Simulated Exam 3

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires date of birth while the regulators only require proof of legal age. B) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts. C) the CIP requires a statement of the customer's goals while the regulators only require current financial information. D) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box.

a

Under the Uniform Securities Act, each of the following statements regarding a sale, an offer, or an offer and sale is true except A) a bona fide pledge is considered an offer and sale. B) a purported gift of assessable stock is considered to involve an offer and sale. C) every sale or offer of a warrant or stock right to purchase or subscribe to another security is considered to include an offer of the other security. D) any security given or delivered, with or as a bonus for any purchase of securities, is considered to have been offered and sold for value.

a

Which of the following is not an annuity purchase option? A) Periodic payment immediate annuity B) Periodic payment deferred annuity C) Single premium immediate annuity D) Single premium deferred annuity

a

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, I. the RMD from each IRA is computed and may be made from one or both of them II. the RMD from each IRA is computed and must be paid from that IRA III. both 401(k)s are combined to compute the required distribution, which may be made from one or both of them IV. the RMD from each 401(k) is computed and must be paid from that 401(k) A) I and IV B) II and IV C) II and III D) I and III

a For RMD purposes, each IRA is figured separately and the distribution is made from one or all of them. That is no the case with a 401(k) plan. Each account has an RMD that can only be paid from that account.

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that A) the bargain element of the ISO is an AMT preference item. B) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee. C) gains on an ISO are always short term, while those on an NQSO are long term. D) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years.

a The only true statement here is that the bargain element (the difference between the current market price at the time of exercise and the strike price) of the ISO (but not the NQSO) is one of the preference items for the alternative minimum tax. It is the bargain element of the NQSO that is reported as wages and it is possible, although difficult, to have long-term capital gains on both. Only the ISO has a maximum time limit and it is 10 years, not 5.

If a person not registered in a state knowingly makes a misleading filing with the Administrator, that person may be A) fined $5,000. B) fined $10,000. C) imprisoned for five years. D) excused from liability because the person is not registered.

a Willful violation is punishable by a fine of up to $5,000, imprisonment of up to three years, or both. A state Administrator has jurisdiction over any transaction conducted in that state and over all applications filed in the state.

Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) A Roth IRA B) An UTMA account C) A Coverdell ESA D) A prepaid tuition plan

b 20% of the UTMA is counted, while only 5.64% of a 529 plan is counted.

If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of liquidity B) Loss of principal C) Changes in interest rates D) Loss of diversification

b 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 falls, subjecting the owner to loss of principal.

Which of the following statements regarding callable bonds is correct? A) They offer lower yields than comparable noncallable bonds. B) They usually provide a call risk premium. C) They are only issued by government entities. D) They are unaffected by changes in market yields.

b Callable bonds are normally called only when interest rates fall. The call premium (a percentage above par value that the issuer will pay when called) helps to compensate bondholders for the lower interest rate at which they will be able to reinvest the proceeds. Callable bonds have greater risk for investors (call risk) and therefore offer higher yields than noncallable bonds.

Which of the following investments is not registered under the Investment Company Act of 1940? A) FACCs B) ETNs C) UITs D) ETFs

b ETNs, sometimes called equity-linked notes, are registered under 33 as debt instruments.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 40% B) 28.6% C) 64.3% D) 22.2%

b the DE ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets - liabilities) plus the long-term debt

A high-risk investment strategy is the short sale of stock. Each of the following is a method of offering some degree of protection except A) selling a put on the short stock. B) buying a call on the short stock. C) buying a put on the short stock. D) entering a buy stop order for the short stock.

c

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of A) 45 days B) 18 months C) 24 months D) 12 months

c

One reason for including commodities in an investment portfolio is because they have a high correlation to A) the stock market. B) the bond market. C) the inflation rate. D) the U.S. dollar.

c

Opening a margin account involves significant documentation. Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change? A) The interest computation agreement B) The loan consent agreement C) The credit agreement D) The hypothecation agreement

c

Trade confirmations sent by broker-dealers to their customers must always include A) the tax identification number of the customer B) the amount of markup or markdown charged C) the amount of commission charged D) the current market price of the security traded

c

A pooled investment fund buys all the shares of a publicly-traded company. The fund takes the company private, reorganizes the company, and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as A) a leveraged ETF. B) a hedge fund. C) a private equity fund. D) a venture capital fund.

c A private equity fund or buyout fund is one that acquires entire public companies, takes them private, and reorganizes the companies to increase their value. A hedge fund will rarely get involved with reorganizing an existing company. Venture capital funds invest in start-up companies. Leveraged ETFs do not take part in the management of their investments.

Which of the following is not true regarding the antifraud provisions of the Securities Exchange Act of 1934? A) The act prohibits the spread of false rumors to induce others to trade. B) The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading. C) The act bars the use of arbitrage by broker-dealers. D) The act proscribes the use of wash trades.

c Arbitrage is legal.

One of your clients buys 300 shares of RIF common stock in March at $25 per share. Three months later, the client purchases 200 shares of RIF at $30 per share. One month later, RIF pays a dividend of $1 per share. Then, five months later, another purchase of RIF is made—this time 400 shares at $35 per share. If the client were to sell all RIF at $30 per share, what is the client's capital gain or loss? A) $500 gain B) No gain or loss C) $500 loss D) $400 gain

c Cash dividend has nothing to do with capital gain or loss.

Which of the following activities would violate the Uniform Securities Act? I. An investment advisory partnership admits a renowned securities analyst to the partnership without informing its clients of this highly desirable addition. II. An investment adviser incorporated in California fails to inform its clients of the departure of the chief financial officer, who did not have an equity position in the firm. III. An investment advisory firm incorporated in Illinois charges clients a share of the capital gains on the basis of a guaranteed performance level above a designated benchmark. IV. An investment advisory firm assigns those accounts that fall to a low level to other firms willing to accept them with the consent of the account holder. A) II and III B) I and II C) I and III D) I, III, and IV

c Investment advisers who are partnerships must inform their clients of any change in the membership of the partnership within a reasonable period. Unless the question refers to a specific exemption, it is a violation of the USA for an advisory firm to charge on the basis of performance. An investment advisory firm may assign accounts to another firm with the consent of the client.

According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, all of the following practices are considered unethical for an agent except A) selling 3,000 shares of ABC at a price the agent determines is the best the client can get, without oral or written discretionary authority. B) determining the quantity of a specific security to purchase once the client has designated that security and the action to be taken. C) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. D) receiving written discretionary authority from a client within 10 business days of first executing a discretionary trade with oral authority from the client.

c 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. Discretionary authority must be received by agents in writing prior to any discretionary trading taking place in the account. Please note that it is investment advisers and their IARs, not broker-dealers and their agents, who are allowed to use oral discretion for the first 10 business days after the initial discretionary trade

An issuer properly files Form D in accordance with Rule 503 of Regulation D of the Securities Act of 1933. As such, the securities that are the subject of any transaction are A) required to register with the SEC. B) required to register with the state(s) in which they are sold. C) federal covered securities. D) available only to institutional purchasers.

c Securities sold under Regulation D of the Securities Act of 1933 are private placements and, under the NSMIA, are considered federal covered securities.

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within A) 60 days. B) 45 days. C) 15 days. D) 30 days.

c When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of the request. Registration of professionals takes place at noon of the 30th day, and an appeal for review of an Administrator's order must be filed within 60 days.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) when informed by the Administrator that the representative's registration is effective. B) immediately. C) within 48 hours. D) when informed by the investment adviser that the representative's registration is effective.

d

Which of the following is a risk common to all fixed-income securities? A) Liquidity risk B) Opportunity cost C) Market risk D) Interest rate risk

d

Which of the following transactions for ERISA plans is not specifically prohibited? A) Any act of a fiduciary by which plan income or assets are used for the fiduciary's own interest B) A transfer of plan income or assets to, or use of them by or for the benefit of a disqualified person C) Lending money or extending credit between a plan and a disqualified person D) A transfer of plan income or assets for the benefit of a plan beneficiary or plan participant which they are entitled according to the provisions within the plan

d

Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the Uniform Securities Act? A) A bank holding company purchases the offering for trading purposes rather than investment purposes. B) The seller reasonably believes that individual purchasers are buying for investment purposes rather than immediate resale. C) The offer is directed to only five individuals during any 12-month period. D) A modest commission is paid to the agents who sell the offering to noninstitutional clients.

d A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. For a private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the sellers must reasonably believe (nice to have it in writing, but not required) they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes.

All of the following are exempt from state registration under the Uniform Securities Act except A) bonds issued by a bank that is a member of the Federal Reserve System. B) securities issued by a nonprofit organization. C) debt securities issued by or guaranteed by an insurance company licensed to do business in this state. D) variable annuities or other variable insurance products offered by an insurance company authorized to do business in the state.

d A variable annuity (or other variable insurance product) offered by an insurance company is a nonexempt security under the Uniform Securities Act. Securities issued by or guaranteed by an insurance company are covered by extensive state insurance regulations and are exempt from the state securities registration. Securities issued by banks are exempt because banks are covered by extensive state and federal banking regulations.

In which of the following situations has the investment adviser acted properly in disclosing confidential information about clients under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) A client who is running for public office is slandered by false reports regarding finances. When a reporter calls the client's adviser, he corrects misconceptions regarding the client's financial affairs without consulting the client. B) A prospective client asks for 3 current clients as references, which the adviser provides without consulting those clients because he knows they are pleased with his performance. C) Without a client's permission, the adviser identifies the client in an interview for an article to be published in a trade magazine; the article contains no information about the client's account. D) A client is unaware that he is under secret investigation by the Department of Homeland Security. Without consulting the client, an adviser turns files over to investigators under a court order.

d An adviser may only disclose information about clients without their permission if required by court order.

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? A) Treasury STRIPS, maturing in 2046 B) 6% Treasury bond maturing in 2045 C) 5% Treasury bond, maturing in 2047 D) 8% Treasury bond maturing in 2046

d Generally speaking, when the length of time to maturity is about the same, those bonds with the highest coupons have the shortest duration are therefore the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile because they have the longest duration. The 8s maturing in 2046 have approximately the same length to maturity as the other two interest-bearing bonds but have a significantly higher coupon, resulting in a much shorter duration (less volatility).

A new client is looking for a recommendation. The client is 72 years old, has sufficient income from Social Security, and has a pension plan to cover all of her living expenses. She has just inherited $100,000. She wants to invest this money to have a bit more income so she can spoil her grandchildren. Which of the following would be antipodal to her wishes? A) Public utility stock B) Jumbo CDs C) Treasury bonds D) Treasury STRIPS

d If she wants additional income, she cannot get that from Treasury STRIPS. They are zero-coupon bonds and pay nothing until maturity.

Under the Uniform Securities Act, which of the following statements regarding private placements is true? A) The offering must be made to fewer than 15 noninstitutional persons. B) A prospectus must be provided before the offering. C) Being an exempt transaction, the antifraud provisions do not apply. D) The security ​that is the subject of the private placement ​need not be registered

d Private placements are offers to no more than 10 noninstitutional 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 periods, and no restrictions on payment of commissions.

Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that A) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age. B) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater. C) Mary is entitled to full spousal benefits because they were married for at least 10 years. D) Mary is not entitled to any of Charlie's Social Security benefit.

d When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a coincident economic indicator? A) Agricultural employment B) Stock market prices as measured by the S&P 500 C) Machine tool orders D) Industrial production

d stock indicies and manufacturing orders are leading indicator