creditors, the excess funds are paid out to the general creditors. Choice (a) is incorrect since the secured creditors only receive payments based on the level of the loan which is collateralized by the building.

According to the Form ADV, a felony, as compared to a misdemeanor, is defined by all the following choices, EXCEPT: a.An offense punishable by a sentence of at least one-year imprisonment b.An offense punishable by a fine of at least $1,000 c.An offense punishable by a fine of at least $500 d.A general court martial

c. An offense punishable by a fine of at least $500 All the choices are applicable except choice (c). A felony is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial, or an offense punishable by a sentence of less than one year imprisonment and/or a fine of less than $1,000.

If the NPV (net present value) of an investment is greater than zero, the investment will provide a return: a. Of less than the discount rate used b. Equal to the discount rate used c. Greater than the discount rate used d. That is unknown

c. Greater than the discount rate used If the net present value of an investment is greater than zero, the investment will generate a positive return. Net present value is used in discounted cash flow (DCF) analysis. It is a standard method for using the time value of money to evaluate investments. For example, if an adviser wants to purchase a portfolio of bonds, she would discount the cash flows of those bonds into one present value amount, for example, $1,300,000. If the adviser can purchase the bonds for less than that amount, then the investment has a positive net present value. This would mean that the return on the portfolio would be greater than the discount rate used to arrive at the net present value. If the adviser could not locate the bonds for a total price of less than $1,300,000, then the purchase would not be completed.

Under the Investment Company Act, which TWO of the following statements are TRUE regarding the redemption of mutual fund shares? I. The investor will receive the net asset value as computed on the previous day's close. II. The investor will receive the net asset value computed on the day the order is entered. III. The fund must pay the investor within seven days of receipt of the redemption. IV. The fund must pay the investor within three days of redemption. a. I and III b. I and IV c. II and III d. II and IV

c. II and III Share redemption of mutual funds is based on forward pricing, which means that the investor will receive the next computed net asset value. This value is normally computed at the end of the business day. The client must be paid within seven calendar days of redemption.

Under the Uniform Securities Act, which of the following choices would fall under the definition of an agent? I. A trust company, bank, or savings institution II. A sales assistant authorized to accept client orders III. Any person other than a broker-dealer who acts on behalf of a broker-dealer or issuer in effecting sales or purchases of securities a. II only b. III only c. II and III only d. I, II, and III

c. II and III only Anyone transacting securities business (i.e., accepting orders) on behalf of a broker-dealer or issuer is generally considered an agent. This would include sales assistants who take client orders, as well as registered representatives. A trust company, bank, or savings institution would not be included

The Dow Jones Industrial Average is considered an index of: a. Value stocks b. Growth stocks c. Large-capitalized stocks d. NYSE stocks only

c. Large-capitalized stocks The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.

A U.S. computer manufacturer repurchased one million shares of its outstanding common stock between January 2000 and September 2001. The company will be required to take which of the following actions if it intends to distribute these shares in the form of a stock dividend? a. The shares must be registered with the SEC b. The distribution of shares qualifies as a private placement offering under Regulation D c. No special action is required by the company d. The company must register new shares of common stock, since the repurchased shares have been cancelled and are no longer valid for reissue

c. No special action is required by the company When a company repurchases shares in the secondary market, it is called treasury stock. SEC registration of securities does not expire, provided the company remains current on its filings. The distribution of treasury stock to existing shareholders does not require the shares to be registered again with the SEC, since the stock dividend would not constitute the issuance of new shares.

Carrie has been a client of an investment adviser that is established as a partnership for four years and is happy with the performance of her account. If she wants to renew her contract with the firm, which of the following provisions is NOT required in the contract? a. Notification if a managing partner, who does not manage any of Carrie's assets, retires from the firm b. Notification if a managing partner, who does not manage any of Carrie's assets, leaves to start a new advisory firm c. Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm d. Notification if a minority partner leaves the firm

c. Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change in the partnership (ownership) within a reasonable period. Whether a partner who leaves or dies is responsible for managing a client's assets is irrelevant to the notification provision. The reason that choice (c) is the answer is because the IAR that manages Carrie's assets is not a partner of the advisory firm. Although it is a good business practice for the advisory firm to notify Carrie that her IAR has left the firm, it is not a requirement.

According to the Uniform Securities Act, which of the following securities are exempt from registration? a. Stock issued by a FINRA member firm b. Debentures issued by a Canadian bank c. Stock issued by a state-regulated railroad company d. Preferred stock sold to investors in the same state in which the firm is incorporated

c. Stock issued by a state-regulated railroad company. Common carriers, such as railroads and shipping companies, are exempt from registration under the Uniform Securities Act. While securities issued in the same state in which the firm is incorporated may be exempt from the Securities Act of 1933, they are usually required to register with the state. Agencies of the Canadian government and domestic U.S. banks are also exempt from registration, but securities issued by Canadian banks receive no such exemption.

Which of the following statements regarding the differences between an annual rebalancing strategy and a buy-and-hold strategy over a 30-year period is FALSE? a. The tax and transactions costs will be lower with a buy and hold strategy b. The buy and hold strategy is easier to manage than a rebalancing strategy c. The risk in a buy and hold strategy portfolio will match the investor's risk tolerance d. The equity portion in a buy and hold portfolio could grow in relation to the fixed-income portion, whereas a rebalanced portfolio will remain balanced every year

c. The risk in a buy and hold strategy portfolio will match the investor's risk tolerance The risk levels in a buy and hold portfolio will rise and fall, while a rebalanced portfolio will be adjusted periodically to meet the investor's risk tolerance. Rebalanced portfolios will also attempt to maintain the percentage of equity and debt in the portfolio, while buy and hold portfolios will allow the percentages to drift. One of the advantages of a buy and hold strategy is that transaction and tax expenses are minimized since there is generally no continuous buying and selling.

Zweispiel Company is registered as both a broker-dealer and an investment adviser. As a broker-dealer, the firm makes a market in WXYZ stock. Zweispiel believes that this stock would be a very good investment for one of its advisory clients and would like to sell shares to a client from its market-maker account. Which of the following statements is TRUE? a. Zweispiel may sell the stock to the client as long as the security is suitable for the account b. Zweispiel may sell the stock to the client as long as it does not charge a commission for the transaction c. Zweispiel may sell the stock to the client as long as it discloses, prior to the completion of the transaction, that it is acting as a principal and it obtains the client's written consent d. Zweispiel is not permitted to effect this transaction under any circumstances due to the conflict of interest

c. Zweispiel may sell the stock to the client as long as it discloses, prior to the completion of the transaction, that it is acting as a principal and it obtains the client's written consent An investment adviser that wishes to act as principal for its own account must (1) disclose the capacity in which it is acting prior to the completion of the transaction, and (2) obtain the client's written consent.

An investment adviser has begun to experience difficulties in collecting fees from the accounts of clients that do not elect to have the fees deducted directly from their accounts. As a result, the firm has decided to raise its fees and require a larger up-front deposit from all new accounts for the upcoming year. However, to reward its current clients, the adviser has decided to waive the fee increase and will not change the terms of their contracts. For this situation, what is the adviser required to do? a.The IA must update its Form ADV Part 2 and any customer disclosure documents within 90 days of its year-end b.The IA must make necessary changes to all of its disclosure documents and receive written consent from all of its current clients within 30 days c.The IA must make all of the necessary changes and promptly file amendments to its Form ADV d.The IA must notify all of its current clients of the new fees and update its Form ADV Part 2 within 60 days

c.The IA must make all of the necessary changes and promptly file amendments to its Form ADV. In this question, since the contracts of the current clients are not being changed, the adviser is not required to provide them with written notification or obtain their consent. However, changing the fee structure for new clients is considered a material change to the adviser's business and the adviser is required update and promptly file the amended Form ADV. For any change that is considered to be routine, the adviser may be file an amended Form ADV within 90 days of the adviser's fiscal year.

Under the Investment Advisers Act of 1940, offering which of the following goods or services would be a violation of soft-dollar practices if the broker-dealer provides them to the adviser in exchange for executing transactions? a. Third-party research b. Market data services c. Trading software used to route orders to a market center d. Assistance concerning its compliance responsibilities

d. Assistance concerning its compliance responsibilities An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors.

A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis will: a.Increase b.Remain the same c.Increase or decrease, depending on its maturity d.Decline

d. Decline A bond's basis is synonymous with its yield-to-maturity. Interest rates and yield-to-maturity on a bond will move in the same direction. If market interest rates decline, it means that yields (including the yield-to-maturity) will also decline.

The Securities Exchange Act of 1934 regulates: I. Broker-dealers II. Stock exchanges III. Transfer agents IV. FINRA a. I and II only b. II only c. I, II, and IV only d. I, II, III, and IV

d. I, II, III, and IV Under the Securities Exchange Act of 1934, the SEC was given the power to regulate broker-dealers, stock exchanges, transfer agents, and self-regulatory organizations such as the NYSE and FINRA

Apex Partners, an aggressive, newly established IA with $5 million in assets under management, is looking to triple its asset base within the next few months. The firm is planning to use outside accountants and attorneys to direct business to it in return for a flat 1% referral fee. Which of the following statements concerning this activity is TRUE? a. IAs are prohibited from paying cash fees to outside personnel, but may enter into soft-dollar arrangements b. IAs are only permitted to pay referral fees to FINRA-licensed individuals c. IAs are permitted to pay referral fees as long as the fee does not exceed 125 basis points per annum d. IAs are permitted to pay referral fees only if a written contract exists between the adviser and the outside solicitor

d. IAs are permitted to pay referral fees only if a written contract exists between the adviser and the outside solicitor. A solicitor is a person who solicits clients for, or directs clients to, an investment adviser. Solicitors do not need to be employees of the firm. If a solicitor receiving a cash fee is not an employee of the adviser, a written agreement between the adviser and the solicitor must exist. The agreement must describe the activities in which the solicitor will engage for the adviser and also describe the compensation to be paid.

William purchased $10,000 worth of VULC when he was 60 years old. At the age of 98, William dies and leaves the shares of VULC to his grandson James. James learns that the shares are now worth $300,000. According to the IRS, which TWO of the following statements are TRUE regarding the shares of VULC? I. The cost basis of the shares is $10,000 II. The cost basis of the shares is $300,000 III. The holding period of the shares for James is short-term IV. The holding period of the shares for James is long-term a.I and III b.I and IV c.II and III d.II and IV

d. II and IV According to the IRS, when securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.

The advantages of a variable annuity, as compared to a fixed annuity, would include which TWO of the following choices? I. The guarantee of a specific rate of return II. Absence of investment risk III. Protection against inflation IV. The ability to vote regarding changes in investment policy a.I and II b.I and III c.II and IV d.III and IV

d. III and IV Over time, stocks usually keep pace with inflation as their dividends rise. The separate account of a variable annuity may be invested in equities and other types of securities through various subaccounts. Though riskier than fixed annuities, variable annuities have higher returns in the long run. In a variable annuity, the contract holders own the separate account, vote on changes in the investment policy, and elect the investment managers.

An agent would like to leave his firm, create his own broker-dealer, and do business as a sole proprietor. This would be allowed: a.Without registering as a broker-dealer as long as the agent hires a qualified custodian to hold client assets b.Without registering as a broker-dealer as long as he limits his clients to qualified institutional investors or family members c.If the agent registers with the SEC as a broker-dealer, passes a principal's exam, and posts a $100,000 surety bond with his state Administrator d.If the agent registers with the Administrator as a broker-dealer and fulfills any additional requirements imposed by the USA

d. If the agent registers with the Administrator as a broker-dealer and fulfills any additional requirements imposed by the USA. Individuals are not allowed to simply leave their firm and begin transacting business independently as a broker-dealer. They must be affiliated with a broker-dealer or issuer. In this case, the agent must first create and register as a broker-dealer and fulfill whatever conditions are required in his state. The firm may also be required to register with the SEC and join FINRA. The agent would also need to become a registered principal. However, a surety bond might not be required, which is the reason that choice (c) is incorrect

The Big Brain Inc. Defined Benefit Retirement Plan maintains a written statement for the plan's fiduciaries that provides them with information concerning various categories of investments and guidance concerning investment decisions. The common name for this document is the: a. Plan administration protocol b. Fiduciary guidelines statement c. Statement of investment guidelines d. Investment policy statement

d. Investment policy statement Every retirement plan must maintain a written statement of investment policy. This document provides the fiduciaries with guidelines concerning various categories of investment management decisions. Two of the main issues addressed in the statement are proxies and the activities of the investment manager.

Which one of the following statements regarding variable annuities is FALSE? a.Investors may invest in various asset classes inside of a variable annuity b.On average, mutual funds have lower fees and expenses than annuities c.In a variable annuity, your investment grows tax-deferred d.On average, variable annuities have lower fees and expenses than mutual funds

d. On average, variable annuities have lower fees and expenses than mutual funds. Mutual funds are often an investment selection within a variable annuity contract. And, since the investor would pay for the cost of the annuity in addition to the costs associated with operating the mutual fund, variable annuities typically have higher fees and expenses.

Investors who subscribe to the Efficient Market theory, may invest in various indices. Which of the following indices is a small-cap benchmark? a. Nifty 50 b. NASDAQ 1000 c. DJIA d. Russell 2000

d. Russell 2000 The Russell 2000 Index is comprised of 2,000 small- to mid-cap companies. The Nifty 50 and NASDAQ 1000 are not indices. The DJIA (Dow Jones Industrial Average) is a large-cap index that includes 30 of the largest publicly traded companies.

Which of the following statements is TRUE regarding the grantor of a trust? a.The grantor may not be the trustee of a trust b.The grantor may not be the beneficiary of a trust c.The grantor may not be both the trustee and the beneficiary of a trust d.The grantor may be the trustee and/or the beneficiary of a trust if desired

d. The grantor may be the trustee and/or the beneficiary of a trust if desired.

Which of the following statements is TRUE regarding hedge funds? a. They have high 12b-1 fees b. There is an active secondary market for their shares c. They generate tax-deferred income d. Their advisers usually receive performance-based compensation

d. Their advisers usually receive performance-based compensation. A hedge fund adviser's compensation is typically tied to the fund's performance. In addition to a management fee of 2%, for example, the adviser will also receive a percentage of the fund's profit (e.g., 20%). 12b-1 fees are charged by mutual funds, not hedge funds. Hedge funds are usually illiquid investments--there is no active market for their shares.

Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)? a.A QDRO is a court order that divides all jointly held property in the event of a divorce b.A QDRO is a court order that requires one person involved in a divorce to provide for the payment of alimony or child support c.A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a non-qualified retirement plan d.A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan

d.A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan. A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.

Your client, Ms. Fabozzi, would like to invest in a fixed-income security for her portfolio. She understands there is a tradeoff between risk and return; however, she prefers to avoid speculative-grade investments. Which of the following bonds is MOST suitable for her portfolio? a.AAA-rated corporate bond, present value = $1,265, market price = $1,334 b.Baa debenture, present value = $1,128, market price = $1,250 c.BB mortgage bond, present value = $1,355, market price = $1,111 d.BBB collateral trust certificate, present value = $1,251, market price = $1,148

d.BBB collateral trust certificate, present value = $1,251, market price = $1,148 In order to answer this question you must compare each bond's current market value to its present value. The present value of each bond has been calculated by discounting the cash flows from each coupon payment and determining the present value of the principal repayment, using the investor's desired rate of return. When comparing the present value of a bond to its current market value, an investor can determine if the bond is fairly valued, undervalued, or overvalued. The bonds in choices (a) and (b) have a current market value greater than the present value. Since the bonds are trading at a premium to their present value, the investor would receive a lower return than desired. The bonds in choices (c) and (d) have a current market value less than their present value. These bonds are trading at a discount to their present value and therefore would result in a return higher than what the investor desired. Since the investor also wants to avoid speculative-grade investments, (BB and below) choice (c) would be eliminated.

According to the Uniform Securities Act, investment advisers are required to maintain their books and records for: a.Three years with the most recent two years in an appropriate office b.Three years with the most recent two years easily accessible c.Five years with the most recent three years in an appropriate office d.Five years with the most recent two years in an appropriate office

d.Five years with the most recent two years in an appropriate office According to the Uniform Securities Act, investment advisory firms are required to maintain their books and records for a minimum of five years with the most recent two years in an appropriate office of the investment adviser.

Which TWO of the following are TRUE regarding credit spreads? I. Credit spreads represent the difference between the yields on various bonds and dividend paying stocks II. Credit spreads represent the difference between yields on various bonds and Treasury securities III. If a corporate bond yields 5.5% and a Treasury bond with a similar maturity yields 4.5%, the credit spread is 2% IV. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5%, the credit spread is 1.5% a.I and III b.I and IV c.II and III d.II and IV

d.II and IV A credit spread represents the difference in the yields of various bonds as compared to Treasury securities of similar maturities. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5%, then the credit spread is 1.5%. Choice (III) is incorrect since the credit spread is 1% (the difference between 5.5% and 4.5%).