Series 66 Pt. II
Current Yield
Annual interest / Current market price
When determining if an IA can give a client a loan you see an option that says: "the loan could only be made after the advisory contract was terminated"
That should be the right answer
For corporations Preferred stock dividends are taxable at a reduced rate due to
The 50% dividend exclusion This break does not apply to the dividends on foreign securities
One of the things that makes the federal rules on custody different from the USA is that
The receipt of a check made out to a third party other than the IA is not considered to be custody
Once a client of a Broker-Dealer has officially changed their state of residence to one where the BD & and its Agent is not registered
The relationship may only continue for a maximum of 30 days. After that, both the BD & Agent would have to register in the state if they'd wish to keep the client
A client who opens a self-directed brokerage account will place unsolicited transactions. In doing so, the client will be responsible for
The results (including any losses) in the account
Most Returns on Mutual Funds are stated on a
Time-weighted basis because of the portfolio's manager lack of control over the future cash flows in to the fund Time-weighted returns are used to state returns
State IA Custody of Customer Funds/Securities
If not prohibited, Discretion and/or Custody would require written notice to the Administrator Requires a minimum net worth of surety bond of $35,000 It is custody if securities or checks are not returned and third party checks forwarded within 3 business days An audited balance sheet would be required if adviser takes fees of more than $500, 6 or more months in advance or the adviser maintains custody
There are 10 individuals employed by Broker-dealer X, each effecting transactions in exempt securities on behalf of their retail clients. These 10 individuals
Individuals employed by a broker-dealer who are effecting transactions in securities, are considered AGENTS of the broker-dealer and must satisfy applicable registration standards, as mandated by the state. It is not relevant whether the securities are exempt or not
An individual representing the State of Florida in the sale of City of Miami GO bonds to Florida residents is
Individuals representing an issuer of an exempt security in the sale of that issuer's securities (in this case a municipal bond) is not considered an agent, and thus not subject to registration as an agent
Federal IA Performance Fees
Prohibited unless: 1) Contract with an investment company 2) Certain clients with at least $1 million under management or a net worth in excess of $2.1 million
Initials that may not be used on business card or lettergead
RIA & IAR
Data mining technology involves the electronic collection of information on website users, and can lead to specific suggestions being made to users of the site. The use of this technology will be considered a
Recommendation being made by the firm
An individual is excluded (not covered) from the definition of an investment advisor rep (IAR) if they are:
1) Providing purely clerical or administrative services on behalf of the firm 2) Their activities are incidental to the investment advisory services being offered by their employer
IAR Registration Requirements
1) Register as an IAR only if a place of business in the state; no de minimis 2) Register in the state if more than 5 retail clients reside in the state
Federal level Brochure Rule
120 day annual delivery
After Tax-return
Total return - Marginal tax bracket
Annualized return
Total return on an annualized basis
Mid-Cap Stocks
$2 billion to $10 billion market cap
Small-Cap Stocks
$300 million to $2 billion market cap
No-load Mutual Funds must have sales load of:
0 Front end sales-charge 0 Back end contingent deferred sales charge
Qualified dividends are taxed at a lower rate than non-qualified dividends. In fact, for taxpayers in the 10% or 15% tax bracket, the rate on Qualified dividends is
0% Note: Don't choose that answer in a question like this (unless the question specifies the lowest tax bracket investors), because that is an exceptional case (there are not many people buying securities in those low tax brackets).
Mandatory waiting time to retest (3rd and subsequent failures)
180 days
Current T-Notes are yielding 2.5%. An investor chooses an Equity security with an Expected return of 7%. The actual return of the equity is 1.5%. What is this investments opportunity cost
2.5% - 1.5% = 1%
Maximum residency under snowbird exemption
30 days
Cash dividends received by one domestic company from another domestic company are subject to taxation on
50% of the amount of the dividend
In order for an Agent to determine the: Asset (Investment), Amount of shares, or Action (Buy or sell) of an order
A Power of Attorney would be required
Distributions from a Non-qualified Plan are subject to an Ordinary Income tax on the amount
Above the basis of the account or initial contribution
Tactical allocation, or active management (the ACT in tACTical means to act)
Adjusts a portfolio based on a manager's market view and sentiment This relies on market timing and predicting future price movements
The required disclosure statement for wrap fee programs must contain the information found in
Appendix 1 of Form ADV, Part 2A
Whenever an Agent leaves his Broker-Dealer
Both the Agent and the Broker-Dealer must promptly notify the Administrator by filing the U-5 form
It is not suitable to recommend the same investments to all clients; this prohibited practice is called
Blanket recommendations
The grantor of a trust can also name themselves
Both trustee and beneficiary
Ways in which a Section 529 plan differs from a Coverdell ESA include
Contributions to an ESA are limited to $2,000 per beneficiary per year, whereas the 529 limit is set by the plan sponsor, sometimes as high as $300,000 Unlike the ESA, where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529
Offers limited liability to its shareholders, but there is no flow-through of income or loss.
C Corporation
Uses actuarial assumptions to ensure specific minimum benefits can be paid to plan participants
Defined Benefit Plans
- The fact that it is a third party must be disclosed - Any script or sales approach used by the third party is the responsibility of the Adviser
Disclosure required when cash referrals are paid to third-party solicitors (not affiliated with the adviser)
Contingent Deferred Annuities
Does not exist
All Corporate Qualified plans are covered under
ERISA
A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels?
Federal, State, and Local
To call attention to the benefits or risks of a new issue, issuers are prohibited from summarizing or modifying
Formal securities filing such as (1) Prospectus & (2) Offering Circular
State Record keeping Requirements
Generally records for Broker-Dealers are maintained for 3 years Investment Adviser records must be kept for 5 years
A single parent (including one who is divorced) would receive the best tax treatment by filing as
Head of household
A market drop may be followed by panic selling
Herd behavior
At a minimum, a firm that permits use of social media sites must
Hold annual training as part of its continuing education obligations
Capital Gains are not a source of Earned Income, and thus cannot be the basis for any
IRA contributions
Under the Dodd-Frank Bill, a pension fund manager is required to register with the states
If it has AUM under $200 Million Once the $200 million level is reached, SEC registration becomes an option
- Name of the adviser's business and form of business organization - Information on how the adviser will be compensated - Information about certain control persons (officers, directors, partners), but does not ask for a listing of their personal investment holding
Information Required on Form ADV
Have their entire portfolio invested in securities issued outside the United States
International funds
Qualified retirement plan created by Congress under ERISA, designed for a business owner (sole proprietor)
Keogh Plan
An individuals Tax Filing status is based on marital status as of the
Last day of the year (Dec. 31)
A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account?
Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death
An individual seeking a vehicle to transfer property to a charitable foundation may wish to utilize a
Living trust A trust is an entity that enables an individual to transfer property or assets to another party
A signed loan consent agreement permits a firm to
Loan out a customer's margin securities Only part of the margin documentation that is optional
Approach that attempts to measure and control risk within a securities portfolio
Modern Portfolio Theory (MPT)
The difference between an investment's present value and its cost. Used to determine whether to invest in a capital project
Net present value (NPV)
Features of a straight life, fixed, single-premium immediate annuity
Payments from a straight life, fixed, single-premium immediate annuity are fixed ad are not dependent on underlying investments. However, as fixed payments, they do not offer inflation protection. As a straight life annuity, payments cease at the death of the annuitant. Because there is no minimum payout period, early death could result in total payments being less than the amount of the invested principal
In a ERISA plan, a transfer of plan income or assets is permitted as long as its for the benefit of a
Plan beneficiary or plan participant which they are entitled according to the provisions within the plan
Is political risk considered systematic or un-systematic risk?
Political risk is considered to be Un-systematic Risk This risk is more pronounced in countries with Emerging economies and less political stability
A state-registered Investment Adviser need only meet the financial & record keeping requirements of the state in which its
Principal office is located
When a Broker-Dealer receives securities from a client it must provide a
Prompt receipt confirming the specific number of securities and specified date
If a filing with the Administrator is found to have material misstatements or omissions, an amendment must be filed
Promptly with the office of the Administrator.
Sending a market newsletter is an example of
Providing impersonal investment advice
Minimum frequency that a statement must be sent to a customer in an inactive account
Quarterly
Gross profit, or gross margin, is
Sales (revenues) - Cost of goods sold (COGS)
The requirement for a retirement plan trustee to follow fiduciary standards is found in
Section 404 (c) of ERISA
Business structure that exposes all personal assets of the owner to creditors
Sole proprietorships
Offers a Variable Annuity investor the maximum monthly payments when he Annuitizes
Straight Line
A hearing must be granted 15 days after written request
Summary Order
Form ADV-E is filled out by the investment adviser and then submitted along with the surprise examination report or statement by the independent public accountant after a
Surprise inspection of the adviser to verify client funds and securities
For purchasers of a Variable Life Insurance Policy, funds obtained from a policy loan are not considered
Taxable income (Same as with any loan - you owe the money)
Banks can run Radio/TV Ads without the FDIC disclosure if
The Ad lasts up to 30 seconds or less
When recovering funds from a broker-dealer as part of an administrator ordered settlement, an investor may receive
The interest paid to the client as part of a settlement is typically referenced as the 'state's legal rate'
Mutual funds do not receive the Sales Charge, they go to the
Underwriter
Who is the last Creditor to be payed in a corporate liquidation
Unsecured bondholders (debentures)
The term used to describe a customer initiated order that includes all of the details except time and price is
Unsolicited Order
Maximum fine for criminal liability under federal law.
Up to $10,000, and /or 3 years jail time
One cannot do a rollover from a 401(K) into a
Variable annuity; Section 1035 only applies to insurance contract exchanges You can do a rollover to a Traditional IRA
It is acceptable, under certain circumstances, for an agent to split commissions with another party. This practice must be disclosed to the client
if the overall cost of the transaction to the client is increased
Receipt of the Options Account Agreement
15 days after account approval
A Mutual Fund investor who qualifies for a breakpoint will receive a
A reduction in the Sales Charge
There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers Instead they would include
A) the cost of overnight delivery services B) interest on debit balances in margin accounts C) safekeeping prices of customer funds and securities
What is NOT a direct power of the SEC?
The SEC does not have the authority to enter an injunction against a person; they must do this through a legal proceeding in a court
The Securities Act of 1933 regulates
All things primary market (issuances)
Bonds are never called at a price
Below par
- Allows tax-free earnings and growth for distributions made for qualified educational expenses - It is similarly taxed to Roth IRA's
Coverdell Education Savings Account
- The registration of securities salespeople in a state - The registration of securities within a state - The regulation of securities transactions in a state
Covered by Blue-sky laws (Uniform Securities Act)
Aggregate of all interest payments received by an investor during the year divided by the current market value price of the bond
Current Yield
When Non-qualified Stock Options (NSOs) are exercised, what is reported as wages by the employer and employee.
The difference between strike price and current market price at time of exercise
The intrinsic value of an options contract is
The difference between the Strike Price and the Market Value of the underlying stock. It cannot be lower than 0
Is selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority an unethical practice?
It is not unethical for an Agent to choose time and price of a trade as long as the client has determined the asset, the action, and the amount
Surrender charges never apply in the case of a
Death benefit
A Limited Partnership Interest in Real Estate is considered a
Security
An interest in the rental income from a group of condos, where the rent is pooled, is considered a security under the USA
a security under the USA
Securities offered under Regulation A Tier 1 require
State registration and compliance with blue sky laws
Only business entity that files a business return with the IRS, and makes an appropriate income tax payment to the federal government
"C" corporation
Micro-Cap Stocks
$50 million to $300 million market cap
An Investment Policy Statement (IPS) requires identifying the clients
- Constraints (TTLLU): Time horizon, Taxes, Liquidity, Laws, and Unique - Objectives: Taxes (shelter), Income, Growth
A Mutual Fund Charges investors:
- Contingent deferred sales charge (CDSC) = Fee when shares are sold - 12b-1 fees = annual expenses based on a percentage of investors holdings in the fund = The term "no-load" fee can only be used for a fund with annual 12b-1 fees of 0.25% or less
Exemption from the Brochure Rule Delivery Requirement (Under both Federal & State)
- Contracts with an Investment Company registered under the Investment Company Act of 1940 - Advisers entering into a contract providing solely Impersonal Advisory services are exempt (unless the annual charge for the service is $500 or more) - Advisers who provide advice to companies that are exempt from registration (Insurance companies, banks)
The private placement exemption is limited to a maximum of 10 offers to retail clients. If this were to institutions there
- No numerical limitation - Commissions would be paid and immediate resale is permitted
Market capitalization of companies:
- Small-cap company have a market capitalization of between $300 million and $2 billion - Mid-cap company have a market capitalization of between $2 billion and $10 billion - Large-cap company is more than $10bn.
Penalty-free cancelation of IA contract if brochure not delivered at least 48 hours in advance (USA only)
5 business days
Brochure Rule
- State IA's must deliver the brochure 48 hours prior to client receiving the contract - Otherwise it must be delivered at the time of entering the advisory contract and client has a 5-day period to cancel without penalty
Time period for Investment Adviser recordkeeping
5 years
Because the Securities Exchange Act of 1934 requires a broker-dealer to join
1 or more SROs
Registration statements are usually effective for a period of
1 year from the effective date May not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding
Part 2B of Form ADV is a brochure supplement that must contain certain information about "Advisory personnel on whom clients rely for investment advice". It includes:
1) Cover page 2) Educational background and business experience 3) Disciplinary information 4) Other business activities 5) Additional compensation 6) Supervision
If the IRS determines a Direct Participation Program (DPP) to be abusive
1) Deductions may be disallowed 2) Taxes and penalties are assessed
What does Direct Participation Programs (DPP) pass through directly to investors
1) Gains & losses 2) Deductions & credits
If Agents wish to conduct an investment seminar they're allowed to:
1) Hand out business cards attached to new account applications 2) Hand out prospectus for a Mutual Fund discussed 3) Invite a professor to speak about the stock market
The cover page of the brochure must state:
1) Name 2) Business address 3) Contact information 4) Website address 5) Date of the brochure, and "This brochure provides information about the qualifications and business practices of Firm X..."
SEC can summarily suspend trading in a security
10 business days
- Advisers having custody solely due to direct fee deduction and who keep the required records and make the required notifications to clients - Advisers having custody solely due to the advising pooled investment vehicles and who keep the required records and make the required notifications to client
2 scenarios where the custody minimum net-worth of $35,000 are waived-
When a third-party promoter engaged by an investment adviser to solicit for new business is going to be compensated above the de minimis limit, there must be a written agreement between the parties kept by the IA. What is the limit
A copy of the written agreement between the parties needs to be maintained if the compensation exceeded $1,000 over a 12-month period
A letter of rescission may be used by
A letter of rescission may be used by both a broker-dealer and an investment advisor They are valid for 30 days
In a defined benefit plan, the client can have some reasonable certainty about the
Amount of income that will be received in retirement
What is the purpose of the Options Agreement and when does it have to be returned
An Options Agreement evidences receipt of the current Option Disclosure Document The Options Agreement has to be signed and returned within 15 days of receiving written approval from a Broker-Dealer to engage in certain option trades
An Administrator may conduct an investigation
An administrator has jurisdiction over the matter, firm, or person investigated if the sale were Directed into, Originated, or Accepted in his State
any individual working for a broker-dealer who is conducting securities activities, such as 'pre-qualifying' clients' would be deemed
An agent and subject to registration requirements
Last year, the bond market was profitable and ABC fund had 70% of its assets in bonds. Next year, the fund's managers expect the equity market to outperform and will adjust the fund's portfolio so that 60% of its assets will be invested in stock. ABC is most likely
An asset allocation fund A mutual fund whose portfolio managers have the flexibility to allocate between different investment classes is known as an asset allocation fund.
A customer makes 25 $500 cash deposits to pay for a $12,500 transaction. This should be recognized as
An attempt to structure payments to fall under the $10,000 radar to avoid filing a CTR
The maximum allowable Sales Load on Variable Life Insurance is
An average of 9% of the premium per year, over a 20-year average
An IA runs an ad describing the the nature of the firm's model portfolio and indicates that it has: "outperformed the overall market by 800% over the last 10 years, and therefore guarantee that their clients will more than keep with inflation" At the bottom it includes in a smaller print the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated" This is an example of
An improper hedge clause - hedge clauses may not be used to disclaim statements that are inherently misleading, since no ad can state a guarantee like that
The Economic Growth and Tax Relief Reconciliation Act of 2001 permits:
An individual to make "catch up" contributions of $1,000 after making the maximum allowable contribution of $6,000 for those tax payers at least 50 years of age
Involves purchasing life insurance sufficient to complete the customer's financial objective should he die before it is met
An insurance approach to a customer's capital needs analysis
Securities offered under Regulation A Tier 2 require
An offering circular to be filed with the SEC and no state registration or disclosure is required
Administrators may not revoke or suspend a registration without
An opportunity for a hearing
The tendency to base expectations upon the first information received which may, or may not be accurate. Once a thought is anchored in your mind, it is difficult to move away from it
Anchoring
A strategic portfolio (e.g., 70% stocks; 30% bonds) must be rebalanced on an
Annual basis
Death benefits are calculated
Annually
Longevity Risk is addressed with
Annuities & retirement plan products
Cover any person or transaction involving a security, regardless of whether the person, security or transaction is registered, exempt, or federal covered
Antifraud Provisions of State Securities Law
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely
Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income
An investment adviser organized as a partnership must disclose to clients when
Any partner, minority interest or not, departs from the firm
Investment Adviser Definition
Any person who for compensation, engages in the business of advising others as to the value of securities or, as part of a regular business, issues analyses or reports concerning securities
Under the Investment Advisers Act of 1940, what is the maximum fine that may be imposed for violating the act?
Any person who violates the act or SEC rules is subject to a fine of up to $10,000 and/or a prison for up to 5 years Note that this is different than the Uniform Securities Act, which provides for penalties of 3 years and $5,000
1) Tax-exempt interest interest on private purpose Municipal bonds 2) Research and development costs associated with Limited Partnerships 3) Accelerated depreciation on Property
Are all Tax Preference Items under the Alternative Minimum Tax (AMT)
If an IAR also engages in Non-securities related activities, such as selling auto insurance or real estate these must
Be disclosed to clients, as they represent a potential conflict of interest (Time away from watching the market)
Definition of Rescission
Cancellation of a trade or contract and return of principle paid with interest usually added = As if the trade/contract had never happened
1) All investors can borrow and lend at the risk-free rate of return 2) No inflation 3) 4)
Capital Asset Pricing Market Theory Assumptions
It is a theory allowing an investor to determine an asset's expected rate of return, using that asset's Systemic risk profile
Capital Asset Pricing Model (CAPM)
An individual who is providing advice about securities as part of a regular business for compensation, but is exempt from the registration requirements of the Uniform Securities Act (USA) is
Conducting business as an investment advisor rep (IAR) and remains bound by all of the legal and 'anti-fraud' standards of the securities laws
Charges on Mutual fund A, B, and C shares
Class A shares have a front-end sales charge and a low 12b-1 fee Class B shares have a declining contingent-deferred sales charge and a high 12b-1 fee. Class C shares have a high 12b-1 fee and a level contingent-deferred sales charge.
Many investors have a hard time changing their existing beliefs, even when new information is presented to them
Conservatism
With variable life insurance, Separate account performance below the AIR causes a reduction the
Death Benefit
proceeds of a life insurance policy are only available upon
Death of the insured
A bond backed by the general creditworthiness of an issuer, which uses assets and earnings of the company to support the Debt Service is called a
Debenture
Marginal tax rate
Defined as the rate of taxation on any additional taxable income received
Being sued by a client is not grounds for
Disqualification
Unsystematic or Non-systematic risk can be reduced through
Diversification
Section 529 contribution limits are set by
Each individual state
Barbell, Bullet, & Laddering bond strategies are all examples of
Each of the other strategies involves some degree of activity. For example, with the barbell strategy of owning only short-term and long-term bonds (no intermediate-term ones), as those short-term bonds mature and the long-term become intermediate, they must be replaced. That is active management. With the bullet strategy, the only thing staying constant is the year of maturity. Each year bonds are purchased with that target maturity date. That is active management. With the laddering strategy, just as climbing a ladder is active, so is the reinvestment into new bonds as each step of the ladder matures.
States that security prices fully reflect all available information in a liquid market There are 3 forms
Efficient market hypothesis (EMH)
Time or price discretion orders are limited to the
End of the business day -Exercise of time or price discretion must be reflected on the order ticket - An extension of such time requires signed & dated customer instructions
According to the Uniform Securities Act, if a car dealer offers $1,000 bonds as a bonus for the purchase of cars, the car dealer is
Engaging in the offering for sale of a security and registration as a broker-dealer may be required
Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to
Ensure that their respective shares go to their heirs instead of the surviving sister
Disciplinary actions that resulted in a fine must be disclosed to customers if it is in excess of $2,500
Excess of $2,500
A special feature available to certain insurance company products, including annuities, is the ability to
Exchange one annuity for another on a tax-free basis under the provisions of Section 1035 of the Internal Revenue Code
Cause for revocation against a Broker-dealer or Investment adviser.
Failure to supervise when proven is one of the most common causes for disciplinary action against a broker-dealer or investment adviser that can result in revocation Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those who pay substantial prepayment of fees
Under modern portfolio theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as
Feasible set (the collection of all feasible portfolios)
A brochure must be delivered to all clients of
Federal and state registered investment advisors
Securities on exchanges registered with the SEC, such as the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange), and the Nasdaq Stock Market, as well as investment companies registered under the Investment Company Act of 1940 are
Federal covered securities
Which of the following terms pertains to registration with the Administrator of a mutual fund, closed-end investment company, or unit investment trust that is registered under the Securities Act of 1933 and also registered as an investment company under the Investment Company Act of 1940?
Federal covered securities (securities listed on national stock exchanges, Nasdaq Stock Market or investment companies registered under the Investment Company Act) are exempt from state registration. A notice filing may be required, along with a payment of fees based on a schedule set forth by the Administrator.
if the common stock of an issuer is traded on the Nasdaq Stock Market, then any security equal to it (rights and warrants) or senior to it (preferred stock and debt securities) are
Federally covered
An investment advisor providing services to a registered investment company (mutual fund) is required to be a
Federally covered IA
An investor pays premiums to an insurance company (lump sum or over time), and in exchange, the insurance company is obligated to make payments to the investor based on the premiums paid
Fixed annuity insurance contract
Who focuses on undervalued stocks with a low price relative to company earnings
Followers of Value Style investing
The buyer of securities may not sue if within 30 days of receipt
He failed to accept or reject a written offer from the seller to rescind the trade and to refund the money with interest added
Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high deductible. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered.
Health Savings Account
The contribution limit for a Coverdell account is $2,000 per beneficiary per year, but what kind of individuals cannot contribute to any Coverdell ESAs
High-income tax payers
The Administrator may not require exempt and federal covered securities to file advertising and sales literature But, the state securities Administrator may require the filing of advertising and sales literature of an
IPO limited to residents of the state
Important factors to determine the amount to deposit include: Current college costs, Expected inflation rate, and the Age of the child Least important factors would be the: parent's salary
If a client is looking at the best way to invest today to meet the goal of funding their child's college expenses
Under the Securities Act of 1933, the following transactions are exempt: Private transactions not involving the issuer or a broker-dealer Issuer transactions that do not involve a public offering Sales or offers limited to accredited investors
If offerings are not made to the public, registration can generally be avoided. The purpose of the Securities Act of 1933 was to protect the public in a new issue. The private offering exemption is used when the offering is made to 35 or fewer nonaccredited purchasers within a 12-month period and no general solicitation (advertising) is used [506(b)]. In addition to private offerings, offers and sales limited to accredited investors are also exempt, but they may have public solicitation, [506(c)].
Investment Advisory services provided by means of written material or oral statements that do not claim to meet the objectives or needs of specific individual or accounts
Impersonal Investment Advice
Which of the following is the best way to fill in the blank in the statement "It is unlawful for any person to transact business in this state as an agent unless he is _______ under this act"?
Registered
Median
In a group number, the one with an equal above and below = The number in the middle
Futures contracts
In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. In isolated cases, delivery of the commodity may be made, but is not required. Futures contracts can be written on financial assets such as currencies and stock indexes as well as on commodities such as agricultural products or precious metals. As with anyone taking a short position, the value goes up when the price of the underlying asset declines. And, just as purchasing a stock or bond, a long position represents one of ownership.
Transaction blotters prepared by a broker-dealer in the course of its daily business must be preserved
In an easily accessible location in the principal office for 2 years, with potential transfer to a remote location for at least an additional year
Investments with a negative Beta will move in what direction to the overall market
In the opposite direction from the overall market
When and how are Mutual Fund Capital Gain distributions taxed
In the year distributed (regardless of withdrawn or reinvested) as short-term or long-term capital gain rates based on the fund's holding period of those traded securities
As referred to in the NSMIA, a "Federal Covered Security" would apply to any security listed on the NYSE and Municipal Bonds except
In their state of issuance
Preferred, utility, and large-cap stocks are typically used to provide
Income as a primary objective
When doing a "60-day" rollover, 100% of the withdrawn funds must be deposited with the new custodian within a 60 days. If less than 100% of the funds are rolled
Income tax liability will apply to the "Unrolled amount" as well as potential penalties
An Administrator may deny an application for registration if the information is
Incomplete, Misleading, or False
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely
Increase Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income
Forward Stock Split
Increases the number of outstanding shares and proportionately reduces the price of each share
Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Unemployment compensation B) Municipal bond interest C) Salary and commissions D) Dividends paid on preferred stock
Municipal bond interest Although tax-exempt interest is reported on the Form 1040 (line 8b), it is not included in adjusted gross income.
Is interest rate risk considered systematic or un-systematic risk?
Interest rate risk is considered to be Systematic Risk
A life insurance needs analysis would not include
Interest rate volatility
Impact of Monetary Policy on Interest Rates
Interest rates rise
In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who
Intrastate basis Broker-Dealers are the only exemption from SEC registration They maintain a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange
1) Services to be provided, including custody if appropriate 2) Term of the contract (contracts can be of any length, not necessarily annual, but all renewals under state law, just as initial contracts must be in writing) 3) Amount of advisory fee or the formula for computing the fee 4) The amount or manner of calculation of the amount of any prepaid fee to be returned in the event of contract termination 5) Whether the contract grants discretionary power to the adviser or its representatives 6) That no assignment of the contract may be made by the adviser without the consent of the other party to the contract (the client) 7) If the adviser is organized as a partnership, any change to a minority interest in the firm will be communicated to advisory clients within a reasonable period of time. A change to a majority of the partnership interests is considered an assignment
Investment Advisory Contract disclosures under State & Federal Law
Fees charged in a Variable Annuity
Investment Management Fees
If a firm offers both Banking and Securities Products in the same location it must disclose that
It must be disclosed both orally and written that the securities are not FDIC insured, are subject to risk, and may loose money
Economic theory that promotes strong Government involvement in Economic Policy
Keynesian Economic Theory
Non-allowable investments in an IRA include
Life insurance policies of any kind (term, whole life, etc.)
A venture capital fund, typically organized as a
Limited partnership
Private equity & hedge funds, are typically structured as
Limited partnerships
Under IA-1092, an investment adviser
Makes advice his regular activity. Under the SEC's release, the rendering of advice does not have to be a person's principal activity and Is compensated directly or indirectly for advice
Product covered by the SIPC, up to the coverage limit of $500,000 for securities
Money Market Fund
(1) Are no-load Open-end Investment Companies funds that serve as temporary holding accounts for investors money (No-load = that investors pay no sales or liquidation fees) (2) Instruments with a 397 maximum day maturity (3) Most suitable for investors looking for liquidity above all (4) Amount of interest these distribute as dividend is computed daily and credited to customers accounts monthly (5) The NAV is generally fixed at $1 per share (6) Not insured or guaranteed by the FDIC
Money Market Funds
Jumbo Negotiable CDs trade in the
Money market
1) Selling securities 2) Pitching or soliciting securities 3) Accepting customer orders 4) Pre-qualifying clients Are activities that
Must be avoided when an unregistered person talks to a client
State level Brochure Rule
Must be delivered 48-hours in advance
Exempt securities don't need to reestablish their exemptions annually or otherwise Exempt securities transactions however,
Must be establish their exemption before each transaction
1) Partnership articles and amendments thereto 2) Articles of incorporation 3) Charters 4) Minute books 5) Stock certificates books of the Investment Adviser
Must be maintained in the principal office of the IA until 3 years after the termination of the business
Can the state Administrator require individuals associated with federal covered advisers in the capacity of Investment Adviser Representatives to register as such in his state as long as the Investment Adviser has a place of business in the state?
No, IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business
Would 2 investments with the same expected return have the same standard deviations?
No, two investments can have the same expected return but have significantly different st. deviations
Is the unsystematic risk of 2 companies in the same industry similar?
No, unsystematic risk is firm-specific or unique risk, such as business risk, financial risk, or credit risk
A 50-year old owner of a Roth IRA makes a withdrawal of her contribution. This withdrawal is
Not subject to ordinary income taxes or penalties Regular contributions may always be withdrawn from a Roth IRA, as these are made as Non-deductible contributions
An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required?
Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser Therefore, the firm must be registered with either the state or the SEC as Investment Adviser. Any agents handling these accounts would be registered as investment adviser representatives
An agent is using social media to try to build her business. If her Facebook page allows for followers to "like" her, that would be considered
One of the things that differentiate interactive content from static content is the ability for persons other than the originator of the content to have access. Posting a like to a Facebook page is an example of this.
You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is
One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees.
An international fund is
One whose entire portfolio is comprised of securities issued outside the U.S
Customer name and/or address would never be on an
Order ticket
Strategic allocation is more
Passive, with a goal of maintaining a portfolio over time When a passive or strategically allocated portfolio is rebalanced (e.g., quarterly), it brings the asset mix back to the target allocations Because one asset class may have outperformed the other
The Administrator may not impose any financial requirements upon federal covered advisers other than to
Pay a fee when notice filing
Civil penalties for violations of the Uniform Securities Act (USA) are charged with interest since the
Payment date of the transaction
Investment council
Principal business must be giving investment advice and provide investment supervisory services (Having discretion, ongoing responsibility to make or select recommendations)
Exculpatory Clauses which clients agree not to take legal action against the adviser are
Prohibited & unenforceable
Is Purchasing power (Inflation) risk considered systematic or un-systematic risk?
Purchasing power (Inflation) risk is considered a Systematic Risk
- Taxed as Long-Term Capital Gains, which are lower than Ordinary Income Tax rates - The specific rate depends on the taxpayer's income level - Must have been paid by a US corporation (U.S. registered corporation)
Qualified Dividends: For a dividend to be qualified, the investor must have held the stock for at least 61 days out of the 121-day period surrounding the ex-dividend date
Under rule 144A who are eligible to purchase non-registered foreign and domestic securities
Qualified Institutional Buyers (QIB's)
An Investment Adviser registered in 15 or more states would be allowed to
Register with the SEC
No family member can receive a direct benefit from it—family members are considered prohibited parties for these purposes. It could be rented to a non-related party
Real estate purchased in a retirement plan
Investment clubs and otherwise unaffiliated groups may not pool their money to
Receive a breakpoint
Stock splits and Stock dividends effect on cost basis
Reduction to cost basis (No current taxation)
- Coordination is the method used for non-exempt companies that are registering with the SEC - Qualification is for Intrastate registration of companies not registered with the SEC - Notice filing is the procedure used where Federal Covered Investment companies notify the states in which they want to issue shares and to whom they must pay a fee (to state)
Registration Methods
An Investment Adviser hires 2 individuals to solicit new customers for the firm's wealth management service. Under the USA,
Registration as investment adviser representatives is required
Sales, Excise, and Property taxes are
Regressive taxes
Trust where the grantor (settlor) retains all control over the assets There are no tax benefits and the grantor can be the beneficiary (and trustee) if the trust is set up that way.
Revocable Trust
Industrials, Utilities, Transportation, and "" are all sectors of the
S&P Composite Index
Lowest investment-grade rating:
S&P: BBB and Moody's: Baa
Under most circumstances, the annual contributions of what retirement plan will be higher than those allowed for ESAs or traditional or Roth IRAs
SEP IRA
Who established minimum levels of equity in a margin account which if below a maintenance margin call will go out for additional funds
SRO's - Self-Regulatory Organizations: FINRA and NYSE Rather than the Federal Reserve Board who established Regulation T
One of the advantages to secondary trading is that making secondary purchases can give an investor exposure to a general partner, which can create opportunities to gain access to future opportunities from that partner. Secondary trading may allow investors to get into a private equity deal at a later stage and, thus, realize positive returns more quickly. Secondary trading provides liquidity and makes it easier for investors to make strategic shifts in their portfolios Secondary markets are often used by investors due to changing portfolio needs, rather than a change in the value of their private equity funds.
Secondary trading in the private equity market
1) US Government securities (Government of Canada too) 2) Municipal securities 3) Securities issued by national or state Banks 4) Securities issued by Credit Unions 5) Securities issued by Non-profit organizations 6) Commercial paper ( Max maturity 270 days) 7) Bankers acceptances (BA)
Securities exempt from Registration
The three parties to a trust are the
Settlor, Trustee, and the Beneficiary
Average market price
Share Price Total / Number of Investments
The income derived from what business entity is considered earned income (Usable to fund an IRA):
Sole proprietorship: the income reported on the taxpayer's Schedule C is considered earned S corporation share holders and Limited partners in a Partnership: Receive passive income which cannot be used to fund an IRA Note: Child support is not earned income and alimony received from a divorce settlement dated January 1, 2019 or later is also not considered earned
Step 1: Determination of the objectives and constraints of the owner Step 2: Creation of the investment policy statement (IPS) Step 3: Determine the asset allocation based on the IPS Step 4: Capital allocation Step 5: Monitor and evaluate investments
Steps of the Asset Allocation Process
Which investment strategy is used to determine an appropriate allocation based on the long-term goals and risk tolerance of the client?
Strategic asset allocation - Once the allocation is determined, it remains relatively constant until some change to the investor's objectives occurs - Periodically the portfolio is re-balanced to reflect any changes in market conditions
An investor has realized a $5,000 long-term capital gain from the sale of $100,000 par value state general obligation (municipal) bonds. This gain is
Subject to Long-Term Capital Gain taxes - Capital gains from the sale of any security, including municipal bonds, are subject to federal tax liability - The interest from a Municipal Bond is exempt from Federal Tax Liability
A qualified plan's investment policy statement would not include the
Summary plan document (SPD) required by the Dept. of Labor
A dollar for dollar reduction of taxes due
Tax Credit
Death benefits from life insurance policies are
Tax free
Under Model Rule, in the absence of a rule prohibiting custody, the Investment Adviser notifies
The Administrator promptly in writing on Form ADV that the IA has custody
If an agent: - Dies - Is declared mental incompetent - Is unable to be located (mail being returned without a forwarding address)
The Administrator would cancel their registration
Under the Securities Act of 1933, (1) Identity (name & address) of owners of more than 10% of the issuer's stock (2) Identify of all the issuer's officers and directors, their holdings of the issuer's securities, and their salaries (3) Identity of the underwriter (4) Estimate of the proceeds and a description of the use to which they will be put Should be included in
The Registration Statement of a public offering
Investment Advisers to an Investment Company registered under the Investment Company Act of 1940 register with
The SEC
When a security registers by using coordination (when there is a simultaneous federal and state registration), under normal circumstances, the effective date is determined by
The SEC
When using the process of registration by coordination under the Uniform Securities Act, issuers shall simultaneously submit to the state, the documents filed with the SEC under
The Securities Act of 1933
Under NSMIA who retains authority to enforce the Antifraud provisions
The State Securities Administrator
Under the Securities Act of 1933, when registering securities with the SEC. The principal executives of the company involved with money and a majority of the board of directors are required to sign the registration statement attesting to the facts presented as being true to the best of their knowledge and belief. This includes
The chief executive officer (CEO), Chief financial officer (CFO), and a majority of the board
Agents cannot share in the profits or losses of client accounts unless
The client & Broker-Dealer supply prior written approval = Broker-Dealers, Investment Advisers, and Investment Adviser Representatives are never permitted to share profits or losses in their clients accounts
When a client rejects a broker-dealers offer of rescission within 30 days of receipt
The client retains the future right to sue the Broker-Dealer regarding the unlawful sale
No assignment of the advisory contract may be made without
The clients consent
An investor's holding period return would be less than the bond's Yield-to-Maturity if
The coupons were re-invested at a rate below the Yield-to-Maturity
Which of the following phrases best describes a prudent investor?
The definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.
A customer has contributed $1,000 a year for 10 years to his tax-deferred Non-qualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences?
The entire $10,000 is taxable as ordinary income When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO)
The party responsible for the management of assets for the account of a deceased person, as reflected in the party's will, is the
The executor will be specially designated in the will of the deceased person, and is legally empowered to act on behalf of the deceased party
What is the best resource to determine an individual's cash flow?
The family income statement
Form ADV Part 2 (both parts) is acceptable for use as
The firm's Brochure - Part 1 is for registration purposes - Part 1B is only used by state-registered advisers
The monitoring of the technology behind a firms social media activities must be part of
The firm's broad supervisory platform
Included in a Broker-Dealer's & Investment Advisers advertising is
The firms website
What would be least important towards understanding a client's risk tolerance
The number of dependents in the client's house hold
Variable life policy guarantees a
The only real guarantee in a variable life policy is that the minimum death benefit will be the face amount of a scheduled (fixed) premium policy Of course, any loans must be taken out first, but they are taken from that guaranteed amount. Cash value and a positive return depends on the performance of the separate account.
Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, they would consider
The price per share (NAV per share) of a fund is not a relevant factor when considering recommending a mutual fund. The fund's investment objective must align with that of the client and it is important to know if the fund's portfolio manager has just come aboard or has been managing the fund for a number of years. All other things equal, the IAR will generally look for the funds with lower expense ratios.
Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur?
The proceeds will be exempt from income tax & The proceeds will not be included in Clara's estate
The face value in an insurance policy is the death benefit In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below
The original minimum face value
One of the features of convertible preferred stock is that
The owner has the opportunity to participate in the growth of the company
Dying intestate means that there is no valid will. In that case, directions for handling the account could only come from
The person appointed as administrator of the estate
One of your clients suffers an accident and dies. Directions for handling the account could only come from
The person named as executor of the estate
It is not prohibited for an investment adviser to limit recommendations to proprietary products available through an affiliated broker-dealer, as long as
The potential conflict of interest, is disclosed to the client
The long party to a put option contract has
The right to sell the underlying asset Being long a put option means owning the option. Owners have rights while sellers have obligations. A put option gives the owner the right to sell the underlying asset at the exercise price. The seller of the put option is obliged to take delivery and pay the exercise price if the buyer exercises the option.
Brochure Rule
The rule calls for delivery within 120 days of the end of the fiscal year if material changes - If there are no material changes, delivery of an annual brochure is not required to be delivered The 48-hour rule is not mandatory; if the State adviser waits until the signing of the advisory contract, there is a five-day penalty-free withdrawal privilege granted to the customer
Which of the following transactions is NOT included in the definition of exempt transaction under Section 402(b) of the Uniform Securities Act? A) Isolated nonissuer transactions B) Unsolicited nonissuer transactions effected through a broker-dealer C) The sale of Treasury Bills to an individual client D) Transactions between issuers and underwriters
The sale of Treasury Bills to an individual client Even though the Treasury bill is an exempt security, the sale to an individual is NOT an exempt transaction. Isolated nonissuer transactions, unsolicited transactions effected through a broker-dealer, and transactions between issuers and underwriters are exempt transactions under the provisions of the USA
A private placement Under the Securities Act of 1933 does not need
The stock does not be registered with the SEC
Trustees should not invest in assets that are owned or connected to
The trustee or grantor Potential conflict of interest and violation of trustees duty as a fiduciary
The death benefit must be payed to the account beneficiary within
There is no specific rule governing the timing of payment of the death benefit to a beneficiary
The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permits borrowing from clients only when
They are in the lending business or are affiliates of the firm
Deferred Compensation Plans receives greater flexibility than a qualified plans because
They are not ERISA-covered plans
The sole proprietor and CEO of a state registered investment advisor has been declared mentally incompetent in a court of competent jurisdiction in his home state. The state Administrator may decide
To cancel this person's registration
When a new investment adviser files for registration, if that IA believes that it will have at least $100 million in AUM within the first 12 months, it would be eligible
To register with the SEC, even if their AUM is way below that on day one
When saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid Funds held in what custodial accounts has the most detrimental effect on financial aid?
UTMA or UGMA Assets are counted at 20% of their value While Section 529 and Coverdell ESA assets at 5.64%
Penalties for violations of the Uniform Securities Act include
Under the Uniform Securities Act, penalties can include fines for up to $5,000 or imprisonment for up to 3 years, or both. No person, however, may be imprisoned for violation if he proves that he had no knowledge of the rule or order, and no indictment can be returned later than 5 years after the alleged violation. Remember the distinction between criminal penalties and civil liability.
Property included in a deceased's gross estate is generally valued for estate tax purposes at
Valued at its fair market value (FMV) on the date the deceased died An estate can also elect to value property on the alternate valuation date, which is usually 6 months after the date of death
When comparing Variable Annuities to Mutual Funds which has higher expense ratios
Variable Annuities
Pays Fixed Scheduled Payments & has a minimum Guaranteed Death Benefit
Variable Whole Life Insurance
John and his sister, Alice, open a margin account as JTWROS. John contributes $50,000, and Alice contributes $25,000. They have agreed that Alice will trade the account, and they will share in the profits and losses equally. As their agent, you would gather information regarding suitability for
When determining suitability and making recommendations to the owners of a joint account, it is the agent's responsibility to know each and every customer, regardless of their contribution or participation level.
The use of superseding commentary from information previously provided in a state-filed disclosure would be deemed an unethical business practice
When preparing an advertisement
Investment Advisers and Investment Adviser Representatives may use testimonials with disclosure of
Whether the person giving the testimonial is a client and whether they are being compensated
The solicitor's brochure is not required to disclose
Whether the solicitor is registered with the SEC or their home state
Permanent insurance with a level premium and a level death benefit
Whole life insurance
Agents cannot solicit sales of a security
Whose registration is Not yet Effective
Although Roth IRA contributions grow without current taxation, that doesn't make them unique. What is truly special about the Roth is that, if certain conditions are met
Withdrawals are totally free of income tax
When does a Federal covered Investment Adviser's application for registration become available
Within 45 days after the application is filed
Whats the effect on Working Capital from the issuance of a New Bond or Equity offering
Working capital increases
An individual whose Broker-Dealer is registered in the state, but whose only clients are institutions
Would still need to register as an Agent The transactions with institutions exemption only applies to individuals selling on behalf of the issuer, bot when representing a Broker-Dealer
Under ERISA, a pension portfolio manager may engage in writing covered options
Writing covered options is appropriate as long as it matches investment objectives. While writing covered calls is sometimes done to generate income, writing uncovered, or naked, calls is not appropriate for a pension plan because of the unlimited risk potential.
The feasible set is the collection of all
feasible portfolios
In order for a security to lawfully be sold or offered under the USA, it must meet at least one of the following requirements EXCEPT - that it is an exempt or federal covered security - that it is registered with the SEC - that it is properly registered with the Administrator - that it is sold in an exempt transaction
that it is registered with the SEC It is unlawful to sell a security in a state unless the security is a federal covered security, exempt from registration under the USA, sold in an exempt transaction, or registered under the act The primary purpose of registration by qualification is registering a security on the state level that is not SEC-registered There is no requirement that a security be registered with the SEC
State IA Fines & Penalties
$5,000 and 3 years in jail
Does an applicant for registration as an investment advisor rep (IAR) need to satisfy bonding requirements of the state?
- There are no financial requirements to register as an investment advisor rep (IAR) - Although the employing investment advisor (IA) must comply with bonding and financial requirements
Is the loss of money in a civil lawsuit with a client a cause for Statutory Disualification
It is not
A client of an investment advisor has received advice contraindicated by the USA, and has suffered monetary damages as a result. This client may
Receive, at the discretion of the Administrator, reimbursement for losses incurred as the result of the given advice, Plus costs incurred in receiving the advice plus stated interest, Less any income received from the advice
When the state Administrator enters an order "summarily",
The party against whom the order is entered is not provided the opportunity for a hearing
The National Securities Markets Improvement Act of 1996 (NSMIA) defined the term
"Federal Covered Adviser" = Advisers who must register with the SEC or who are excluded from the definition of "investment adviser" under the Investment Advisers Act of 1940
Whole life insurance may be described as
"permanent life insurance" or "cash value life insurance"
Time Value of an XYZ call for $3 when its trading at 52
$1
Large-Cap Stocks
$10 billion or more in market cap
Performance fees may be charged, regardless of the client's age, to anyone with a
(1) Net worth in excess of $2.2 million or (2) With at least $1.1 million under management with the firm
Alpha (RF given)
(Actual return - RF) - (Beta x [market return - RF])
Useful disclosures for Advertising:
- Past performance is no guarantee of future results - Explaining the effects of market or economic conditions on the results advertised
Form D for Private Placements - Rule 506 must be filed
15 days after the first sale
Deferred Compensation Plan offered to employees of State and Local governments, including their agencies, i.e., fire and police departments
457 Retirement Plans
A registered investment company whose portfolio consists of equity securities and the portfolio does not change in response to market conditions is probably
A unit investment trust
Which of the following securities is (are) exempt from registration under the Uniform Securities Act? Municipal securities Government securities Stock or bonds issued by an insurance company authorized to do business in this state
All of them All government and municipal securities are exempt from registration requirements under the Uniform Securities Act, as are insurance company securities if the company is authorized to do business in this state.
What is the term used to describe a common stock issued below its par value
Assessable
When a portfolio manager is said to have generated alpha, the investment performance was
Better than what would have been expected, based on the volatility risk that was assumed
No annuity payment is ever taxed as a distribution of On the exam, all contributions to retirement plans are fully -deductible unless something in the question specifies otherwise
Capital gains
An officer of a company calls her Broker and places an order to sell a large block of stock right away. The broker should
Contact the legal or compliance departments for guidance Given that Corporate insiders (officers, directors, and large shareholders) are subject to limits on share sales during any 90-day period
Working Capital
Current Assets - Current Liabilities
Lower average cost to acquire fund shares relative to the fund's average price over the buying period. Would describe an investor using
Dollar Cost Averaging
1) 2) 3) 4)
Fixed Income (Bond) Strategies
Economic theory that promotes strong government involvement in economic policy
Keynesian Economics
Cash value is calculated
Monthly
All stock issued today is
Non-assessable
Form ADV - Part 1B & Part 2
Only State-registered advisers file these parts with their regulators
IRS Schedule K-1 are prepared on an annual basis for
Partners of a partnerships showcasing the partnership's tax results
Compared with a corporation, it is generally easier to form (and dissolve) a
Partnership
Advantage of investing in a Foreign Bond
Serves as a hedge against a drop in the US dollar
Who bears the liability of the debts of a Direct Participation Program
The General Partners
If an IAR terminates employment with a State-registered IA, notification is required by
The IA promptly through Form U5 to the Administrator
The true rate of return on a bond is the nominal rate minus
The inflation rate
The investment objectives of a trust may be changed by
The investment objectives of a trust may only be changed by the grantor If, however, the assets are in the possession of the beneficiaries, such changes may be effected by them
Beneficiaries of a trust are not allowed to place trades in the trust brokerage account unless
They have a written Power of Attorney, granted by the trustee
Systematic (market) plus unsystematic (company-specific) risk equals
Total Risk
The Joint Tenants with Rights of Survivorship (JTWROS) can be described as an account with
Undivided ownership interests
A special registration exemption exists for advisors to
Venture capital funds
When must a Privacy Notice be provided to clients
When a new account is opened & on Annual basis there after
Solicited trades are generally not exempt transactions unless
With institutional buyers
The promise to pay a "commission" to any investor who introduces the offering to a friend
Would be a "red flag" for an investor when considering an online investment offering
What are the Uniform Securities Act rules regarding Investment Advisers engaging in Principal or Agency transactions
Written client is required either prior to execution of the transaction or After the execution but prior to settlement
Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except certain incentive stock options accelerated depreciation straight-line depreciation excess intangible drilling costs
straight-line depreciation
Federal IA Fines & Penalties
$10,000 and 5 years in jail
IA Federal registration AUM requirement
$110 million or more AUM registers with the SEC $100-110 can register either with the SEC or state level
Performance-based fees are acceptable when the client meets the definition of a
'Qualified client', which includes a client that, immediately after entering into the advisory contract, has at least $1 million under management
The term Investment Counsel may not be used unless
1) Principal business is investment advice 2) Substantial portion of his service is providing investment supervisory services (the giving of continuous advice on the investment of funds on the basis of the individual need of each client)
IA Federal level Exemptions
1) Private fund adviser exemption is available for advisers with less than $150 million in assets under management for private equity funds 2) The only clients are insurance companies 3) Intrastate business only and does not furnish advice with respect to securities listed on any national securities exchange, and do not have private funds as clients
IA State level Exemptions
1) Private fund adviser exemption more restrictive than Federal law 2) Adviser has no place of business within that state and 2A- The only clients are institutions such as investment companies, banks and trust companies, insurance companies, Broker-dealers and other investment advisers, $1 million or larger employee benefit plans, governmental agency, or instrumentalities 2B- Does not direct communications to more than 5 clients in the state (other than those above) during the previous 12 months
Firm F has a small office (six employees) in City C located in State S. All clients are referred institutions
Firm F is a broker-dealer in State S since it has an office in the state Once we know there is an office in the state, the number (or type) of clients becomes irrelevant, because it must register in the state
Any material legal action against the Investment Advisor or any of its Officers or Directors must be
Disclosed to existing clients promptly
Treatment of insolvency Federally vs. at State level
Federally: Insolvency is not a cause for revocation State: Insolvency is a cause for revocation
Federal & State level IA Registration renewals
Federally: within 90 days of fiscal year State: on December 31
IA Federal Registration
File form ADV with SEC and pay initial and renewal fees based on their fiscal year Effective within 45 days No net worth requirements or surety of bonds Withdrawal of registration is on 60th day Successor firm pays fees/No registration of investment adviser representatives
IA State Registration
File form ADV with the Administrator and pay initial and renewal fees on 12/31 Effective at noon of the 30th day There are net worth and surety bonds requirement (for the handling of custody or discretion) Withdrawal of registration is on the 30th day Successor firm pays no fee until renewal Registration automatically registers any adviser representative who is a Partner, Officer, Director, or of similar status
Federal Filing of Advertisements
No filing with the SEC ever
Which form is used by an investment Advisor to notify the state administrator that it has, or may have, custody of clients funds or securities
Form ADV
For those investment advisors providing a wrap fee service to its clients, the required client disclosure is
Form ADV Part 2A, Appendix 1
There have been no material changes to the brochure of a federal registered investment advisor during its last fiscal year. What obligation does this advisor have to its clients during its next fiscal year?
It is not required to provide any brochure information to its clients during this time It is not required to provide a brochure, nor a supplement or summary to its clients
Federal IA Custody of Customer Funds/Securities
Kept by a Qualified custodian It is custody if securities and/or checks are not returned or forwarded within 3 days Third-party checks are not custody If an IA maintains discretion an audited balance sheet would be required if adviser takes advance fees of more than $1,200, 6 months or more in advance. Not required when adviser maintains custody
Broker-dealer ABC will be launching Investment advisor XYZ, a subsidiary of the securities firm. Broker-dealer clients who wish to become clients of the newly formed subsidiary
Must enter into a new advisory contract with the newly created advisory entity
An investment advisor rep (IAR) has a colleague who assists with managing the rep's business. Activities include helping to prepare client statements and arranging client meetings and virtual visits. Does the colleague need to be registered as an IAR as well?
No, provided the colleague is not providing investment advisory services directly to clients Office support and other admin functions do not trigger registration requirements
May an agent of a broker-dealer receive an allocation of shares of an IPO?
No, this is prohibited conduct, as the agent is a restricted person and cannot purchase any IPO
An employee of an investment advisor who provides impersonal investment advice only is
Not considered an investment advisor rep (IAR) under federal securities laws Not subject to any registration standards
State IA Performance Fees
Prohibited unless: 1) Contract with an investment company 2) Certain clients with at least $1 million under management or a net worth in excess of $2.1 million Must make risk incentive statement and additional disclosures
A "covered" advisor refers to an advisor registered with
The SEC These are firms whose AUM exceed $110 million, or are serving as an advisor to a registered investment company
When an IAR terminates from a federal covered adviser, the responsibility to notify the state Administrator lies with
The departing IAR
Elements that should be incorporated into the Business Continuity Plan of a state-registered investment advisor
There must be a protocol for the 1) Protection, 2) Backup, and 3) Recovery of books & records The BCP should include the firms Succession Plan
Does an employee of a Broker-Dealer need to be registered as an Agent in order to accept unsolicited orders or effect transactions in exempt securities?
Yes, registration as an Agent required in order to accept any type of an order from a customer
When any changes occur in a membership or partnership, the adviser must notify the client
Within a reasonable period of time
If the purchaser does not act on a letter of rescission for 4 weeks,
he will surrender legal rights against the seller, provided no action is taken on the offer of rescission
When trades are coordinated for the purchase or sale of a security Essentially an order is placed with the knowledge that another order (or orders) of substantially the same size, at substantially the same time, and at substantially the same price, has been or will be entered The effect is to cause an appearance of market activity and price movement that is not market driven
"Matched orders," sometimes known as "painting the tape"
ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders this year, each preferred share must be paid a dividend of
$10.00 This stock has a par value of $100 and a dividend rate of 10%. That means the annual dividend will be 10% of the $100 par, or $10. Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shareholders. Any dividends from previous years that were not paid are ignored. If this had been a cumulative preferred stock, all of the dividends in arrears (past unpaid) would have to be paid before the common shareholders could get a dividend. In that case, it would have been $10 for two years ago, $5 for the balance of last year's dividend, and $10 for this year's (a total of $25).
A mutual fund's computed NAV on April 24 is $100 per share. On April 25, the portfolio realized gains of $2 per share, and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market?
$101 per share Net asset value per share (NAV) is the fund's total assets minus total liabilities (net asset) divided by the number of shares outstanding Therefore, when that gain is realized, paper profit is now real and there is no change to total assets. The $2 per share realized gain has no effect (already computed into the NAV) The unrealized appreciation of $1 increases the NAV by that amount
Gift taxes apply if gifts are made from one person to another in excess of the limit
$15,000 in 2020 There is no limit to how many gifts can be made
William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate?
$175,000 The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net or taxable estate. The math goes like this. The $1.1 million gross estate (add together the assets ($200,000 + $650,000 + $250,000) is reduced by the $850,000 left to his wife. That brings the net estate down to $250,000 ($1,100,000 minus $850,000). The net estate is further reduced by the $75,000 in debt and expenses. Subtracting $75,000 from $250,000 leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019.
At his death, on January 1, 2017, Morris owned shares of ABC Corporation common stock, with a fair market value of $50 per share, which he had purchased in 2001 for $25 per share. If Morris's executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker-dealer on May 15, 2017, at $40 per share, what is the estate's basis per share for estate tax purposes?
$40 If the executor elects to value the decedent's estate by using the alternate valuation date, the value per share is the value at the date 6 months after death, unless the property is sold prior. In this case, the value per share is the FMV on the date of sale, $40 in this example.
Under the USA, what are the maximum penalties for a securities-related felony
$5,000 and 3 years imprisonment
Criminal penalties for violations of the USA are punishable by fines of up to
$5,000, imprisonment for up to 3 years, or both
Common features to both variable annuities and scheduled premium variable life insurance?
(1) All variable products offer tax deferral of earnings in the separate account (2) Contract owners have voting rights.: Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value
The Brochure must be updated
(1) Each year at the time of filing the annual updating amendment; and (2) Promptly, whenever any information in the brochure becomes materially inaccurate
Different taxations
(1) Earned income includes salary and bonus (2) Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities (3) Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved (4) Items that must be added back into taxable income for calculation of the alternative minimum tax (AMT) include: accelerated depreciation on property placed in service after 1986; local taxes and interest on investments that do not generate income; and incentive stock options exceeding the fair market value of the employer's stock
Compare Futures contracts vs. Forward contracts: Focus on how terms are set, risks of counter-party & liquidity
(1) Future contracts trade in exchanges and have standardized terms, in contrast with forward contracts which are customized instruments (2) A Futures clearinghouse reduces counter-party risk by guaranteeing the performance of buyers and sellers (3) Because futures contracts trade on organized exchanges and have standardized terms, they are more liquid than forward contracts
Employer contributions to the plan are not subject to current taxation to the employee with
(1) Qualified plans (2) Non-qualified deferred compensation plans
Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead they:
(1) Reduce the owner's cost basis and, (2) When sold at a price above that cost basis, they are treated as a capital gain
In order to open a Margin Account for a Trust, compliance with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents mentions:
(1) Specific text in the Trust Agreement authorize a Margin Account (2) A Margin Agreement has to be executed promptly after the first margin trade (3) Approval of the account by the designated supervisory person
The Administrator may prohibit advisers from having custody of client funds or securities. If no such prohibition applies,
(1) The Administrator must be notified in writing if an adviser has custody (2) In almost all jurisdictions, a surety bond or sufficient net worth ($35,000) is required to maintain custody
Under the Securities Act of 1933, when registering securities with the SEC, the parties who must sign the Registration Statement are
(1) The company's principal executives involved with money (CEO & CFO) (2) Majority of the board
An individual can always withdraw the initial principal in a Roth without tax or penalty - it is only the earnings that will be subject to tax if not meeting the requirements of the Internal Revenue Code. In order for withdrawals of earnings from a Roth IRA to be free of any tax, there are two primary requirements:
(1) The first is that the owner be at least 59½ years of age (2) The second is that it is at least 5 years since the first deposit to a Roth IRA in the individual's name A client that is 62 and an initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years
Pre-organizational subscription are exempt transaction if
(1) There are no more than 10 subscribers (2) No commissions are paid, either directly or indirectly (3) The subscribers make no payments until they purchase the underlying security
There are 3 types of Investment companies:
(1) Unit investment trusts (2) Face-amount certificates (3) Management companies (Open and Closed-end companies)
An unintentional omission of material facts when offering or selling a security may result in:
(1) civil liabilities (2) criminal liabilities (3) criminal penalties An unintentional omission of material facts when offering or selling a security would result only in civil
An adviser's financial impairment has to be disclosed to clients when the adviser has
(1) discretion (2) custody or (3) requires prepayment of more than $1,200 in fees, 6 or more months in advance Note: By requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include in its Brochure (Form ADV - Part 2) an: Audited balance sheet which must be filed with the SEC
An Investment Policy Statement would include
(1) how the plan measures investment performance (2) the schedule for future needs of the plan (3) investment parameters to be followed by the portfolio managers
Sharpe Ratio: Measure of a portfolio's risk in comparison to its Expected Return. The higher the value, the more attractive the investment
(Actual return - RF) / Standard deviation
Net asset value of a mutual fund is calculated as:
(Assets - Liabilities) / Number of Shares
Holding Period Return =
(Income + Gains (or minus losses)) / Initial Value of Portfolio
A customer buys 100 shares of stock for $120 per share, depositing $6,000 in cash A maintenance margin call occurs if the stock price declines to
(Purchase Price x 50%) / 0.75 (120 x 50%) / 0.75 = 80
12b-1 Mutual Fund Charges
- 12b-1 fees may only be used to cover promotional expenses, not fund management expenses (amount of the fee must be disclosed in the prospectus) Note: Funds that charge 12b-1 fees of more than 0.25% cannot call themselves no-load funds
Marker makers provide a two-sided quote because market makers stand ready to buy and sell the specific security. They charge a markup or markdown and provide
- A bid price, the price the firm is willing to pay for the stock - An offer price, the price they are asking to receive when selling the stock
Agent Unsolicited Orders
- Agents are required by the Administrator to obtain written client acknowledgment of unsolicited transactions - An agent may accept unsolicited orders without prior approval of a principal; approval is necessary after the trade
Record keeping requirements for IA's by the Investment Advisers Act of 1940 & the NASAA Model Rule
- An IA's books & records be maintained in a readily accessible place for 5 years - The 5-year period will run from the end of the fiscal year in which the record was originally generated - During the first 2-years the records must be maintained in the principal office of the Adviser, after the records may be maintained in electronic or microfilm format or any other format in compliance
Advertising defined by the SEC: Any notice, circular, website, letter, or other written communication addressed to more than 1 person, or any notice or other announcement in any publication or by radio or television, that offers: - Any analysis, report, or publication concerning securities - Any graph, chart, formula, or other device to be used in making any determination concerning securities - Any other investment advisory service with regard to securities
- An Investment Adviser's proposed publication of lists of past securities recommendations for a specific period constitutes an advertising - Investment Advisory material that promotes advisory services for the purpose of inducing potential clients to subscribe to those services is advertising material - An investment adviser's website is considered advertising
Assumed Interest Rate (AIR) in Variable Annuities
- Benchmark used to determine the size of distributions from the variable annuity - It serves as a target rate for the separate account; the actual account performance can exceed or fall short from the AIR
The trustee of a 401(k) would be able to reduce her ERISA fiduciary exposure and meet the safe harbor provisions of 404(c) if the plan offered a
- Broad index fund - Medium term government bond fund - Cash equivalent fund. Example: Money market fund, intermediate-term government bond fund, large-cap stock index fund It isn't the number of funds that counts; it is the different asset classes available. Note: That municipal bond funds (or municipal bonds themselves) would be an inappropriate investment for a tax-qualified plan
A Private placement is considered an exempt transaction if
- Directed to no more than 10 non-institutional persons in a 12-consecutive-month period. - Purchasers must agree that they are purchasing for investment purposes only, not for immediate resale Note: No such holding restrictions apply to institutional buyers of a private placement
How are Municipal bond fund dividends and capital gains taxed?
- Dividends are not subject to federal income tax - Capital gains distributions are subject to federal capital gains tax Dividends distributed by municipal bond funds are federal tax free (and in some cases, state tax free as well) in alignment with the tax rules of how the fund's investment income was earned Any capital gains distribution resulting from the sale of bonds held long term by the fund is subject to capital gains taxation to the shareholder
Distributions from a REIT are taxed the same as any other portfolio income
- Dividends are taxed as dividend income to the investor - Capital gains are treated as capital gains
Thin markets exist when there are
- Few buyers and sellers, creating a lack of liquidity in the security - Produce wide price fluctuations over short periods - Not be suitable for elderly retired individuals on fixed incomes
In advertising stay away from:
- Gross performance (reflect the deduction of various fees, commissions, and expenses). Instead use net performance - Untrue statements - Saying a service is free when its not
Premium variable life insurance policy =
- Guaranteed minimum death benefit - No guaranteed cash value - The ability to borrow a minimum of 75% of the cash value once the policy has been in force at least 3 years - The right to exchange the policy for a permanent form of insurance with comparable benefits within the first 24 months of issue
2 advantages to Investment Advisers using a Qualified Custodian
- IA is free from burden of having to send quarterly reports to the client, Custodian does that - No requirement for a surprise annual audit by an independent accountant
When calculating a Broker-Dealers net worth:
- Include: Financial assets and tangible assets (Computer equipment & furniture) - Exclude: Intangible assets (goodwill, patents, and copyrights)
Exchange-traded notes (ETNs) differ from exchange-traded funds (ETFs) because they are NOT investment companies
- Instead, ETNs are unsecured debt instruments, which carry the following risks: call, early redemption, and acceleration risk (ETNs may be called at the issuer's discretion) - ETNs also carry liquidity risk (although exchange-traded, a trading market may not develop) and possible conflicts of interest (the issuing broker-dealer may engage in trading activities that are at odds with the note holders) - Exchange-traded notes (ETNs) are not suitable for those who cannot bear the credit risk (remember, these are debt securities and are only as safe as the issuing institution)
Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities When it comes to revoking a security's exemption, the only 2 where the Administrator has to power to do so are those
- Issued by nonprofit organizations - In connection with an employee benefit plan
Custody Investment Adviser vs. Broker-Dealers
- Most Investment Advisers do not take custody and, are unable to accept direct delivery of customer securities or funds - Broker-Dealers are not constrained by this rule; they're only required to provide receipts anytime they accept customer assets
A qualified domestic relations order (QDRO) is a court-issued order (usually established during a divorce proceeding) that entitles a person to a portion of their former spouse's assets The QRDO may be used to establish
- Ownership and rights to distributions of retirement assets - Any early distribution penalty is waived in a qualified corporate retirement plan (including both defined benefit and defined contribution) if the distribution by the ex-spouse is taken pursuant to a QDRO - Note that there is no such exception for Roth, Traditional or SEP IRAs. Put differently, there is no 10% early withdrawal penalty, even if under age 59.5, in this circumstance
When investigating a violation an Administrator may:
- Public or private investigations may be conducted by the Administrator to determine whether violations of the act are about to take place or have already occurred - These investigations may take place inside or outside the state - The Administrator, or any officer designated by him, may subpoena records to compel testimony from individuals
For tax purposes S-corps, LLCs, and Partnerships
- Report Profits or Losses on Form 1040-Schedule C (Individual Income Tax Return Form) - Not taxed at the corporate level
Corporations organized as a C corp are taxed separately from its owners (shareholders) through
- Taxation on the corporation's profits at the corporate level and - Then later at the shareholder level is = Referred to as double taxation
Corporate tax returns must be filed on
- The 15th day of the 3rd month after the end of the corporation's tax year - Example: A corporation whose fiscal year is the same as the calendar year (Jan.-Dec.) must file its taxes on March 15
Taxation of a home sold at a profit
- The first $250K for an individual and the first $500K for a married couple is not subject to taxation - Everything in excess of that is taxed as capital gain on Schedule D of Form 1040
The compliance rules of the Investment Advisers Act of 1940 require all of the following
- The rules require written policies and procedures, an annual compliance review - While the rules require annual compliance reviews, conducted internally by the firm's appointed chief - Appointment of a chief compliance officer (CCO)
Regarding Wrap Accounts, Agents are required to disclose to clients
- Wrap Accounts may result in higher costs than separate charges for advice, management, and transactions if the client is not able to use all services included - For those clients that are able to make use of all of the services provided, the costs will generally be lower than the cost of buying them individually
An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? 1) A sofa in the reception area 2) The value of the copyright on an investment manual authored by the investment adviser 3) The reputation of the investment adviser 4) Patents held by the investment adviser on a stock tracking software program
1 only For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.
Under the Investment Advisers Act of 1940, the persons excluded from the definition of an investment adviser are
1) Banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines) 2) persons advising about certain securities (U.S. government or agency issues) 3) broker-dealers not receiving special compensation for giving advice 4) persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers
Before venturing into any form of social media, firm policies should
1) Be firmly established 2) Be precise 3) Clearly label define the employees responsibilities 4) Explain how they are to be monitored on each electronic platform used by the firm
Securities professionals may not borrow money or securities from a client unless the client is a
1) Broker-Dealer in a margin account 2) Affiliate of the professional 3) Bank or Financial institution engaged in the business of loaning money
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, borrowing money or securities from a client is an unethical business practice, unless the client is a
1) Broker-dealer 2) Bank or other financial institution in the business of loaning funds 3) Affiliated person of the adviser
The term "Qualified" means that the retirement plan:
1) Complies with all IRS standards 2) All contributions are made with pre-tax dollars, with earnings on the contributions deferred until withdrawn
Universal life insurance has two components:
1) Death benefit in a universal life insurance policy can be either A) the policy's face amount, or B) the policy's face amount plus the value of the cash account 2) Cash value in a universal life insurance policy grows based on prevailing interest rates or market performance If a client chooses to cash out (or surrender) a universal life policy, the customer will often incur a surrender fee (or surrender charge). The customer's net proceeds will be the cash value minus the surrender charge
Effects on Working Capital from Declaring and Paying a Cash Dividend
1) Declared - Working Capital decreases: As Current Assets are unchanged, but Current Liabilities increase (until the dividend is paid) 2) Paid - Working Capital is unchanged: As Current Assets fall (cash decreases) and Current Liabilities fall equally (the dividend payable is gone)
Definitions of control
1) Exchange Act requires more than 10% 2) Investment company act requires more than 25% 3) Advisers act & USA act require more than 25%
SEA of 1934 - Section 28(E): Soft dollars are payments are most often made between Broker-Dealers and Investment Advisers as a way of encouraging IA's to send trades and commissions dollars through Broker-Dealers Appropriate use of soft dollars:
1) Financial newsletter with appropriate specificity 2) 3) 4)
Information necessary to be provided by a client when opening a new account
1) License or Passport 2) Visa 3) Date of birth
An investment adviser representative is an associated person of an adviser firm (not clerical) when
1) Makes recommendations or otherwise fives advice 2) Manages accounts of clients 3) Solicits or negotiates for the sale of advisory services 4) Supervises any of these
3 NASAA Brochure Rules:
1) NASAA rules require a brochure to delivered to a new client at least 48 hours prior to entering into an advisory contract with the client 2) But the advisor may deliver the brochure at the time the contract is executed, provided the client has the right to cancel the contract w/o penalty during the first 5 business days after executing the contract 3) Meaning the client may recover any "setup" fees that were paid to the advisor, but not fees for any advisory services that were paid during those first 5 business days
When applying for registration as an Agent, the following must be disclosed:
1) Negative financial information (bankruptcies and unsatisfied liens or judgements) 2) Employment history for the last 10 years (disclose if person was a full-time student at any point) 3) Residential history for the last 5 years
There is a "de minimis" exemption from state registration for an advisor with:
1) No office in the state 2) Maximum of 5 retail clients in that state during the past 12 months
Securities that CANNOT be purchased on margin or used as collateral include
1) Options (LEAPS options with greater than 9 months until expiration are an exception) 2) Stock rights 3) Insurance contracts (variable annuities and variable life insurance)
The Investment Adviser must receive from the client, before or at the time of entering into any written or oral investment advisory contract
1) Signed and dated acknowledgement of receipt of the IA's brochure 2) Solicitors' written brochure
Useful information to complete a client financial profile
1) Tax returns 2) Bank and brokerage account statements 3) Life insurance policies (especially those with cash value)
The primary relationship between a client and an Investment Adviser is evidenced by an Investment Advisory Contract, there are 3 major differences between Federal vs. State law
1) The USA (State law) prohibits entering into, extending, or renewing any advisory services, unless the contract is in writing, while Federal law permits the contract to be written or oral 2) The USA (State law) requires that fees be competitive while Federal Law only requires that they be reasonable in view of the services rendered 3) NASAA Model Rule on performance-based compensation is more stringent than that of the SEC
In order for an Investment Adviser to act as an agent (or principal) in a trade with an advisory client, the 2 requirements before the completion of the transaction are:
1) The client receives full written disclosure as to the capacity in which the adviser proposes to act 2) Consent of the client
Securities professionals may not loan money to clients unless
1) The firm is a Broker-Dealer 3) The client is an affiliate of the professional 2) Financial institution engaged in the business of loaning funds
Federal Covered Advisers must make a notice file with the state if
1) They have a place of business in that state; or 2) Have 6 or more more clients in that state in a 12-month period
The Uniform Securities Act (USA) was drafted for 2 primary reasons:
1) To eliminate conflicts in state securities legislation and make state securities laws uniform 2) To protect the public from unethical securities practices and fraud
Both Federal and State Law prohibit the exercise of any discretionary power by a Broker-Dealer or Agent in a customer's account unless the customer has given prior
1) Written authorization (POA or Trading authorization) 2) Account has been accepted by the brokerage firm, as evidenced in writing by the firm
SEC can suspend trading on a security
10 Days
Investment advisers may use oral discretion
10 business days after first trade
Unique provision in the NASAA Model Rules which permits oral discretionary authority to be used for transactions in a customer's account during the first
10 business days after the date of the first transaction
To qualify for Social Security benefits, one must work for at least
10 years
Annual delivery of Adviser Brochure to client when material changes
120 Days
Time limit for an IA who expects to reach the required AUM to register with the SEC
120 Days
Annual delivery of adviser brochure to clients (if material changes)
120 days
Time limit for an IA who expects to reach the required AUM to register with the SEC
120 days
Maximum time to complete a letter of intent
13 months
File Form D (Private placement Rule 506)
15 days after sale
Hearing must be granted - Summary order
15 days after written request
The Dow Jones utilities average contains
15 members
If at the time of filing the annual updating amendment to the Form ADV by an SEC-registered IA, the reported AUM is less tan $90 million, it is necessary for the IA to withdraw its SEC registration and register with the appropriate states within
180 days
SEC IA with AUM below $90 million must complete registration with states in
180 days
Latest date for a Coverdell ESA contribution
18th birthday
Maximum and Minimum offering prices and underwriting discounts on file for coordination
2 business days
Maximum and minimum offering prices and underwriting discounts on file for coordination
2 business days
Government-Assisted Housing & Historic Rehabilitation are
2 types of Real Estate Limited Partnerships that may offer tax credits
Records must be kept easily accessible
2 years
Rescission (civil liabilities) must occur by the earlier of
2 years after the discovery of the facts or 3 years after the occurrence The offer is based on the price originally paid for the security plus interest at a rate determined by the Administrator (less any income received from that security)
Minimum time the Administrator must have documents for Coordination
20 Days
Cooling off period under Securities Act of 1933
20 days
Minimum time the Administrator must have documents for coordination
20 days
A specialized or sector fund invests at least what % of its assets in a specific industry or region
25% or more of its assets in a particular region or industry
Form ADV - Part 2A & 2B applies to registration with SEC & States
2A: Requires a narrative brochure about information on the Advisory Firm 2B: Requires a brochure supplement with information about certain supervised persons (control)
Securities or funds received by non-custody IA must be returned to client
3 business days
(1) There may be no more than 10 subscribers (2) No payment may be made by any subscriber (3) No commission may be paid to anyone for soliciting potential subscribers
3 requirements for a pre-organization subscription to qualify as an exempt transaction, They may be advertised
Time period for most records kept by Broker-Dealers
3 years
Rules require the articles of incorporation or partnership documents of the advisory firm and other business organizational documents to be kept for
3 years after termination of the business
The statute of limitations for civil liability under the Uniform Securities Act (USA) is the earlier of
3 years from date of sale or 2 years following discovery
New issues are eligible for margin once owned for
30 days
The number of days after account opening a firm has to furnish a copy of the account record to the customer
30 days
Time limit within which rescission offer must be accepted or rejected
30 days
Time period during which an agent can continue doing business with a client under an existing state registration, after that client moves to a new state
30 days
Wash Sale Rule
30 days
When there is a change to any material information (Change of address or military status) in an IAR's U4, an amendment must be filed filed within
30 days
if a client changes legal residence to another state, the investment adviser has
30 days to register in that state or discontinue doing business with that client (unless qualifying for the de minimis exemption)
State registration or withdrawal of securities professionals is effective on the
30th day
Maximum maturity of any holding in a Money Market Fund
397 days
Maximum maturity of any holding in a money market mutual fund
397 days
Form 8-K report filed periodically at the occurrence of major events, such as earnings releases, major asset sales, acquisitions, and auditor changes - must be filed
4 business days
Number of days after the end of each quarter to file form 10-Q
40 Days
Days after end of each quarter to file Form 10-Q
40 days
- There are no income limits imposed on participants - Contributions are excluded from the plan participant's gross income - Participants earnings grow tax deferred until withdrawn - Intended to encourage retirement savings for employees of charitable institutions
403(b) Plans
Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in
403(b) plans. They offer: - Distributions after age 59½ are taxed as ordinary income. - Contributions are tax deductible. - Distributions must begin by age 72.
Days after the end of a quarter to file form 13F
45 Days
Days after end of each quarter to file form 13F
45 days
The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason. Even though there is no early distribution tax, Maria will still owe ordinary income tax on the amount withdrawn - the 457 benefit is only that there is no additional 10% tax.
457 Plan Advantage Over All
Non-qualified deferred compensation plan for municipal employees, as well as for independent contractors performing services for those entities.
457 plan
Pre-tax plan offered to government employees and non-profits
457 plan
Certain employers offering a 403(b) plan can increase Retirement Benefits by also offering a
457 plan - Employees may fully contribute to a 403(b) & then make a second full contribution to a 457 (or vice versa)
Federal registration of Broker-Dealers and Investment Advisers is effective on the
45th Day
Federal registration of Broker-Dealers and Investment Advisers is effective
45th day
Record Retention Requirement for Investment Advisers correspondence with clients is
5 years, with the first 2 years easily accessible in the firms office
Education savings account where assets remain in the donor's control
529 Account
- No earnings limitation on the donor - Has no age limits - Allows for higher contribution levels Are advantages of what plan
529 Plans
Funds in what plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference
529 plan and a Coverdell ESA
Alternative valuation date for estate taxes
6 months
Excess contribution to an IRA are subject to a penalty of
6% on the excess contributed The deadline to withdraw the excess contribution is the tax filing date of April 15
Maximum termination clause with a Mutual Fund Adviser
60 Days
Maximum termination clause with mutual fund adviser
60 days
Maximum time for tax-free rollover
60 days
Time limit to appeal an order under both State and Federal Law
60 days
There is no problem with an affiliated person being elected to a Mutual Fund's board of directors. Under the act, as many as
60% of the board members may be affiliated persons Affiliated persons may not have any dealings with the investment company such as: - Buying securities, furniture, real estate, or other property from the company or - Selling such property to the company
Withdrawal of a Federal Covered Adviser through Form ADV-W is effective on the
60th Day
Withdrawal of Federal Covered adviser on ADV-W
60th day
Time limit for Open-End investment company (mutual fund) to redeem shares
7 days
Rule of 72
72 / known interest rate = number of years to double investment 72 / known number of years = interest rate required to double investment
Maximum maturity of exempt commercial paper
9 months (270 days)
Estate taxes must be payed
9 months after death
Payment of estate taxes when someone dies is due
9 months after death
Maximum time a letter of Intent (LOI) can be backdated is
90 Days
After end of fiscal year, IA must file annual updating amendment
90 days
If at the time of filing the annual updating amendment to the Form ADV by a state-registered adviser's reported AUM exceed $110 million, registration with the SEC must take place within
90 days
Length of time a Form 144 filing covers
90 days
Maximum time a letter of intent (LOI) is backdated
90 days
SEC, with notice to U.S. President, can suspend all trading on an exchange
90 days
State IA with AUM at $110 million or above, must register with SEC
90 days
After the end of a fiscal year, IA's must file an annual updating amendment
90 days after the end of fiscal year
Form ADV must be updated each year by filing an Annual updating ammendement within
90 days after the end of the Adviser's fiscal year
When the annual updating amendment filed by a state-registered investment advisory firm indicates that the $110 million threshold has been reached, the firm has
90 days to register with the SEC
Maturity of T-Bill most commonly used as "risk-free" rate
91 days
The standard benchmark used to measure the "risk-free" rate of return is the
91-day Treasury bill
A widowed grandfather has named his two sons as beneficiaries in his will. He also wants to be ensure that, in the event of the death of either son, that his grandchildren would receive their father's share of any estate settlement. To ensure this can occur, the will must contain
A "per stirpes" clause
Pattern Day Traders effect 4 or more trades within
A 5 business day period
In general, a broker-dealer will disclose its fee schedule
A broker-dealer's fee schedule typically is disclosed at the time an account is opened Changes are disclosed by giving notification before the change is made
Increased "Short Interest" in a corporation is seen as a technical indicator with what market view
A bullish market indicator, suggesting that increased demand for that security will be imminent in the future with the short selling positions needing to be covered
What account requires: (1) New account must first be approved by the appropriate supervisory person (2) Orders must be approved on the day of the trade (3) The account must be reviewed frequently for suitable activity
A discretionary account at a Broker-Dealer The written authorization must be in hand before any discretion may be exercised
Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that
A firm's social media policies be in writing and made known to all in the company - It is not just supervisory personnel who must know the policy; any employee is subject to it
To call attention to the benefits or risks of a new issue, issuers are prohibited from summarizing or modifying
A formal securities filing, such as a prospectus or offering circular
What type of client will likely have the least strict suitability standards, given that the entity is typically founded/financed by its founders and provide greater flexibility to those managing the assets.
A foundation
An agent puts together a recommendation for a customer but is unable to attend the meeting. Another agent from the firm meets with the customer and presents the recommendation, but omits some material facts. According to the Uniform Securities Act, this is
A fraudulent act The agent making a recommendation to a customer is responsible for presenting all the material facts Material facts must be presented to a customer, regardless of the type of security sold or whether a commission is to be earned or not Remember, a material fact is one that is critical to the investment decision making of a client
Between mortgages and CMOS which is a security?
A home mortgage is a pledge by the mortgagor, or homebuyer, and no security is issued Ginnie Maes, CMOs, and collateralized credit card trust certificates are collateral-backed securities issued and sold to third-party investors who own an interest in the collateral pool; they trade in markets like any other security
If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk?
A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal
An exempt non-issuer transaction by a pledgee involves
A party (not an issuer) selling stock that been obtained through a default after being pledged as collateral
A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $.07 per share for each of the last 15 quarters, and market analysts had anticipated a similar dividend this quarter. In an efficient market, one would expect
A price change upon the announcement
Under the provisions of the Uniform Securities Act, which of the following transactions may be made legally with unregistered, nonexempt securities? A private placement
A private placement The USA states that unregistered, nonexempt securities may legally be sold in exempt transactions. Private placement transactions may legally include the sale of unregistered, nonexempt securities because they are defined as exempt transactions under the Uniform Securities Act. A transaction qualifies as private placement when the offer is directed to 10 or fewer noninstitutional persons during a 12-month period and no commission is paid on sales to noninstitutional buyers.
As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime within 6 months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be
A prohibited guarantee against loss
A security may be registered by coordination if
A registration statement has been filed with the SEC under the Securities Act of 1933 in connection with the same offering
Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of
A sale
An investor has three different holdings in HMK common; one block at 25, another at 28, a third at 31. An order placed to sell a block, no further instructions provided, will result in
A sale of the block purchased earliest Absent specific client instruction, the IRS assumes the shares are being sold on a FIFO basis
If a Registration Statement has been filed with the SEC under the Securities Act of 1933
A security may be registered by Coordination
Unlike IA's and IAR's there is no de minimis exemption for Broker-Dealers. Meaning that even if the BD does not maintain a place of business in the state
A single retail clients means registration is required
A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would
A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both) (1) By the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located (2) Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator (3) The firm would need to increase their net worth, not the bond.
The NSMIA took away the power of the states (Administrator) to regulate federal covered advisers except in the case of
A violation of the antifraud statutes
Under the Investment Advisers Act of 1940, an IA that uses a website would be required to maintain a copy of the screens used on its site in the firm's advertising file place copies of new screens into the firm's advertising file each time a change is made
A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file Advertisements are never filed with the SEC.
Which of the following are included in the definition of federal covered security? ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland City of Portland, Maine, GO bond sold to a resident of Augusta, Maine City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia
ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia Any security listed on the NYSE, regardless of the corporation's or the customer's state of domicile, is a federal covered security. Municipal bonds, exempt securities under the Securities Act of 1933, are also federal covered securities with one significant exception: if the issuer is a political entity in this state and it is sold to a resident of this state, it is not considered a federal covered security in this state.
Why must customers be careful with the use of accelerated depreciation
Accelerated depreciation is a tax preference item and could result in requiring this client to pay the AMT
FIFO, Share identification, and Average basis are
Accounting methods used to determine which shares to liquidate
Rule 506(c) of Regulation D that permits advertising as long as the issue is sold exclusively to
Accredited investors
Alpha (RF not given)
Actual return - (Beta x Market return)
Annuity contracts may offer a credit bonus or purchase bonus to attractive new purchasers. These are often in the form of an
Additional contribution or a higher interest rate for the first year of the contract Example: Purchasing a $50,000 annuity with a credit bonus of 10% would result in the insurance company contributing $5,000 (10% of the 50K) for a total initial balance of $55,000 Credit bonuses are generally not sufficient on their own to make an annuity suitable
An individual who files an extension with the IRS to submit his tax returns, will receive
Additional time to file his returns No additional time to pay the taxed owed to the IRS
How long can an Administrator take while doing an investigation of registrant
Administrators have no limits on the amount of time they may devote to an investigation of a registrant
When a securities firm links to a third-party site and indicates that it endorses the content on that site
Adoption: The use of content or a link that is solely created by someone else
Adoption vs. Entanglement
Adoption: When a securities professional implicitly or explicitly endorses or approves material posted by a third party to its social media site, but plays no role in its development Entanglement: Occurs when the firm or securities professional was involved in the preparation of the content
Form ADV-W is submitted when an Adviser no longer desires to engage in the business. Withdrawals are effective:
After 60 days for Federal Covered advisers After 30 days for State Covered advisers The administrator retains jurisdiction for a period of 1 year over the former registrant
The USA has specific wording requiring that customers who can prove they were the subject of a violation by the IA are entitled to collect
Against the bond
The USA specifically excludes from the definition of a Broker-Dealer
Agent Issuers Banks, international or domestic Investment advisers also may have to register as broker-dealers if their method of operation requires it
State registration of any securities professional expires on December 31, unless renewed.
Agents Broker-dealers Investment advisers Investment adviser representatives
Payments to an ex-spouse that are non-deductible to the payer and is not treated as income to the recipient
Alimony
The types of firms required to establish Cybersecurity programs
All Financial firms
A corporate bond fund does not offer any significant tax advantages, as it will pay interest that is taxable at
All levels
Which of the following are nonissuer transactions? An investment manager purchases 100,000 shares of XYZ on the NYSE. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. Dot.com purchases its own shares on the open market in order to place them in treasury.
All of them A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer, as in a secondary transaction. When the investment manager purchases XYZ shares on the NYSE, the proceeds of the sale do not go to XYZ Corp. but to the investors who sold the stock. When an investment adviser sells YYY Corp. shares to an overseas private investment group, YYY Corp. does not benefit directly or indirectly because the proceeds go to the investment adviser, not to YYY Corp. When Dot.com purchases its own shares on the open market, the proceeds go to outside investors, not to Dot.com as the purchaser. However, if Dot.com resold its shares, the transaction would be an issuer transaction.
Which of the following factors determine(s) whether a person is considered an investment adviser under the Investment Advisers Act of 1940? The specificity of the advice The business engaged in Whether compensation is received
All of these
- A banker liquidates stock pledged as collateral for a loan that has gone into default - An offer to purchase a new stock made to 5 individuals and 15 institutional investors in this state during the past 12 months - An isolated non-issuer transaction - The sale of pre-organization certificates to 10 individuals with no commission being paid
All of these are exempt transactions under the USA Sales made by a bona fide pledgee are exempt Even though the number of offerees in the private placement exceeds 10, that limitation does not apply to institutional investors A pre-organization certificate may be sold to as many as 10 persons, while a private placement may not be offered to more than 10 (not counting institutional investors)
Administrator's authority to examine the books and records of registrants
All required records must be made available for examination by a state Administrator during normal business hours, within or outside the state, as is appropriate or necessary in the public interest
The Securities Exchange Act of 1934 regulates
All things secondary market
In what type of accounts can any account owner place orders for the account, but distributions must be endorsed by all account owners
All types of joint accounts (JTIC & JTWROS)
The purpose of Regulation A is to
Allow small companies to raise a limited amount of capital every 12 months by selling securities to the public that are exempt from registration
(1) Real assets (2) Hedge funds (3) Private equity (4) Structured products Are the main categories of:
Alternative investments
Created by the U.S. Congress to ensure that wealthy taxpayers cover their fare share of the federal tax burden
Alternative minimum tax (AMT)
Martin holds both the CPA and the CFP designations. Within the previous year, if he has provided portfolio advice to approximately 40 clients, is Martin required to register as an investment adviser? Yes, because he provides investment advice on a more than incidental basis.
Although Martin is an accountant, he provides investment advice on a more than incidental basis (typically regarded as more than 10 client contacts per year). Nothing indicates that Martin will be executing commissionable trades; only providing advice.
If information filed with the Administrator by a broker-dealer, investment adviser, or securities as part of its registration changes in a material way, the registrant must
Amend or update the information promptly regardless of the renewal date
While the Administrator has great power, the USA does place some limitations on the office. Which of the following statements regarding those powers are TRUE? In conducting an investigation, an Administrator can compel the testimony of witnesses. An Administrator may deny the registration of a securities professional who has been convicted of any felony within the past 10 years.
An Administrator can compel the testimony of witnesses when conducting an investigation. Investigation of serious violations need not be held in public. An Administrator in Illinois may enforce subpoenas from South Carolina whether the violation occurred in Illinois or not. Conviction for any felony within the past 10 years is one of a number of reasons that the Administrator may have for denying a license.
Corporate entities, broker-dealers, and issuers are all excluded from the definition of
An agent
Definition of a 12b-1 Fee
An ongoing marketing and shareholder service fees paid by mutual fund shareholders, a a percentage of assets invested
Dividend Discount Model: The current market value of a stock should be equal to the present value of all future dividends
Annual dividend / Expected return of the company
Joint Life with Last Survivor
Annuity option that guarantees that income will be paid for the lives of 2 individuals
Information required on an application for registration as an agent would include
Applicants for registration as agents must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship Agents can only be individuals, not business entities, and it is only broker-dealers and investment advisers that must submit financial information
A sister, who is a surgeon, shares a TIC account with her brother , who is a vice principal in the local elementary school. The investment advisor rep (IAR) who is handling this account should make investment recommendations that are
Appropriate based upon the brother's financial situation In this type of situation, suitability is typically based on the profile of the lower wage earning party
If Maria turned 72 on August 16, 2020, when must the first required minimum distribution (RMD) be made from her IRA?
April 1, 2021
Common stock issued by a public utility company whose rates are subject to state regulation
Are exempt from State registration procedures
NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents
Are properly registered with the same broker-dealer or one under common control There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter
S-Corporation taxes
Are reported on Form 1040 - Schedule C (Individual Income Tax Return Form) - Profits passed-through to shareholders are taxed - Losses passed-through to shareholders offset their personal income (reducing their tax liability)
Social Security benefits vary based on the age at which workers first claim them. The eligible range is
As early as 62 and as late as 70 - Age 62: The earliest workers can claim benefits. This will result in the smallest monthly payment (but more months in which to receive benefits since you start earlier). Retirement benefit is reduced by 30% - Age 67: The current standard age to receive benefits Retirement benefit is paid at 100%. - Age 70: No additional increase in payouts, so investors should draw their Social Security at 70. This will result in the largest monthly payment (but fewer months in which to receive benefits). Retirement benefit is increased by 124%
A client of an investment adviser is thrilled with her portfolio's results and posts a note on her bridge club's cork board suggesting that some of the other members would probably benefit from the adviser's skills. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers,
As long as this note was posted without any knowledge of the IA (or IAR), there is no problem. However, once the IA (or IAR) finds out about it, a request must be made to remove it There is a limit as to how far an investment adviser or IAR can go to prevent clients from giving testimonials. After all, as in so many businesses, referrals are a key to growth The prohibition on testimonials is not limited to social media.
Shareholders' Equity
Assets - Liabilities
The registration applications of broker-dealers and investment advisers becomes effective
At noon on the 30th day after filing the application
Holds a mix of equities and bonds in the portfolio. The specific blend is determined by a formula deployed by the fund manager
Balanced funds
- Do not trade in the secondary market and have a fixed value - They are insured by the FDIC - Their interest rate is set by the issuing bank - They are a preferred product for an investor who is looking for preservation of their capital
Bank Insured CDs
Preservation of capital is almost always a sign that the client needs a
Bank Insured Certificate Deposit
(1) Eliminate interest rate risk, because do not trade on exchanges. Value is fixed and can always be redeemed (2) Not savings account with a maturity date (3) Included as an asset in the family balance sheet (4) Preferred answer for a client who wants capital preservation with no risk of loss (5) Insured by the FDIC (6) Each bank sets the interest rate it will pay, with smaller banks offering a more competitive rate (7)
Bank Insured Certificate Deposit (CD)
Only trustee transaction to be considered exempt are the ones happening in a
Banruptcy
An investor has $50,000 to invest in bonds, 10-year bonds are currently offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest?
Barbell strategy - Place $25,000 into bonds maturing in 10-years and the other half into bonds maturing in two years - This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates
An investor purchases bonds maturing in 1 or 2 years and an equal amount maturing in 10 (or more) years with no bonds in between (important that there are only a total of 2 different maturity dates; 50% allocated to each maturity)
Barbells: Considered an active strategy
A Roth IRA is not a security. Although securities may
Be put in an IRA, but the IRA is not a security
A 61-year-old wanting to take a lump-sum distribution from his Keogh will
Be taxed at ordinary income rates
Do Limited Partnerships cast votes at stockholders meeting?
Because Limited Partnerships are not corporate entities votes are not casted
In a qualified plan, if the employer makes all the contributions, the employee's cost basis is
Because the employee has not made any contributions, the cost basis is zero. In any qualified plan, if all of the contributions are in pre-tax dollars, the cost basis is zero no matter who contributes the money.
A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions
Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to and requires no disclosures The minimum net worth requirement is over $2.2 million, or a client is qualified if he has at least $1.1 million under management with the adviser Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception.
Divorces before and after 2019
Before January 1, 2019: - Alimony is income to the recipient (recipient can use alimony as earned income for an IRA contribution) - Taxable income deduction for the payor - Child support is neither income to payee nor deductible to payer After December 31, 2018: - Alimony is not income to the recipient (recipient cannot consider alimony as earned income for making an IRA contribution) - No taxable income deduction for the payor - Child support is neither income to payee nor deductible to payer
Under the USA, the Administrator has a broad investigative authority and may begin an investigation against a registrant
Before a violation has occurred & may subpoena witnesses in any state
An investor is long stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to:
Best strategy: Selling a call against a security will generate additional income (the premium) An investor who writes a put receives additional income from the position but must also be willing to increase his position should the put be exercised
Measure of the covariance of a security or fund versus the overall market
Beta
Measure of risk for the security market line (SML)
Beta (systematic risk)
The term "sale" does not include a
Bona fide pledge. It does, however, include - Securities given as a bonus with a purchase and gifts of assessable stock (the owner of the stock may be called on to produce additional money) - Sales of rights or warrants are considered sales of the underlying security.
An investor purchases several bonds with different maturities. As the shorter maturity bonds come due, they are re-invested, and now become the long-term ones To immunize a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in the other The laddered portfolio will generally provide higher (not lower) yields than a portfolio consisting entirely of short-term bonds
Bond Ladders: Considered an active strategy
Parity
Bond Market Value / Number of Shares
Senior securities includes
Bonds (Secured & Unsecured) + Preferred stock
A corporation's theoretical per share liquidation value
Book Value
If an IAR terminates employment with a IA to begin working for another IA, notification is required by
Both IA's must promptly notify the Administrator through Form U5 - IA 1: Must express that the IAR is no longer under their responsibility - IA 2: Must express that the IAR is now under their responsibility
If an Agent terminates employment with a Broker-Dealer, notification is required by
Both parties promptly through Form U5 to the Administrator
If an Broker-Dealer terminates employment with an Agent, notification is required by
Both parties promptly through Form U5 to the Administrator
Only State-registered Investment Advisers are required to file the
Brochure Supplements
1) Issuance of a stock certificate 2) Transferring an account 3) Wiring funds 4) Margin account interest 5) Account maintenance fees 6) Safekeeping of funds/securities 7) Late settlement fee 8) Postage and handling
Broker-Dealer Fees that must be disclosed
If justified a Bona Fide error may be corrected by a
Broker-Dealer, but not an associated person
Broker-Dealers that conducts all of its business in 1 state To qualify, all aspects of all transactions must be done within the borders of 1 state Meaning they cannot participate in any transaction executed on a National Securities exchange
Broker-Dealers Exempt from Federal (SEC) Registration
- BD's with no place of business in the state and who deal exclusively with (1) Issuers, (2) other BD's, (3) other financial institutions (banks, savings institutions, loan associations, trust companies, insurance companies, investment companies, or employee benefit plans with more than $1 million in assets) - BD's with no place of business in that state, but are licensed in a state where they have a place of business, and offer & sell securities in the state only to persons that are existing customer and non-residents of that state
Broker-Dealers Exempt from State Registration
Investment advisers and their IARs are allowed to use oral discretion for the first 10 business days after the initial discretionary trade. But who is not allowed
Broker-dealers and their agents
An investor determines a specific year in which there is an investment objective and he buys bonds with a maturity year in that same date. The investor may buy more bonds next year following the same maturity year, and so on (Bonds bought at different times, with the same maturity date)
Bullets: Considered an active strategy
Technical Analysts consider a Breakout as a
Bullish. Stock price change of a stock that penetrates either the Support or Resistance level
You have a client who is bullish on XYZ stock and currently owns 100 shares that last traded at $50. He has a CD coming due in March, 6 months from now, and is afraid that by the time those funds are available, XYZ will have shot up in price. How can he ensure that he'll be able to pick up the stock at today's price 6 months from now and not miss out on that market appreciation?
Buy an XYZ March 50 call option
Passive investment strategy for a bond portfolio
Buy and hold
When looking at Mutual Funds an investor would pay which price and sell at which price
Buy at POP Sell at the NAV
What type of client would be least suitable for a Wrap Fee Program
Buy-and-Hold clients, because they don't engage in enough trading to benefit from the commissions included in the program
Someone who is short stock would receive the best upside protection by
Buying a call
Unethical business practice of a securities professional placing a personal oder ahead of a previously received customer order. It occurs most frequently when the firm has received an institutional order of sufficient size to move a market.
By Front Running or Trading Ahead, the firm or representative can profit from that movement
If an Agent calls a customer by phone to ask whether she has interest in selling securities held in her portfolio, the Agent must be registered in the state where the offer is made
Calling to inquire whether a customer is interested in selling securities is considered an offer and therefore requires registration as an Agent
(1) Expected return of the portfolio (2) Risk-free rate (3) Return of the market (4) Standard deviation of the market (5) Standard deviation of the portfolio
Capital Market Line equation CML provides an expected return for a portfolio based on the expected return of the marker, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market The CML is generally used to evaluate diversified portfolios
A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market.
Capital Needs Analysis
1) All investors can borrow or lend money at the risk-free rate of return. 2) All investors are rational and evaluate investments in terms of expected return and variability (standard deviation). All investors use the same information to generate an efficient frontier. 3) Time horizon is equal for all investors: when choosing investments, investors have equal time horizons for the chosen investments. 4) No transaction costs or personal income taxes; investors are indifferent between capital gains and dividends. 5) There is no inflation. 6) All assets are infinitely divisible: this means that fractional shares can be purchased. 7) Capital markets are in equilibrium; it is assumed that the markets are efficient and that no mis-pricing within the markets exist
Capital asset pricing model (CAPM) assumptions:
An individual receiving inherited jewelry or collectibles is required to pay what taxes upon sale
Capital gains tax: Sale price - Value at the date of death
- A broker-dealer stores some of the firm's financial records electronically - A broker-dealer's agents operate as independent contractors and maintain devices that access personally identifiable information about clients - A broker-dealer's bookkeeper prefers to do the books from home on a personal computer
Causes for concern about cybersecurity
Under the NASAA Model Custody Rule, an investment adviser would be considered to have custody of client assets if that adviser inadvertently receives a check from a client for a purchase that is made payable to a third party and does not forward the check within 3 business days stock certificates from a client and does not return them within 3 business days
Checks made payable to a third party must be forwarded to that party within 3 business days of receipt or the IA will be considered to be maintaining custody In the case of certificates or checks made out to the IA for a securities purchase, return must be made within 3 business days of receipt in order to avoid custody issues; they are never forwarded.
There is no specific experience requirement for this position; - He should be competent and knowledgeable regarding the applicable federal securities laws - Should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser
Chief Compliance Officer of an investment adviser
An Investment Adviser executing a principal or agency transaction must obtain
Client consent (orally or verbally) after execution, but before settlement of the transaction Unless, the IA is also registered as a Broker-Dealer and the transaction is unsolicited
The NASAA Contents of Investment Advisory Contract Model Rule states that no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the
Client or other party to the contract Pledging a majority interest in the company as collateral for a loan to the business is considered an indirect assignment; the reason for the loan is of no significance
Form ADV Part 2A contains information of most use to
Clients, such as the type of strategies employed by the adviser
What can Closed-end funds issue and what can Open-end funds issue
Closed-end funds can issue preferred stock in addition to common stock Open-end funds can only issue one class of stock
The only way the corporate bond would be exempt is if it was issued by a company whose
Common stock was federal covered
Parties who vote for the Board of Directors seats but are not involved in the daily operations of the company are the
Common stockholders
Who is the last Owner to be paid in a corporate liquidation
Common stockholders
1) Any incentives or other compensation from the issuer of securities recommended 2) The method of computing compensation 3) Refunding of prepaid fees 4) Type of compensation (hourly fees, fees based on AUM, commissions, etc)
Compensation details of Advisory Contracts that must be disclosed:
Every legal or natural person seeking registration or making a notice filing must supply
Consent to service of process with their registration applications
Appoints the Administrator as the applicants attorney to receive and process non-criminal securities-related complaints against the applicant
Consent to service of process, it is submitted once with the initial application
The notion that investors can have a difficult time altering their existing beliefs, even in the face of updated information, is a core tenant of
Conservatism
The party responsible for placing trades for the account of a person deemed incompetent by a court is the
Conservator (or guardian)
Its goal is to maintain the same dollar valuation in one security or category, which may require occasional adjustments
Constant Dollar Plan
A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best?
Consult a qualified tax specialist Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen
The succession plan of a registered investment advisor should be
Contained within the business continuity plan of the firm
Open-End Investment Companies (Mutual Funds) have virtually no Liquidity Risk, since they have a
Continuous Redemption Opportunities
Buy when the majority of other investors are selling and sell when the majority of other investors are buying
Contrarian Investors
In a qualified retirement plan
Contributions are made with pre-tax dollars, and All distributions are taxed as ordinary income
All of the following statements concerning IRA contributions are true between January 1 and April 15, contributions may be made for the current year, the past year, or both contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15
Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension
Tax advantage available for 529 plans contributions in many states to state resident
Contributions to 529 plan sponsored by the state are tax deductible on state tax returns
Stock with no Credit Risk, as its investors are owners of the business
Convertible Preferred Stock
State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering.
Coordination
A portfolio that is primarily invested in what would be subject to the following risks: - Credit risk - Interest rate risk - Opportunity cost - Purchasing power risk
Corporate bonds It would have been U.S. government bonds, if credit risk would not have been included
Collateral Trust Bond (or Collateral Trust Certificates) are
Corporate bonds backed by either shares of another company or their own, and used as collateral for the bond offering The stronger the quality of the collateral used, the better the Rating and Quality of the bond
In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock
Corporate forms
In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was stated as a choice, the LLC has multiple members.
Corporation Tax Forms
Ownership of Foreign Securities, whether through outright ownership or an ADR, will mandatorily entail a certain degree of
Currency risk for the investor Due to the fluctuating exchange rates between the US and Foreign country
Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. The working capital of a corporation is equal to its
Current assets minus Current liabilities (a current liability is payable within 12 months) Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.
Trust funds must be placed in what type of accounts?
Custodial accounts (not to be confused with custodian for minors)
Under the Investment Advisers act of 1940, investment discretion over an account & receiving a fee of $1,500 as a pre-payment for the next contract year. Are not considered
Custody
The Administrator has considerable discretion to make rules or issue orders. Specifically, The USA allows the Administrator to prohibit which rule
Custody by rule
A Will is not required as part of building a
Customer's financial profile
Protecting information from both the firm and its customers from internal and external threats
Cybersecurity
The discounted cash flow (DCF) of a bond is measured by adding the present value of the bond's par value received at maturity plus the present value of all the coupons. It is not calculated by adding up the future value of these cash flows.
DCF is used to assess the Fair Market Value of a security
Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong to the
Deceased estate
Deceased individuals are not persons either, but their estate is so an account may be opened in the name of the
Deceased individuals estate
Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least
December 31, 2020 Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the end of the fiscal year in which the record originated—in this case, 5 years from the end of 2015.
An investment adviser new to the business is engaged by an elderly client who, on the grounds of privacy, refuses to disclose his annual income or net worth. The client merely asks the adviser to establish and manage a $50,000 portfolio. If the client brings a cashier's check for $50,000 to the initial meeting, which choice below reflects the best action on the part of the adviser?
Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information Unlike the broker-dealer, who may act merely as order filler, the investment adviser has a fiduciary responsibility and is obligated to determine suitability An investment adviser cannot perform effectively for a client who refuses to provide information necessary for determining the suitability of investments or a portfolio
Contra party
Defined as the broker-dealer or customer to whom a person has sold securities or from whom a person has purchased securities—they are on the other side of the trade
Variable annuities are not exempt from state registration because the payments from the annuity are
Dependent on the performance of a segregated fund invested in securities
These instruments are called: - Options - Forwards - Futures - Convertible securities
Derivatives Derivatives that are securities: convertibles & options Derivatives excluded from the definition of a security: forwards & futures contracts
In order to achieve its goals, an inverse ETF uses
Derivatives and debt (Margin)
Best practices for Cybersecurity include
Detailed inventories of the firms: Assets, Devices, and Systems
1) Age 2) Citizenship 3) Filing status
Determinants of an individuals Federal Tax liability
References to charts, tables, formulas, or other devices used to forecast securities prices requires disclosure of the systems:
Difficulties or limitations in their use - Not necessary to indicate how long the system has been used or its performance history
Often referred as Private Placements, which may include individual parties
Direct Participation Programs (DPP's)
There is no conflict in recommending a stock where the agent uses a product sold by the company unless we can see some
Direct or indirect benefit to the agent if the client purchases the stock
If the beneficiary of an IRA does not want to accept an inheritance, this beneficiary is permitted to
Disclaim the assets which would be transferred to a Contingent Beneficiary This action must be taken within 9 months of death
An investment adviser who structures his personal securities transactions to trade on the market impact caused by his recommendations to clients is required to
Disclose this practice to clients
An investment adviser representative that renders investment advice outside the scope of employment with the broker-dealer must
Disclose this to clients
- The periods that will be used to measure investment performance throughout the contract and their significance in the computation of the fee - The nature of any index that will be used as comparative measure of investment; and performance, the significance of the index, and why its appropriate - That the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee - Where relevant, that the investment adviser may receive increased, compensation with regard to unrealized appreciation as well as realized gains in the client's account
Disclosure in writing required for a State-registered IA to enter into, extend, or renew a performance-fee based contract = None of these disclosures apply to Federal-covered advisers
When taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money (the discount rate)
Discounted Cash Flow Using: Number of interest payments, future cash flow, & discount rate
Uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price that a security should be selling for in the market
Discounted cash flow (DCF) - When the current market price of the security is less than this value, it has a positive net present value (NPV) and should be a good investment - The opposite is true if there is a negative NPV (the market price is higher than that computed under the DCF method)
Any order missing 1 of the 3 A's is: 1) Amount (# of shares) 2) Asset (which security) 3) Activity (buy or sell)
Discretionary
To safeguard against the possibility of churning, a designated supervisor or manager must frequently review all trading activity in
Discretionary accounts
When the investment adviser makes investment decisions with parameters agreed upon with the client, the arrangement is best described as being on a
Discretionary basis
When an agent places an order for a customer's account without the customer's express authorization for that order and the Agent chooses least one of the following: the security, the number of shares (or dollar amount), or whether to buy or sell The order is considered a
Discretionary order
The simplest model for valuing equity is the
Dividend discount model: The value of a stock is the present value of expected dividends on it - Book value per share has little or no bearing on the current market price of the stock
Valuation method that analyzes a stock's price based on its dividend and the dividend's expected growth. It is most appropriate for mature companies with stable and growing dividends
Dividend growth model The dividend discount model is similar but assumes the dividend will not grow.
Distributable Net Income (DNI) is
Dividends & interest plus capital gains that have not been reinvested back into the trust
Limited Partnerships do not pay
Dividends, instead they pass through all of their operating results and investors then pay Income Taxes on them
Mrs. Jones, age 70, is retiring, and her employer has 3 investment options for her 401(k). You should advise her to
Do a rollover to a traditional IRA
An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered. What are its state registration requirements?
Does not have to register in a state, regardless of whether or not it has a place of business there
- Strategy looking to reduce the average cost per share relative to its average price (i.e., buy more when it's cheaper) - It also helps minimize the chance of a client mis-timing the market because purchases are made on a fixed schedule
Dollar-cost averaging
Considers the investor's specific cash flows and are used to determine a particular client's rate of return. Dollar-weighted returns reflect the IRR for a client; time-weighted does not (because it is not specific to any one client)
Dollar-weighted returns
- Mutual Fund sponsors and banks that provide flexibility and tax advantages - They allow individuals to donate a lump sum and take a current tax deduction, then have the assets invested while allowing the donor to advise distributions to favored charities
Donor Advised Funds
Vehicle into which an individual donates a tax-deductible lump sum, which is invested, allowing the donor to distribute to favored charities
Donor-Advised Funds
Index of 65 Industrial, Transportation, and Utility stocks (which contains 30 industrial stocks)
Dow Jones Industrial Average
Yield-to-Maturity (YTM) has an inverse relationship to
Duration
Requires retirement plan Trustees (Fiduciaries) act in the best interest of the plan participants and invest prudently (Diversified) = Trustees can delegate investment choices to an Investment Adviser
ERISA Section 404
Jesse Liverless is the trustee of the Short Circuit Electric Corporation 401(k) plan. Jesse would be able to reduce his ERISA fiduciary exposure if the plan offered a broad index fund, a medium-term government bond fund, and a cash-equivalent fund
ERISA Section 404 (c) describes a safe harbor for 401(k) plan fiduciaries. Among the requirements is to provide at least 3 different investment alternatives with a range of risk and provide account access no less frequently than quarterly.
1) Investment selection (Must be given at least 3 investment choices with varying risk/return profiles) 2) Investment control (Plan owner can control where to invest) 3) Communication (Receives prospectuses & has real-time access to account information)
ERISA Section 404(c) guidelines that if met a Fiduciary is Not Liable for Losses to a retirement plan
Non-qualified retirement plans, such as Deferred compensation plans and Payroll deduction plans, do not meet
ERISA guidelines and do not allow the employer a current (i.e., upfront) tax deduction for contributions
Pension funds are regulated by - Think of the organization that sets forth the guidelines that Qualified Retirement plans must adhere to
ERISA of 1974
Deferred compensation plans are not
ERISA-covered plans; that is what gives them greater flexibility than a covered plan
Growth managers look for
Earnings momentum
A non-qualified, single premium variable annuity differs from a Keogh plan in that
Earnings on investments made in both a Keogh plan and non-qualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a non-qualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable
General partnership among the benefits of using this structure would be
Ease of formation
Email communication by securities professionals is subject to
Electronic business records, including email, must be maintained in accordance with standard record keeping for at least 3 years
1) Research reports analyzing the performance of a particular company or stock 2) Financial newsletters and trade journals can be eligible research 3) Quantitative analytical software 4) Seminars or conferences with appropriate content 5) Effecting and clearing securities trades
Elegible to receive as Soft Dollars compensation Form ADV is used to disclose IA's brokerage allocation practices
The primary purpose of the National Securities Markets Improvement Act (NSMIA) is to:
Eliminate state registration requirements for federal covered investment advisors No need to duplicate registration efforts
Designed to regulate the creation and management of Corporate pension and retirement plans
Employee Retirement Income Security Act (ERISA)
When the firm or its personnel is involved with the preparation of content on a third-party site to which it publishes the link
Entanglement: Your firm had part ownership in its authorship
Regressive taxes are imposed
Equally regardless of income levels
The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? Remember what NASAA likes
Establish an emergency fund
For purchasers of a Variable Life Insurance Policy, funds obtained from a death benefit may be subject to
Estate taxes
US dollars held in a foreign bank or depositary
Eurodollar
An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify,
Every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million Private fund advisers must keep the AUM under $150 million $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors Conviction of a felony within the past 10 years, not 12, will generally make one a "bad actor" and cause the exemption to be forfeited
Which of the following statements relating to the general securities registration provisions of Section 305 of the Uniform Securities Act is most accurate
Every registration statement is effective for 1 year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed.
- Natural person or company that immediately after entering into the contract has at least $1 million under management of the Investment Adviser - Natural person or company that the IA has reason to believe that immediately prior to entering into the contract has a net-worth exclusive of the primary residence in excess of $2.1 million (Assets held jointly with a spouse can be used, no one else) - Natural person who is an officer or director of the investment adviser or one of their IAR's who has been employed in the industry for at least 12 months
Exceptions for use of Performance Fees under State & Federal Law
Creative Financial Solutions (CFS) is a broker-dealer registered with the SEC. CFS has its principal and only office in State A. CFS also does business with clients in State B. Which of these clients would cause CFS to have to register in State B?
Excluded from the definition of broker-dealer under the Uniform Securities Act is a broker-dealer with no place of business in a given state whose clientele consists exclusively of other broker-dealers, financial institutions (banks, investment companies), or existing customers who are temporarily in the state However, once the BD has even 1 retail (non-institutional) client who resides in the state, registration is required. There is no de minimis exemption for broker-dealers (unlike investment advisers)
Under state law, the publication of investment advice that is not based on the specific investment situation of each client
Excludes the publisher from the definition of an investment adviser
- Agents - Issuers: Corporations and Governments who raise money through the issuance of securities - Banks, savings institutions, and trust companies
Exclusion from the definition of a Broker-Dealer under the state
Under the Uniform Securities Act, Municipal securities and Regulated Public Utilities are
Exempt from registration procedures
An unsolicited transaction is
Exempt from the Registration & Advertising filing requirements under the USA
An executor (a fiduciary) selling shares of common stock for an estate is a
Exempt transaction
Under the terms of the USA, any sale to certain institutional customers, such as banks and insurance companies, is an
Exempt transaction that is not bound by the advertising and registration requirements of the USA
Sales to a financial institution (such as a bank or insurance company) are
Exempt transactions
Unsolicited trades in the secondary market are
Exempt transactions
The capital asset pricing model (CAPM) is most commonly used to determine an investor's Er = Rf + Beta x (expected return on the market − Rf)
Expected return on a risk-adjusted basis
Third-party use of the "like" feature on an Investment Adviser's social media site could be deemed to a testimonial if it is an
Explicit on implicit statement of a client's experience with the Adviser
T/F: An individual with an office in the state, having no retail clients in the state, is EXEMPT from registration as an agent in the state.
False - This individual WOULD BE subject to registration in the state, since he /she has an office there
Made it up by income; such as: Salary, dividends, interest, or amounts paid for expenses
Family Income Statement includes income and expenses and is used to determine the client's cash flow; revealing positive cash flow if there is money left at the end of each mont
NSMIA eliminated state registration requirements for
Federal Covered Advisers, largely based upon assets under management (AUM)
- A security quoted on the Nasdaq Stock Market - Shares of an investment company registered under the Investment Company Act of 1940 - An offering in a security exempt from registration under the Securities Act of 1933 - A security that has a federally imposed exemption from state securities registration.
Federal Covered Securities
(1) Securities listed on national stock exchanges (2) Nasdaq Stock Market (3) Investment companies registered under the Investment Company Act
Federal covered securities: Are exempt from state registration A notice filing may be required, along with a payment of fees based on a schedule set forth by the Administrator
If the common stock is federal covered (listed on the NYSE) and, therefore exempt from registration, then a senior security, such as the bond, would also be
Federally covered. But, it doesn't work in reverse.
Employee Benefit Plans are considered institutions when
Federally: worth more than $5 million State: worth more than $1 million
Account charge appropriate for people engaging in Moderate to Active trading
Fee based
1) Commissions 2) Markups and markdowns 3) Advisory fees
Fees not included in the Fee Disclosure Documents, they're disclosed in other documents
One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from 2 previous employers. When computing the RMDs
For RMD purposes - Each IRA is figured separately and the distribution can be made from one or all of them - With a 401(k) plan, each account has an RMD that can only be paid from that account
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. For gift-tax purposes, what is the value of the gift and the son's cost basis?
For gift-tax purposes, the value of the gift is $7,000 The son's cost basis on the stock is $3,000
EAFE Index serves as the most common benchmark for
Foreign Stock Funds, it contains stocks from 21 different countries outside of the U.S. and Canada
Form that mutual funds send shareholders annually to report taxability of distributions
Form 1099
The identity of an investment adviser's chief compliance officer must be disclosed on
Form ADV
All advisers registering with the SEC or any state securities authority must complete what part of Form ADV
Form ADV - Part 1A
Form used by investment advisers who offer wrap fee programs
Form ADV Part 2, Appendix 1
To establish a Wrap Fee Program the adviser would give a client
Form ADV Part 2A, Appendix 1 for completion
Must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.
Form ADV-E (E for surprise Examination)
Derivative product with no secondary market
Forward contracts; direct commitment between 2 private parties
Futures are contracts that trade on exchanges and have standardized terms, in contrast with forwards contracts, which are
Forwards are Customized instruments with less liquidity
A client who has read two investment books and now wishes to take over his own accounts
Frame dependence if both books promoted a specific type of investment strategy and discounted its risks, or Overconfidence if the books were more general in nature
When an individual remarries, the new spouse is entitled to
Full Social Security benefits IF the previous marriage lasted a minimum of 10 years, that ex-spouse (if not remarried) is also entitled to full benefits
The composition of a family portfolio would not be considered 'Relevant' when performing a
Full capital analysis for life insurance
Keogh plans must have eligibility requirements that cover all employees who are:
Full- time, are at least 21 years of age, and have 1 or more years of service
NAV per share of Mutual Fund Share
Fund NAV / Number of Shares Outstanding
Is determined based on the rate of return and the time period over which that amount is invested
Future value
Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax If the spouse is a non-citizen, there is a limit ($152,000 in 2018) Anything in excess of $15,000 to a grandchild or sibling is taxable unless the donor elects to use the excess against the lifetime exclusion ($11.2 million in 2018).
Gift Tax
Breakpoints are offered by
Giving a lower sales charge
Have the portfolio invested around the world, and it includes U.S. securities
Global funds
Sales (or revenues) - Cost of goods sold (COGS) When depreciation expense relates to the equipment used directly in the production of the sales, it is included in COGS
Gross profit (or gross margin)
Issuers will call their bonds when interest rates:
Have fallen from higher levels Issuers will benefit from lower borrowing costs in a lower interest rate environment
- Used to pay for qualified health expenses and these funds rollover from year-to-year if unused - They may pass to a named beneficiary and proceeds are immediately taxable as ordinary income - The beneficiary may use the proceeds for up to 12-months after the death of the HSA owner for qualified health expenses
Health Savings Accounts (HSA) funds
Under the Capital Asset Pricing Model, the investor should be rewarded for the risks taken so it is proper to assume that the
Highest the risk, the higher the return
Custody
Holding directly or indirectly client funds or securities - In possession of securities - Having a Power of Attorney
Odd Lot Theory
Holds that small Retail Investors tend to be wrong in their assessment of market trends and timing, thus creating a potential opportunity for other investors who may wish to trade opposite of these investors Trading behavior of smaller retail investor can sometimes initiate actions by other marker players
Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. What should be included as a constraint in an investment policy statement?
How funds are spent after withdrawal would not be a constraint of an IPS Anything that might be an obstacle to reaching the goals, such as regulatory restrictions and specific investor preferences, are considered constraints. Such as: - Any unique needs or preferences an investor may have - Asset classes the client specifically forbids or limits based on past experience - Constraints put on investment activities by regulatory agencies
"A self-employed CPA has earned $38,000 from his practice; he also earned $2,300 interest on his savings. What is the basis for his deposit into his defined contribution Keogh (HR-10) account this year?" What is this question asking for
How much can the CPA allocate to the Keogh plan Only earned income may be included in determining the income eligible for Keogh contributions. Dividends and interest are classed as portfolio income and are not included.
A Life Insurance Capital Needs Analysis goal is to determine
How much insurance is necessary to meet future financial needs
(1) An investment of money (2) In a common enterprise (3) where there is an expectation of profit (4) through the efforts of a third party and not the investor
Howey definition of when an Investment Contract is a Security
A registered investment adviser runs a promotion offering free information to all who request it. Which of the following statements to people who respond do not comply with the advertising interpretation of the Uniform Securities Act? "The offer is yours, free of charge; all I need are the names of 5 friends who might be able to use our service." "Such a deal; our information about the market is free to anyone who makes only one trade with our broker-dealer affiliate." "Thank you for responding; if we can help you after you read our information, please let us know."
I and II If an advertisement claims to offer something for free, it must be free of any obligation. Choices I and II have strings attached and are not free.
SYZ Corporation is having a rights offering that will enable existing shareholders to acquire 1 share of SYZ common stock for each 10 shares they currently own. Under the Uniform Securities Act, this would be considered 1) an offer of SYZ rights 2) a sale of SYZ rights 3) an offer of SYZ common stock 4) a sale of SYZ common stock
I and III the USA states that any offer of a right or warrant that gives the holder the ability to subscribe to another security is also an offer of that security.
As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Which items would be included gold jewelry loan secured by the family automobile the amount paid thus far this year for Botox injections the balance owed to the dentist for new crowns
I, II and IV The balance sheet contains assets and liabilities as of a specific point in time. Personal property currently owned, such as jewelry, is an asset. A loan still outstanding, such as the car loan and the debt to the dentist, are liabilities. The amount already paid for the Botox injections is no longer on the balance sheet.
Complaint record keeping:
IA: 5 years BD: 3 YEARS
A supervisor is also registered as an
IAR
Designations that can't be used in advertising or business cards:
IAR & RIA - These can be used: CLU, MBA, CPA, CFP, JD, or PhD
In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? A guaranteed investment contract (GIC) A municipal bond fund A leveraged real estate limited partnership A corporate bond rated A or higher
II and III GIC's and investment-grade corporate bonds (A- or higher-rated bonds) are considered appropriate investments for a qualified plan. A municipal bond fund will potentially convert tax-free income into ordinary income and using leveraged investments in retirement plans is generally prohibited.
An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case, the agent acted
Improperly; the order should have been placed on Thursday Time or price discretion orders are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received
An Investment Advisory Contract must contain
In writing and disclosing: 1) Services to be provided 2) Term of the contract 3) Advisory fee 4) Formula for computing the fee 5) Amount of pre-paid fee to be returned in the event of contract termination or non-performance 6) Whether the contract grants discretionary power to the adviser 7) No assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract
Discretionary authority must be received by Agents
In writing prior to any discretionary trading taking place in the account, they're not allowed to use oral discretion for the first 10 business days after the initial discretionary trade Note the difference with investment advisers and their IARs
One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $6 million, currently earns in excess of $500,000 per year, and is married with 2 teenage children. He currently has a little over $1 million in his 401(k), more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser?
Inadequate life insurance coverage Because the client's only life insurance seems to be that with the company as beneficiary, it does not appear that he has adequately planned for his premature death and the potential estate taxes.
- Has to be held at least 2 years after date of grant & 1 year after exercise date - If these time limits are breached, they're taxed like a Non-qualified Stock Option (NSO) - Profits are reported as Long-Term Capital Gains
Incentive Stock Option (ISO)
1) The account ID 2) Description of the security (including # of shares) 3) Terms and conditions of order 4) Time of order Entry and Execution 5) Execution price 6) Identity of the agent
Included in an order ticket
Limited Partnership Exploratory programs do not generate
Income
Life insurance companies offer many different products. Which of the following would NOT be considered a security? Index annuity Modified endowment Variable annuity Variable life
Index annuity & Modified endowment Any insurance product that includes the word variable is a security. Otherwise, it is not
Users of this technique incur in relatively low cost due to lower levels of portfolio turnover
Indexing
If an investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms, any advertisement about the system must
Indicate that there are limitations and difficulties to using the system
The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing shifting the focus from
Individual investment choices, which made it very difficult to focus on the risk and return of the entire portfolio to the benefits of diversification
An individual opened a Roth IRA 6 years ago with a deposit below the minimum allowable level. Distributions taken from this account are tax-free if the
Individual is at least 59 1/2 years of age
- Identify all the issuer's officers and directors, their holdings of the issuer's securities, and their salaries - Identity of owners of more than 10% of the issuer's stock - Estimate of the proceeds and a description of the use to which they will be put - Identity of the underwriter
Information contained in the Registration Statement of a New Security Public Offering
Federal IA Record keeping Requirements
Investment Adviser records must be kept easily accessible for 5 years
The IARD is an electronic filing system that facilitates
Investment Adviser registration, regulatory review, and the public disclosure information of investment adviser firms
- Used as the benchmark to establish an appropriate Asset Allocation program for a client - Its created to maximize the efficiency of an asset allocation plan
Investment Policy Statement (IPS)
(1) Time horizon (2) Liquidity (3) Taxes (4) Laws and regulations (5) Unique circumstances and preferences
Investment Policy Statement: Constraints
Return requirements & risk tolerance
Investment Policy Statement: Objectives
the adviser performs investment supervisory services, and the adviser provides advice as the primary business of the firm
Investment council
Qualified corporate plans are mandated under ERISA to have an
Investment policy statement (IPS)
Sets forth the retirement plan's investment objectives, future cash flow needs, and target asset allocation, but will not identify any specific investments
Investment policy statement (IPS)
It can be said that: An adviser who charges a fee of 1% of the average value of the account portfolio during the year An adviser who charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more
Is allowed, because flat fees and fees based on total portfolio value are permitted
Attempting to solicit a trade in unregistered exempt securities with an individual client
Is allowed, the security may be unregistered if it is also exempt
A firm with no place of business in a state, and who deals ONLY with issuers, other BDs, and financial institutions in that state
Is exempt from the definition and registration requirements of a Broker-Dealer in that particular state
The spouse of a deceased individual has started to receive a life insurance benefit from her spouse's policy - This benefit
Is not subject to federal income tax liability Generally, proceeds from life insurance policies are not subject to federal income taxes
When a primary residence that has been lived in for at least 2 of the 5 years is sold at a profit, the first $250,000 for an individual and the first $500,000 for a married couple
Is not subject to taxation Everything in excess of that is taxed as capital gain on Schedule D of the Form 1040
Leaving out risk factors and other potentially deal-killing information as well as highlighting on a prospectus to draw attention to key points
Is prohibited
Executing a transaction in a nonexempt security in a discretionary account is a permitted activity, as long as the security
Is properly registered
Dividing or splitting an Agents commissions, profits, or other compensation from the purchase or sale of securities with any person no also registered as an agent for the same Broker-Dealer, or for a Broker-Dealer under direct or indirect common control is allowed. There is no disclosure required to the client, unless
It increases the transaction cost to the client
Selling away
It is a violation of securities regulations for an agent to effect trades not properly recorded on the book & records of the firm To avoid a violation, the agent should notify and get consent from the firm in advance
Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employees pension fund with assets of $4 billion. What are this firm's registration requirements?
It may choose to register with either the D.C. Administrator or the SEC Under the provisions of the Dodd-Frank Act of 2010, pension consultants providing advisory services to employee benefit plans having at least $200 million of assets may register with the SEC (even though the consultant does not itself have those assets under management). JAW's only client has $4 billion in assets, well in excess of the minimum of $200 million required to allow the firm to choose between state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.
- Cash dividends by corporations to shareholders - Short-term Capital Gains from the sale of stocks - Bonus received as part of year-end compensation -
Items included in the Adjusted Gross Income (AGI) of an individual taxpayer
(1) Current expenditures (2) Debt obligations (3) Tax status (4) Income sources (5) Balance sheet containing the client's assets (Cash, CD's, savings accounts [looked as an emergency fund generally considered to be a primary requirement for investing in securities], real estate holding, pension and retirement accounts, cash value in life insurance policy, personal items such as jewelry and automobiles and liabilities including: current debt obligations [credit cards, estimated tax payments], long-term debt obligations [auto loans, mortgage], loans against insurance cash value or 401(k) plan
Items needed to create a financial profile and family balance sheet: to determine the client's net-worth and liquidity This information indicates if the client is able to make a lu,p-sum investment
Joint Account in which the assets are transferred to another named party on the account, in the event of death or incompetency of one of the owners, without regard to original contribution levels
Joint Tenants with Right of Survivorship (JTWROS) Regardless of contribution, each account owner has an equal and undivided in the assets in the account
Type of accounts, there is an undivided interest in the account and any co-tenant has full right to withdraw assets (but any certificates or checks must be in all names)
Joint tenants in common (JTIC) & Joint Tenants with Rights of Survivorship (JTWROS)
The theory behind the laddering strategy is that with bonds maturing every year, the investor is reinvesting the principal at current market rates. In a period of rising inflation, interest rates follow along, so annually, the maturing bonds will be used to purchase new bonds with higher coupons The barbell strategy has all bonds purchased at the same time with two different sets of maturities - half of the bonds mature near term and half mature intermediate term The bullet strategy is used when aiming at 1 target date
Laddering strategy is that with bonds maturing every year, the investor is reinvesting the principal at current market rates. In a period of rising inflation, interest rates follow along, so annually, the maturing bonds will be used to purchase new bonds with higher coupons The barbell strategy has all bonds purchased at the same time with two different sets of maturities - half of the bonds mature near term and half mature intermediate term The bullet strategy is used when aiming at 1 target date
Who are taxed based on their Pro-rata Ownership
Limited Partners of a Limited Partnership
Provides specific instructions, authored by the creator of the document, as to what steps/procedures should be taken in an end-of-life situation
Living will (sometimes referred to as an 'advance healthcare directive)
A "qualified" cash dividend is taxed at a
Long-term Capital Gain rate
By investing a constant amount of dollars at regular intervals, the investor buys fewer shares when the fund's price rises and more shares when the share price drops, thereby
Lowering the average cost
Dr. Smith is resigning from the clinic where he was an employee covered under its profit-sharing plan. The plan document requires distribution of vested amounts once an employee leaves the clinic. Under the Internal Revenue Code, what can he do to avoid current-year taxation of the distribution?
Lump-sum distributions from retirement accounts can be rolled over into an individual retirement account If implemented within 60 days, no tax liability is incurred
The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. Regulation T addresses: Initial margin requirements, Loan value of securities, and Mixed margin accounts Regulation T does NOT address
Maintenance margin levels which set by the SROs, such as FINRA They are currently 25% for long accounts and 30% for short accounts
Because the death benefit in a life insurance policy is generally a fixed amount, when performing a capital needs analysis we are not concerned about
Maket volatility
Rate an individual pays on each additional dollar received as income
Marginal Tax Rate
Maket makers vs. Specialists
Market maker: a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market. All OTC market makers are members of FINRA Specialists: a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on the listed exchanges
A brochure supplement instead of showing the
Material changes
Under the Uniform Securities Act, an Administrator investigating violations
May appoint an officer who has the power to subpoena records, administer oaths, or require production of documents and books
In an agency cross transaction, the adviser
May not recommend the transaction to both parties of the trade Must obtain prior written consent of both parties (oral or verbal) before completion of the transaction
Instead of analyzing particular stocks, MPT focuses on the relationship among all the investments in a portfolio. This theory holds that specific risk can be diversified away by building portfolios of assets whose returns are not correlated MPT diversification allows investors to reduce risk in a portfolio while simultaneously increasing expected returns Diversification reduces risk only when assets whose prices move inversely, or at different times, in relation to each other are combined. In other words, decreased correlation leads to decreased risk The theory is that, all factors being equal, the portfolio with the least amount of volatility would do better than one with greater volatility
Modern Portfolio Theory is an approach that attempts to quantify and control portfolio risk It differs from a traditional securities analysis in that it emphasizes determining the relationship between risk and reward in the total portfolio rather than analyzing specific securities
- Method of Financial Analysis that attempts to forecast how investment returns on different asset classes vary over time through the use of multiple computer simulations - A computerized Risk Management tool used to assess the probabilities of achieving various investment outcomes
Monte Carlo Simulation
A computerized mathematical technique that is often used by investment advisers to project future financial outcomes, such as the probability of a client's funds lasting through retirement, is called
Monte Carlo simulation (MCS)
Long-term treatment applies when a sale is made
More than 12-months after the purchase The best way to compute this is to add 1 year and 1 day to the purchase date
Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to
Mr. Hawkins as the donor
Tax Equivalent Yield
Municipal Rate / (100% - Tax bracket)
Tax-free Equivalent Yield
Municipal Rate x (100% - Tax bracket)
Shares that cannot be purchased on margin, but can be used as collateral once owned for at least 30 days
Mutual funds shares
Type of index that tracks movements of a specific industry
Narrow-based Index
Most common way for a company to compute cash flow is
Net Income plus Depreciation The reduction to net income is zeroed out by the increased depreciation added back in
Money market funds traditionally maintain a stable
Net asset value resulting in no market volatility
Situation in which an individual must register as a Investment Adviser Representative (IAR) with the SEC
Never
An Exculpatory Provision purpose is to exclude officers and directors from liability for disregard of their duties. They are
Never acceptable in an investment advisory contract
If a Broker-Dealer forms a subsidiary to start an Investment Adviser, existing clients of the Broker-Dealer wishing to become clients of the IA must enter into a
New contract for Advisory Services
An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file a Form D with the SEC
No later than 15 days after the first sale
The estate of a deceased person will file the estate tax return
No later than 9 months after the date of death through Form 706
The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge
No longer applies to the account
Private placements are offers to
No more than 10 non-institutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. When it comes to institutional clients, there are no numerical limitations on offers, no required holding period, and no restrictions on payment of commissions.
Section 201 of the Uniform Securities Act specifies the conditions under which one is an investment adviser in the state. Specifically excluded from the definition are those IAs with:
No place of business in the state who confine their advisory activities in the state to: (1) Investment advisers, (2) federal covered advisers, (3) broker-dealers, (4) banks, (5) trust companies, (6) savings & loan associations, (7) insurance companies, (8) employee benefit plans with assets of not less than one million dollars ($1,000,000), and (9) governmental agencies or instrumentalities.
A school district in Tennessee issues a bond that will be sold in 5 states. The bond must be registered in
No states. Municipal bonds are exempt securities
If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employee's pension plan, under the Uniform Securities Act, this omission constitutes
No violation occurs because the Uniform Securities Act requires the disclosure of only material facts Material facts are those that could influence the price of a security Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision
Would a quarterly cash dividend received from a blue-chip holding be shown in a family balance sheet?
No. Items of income, such as interest and dividends, will appear in the Income Statement A balance sheet will include assets and liabilities only
When a Lawyer, Accountant, or Insurance agent refers a client to an IA, it would be permitted for the IA to offer a
Nominal fee for the service (several hundreds of $) = What would be prohibited would be to have the size of the fee based on the size of the client
Rule 506(b) of Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of
Non-accredited investors to whom the security is sold
(1) Age (2) Marital status (3) Investment experience (4) Interest in ESG (5) Number and age of dependents (6) Employment stability (7) Employment of family members (8) Demographics (9) Current and future family educational needs (10) Current and future family health care needs
Non-financial Consideration
A partner in the AAA Oil and Gas Partnership selling his interest in the investment (The resale of a partnership interest) by an investor is a
Non-issuer sale because the investor is not the issuer
Forward contracts and futures contracts are known as
Non-securities derivatives because they derive their value from something that is not a security
When a client insists that a trade be executed even if the Adviser explains that the transaction may be unsuitable, a firm can protect itself by having the customer sign a
Non-solicitation letter before effecting the trade
Jurisdiction of FINRA in registering Investment Advisers is
None. The SEC and states register and regulate IA's
Which of the following statements regarding nonqualified annuities is It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties.
Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.
Traditional defined benefit plans promise to pay a specific benefit to a participant at
Normal retirement age, as specified by the plan document
Under the USA, a transaction of an isolated sale of a corporate bond on behalf of the bond's issuer is
Not an exempt exempt transaction, because the transaction is on behalf of the issuer Under the USA, only isolated non-issuer transactions are exempt
Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence would
Not be in the client's best interest, because the client might be subject to substantial additional sales charges
Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action?
Not considered a prohibited practice to charge $100 commission provided the customer was informed of the $100 commission prior to the transaction and the customer decided to proceed with the trade - Charging larger than normal commissions without informing the customer of such intent in advance is a prohibited practice under the Uniform Securities Act - No requirement for administrative clearance prior to charging larger than normal commissions
A fee based on the average amount of money under management over a particular period is
Not considered to be a performance fee
The Uniform Securities Act makes it illegal for any person to commit a fraudulent act in connection with the sale or offer for sale of a security
Not just agents and broker-dealers
Under the Uniform Securities Act, a person who is in the business of providing advice on trading futures contracts in addition to advising clients on securities issued or guaranteed by the U.S. government is
Not required to be a registered investment adviser in the state A person whose securities advice is limited to those issued or guaranteed by the U.S. government is included in the definition of a federal covered adviser
When passing the required NASAA examinations for registration as an Investment Adviser Representative, advisory activity may start after
Notice is received by the investment adviser from the appropriate state and/or federal authorities
Investment Advisers who do not maintain custody or receive substantial pre-payments avoid
Notifying their clients about any financial situation that might impair their ability to meet contractual commitments to clients
Market capitalization of a company
Number of outstanding shares of a company's stock is X The market price per share
When an IA or IAR prepares a plan for a client, what is used to create the Investment Policy Statement (IPS)
Objectives & Constraints
(1) Approximately two-thirds, or 68.26%, of observations will be within 1 standard deviation on either side of the mean (2) Approximately 95% will be within 2 standard deviations (3) Approximately 99% will be within 3 standard deviations
Observations according to a normal frequency distribution curve when analyzing a security's standard deviation
The schedule should be made available on the broker-dealer's public website without requiring any login or password
Obtaining the fee schedule should be a simple process for retail customers and prospects
Investment Adviser Representatives need their clients' consent when acting as Agents or Principals on trades with them because
Of their Fiduciary responsability
- Must occur by the earlier of 2 years after the discovery of the facts or 3 years after the occurrence - The offer is based on the price originally paid for the security plus interest at a rate determined by the Administrator (less any income received from that security).
Offer of Rescission: Civil liability used when a sale violates a provision of the USA Act
An agent mistakenly sold an unregistered, nonexempt security to a customer. What action should the broker-dealer take?
Offer right of rescission Offer to buy the security back from the customer and pay the customer interest on the amount invested in the security for the period from the original purchase to the resale back to the firm, minus any income or profit realized by the client on the security
The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an
Offer to sell the underlying security Because, they involve the payment of money to acquire the stock, thereby making them an offer to sell
A security offered under the USA's Private Placement Provision is exempt from full state registration if
Offered to 10 or fewer Non-institutional Investors in that state within 12 months
Universal variable life (or variable universal life)
Offers flexible premiums, variable death benefits, premiums invested in securities in a separate account, and no guaranteed cash value
Disadvantage to investor when buying No-Load Mutual Funds
Often lack of professional advice and service, since there are no loads or 12b-1 fees to compensate firms and professionals
Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? He will have a $1,000 loss to carry over to the next year. There will be no tax consequences. He will offset $1,000 ordinary income this year. He will have a $1,000 gain.
Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.
Which of the following is (are) required to register with a state Administrator? 1) Investment adviser representatives of federal covered advisers who have natural person clients and have a place of business in the state 2) A person who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation 3) An investment adviser registered in a different state and who has no place of business in the state, but has had fewer than 6 individual advisory clients in this state during the previous 12 months 4) A person who is an officer of a federal covered investment adviser and does not function as an investment adviser representative
Only the Investment adviser representatives of the federal covered adviser
Non-qualified Variable Annuity distributions are taxed as
Only the growth portion is taxed as ordinary income (LIFO)
A Federally Covered Investment Adviser (IA) serves clients in 3 states. The state(s) that have the right to examine the the IA's books is
Only the state in which the Investment Adviser's principal office is located
A portfolio that returns the highest rate of return consistent with the amount of risk an investor is willing to take The portfolio that makes the best trade-off between risk and reward for a given investor's investment profile = Simply stated given a choice between assets with equal rates of expected return, the one with the lowest level of risk will be selected
Optimal Portfolio
A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?
Options account
Firms do not accept emailed orders without
Oral verification from the client
Account number (not name) Execution price (once the order is completed) Time of entry and execution (or cancellation if it is a day order that is not executed) Terms and conditions (limit, market, stop, etc.) are included in the
Order ticket
Distributions from a Qualified Retirement Plan are treated as
Ordinary Income Tax
Qualified Variable Annuity distributions are taxed as
Ordinary income
The Securities Act of 1933 exempts securities issued by charitable or religious organizations are exempt from the registration and prospectus delivery requirements as long as the
Organizations are non-profit
The required minimum distribution (RMD) on a Qualified Domestic Relations Order (QDRO) is based on the
Original Plan participant's Age, not the recipient alternate payee's age
Experienced (and even rookie) investors tend to overestimate their ability and the accuracy of the information available to them
Overconfidence
Sector rotation is an investment strategy where an investor
Overweights or underweights certain sectors (e.g., technology, industrial, transportation, energy, etc.) based on expected performance in those sectors
Number of shares for conversion
Par Value / Conversion Price
Brochure part that must be sent to the SEC or Administrator within 90 days after the end of the fiscal year
Part 1A - Annual Updating Amendment to the form ADV
Brochure part that must be delivered to clients of all Investment Advisers before entering into an Advisory contract and within 120 days of the end of the fiscal year (when there are changes to it)
Part 2A - Investment Adviser's Brochure
The Pension Plan itself is not a security, but what about it is considered a security
Participation in a Pension Plan is a security
Summary of Notice and Consent
Partnerships IA's: - Must notify clients when there's a change involving minority of the partners - May only assign client contracts with client permission, assignment occurs when there's a majority change of partners Corporation IA's: - Do not have to notify clients of changes to shareholders - Assignment occurs if the majority of the stock is pledged as collateral for a loan
As of January 1, 2019, regarding Alimony payments
Party paying the alimony cannot deduct the payment Party receiving the payment will not report it as income
Both the Bypass trust and the Generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by
Passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the Generation Skipping Trust
In a perfectly efficient market, which investment strategy would be the most effective
Passive investment strategy
Limited Partners are best described as
Passive investors with no active daily role in the operations of the business
Can an employee of a Broker-Dealer participate in an IPO for their personal account
Per FINRA rules, no employee can participate in an IPO
Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. What is the necessary criteria?
Performance fees may be charged to anyone with a net worth in excess of $2.2 million or with at least $1.1 million under management with the firm One way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks
Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited These plans are discriminatory and there is no current tax saving, hence the term "deferred" As non-qualified plans, they do not have to comply with
Plans that do not comply with ERISA are
The Uniform Securities Act excludes from the definition of broker-dealer, a person who has no place of business in this state if he effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions, other broker-dealers, or banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers. Note: investment advisers are not included in this list
Please note that investment advisers are not included in this list. What is confusing is that the USA offers almost the exact same exclusion for investment advisers and that list includes other investment advisers as well as broker-dealers.
Variable annuities offer tax-deferred participation in the equity markets by offering
Pooled investments in the separate account When held inside an annuity, the pooled investments typically has higher fees than similar funds outside an annuity
A commitment to invest when the corporation's charter has been granted - No money changes hands - No holding period restrictions are placed - The number of subscribers is limited to 10 regardless of whether they are Retail or Institutional - Buyers are allowed to re-sale
Pre-organization Certificate or Subscriptions (Exempt transactions under the Uniform Securities Act)
Gold coins and bars are not securities they are
Precious metals
- Gives shareholders the right to purchase shares in new stock issues in direct proportion to the number of shares they already own at a price below current market price - Allows shareholders to maintain their proportionate share of ownership in the corporation (Avoid dillution)
Preemptive rights
Equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings
Preferred stock Best way to remember is to think of preferreds' as a hybrid between bonds & stocks
Purchase of what kind of security would not cause a wash sale violation
Preferred stock (Non-convertible) of the same issuer
Indicates the Value Today of a Future Cash Flow discounted at a specific interest rate
Present value
Investors will earn less when Reinvesting Interest Payments than at the time was the bond was issued if
Prevailing rates are lower today than at the time of issuance
The Dow Jones Industrial Average is a
Price-weighted average
What happens to outstanding fixed-income securities when interest rates decline?
Prices increase
A primary offering is an issuer transaction involving new securities An initial public offering is the first time an issuer distributes securities to the public Both of them occur in the
Primary market
An agency cross transaction occurs when an investment adviser acts as both adviser and broker-dealer and requires prior written approval from the client and special reporting requirements. The adviser cannot recommend the transaction to both parties, only one side or the other.
Prior written approval from the client and special reporting requirements The adviser cannot recommend the transaction to both parties, only one side or the other
- Large investment fund of sophisticated, high-net worth individuals who pool their assets to invest - All are exempt from the registration requirements of an investment company under the Investment Company Act of 1940 - These may include hedge funds and private equity funds
Private Investment Company (PIC)
- Offers to no more than 10 non-institutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly - Such transactions are exempt from registration requirements - The fraud provisions apply to any person involved with the purchase or sale of a security, whether registered or exempt, and the prospectus delivery requirements apply to registered securities - Please note that when it comes to institutional clients, there are no numerical limitations on offers, no required holding period, and no restrictions on payment of commissions
Private Placements
If information filed with the Administrator as part of investment advisers, broker-dealers, and securities registration changes in a material way, the registrant must
Promptly amend or update the information regardless of the renewal date
An investment adviser representative is meeting with a potential advisory client. Among the items of information the IAR needs to obtain in order to develop the proper plan are the prospect's
Proper investment planning involves saving for retirement and what steps are taken to reach that goal are influenced by the time remaining. Future plans are developed using current assets as the starting point.
Broker-dealers are far more likely to have custody arrangements than are investment advisers. When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to
Provide the customer with a receipt on the spot
- Keep copies of all confirmations sent to clients - Maintain a separate ledger for each client showing all purchases and sales - Arrange for a surprise audit by an independent public accounting firm at least annually and subsequently file a report of the examination with the SEC
Provisions of the Investment Advisers Act of 1940, for investment advisers that maintain custody of client securities
Modern portfolio theory (MPT)
Quantify and control portfolio risk across an entire portfolio of securities by diversifying away specific risk (i.e., the risk of any specific security) The goal of MPT is to construct the most efficient portfolio—that is, a portfolio that offers the highest return for a given amount of risk
Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security A bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock Market makers charge a markup or markdown
Quotes from Marker makers
The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.
Reasons why a corporation might issue a convertible preferred stock would include
Under the Investment Advisers Act of 1940, for how many years must records be kept after the end of the fiscal year in which an entry was made
Records must be kept for a full 5 years (governs records of business activities) The first 2 years in a in the firm's principal office — and are subject to SEC examination at any time
A successor firm registers by filing a new application and fees are paid if
Registration is with the SEC, and they are not payed if registration is with a state
- Taxes which represent a larger percentage of one individual's income versus another individual's income are said to be - A type of tax that consumes a greater percentage of one person's income over another person's income is said to be - Examples of these include sales and excise (gasoline & tobacco) taxes. These taxes will consume a greater portion of a lower income earner's wages as compared to a higher income earner
Regressive taxes
The investor prepares himself in such a way as to avoid distress over an adverse outcome
Regret aversion
The main purpose of dividend reinvestment in a mutual fund accumulation plan is to
Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested
A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to
Relates exclusively to securities issued or guaranteed by the U.S. government
If general interest rates increase, the interest income of a bond unit investment trust will:
Remain the same because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.
A principal adjustment on a TIPS investment due to an increase in CPI results in a
Reportable Ordinary Income Tax event in the year it was adjusted
Variable annuities issued by a major insurance company
Required to be registered
- The adviser may only accept an order from a third party if the proper trading authorization is in hand - The adviser may not provide a report or a recommendation to any advisory client prepared by someone other than the adviser without making a disclosure of that fact - Investment advisory contracts must be in writing
Requirements placed upon Investment Advisers registered at both the Federal & State level
- The Administrator must provide notice and give an opportunity to a hearing - If a hearing is held, the Administrator must provide written findings that support the disciplinary action
Requirements when a state Administrator subjects an individual to a disciplinary action
Which of the following actions should be taken by an agent when a client decides to open an options account?
Review with the client the risks involved when trading options before the first options trade It is imperative that suitability and risk be addressed with the client before allowing option trading to take place The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening An options account must be approved by a designated supervisor prior to any trading takes place in the account
The conviction of a BD's principal officer for a securities-related crime and a BD being unable to meet its obligations Are 2 causes that could lead to the
Revocation of the registration of a broker-dealer under the Uniform Securities Act
CAPM says that an investor is rational and risk-averse. Formula:
Risk Free Rate+ (Beta × (Market Return - Risk-Free Rate))
Required rate of return for any investment
Risk-free Rate (T-Bill) + Risk premium (CAPM)
If the beneficiary of a Coverdell account or a 529 college savings account does not have eligible education expenses (e.g., the beneficiary does not attend college), the funds in the account may be
Rolled into an Equivalent Plan for a family member of the beneficiary
- A minor can be named as a beneficiary on the account - Contributions into the account may be made after 72 provided there is earned income - Distributions are not required to begin at age 72 - Distribution taken because of a disability are not subject to Ordinary Income Taxes or Penalties
Roth IRA
Pure tax-free returns on investment occur in
Roth IRA's & Section 529 plans
The appropriate benchmark to assess the performance of a small-cap stock fund would be to compare its results against the
Russell 2000
Lamar is an investment adviser representative for Southeast Retirement Advisers (SRA), a wholly owned subsidiary of Southeast Retirement Solutions (SRS), a broker-dealer registered in a number of southeastern states. Lamar is also a registered agent with SRS. If one of Lamar's advisory clients sends a check made payable to SRS for a stock purchase, under NASAA's Model Rule on Custody
SRA is considered to be maintaining custody of client funds and securities Under the NASAA Model Rule, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded) IARs would never take custody, and there is no bonding requirement for IARs.
(1) Ability to select from at least 3 different investments (2) allow plan participants to change their investment options no less frequently than quarterly
Safe Harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must
The following 2 actions are included in the definition of what - Giving a security as a bonus with any purchase - Exercising a right to convert one security into another
Sale, under the Uniform Securities Act A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold When a right to convert or purchase a security is exercised, it is considered to be a sale
Mutual Fund Costs that investors pay upfront, when buying fund shares, are called
Sales Charges (loads)
Time limit for execution of: 1) day limit orders 2) Price and/or Time discretion orders
Same day
The Securities Exchange Act of 1934 regulates the
Secondary market and its employees and firms
Distributions from: - Can be tax-free for apprenticeships and will confer an industry recognized credential upon completion (generally 3 to 5 years) - The funds can be used for fees, textbooks and required trade tools for the role
Section 529 plans
1) securities issued by the state or U.S. government 2) securities issued by foreign governments with whom the U.S. maintains diplomatic relations 3) any securities issued by savings and loan or building and loan associations, insurance companies, and credit unions authorized to do business in this state
Securities exempt from registration requirements include under Uniform Securities Act
1) Exchange-listed stocks 2) Bonds 3) Warrants 4) Government securities 5) Municipal securities
Securities that can be purchased as margin and/or used as collateral
If secretaries or sales assistants accept customer transactions, take orders over the phone, or prequalified clients they are engaging in
Securities transactions and are required to registration as Agents There is no way for an individual to represent a Broker-Dealer in a securities function without being an Agent
To avoid commingling of customers and firms assets Broker-Dealers and Investment Advisors must segregate customers'
Securities which have no lien against them vs securities pledged as collateral in a margin account, which have a lien against them
Of the following which would be considered Securities and which Non- securities: Forward contracts, Futures contracts, Hedge funds, and REITs
Securities: Hedge funds and REIT's Non-securities: Forward & Futures contracts
An investor who is long a put option for 100 shares of ABC common stock has the right to
Sell 100 shares at the stated exercise price
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is
Selling at a premium A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6% The only way for a bond with an 8% coupon to have a Yield-to-Maturity of 6% is if the bond is selling at a premium
An Agent taking a part-time night job as a Securities Sales Person, without receiving permission of his firm is guilty of
Selling away: Violation that occurs when a registered representative offers investment opportunities not sponsored by the firm
When the IA's net worth is insufficient a notification must be sent to the Administrator
Send details the next business day
If a nonexempt company has authorized a stock split that will give each shareholder 2 shares for every 1 share owned without charge, this action
Shares issued as a result of a stock split need not be registered because the distribution of additional shares through a stock split or stock dividend is not within the definition of an offer to sell or a sale as long as no consideration (payment) is involved.
- Used to measure risk-adjusted performance of either a portfolio or an individual security - Uses standard deviation as the denominator in its formula: the higher the Sharpe ratio, the better the portfolio or security has performed on a risk-adjusted basis
Sharpe ratio
It measures the portfolio's return over and above the risk-free rate divided by the standard deviation of the portfolio's returns
Sharpe ratio The higher the Sharpe ratio, the better the risk-adjusted performance of the portfolio, and the greater the implied level of active management skill
You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct?
She may continue to contribute and her contribution will be tax deductible The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution
Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan, and after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral,
She would be engaging in an prohibited practice Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. Because a formal written agreement must be in effect, not just a one-time reward
Represents an obligation to purchase the underlying security at a specific price (strike price) during a specified time period (life of the the contract)
Short put
The London Interbank Offered Rate (LIBOR) is the worlds most commonly used benchmark for
Short-term (Overnight) lending - Used by Banks to lend to Savings Institutions
The portfolio manager of a bond fund believes that Interest Rates are going to increase in the near future. As such, it would be wise for that manager to:
Shorten the average duration of the portfolio
When the Investment Adviser directs a trade execution to a specific broker-Dealer and uses the commission dollars generated to acquire software that analyzes technical market trends, it is known as
Soft Dollar compensation is when an Investment Adviser derives an economic benefit from the use of a client's commission dollars
- No liability protection to the owner (i.e., no limited liability). The potential loss for the owner is unlimited because all personal and business assets are available to creditors (Would be changed to an LLC to reduce or eliminate personal liability) - Offers benefits to a small business because it is easy to create & offers single taxation - The business' income is reported on the owner's personal Form 1040 - All losses are offset against the business gains
Sole proprietorship
1) Name of the solicitor 2) Name of the investment Adviser 3) Nature of the relationship between the solicitor and the IA 4) Fact that the solicitor will receive compensation, terms of compensation arrangement, and whether the client will have to pay a higher advisory fee because of the solicitors recommendation
Solicitor's Brochure
1) The name of the solicitor 2) The name of the investment adviser 3) The nature of the relationship between the solicitor and the Investment Adviser 4) The fact that the solicitor will receive compensation 5) Terms of the compensation arrangement 6) Whether the client will pay a higher advisory fee because of the solicitors recommendation
Solicitor's Brochure must include
Part 2 of form ADV is designed to promote effective communication between the firm and its clients - The brochure should discuss any conflicts the adviser has or it is reasonably likely to have and practices in which it engages or is reasonably likely to engage - It must make full disclosure of all material conflicts of interest between them and their clients that could affect the advisory relationship
Some of the items include: 1) Description of the types of advisory services provided 2) Fees and compensation 3) Methods of analysis, investment strategies, and risks of loss 4) Disciplinary information 5) How you select or recommend broker-dealers for client transactions 6) Custody practices 7) Investment discretion
Is the statistic that indicates how much an investment's returns have fluctuated compared with its average returns over a given period of time
Standard deviation
In the context of the Capital Market Line (CML), the measure of risk is
Standard deviation (total risk)
Substantial Pre-payments of Fees: State vs. Federal
State covered adviser = More than $500 for a contract period of 6 months or more Federal covered adviser = More than $1,200 for a contract period of 6 months or more
Receipt of a check made out to a third party is considered as having custody over clients funds and/or securities at what level
State level
The provision that if the brochure is not delivered at least 48 hours in advance, the client has the right to a penalty-free withdrawal from the agreement. Applies to Investment Advisers registered at the
State level only
Clauses that limit the IA's liabilities for losses caused by events beyond its control (War, strikes, natural disasters, new government restrictions, market fluctuations, or communication disruptions)
Such provisions are acceptable by the SEC, because they do not attempt to limit or misstate the adviser's fiduciary obligations to its clients
The Uniform Securities Act, subjects to civil liabilities any person
Supervising those who violate the law But a supervisor may not be held liable if it can be proved that the supervisor used reasonable care to discover and prevent the violations and has no knowledge of the violations
- Firms that maintain net capital in excess of minimum requirements may be exempted from posting surety bonds - Agents exercising discretion over client accounts may be required to post a surety bond - The Administrator can accept securities instead of cash if the posting of a bond is required - The Administrator requires the posting of bonds primarily to cover the cost of civil liabilities associated with violations of the Uniform Securities Act
Surety bonds under the USA Act
Insufficient justification is deemed to exist for a state administrator to
Suspend the license of a registered officer of a broker-dealer, based upon her relationship with an investment advisor rep (IAR) of an unaffiliated investment advisor who is accused of a securities felony
Purchasing power risk & Interest rate risk are examples of
Systematic Risk (Un-diversifiable risk)
What kind of risk cannot be eliminated through the process of diversification or by increasing the number of securities within a portfolio?
Systematic risk
A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably
Take a long position in corn futures A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one. So, why not the long forwards? Those who purchase forwards contracts anticipate accepting delivery of the asset. This individual is merely speculating and has no interest in taking physical possession of the commodity and paying for transportation, silage, and insurance until the commodity is sold If the person in the question had been a user of corn (a cereal maker, for example), then the forward contract would have been a better choice
- Limited individual deductions for state and local taxes (referred to as SALT) to $10,000 - For high income individuals, this means that they will end up paying more federal taxes because they no longer receive the full state tax deduction on a federal tax return - The TCJA greatly increased the estate tax exclusion
Tax Cuts and Jobs Act (TCJA) of 2017 - Tax law change
- Deductions taken for accelerated (but not straight-line) depreciation; - Excess intangible drilling costs; - Capital gains on incentive stock options; and - Otherwise tax-exempt interest from specified private activity bonds
Tax preference items are added back to the taxpayer's ordinary income to arrive at the taxpayer's alternative minimum taxable income (AMTI)
The efficient market hypothesis is in direct contradiction to
Technical analysis Because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price The weak form claims that fundamental analysis works and the semi-strong form claims that inside information works True believers in EMH claim that none of these can outperform random selection
- After the policy ends, the policy does not accumulate cash value - Cheapest way to obtain life insurance - A life insurance policy that lasts for a set number of years
Term Life Insurance
During the Accumulation stage of a Deferred Variable Annuity, the investor is permitted to
Terminate the contract at any time, but a surrender charge may be applied by the Insurance Company
If an Agent terminates employment with a Broker-Dealer to join another Broker-Dealer, notification is required by
The 3 parties promptly through Form U5 to the Administrator
An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state upon discovery that the broker-dealer's license had been suspended in another state upon discovery of new facts unknown to the Administrator at the time of the broker-dealer's initial registration
The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal. An action against an agent of the broker-dealer does not allow the regulatory authority to also go after the broker-dealer. It is only when the question states that the individual is an executive or other supervisory person of the firm that action against the firm may commence unless that agent is a supervisor of the broker-dealer or part of the ruling indicated that there was a failure to supervise. The broker-dealer must disclose all suspensions by other regulatory agencies, including other states, to the state Administrator of its own state. A broker-dealer must also provide full disclosure of all relevant facts to the state Administrator concerning its registration.
An Investment Adviser registered with the state wishes to take custody of a client's funds or securities. What are the NASAA rules regarding how the Administrator should be notified
The Adviser must supply prompt notification to the Administrator by immediately updating its Form ADV
When agents sell exempt securities who does and does not need to be registered
The Agent must be registered The securities are not needed to be registered
When must an agent obtain a written Margin Agreement from a client
The Agent must obtain a properly executed written Margin Agreement from his client after the initial transaction in the margin account
A bond's NPV is most likely to be zero when its YTM (IRR) is equal to
The Current Market interest rate
If an IAR terminates employment with a Federal-registered IA, notification is required by
The IAR promptly through Form U5 to the Administrator
Who states the (Qualified domestic relations order) QDRO must contain certain specific information, such as: (1) The participant and each alternate payee's name and last known mailing address, and (2) The percentage of the participant's benefits to be paid to each alternate payee
The IRS
Requirements for Solicitors to register as IAR's at the Federal & State level
The Investment Advisers Act of 1940 and SEC rules do not require the solicitor to register as an IAR as long as the solicitor's activities are strictly limited to referring clients to a registered IA in compliance with SEC rules The majority of states securities regulators require the registration of the solicitor as an IAR
Who is empowered to take evidence, subpoena witnesses, administer oaths, and require the production of books and records in conducting a formal investigation
The SEC Setting bail is the function of a court
Under the Uniform Securities Act, Mutual Fund securities are registered with
The SEC only (Federally covered) State registration is not required for Mutual Fund shares, although Mutual Funds typically notice-file prior to issuance in each state
Under the Securities Exchange Act of 1934, the SEC has the authority to investigate violations of the following securities laws The SEC may investigate violation of the Securities Exchange Act of 1934. The SEC may investigate violations of the Securities Act of 1933. The SEC may investigate violations of FINRA's rules.
The SEC's regulatory mandate is only on the federal level. The Uniform Securities Act is under the jurisdiction of the states, not the federal government or one of its agencies. Because the SROs, such as FINRA, were created through amendments to the Exchange Act, the SEC has the ultimate authority over their rules.
The final determination on whether to bring a criminal action against a person for willful violation of a provision of the Uniform Securities Act (USA) rests with the
The State Attorney General will make the final judgement as to whether a criminal action will be brought against a person under the USA
A state securities Administrator may issue a ruling or order to comply with the blue-sky laws of the state and designate the use of certain forms, but he does not have authority to amend or alter
The Uniform Securities Act itself All rules and forms of the Administrator must be published
If a securities agent violates a provision of state securities law, the agent may be subject to civil liability, criminal penalties, and forfeiture of his surety bond Under civil liabilities, the customer can be made whole for the cost of the securities, the advice, the transaction, any attorneys' fees, less any income The maximum criminal penalties under the Uniform Securities Act are 3 years in prison and a $5,000 fine
The Uniform Securities Act provides for both civil and criminal liability
Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? An adviser who maintains custody over client funds and securities An adviser who, 6 or more months in advance, collects prepaid fees of more than $500
The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees.
Which of the following constitutes either an offer or a sale? Thomas is offered warrants by his registered agent as the best way to take a position in the XYZ Corporation. Peggy receives a gift of nonassessable securities. Marge, a wealthy client, receives salable stock in lieu of a cash dividend as a result of her large holdings in ABC. Mrs. Smith pledges her portfolio to secure a loan for her son who plans to use the proceeds of the loan to buy a major interest in a publicly traded company.
The agent who offered Thomas warrants has made an offer of securities under the USA. Mrs. Smith's pledge of securities to her son does not constitute a sale or offer to sell. Marge's receipt of a stock dividend is not a sale or an offer to sell because she did not get anything of value in return for the shares. A gift of nonassessable stock is not a sale, it is a gift.
Among the benefits of a revocable trust is that the grantor (settlor) retains all control over
The assets
A broker-dealer who gives advice for which he charges a specific fee An agent of a broker-dealer who gives investment advice within the course of his duties with the firm for which a fee is charged
The broker-dealer has to register as an IA the Agent of the broker-dealer has to register as an IAR
ABC Furniture Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the Administrator is unnecessary because the issue is exempt. Should ABC be ordered to appear at a hearing, the burden of proving its issue is exempt is on
The company In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption
Non-qualified plans do not provide a tax deduction to the employer until
The employee receives the economic benefit as income at some point in the future
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. What happens next?
The fund will liquidate shares to meet the additional sales-charge - An investor has only 13 months to meet a letter of intent commitment -Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. Which is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed
The collection of efficient portfolios is called the efficient frontier Which represents the set of portfolios that has the maximum rate of return for every given level of risk Any portfolio below the curve is is said to be taking too much risk, and any portfolio above the curve is not achievable (impossible)
The goal of the MPT is to construct an Efficient Portfolio; An efficient portfolio is one that offers (1) The most return for a given amount of risk (2) The least risk for a given amount of return
When a co-tenant in a TIC account dies, that individual's share of the account passes to
The individual's estate, not the other co-tenant - In a TIC account, each co-tenant has an undivided interest (specific securities in the portfolio are not designated to each co-tenant—they share ownership in the entire portfolio). - The ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%.
Impressed by a televised interview with a fund manager, a client calls an adviser at 10 AM to purchase shares. The fund's NAV per share is $30.00 and there is a 5.00% sales charge. If the NAV remains the same at the end of the day what price would the investor pay
The investor would pay the Public Offer Price (POP) POP = NAV / (1 - sales charge) POP = 30 / 0.95 POP = $31.58
Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million.
The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.
An agent for a broker-dealer receives a buy order from an investment advisory firm on behalf of its clients. The order is to purchase 5,000 shares of XYZ common stock at the market. The adviser informs the agent that once the purchase is completed, the account numbers and quantities for each individual client will be supplied. The buy is completed, but at various prices. How is the order allocated to the adviser's accounts?
The order is reallocated to the investment adviser's clients by using the average cost basis This is not an uncommon practice where an investment adviser has the ability to direct clients' orders to a specific broker-dealer. In many instances, the adviser will be purchasing (or selling) the same security for a number of different clients and, rather than turning in a large number of small orders, enters the trade as one large order. If, as in this case, the order is filled at different prices (particularly prevalent today with decimal pricing), then both state and federal rules require that an average price method be used.
Commodities contracts are not securities unless
The underlying asset is a security
Is an investor's total return if they purchase the bond at any point and then hold it until maturity, assuming all interim cash flows are reinvested at that same yield. This, therefore, takes into consideration any capital gain or loss and therefore the yield to maturity will fluctuate with the bond's price.
The yield to maturity (YTM)
What bond yields represent
The yield to maturity (YTM), or internal rate of return, of a bond is the total return earned on a bond that is held to maturity. A major assumption when calculating YTM is that all interest payments on the bond are reinvested at the calculated YTM The NPV indicates how the market price of the bond compares to its present value. The real rate of return, often called the inflation-adjusted return, compares the actual return with the inflation rate he annualized return is the return an investor would have received had he held
A hedge fund and a traditional mutual fund are similar in that
Their portfolio managers are required to adhere to the fund's stated objective Both hedge funds and mutual funds have stated objectives. It is expected by owners that the management will follow those objectives. Only the hedge fund always has performance incentives, and only the mutual fund has a low initial investment requirement. Mutual funds are prohibited from selling short.
One major difference between S corps and C corps is
Their taxation -C corps pay corporate income tax -S corps do not pay corporate income tax - Both offer owners limited liability (i.e., shareholders in a C corp, members in an S corp)
If there a re no material changes, then nothing- not the brochure nor the brochure supplement, nor the summary- Actions that would require changes be made to the brochure: Disciplinary action against the IA
Then no new brochure & summary must be sent
One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate.
There are two problems here 1) Any investment in a qualified plan (or IRA), must be for future use (or else it would be considered a distribution subject to tax) 2) Real estate may be used prior to your retirement, but not by "related" parties. Because the parents will be using the property, they are considered prohibited persons.
The Uniform Securities Act provides for both civil and criminal prosecution. In which of these cases might an agent face civil liability? - A sale was made of an unregistered nonexempt security. - During a sales presentation, the agent misstated a material fact that resulted in the prospect deciding to make the purchase. - The agent was included in the judgment along with the broker-dealer for a civil infraction.
These are all cases for civil, not criminal liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case.
Beneficiaries of a trust are not allowed to place trades in trusts brokerage account unless
They have a written power of attorney granted by the trustee
Securities listed on most major US Stock Exchanges are exempt from registration because
They're Federally Covered under the Uniform Securities Act (USA)
Equity REIT, Mortgage REIT, & Hybrid REIT
Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond Equity REIT's: Owns property, and like stocks it offers the possibility of income (rental money) and potential for capital gains (by selling the property) Mortgage REIT's: Offers the possibility of income like a bond through interest Hybrid REIT's: Contains the features of both an equity REIT and a mortgage (debt) REIT
A guaranteed security is one that has a
Third party other than the issuer (such as an insurance company or a parent company) who guarantees the payment of principal, interest, or dividends
A Broker-Dealer providing a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The BD, in this instance sends the customer a list of specific securities the customer could buy or sell to meet the investment goal the customer has indicated
This communication falls within de definition of a recommendation
A Broker-Dealer uses data-mining technology to analyze a customer's financial or online activity- whether or not it is known by the customer- and then, based on those observations, sends specific investment suggestions that the customer purchase or sells a security
This communication falls within de definition of a recommendation
The Bank Secrecy Act requires every financial institution to electronically file through the Department of the US Treasury, a Currency Transaction Report (CTR) on FinCEN Form 112 for each transaction that exceeds $10,000 within 15 days of receipt of the currency.
This requirement applies to 1) Cash transactions used to pay off loans 2) The electronic transfer of funds 3) The purchase of certificates of deposit, stocks, bonds, mutual funds, or other investments 4) Wire transfers of $3,000 or more
A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in
Those states where the registration was coordinated
Can Government and municipal securities can be purchased on margin and used as collateral
Though exempt from Reg T (because they are are exempt securities) government and municipal securities can be purchased on margin and used as collateral
Without consideration to any additional deposits or withdrawals made by the customer. It is an analysis that shows the performance of the investments and the manager
Time-weighted returns
1) Agreement must be in writing 2) Provide for disclosure of any affiliations between the adviser and the solicitor (Unless the solicitation is being made for impersonal advisory services) 3) Provide that no one subject to statutory disqualification be compensated 4) Follow a script approved by the adviser 5) Provided that, in addition to the adviser's brochure, a solicitor brochure be delivered as well (third party)
To make cash payments to solicitors, the agreement must:
Dollar cost average formula
Total dollars invested / Number of shares purchased
Inflation-Adjusted Return
Total return - CPI
Violation that occurs when an Agent trades or makes a recommendation based on knowledge of an unpublished research report, its content, or timing
Trading ahead To distinguish trading ahead from insider trading. Notice that with trading ahead the agent doesn't have access to actual Non-public information, but knowledge that it exists
Investments in REITs or newly minted, government-issued gold and silver coins can be found in a
Traditional IRA, which have required minimum distribution beginning on the April 1 of the year following one's 72nd birthday
- Account designation enabling transfer of account assets upon the account owner's death - While living, the account owner is the only party who is authorized to make trades in the account
Transfer-on-Death (TOD)
All qualified retirement plans must be established under a
Trust agreement Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.
Organization that maintains a list of known or suspected terrorists that must be checked when a firm verifies a New Customer's Identity
US Treasury - Office of Foreign Assets Control (OFAC)
Adjusted-Rate Preferred Shares provide
Uncertainty of the level of dividend that will be paid
When a dividend is paid, Working Capital is:
Unchanged: Assets and Liabilities both decrease by the same amount; offsetting each other - Current Assets falls (Cash paid) - Current Liabilities falls (Dividend payable is gone)
Under the Uniform Transfers to Minors Act, Ralph wants to give some stock to his brother's son, Jose. Jose's father, Bob, is the legal guardian, but he has failed the Series 7 exam 11 times. Who can be the custodian
Under UTMA, a custodian is required. Any adult can be the custodian and there are no other specific requirements, nor does the custodian have to be a member of the family.
A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A) Because we can allow all of the jointly held property, this client has the necessary net worth to qualify for a performance-based compensation program. B) Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program. C) Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. D) Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program.
Under federal (and state) law, in order to qualify for a performance-based compensation program, the client must have either $1.1 million in assets managed by the adviser or a net worth in excess of $2.2 million. This requirement is described in Rule 205-3 of the Investment Advisers Act of 1940 and the NASAA Model Rule makes reference to the federal rule. If using joint assets, only those with a spouse are allowed. Please note: This differs from meeting the net worth standard as an accredited investor. Under Rule 501 of Regulation D of the Securities Act of 1933, one can use assets owned jointly with persons other than a spouse to qualify as an accredited investor, but only to the extent of the percentage ownership of the account or property.
Checks made payable to an unrelated third party are returned to the customer by the Adviser within 3 business days of receipt. This adviser is said to have
Under the NASAA Model Custody Rule, whenever an Investment Adviser receives customer checks made to an unrelated third party the Adviser is considered to be maintaining custody
- Requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale - It is not required that purchasers receive a red herring prospectus - Only the SEC gets copies of the registration statement
Under the Securities Act of 1933, sometimes referred to as the "paper act"
Under the Uniform Securities Act, one method of securities registration is qualification. When that method is used, which of the following statements is The registration is valid for 1 year from the effective date unless the underwriter or issuer still has some unsold shares. The registration statement may be amended to increase the number of shares in the offering as long as the public offering price and the underwriter's compensation is not changed.
Under the USA, when a security is registered, the registration is valid for 1 year after the effective date. However, the act provides that if the issuer or underwriter still has unsold shares from the offering, the effective date may be extended, so this is a more accurate choice. The act also allows the registration statement to be amended to allow for an increase in the number of shares to be offered as long as the public offering price and the underwriter's compensation is not changed.
- The USA prohibits an investment adviser from acting as principal or agent in a transaction with an advisory client without approval prior to completion (settlement) of the trade - There is nothing wrong with agency cross transactions as long as disclosure is made and the trade is recommended to only one of the parties by the adviser - Anytime a broker-dealer acts in an agency capacity, the amount of the commission must be disclosed on the trade confirmation - There is no prohibition against an individual being an IAR of an investment adviser and an agent of a totally unrelated broker-dealer.
Under the Uniform Securities Act
(1) Pre-Organization certificate (2) Certificate of deposit for a security (3) Oil and gas drilling program (4) Cattle feeding program
Under the Uniform Securities Act all of these are securities
Which of the following situations would require registration as an investment adviser? A broker-dealer provided investment research services to a customer and charged a fee for the service. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I and III B) I, II, III, and IV C) I only D) I, III, and IV
Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.
Under the Uniform Securities Act, prepaid advisory fees
Under the Uniform Securities Act, prepaid fees are permitted if they are detailed in the advisory contract and there is a refund of the fees if the contract is canceled prematurely If an adviser accepts more than $500 in prepaid fees, 6 months or more in advance of services, a balance sheet must be included in the brochure (Part 2 of Form ADV) given to customers
Pattern of unreasonable and unjustifiable delays in the delivery of securities and/or in the payment upon request of free credit balances to its customers
Unethical Delivery Delays by a Broker-Dealer
The failure of a broker-dealer employee to register as an agent in the state, as necessary, is a violation of the
Uniform Securities Act (USA)
Life Insurance that has flexible premiums and, depending on the option chosen, the death benefit can increase
Universal life Insurance
If a client wishes to purchase a life insurance policy that doesn't invest in the market, but allows the holder to pay additional premium if desired, the recommendation is
Universal life does not invest in the market through a separate account That is only true of life insurance policies using the word "variable." These policies are frequently overfunded (premium over the required amount is paid-in by the policyowner) Term life cannot be overfunded and annuities of any type are not life insurance policies.
Under the USA, an investment adviser's current clients must be delivered a brochure annually whether or not the adviser has custody or discretion
Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.
One way in which futures contracts differ from options contracts is that
Unlike options contracts, where only the seller of the option is obligated to perform (if the option is exercised) Both parties to a futures contract are obligated to fulfill the terms
Describe the advantage of using an UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages
Unlike the ESA where couples earning in excess of $220,000 per year are not eligible to contribute, no such ceiling is imposed on those donating or transferring property to an UTMA Unlike the ESA, where there is a 10% tax penalty on the earnings withdrawn for non-qualified educational expenses, no such penalty applies to an UTMA Unlike the ESA, which has a $2,000 per year per child limit, there is no limit to the amount that one can give to an UTMA Note: Unlike the ESA, where all earnings are tax free if used for qualified educational expenses, earnings in an UTMA are taxable and, if over a certain amount, might be taxed at the parent's top marginal rate
When is a Durable Power of Attorney automatically considered terminated?
Upon death of the party
- Part 1 used for Regulatory purposes - Part 1B used by State-registered Investment Advisers - Part 2A & 2B = firms brochure - Part 2, Appendix 1 used by Investment Advisers offering Wrap programs
Uses of Form ADV
Determine how much life insurance is sufficient to complete the customer's financial objective should he die before it is met.
Using an insurance approach to capital needs analysis (technique used to determine how much life insurance an individual needs)
In which of the following situations is an agent committing a prohibited practice? Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account Buying a security on behalf of a customer and then reselling it before the customer has paid for it Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority
Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority Written receipt of trading authority is required before conducting any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits the client from making his own trades.
- Minimum death benefit is guaranteed - No cash value is guaranteed - Contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance, but no physical is required - Ability to borrow a minimum of 75% of the cash value once the policy has been in force at least 3 years
Variable Life Insurance Policy
- Policy must have been in place for 3 years & at least 75% of Cash Value must be available - If insured dies or surrenders with a policy loan outstanding the Death Benefit is Reduced by the loan amount - Interest rate of the Loan is stated in the Insurance Policy
Variable Life Policy Loans Policy holder is never allowed to loan 100% - this is considered a Surrender
Sale of a Life Insurance Policy to a third party to provide cash for an immediate medical expense is called a
Viatical settlement
Standard Deviation is a measure
Volatility measure of a security compared to its Expected Return SD is computed using Historical Performance Data SD = Systematic + Un-systematic risk
If you encounter the following statement: "The client agrees to waive rule violations by the IA (or other securities professionals". Answer has to be
Waivers to the implied fiduciary responsibilities inherited by IAR's to clients are never permitted
The state administrator is not deemed to have jurisdiction over a securities transaction when the sale
Was monitored by the supervisor of the agent from within their state
Assignemnt
When an Investment Advisor is sold their contracts with clients have been assigned to the new buyer This does not mean that the clients have to approve of the sale; they only have to approve of letting the new owners mange their money. They can decide to take their money elsewhere Assignment also includes any direct or indirect transfer or pledge of an investment advisory contract by the adviser or of a controlling block if the adviser's outstanding voting securities by a stock holder of the adviser If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the partners or from the admission to the adviser of one or more partners who, after admission, will be only a minority interest in the business While a change to a majority would be considered an assignment A reorganization or similar activity that does not result in a change of actual control or management of an investment adviser is not an assignment
One of your clients has just completed a divorce. The client is a participant in a 401(k) and has a traditional IRA. The divorce settlement includes a QDRO providing for half of the client's account to go to the ex-spouse. The ex-spouse also receives half of the client's IRA. With regard to the ex-spouse, which of the following statements is correct? A) The ex-spouse has 60 days to rollover the distribution. B) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty. C) The name of the former spouse must appear on the ex-spouse's IRA. D) Withdrawals from the 401(k)prior to age 59½ may be subject to the 10% penalty.
Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty. QDROs apply only to qualified plans and, therefore, if the ex-spouse withdraws funds from the 401(k) prior to age 59½, it will generally qualify for the exemption from the 10% penalty. In the case of withdrawals from the IRS, unless due to one of the allowable exceptions (death, disability) the 10% tax penalty applies. When there is a divorce and an IRA is split, the ex-spouse now has an IRA in his or her name with no mention of the previous owner. There is technically no distribution so there is nothing to rollover.
May an individual take a Tax Deduction from a Margin Interest Expense incurred in a margin account?
Yes, except if the margin loan is used to finance Municipal Bonds. Due to the tax-exempt nature of Municipal Bond Interest
Can an Investment Adviser Representative (IAR) of a Federal Covered Investment Adviser (IA) who is only registered in 1 state conduct advisory activities in other states without registration?
Yes, if Joe does not have a place of business in those other states The number of clients would not be relevant in this scenario.
Because a trust account is managed for the beneficial interest of the beneficiary, can the investment adviser representative handling the account have a check drawn on the account payable to the trustee for trustee expenses?
Yes. A trust account must be managed by the trustee and not by the beneficiary, because of this the trustee can be reimbursed for trustee expenses that are reasonable Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document
An investor seeking the highest total return would consider which yield as the most important when evaluating different bonds
Yield to Maturity (YTM)
- Interest payments to be received - The length of time to the call - The current price - The call price Are all required to calculate the:
Yield-to-Call
What yield represents a bonds Internal Rate of Return
Yield-to-Maturity (YTM): Discount rate that equates to the discounted value of the bonds future cash flow to its current market price
When all coupons are Re-invested at the coupon rate, what yield would be equal to the bonds Holding Period Return
Yield-to-maturity (YTM) - If interest rates rise & coupons are re-invested, the HPR will exceed the YTM - If interest rates fall & coupons are re-invested, the HPR will be lower than the YTM
The Seeking Alpha Growth Fund directs a sizable portion of its portfolio executions to your broker-dealer. If the firm has this fund on its highly recommended list, this would be
a conflict of interest that would have to be disclosed Recommending shares of a fund when the broker-dealer is aware that a policy exists to direct brokerage to them is an obvious conflict of interest and would have to be disclosed.
As defined in the Uniform Securities Act, the term "offer to sell" would include
a gift of warrants. Even though a gift is not normally a sale or an offer to sell, when it is of a warrant, a right, or any convertible security, it is considered to be an offer to sell the underlying security. Although a gift of assessable stock is considered both a sale and an offer to sell, a gift of nonassessable stock is simply a gift. A sale of Treasury bonds is a sale, not an offer, and the attempt to sell gold coins is an offer to sell, but not of a security, and the USA is only concerned with an offer to sell a security.
Alexander Wimpton is registered as an agent with WorthMore Securities, a broker-dealer registered with the SEC and 10 states. Wimpton is also an investment adviser representative (IAR) with their wholly owned subsidiary, WorthMore Investments, a federal covered investment adviser. Many of Wimpton's advisory clients also maintain brokerage accounts at WorthMore Securities. If one of those clients were to call Wimpton and enter an order to purchase shares of a stock the broker-dealer is selling out of inventory,
consent of the client would not be necessary as long as the only capacity in which Wimpton was acting was that of an agent Only when acting in an advisory capacity is there a requirement to obtain client consent when selling out of inventory In this case, unless there was a statement to the effect that the security had been recommended by Wimpton, this is just a brokerage transaction and consent is not necessary (although the principal capacity would have to be stated on the trade confirmation) Because this is a principal transaction, there is no commission, only a markup.
A client of a broker-dealer calls his agent and submits an order to purchase 1,000 shares of a Peruvian copper mining company. As the order ticket is being prepared, the agent notices that this is a nonexempt unregistered stock. The agent should
continue to process the order because this is an exempt transaction Transactions resulting from unsolicited orders are exempt under the USA. Therefore, this order may be taken as placed.
As with all investors, it is important that trusts have an investment policy statement (IPS). If the beneficiary of a trust requests that the trustee use trust assets to enter an order that is considered a prohibited transaction under the IPS, the trustee should
follow the trust's IPS and refuse the order A trustee is the classic example of a fiduciary - one responsible for handling the assets of another person. It would be considered imprudent for the trustee to engage in any transaction specifically prohibited by the IPS
Using the powers granted under the Uniform Securities Act, the Administrator would have the right to deny the registration of a broker-dealer
if the broker-dealer's membership in the FINRA was revoked because of a violation of FINRA rules This is tricky because the USA only permits an Administrator to take action against a person convicted of a securities violation in another state if that action would be a violation in his state However, when the license is revoked on a federal basis, whether through the actions of the SEC or a national SRO like FINRA (the exam may still use NASD), it would be cause for denial by the Administrator even when the action involved is not a violation in his state
Total return
income (dividends or interest) + gain or loss / Original investment
Out-of-state investment advisers with no office in this state are not required to be registered if only advising
insurance companies, registered investment companies, banks or other institutional investors, broker-dealers, and other investment advisers. It is not the securities they advise on but their clients that count. Out-of-state investment advisers with no office in this state must be registered under the Uniform Securities Act unless their only clients are insurance companies, registered investment companies, banks or other institutional investors, broker-dealers, and other investment advisers.
One of your clients has told you that his employer has just instituted a Roth 401(k) plan. If the employer wishes to make matching contributions,
it may contribute a specified percentage of the employee's pay to a regular 401(k) In order to have matching contributions, participants in a Roth 401(k) plan must actually have 2 accounts—the Roth and a regular 401(k) The employer contributions are made on a tax-deductible basis to the regular 401(k) and are fully taxable upon withdrawal
As long as consent has been granted by the client and the employing broker-dealer, an agent may share in the profits and losses in the client's account without the need to
make a financial contribution to the account.
Harry Thomas has turned 19 and decided that he is going to join the Marines and postpone going to college. If Harry decides to stay in the military, the unused funds contributed to his Coverdell ESA
may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia Funds that are not used for qualified education expenses may be withdrawn, but the earnings are subject to income tax plus a 10% tax penalty. To avoid this, the IRS permits the funds to be transferred into another Coverdell ESA for someone related to the first beneficiary (Harry), who is under 30 years of age. In the case of the Section 529 plan, the transferee has no age limitations. Related parties include immediate family members of the original beneficiary, parents, cousins, aunts and uncles, and even in-laws. If funds remain unused in the Coverdell ESA, they must be distributed to the named beneficiary on the account by 30 days after the child's 30th birthday, not the 21st. By statute, there is no age limit for the Section 529 plan, but some states set a time limit for distribution of unused funds. In either case, there would be the tax and penalty.
An employer whose 401(k) plan complies with ERISA Section 404 is placing investment risk with the
plan participant
An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when
receiving a check made payable to that broker-dealer Under the NASAA Model Rule on Custody Requirements for Investment Advisers, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded). Discretion is not custody and the method of compensation has nothing to do with custody. Don't confuse that with the case where the IA can debit the client's account for fees—that would be custody—but whether the fees are hourly, performance-based, or any other method is not related to custody.
The Uniform Securities Act provides for all of the following EXCEPT A) criminal penalties for violations of the act B) exemption from registration for federal covered securities C) specific civil penalties for up to 3 times the amount of money invested for willful violation of the act D) subpoena power for the state Administrator
specific civil penalties for up to 3 times the amount of money invested for willful violation of the act The Uniform Securities Act provides for criminal penalties of up to 3 years in prison and/or $5,000 in fines. The act describes civil liability, not specific civil penalties. Civil liability includes interest costs, rescission of trade, payment of attorney's fees, and return of principal invested. The act makes no reference to penalties of 3 times the amount of money invested. The Uniform Securities Act does provide the state Administrator with the power to issue subpoenas.
Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with A) capital losses. B) losses on options positions. C) tax preference items. D) gains associated with variable annuity portfolios.
tax preference items. Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private purpose municipal revenue bonds. Another example is accelerated depreciation. These types of items are known as tax preference items. For investors who are subject to the alternative minimum tax (AMT), the benefits normally associated with tax preference items are lost, because these items must be added back into the investor's taxable income
Under the Uniform Securities Act, a nonexempt transaction may take place in the state only if
the security is registered, exempt, or federal covered
A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if A) the friend is an employee of the advisory firm B) the friend is a client of the adviser's firm C) There are no exceptions D) the solicitations are for impersonal advisory services
the solicitations are for impersonal advisory services Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.
An applicant for registration as an IAR in this state was convicted 4 years ago of a nonfinancially related crime in another state. Under that state's laws, the crime was a misdemeanor, but under this state's laws, it is a felony. When viewing this IAR's application, the Administrator will
treat the crime as a non-financial misdemeanor Even though the crime is a felony in the state where registration is being sought, the applicant's record shows a misdemeanor and, therefore, this individual would not be subject to statutory disqualification.
Most qualified retirement plans and life insurance policies require naming a designated beneficiary (or beneficiaries). Upon the death of the participant, the account proceeds are distributed
without going through the probate process This is done without regards to the terms of the will
Stock dividends, Mergers, and Bona Fide loans
would not be included under the Uniform Securities Act as an offer to sell
Exclusions from Investment Adviser - State Level
1) Banks 2) Lawyers, Accountants, Teachers, Engineers 3) Broker-dealers 4) Publisher of any bona fide newspaper, news magazine, or other publication of general circulation 5) Investment Adviser representatives
A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act,
- Canadian broker-dealers and their agents must be registered in any state in which they wish to do business with existing clients who are temporarily in the state - The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States - In order to qualify for the limited registration, the BD must be properly licensed in its home province and their only dealing in the states is with an existing client
There is an exemption from the registration requirements of the Investment Advisor's Act of 1940 for those advisors who operate on an "intrastate' basis only:
1) All clients are residents of the 'home' state of the advisor 2) They have no offices in other states 3) Advice is provided on securities not listed on national exchanges
Exclusions from Investment Adviser - Federal Level
1) Banks 2) Lawyers, Accountants, Teachers, Engineers 3) Broker-dealers 4) Publisher of any bona fide newspaper, news magazine, or other publication of general circulation 5) Any person whose advise relates solely to securities issued or guaranteed by the US government
Business origination records, such as partnership articles, charters, and the minute books of the advisor must be preserved for
3 years post termination of the business
A final order may not involve any
A Monetary sanction not a part of the issuance of a final order
When a broker-dealer receives a delivery of securities or funds from a client,
A broker-dealer must always provide a receipt, confirming that specific securities or funds have been received as of the specific date
A firm provides advisory services for commodities and real estate. This firm
Is not providing advice about securities, as commodities and real estate are not securities Therefore, the firm is not required to register as an investment advisor.
IA State registration AUM requirement
Less than $100 million AUM generally registers with the states
A FINRA member firm is required to provide a customer with a current copy of its privacy notice
Must be provided to clients when the new account is opened and on an annual basis thereafter
When effecting agency cross trades, an investment advisor
Must have prior written consent from both parties and may recommend the security to 1 party only
State Filing of Advertisiments
No filing for exempt securities or transactions Otherwise file with the Administrator
Federal Private Placement Exemption
Sold to up to 35 non-accredited investors under Rule 506(b) Exclusively sold to accredited investors under Rule 506(c)
Federal Statute if Limitations for Civil Actions
Sooner of 3 years after the sale or 1 year after discovery
State Statute if Limitations for Civil Actions
Sooner of 3 years after the sale or 2 year after discovery
An IAR of a federal covered advisor would be required to register
The IAR of federal covered advisor must register in those states where they conduct an investment advisory business
A contract for the delivery of purely impersonal advisory services (Ex: providing a market letter or general industry information)
The Investment Advisor is not required to deliver a brochure
State Private Placement Exemption
Up to 10 offers within the state over a 12-month period The term accredited investor is meaningless. Institutions are not counted nor restricted
When a state-registered investment advisor observes that it now qualifies for federal registration status (greater than $110 million in AUM), it must
Withdraw its state registration and register with the SEC within 90 days
