Wrong Answers/Concepts to go over

To protect against possible inflation, your clients purchase some TIPS with a 2.5% coupon. If, over the next six years, the annual inflation rate is 6%, the principal value of each TIPS will be closest to A) $1,426. B) $1,150. C) $1,161. D) $1,360.

$1,426 The principal of a TIPS is adjusted every six months for the inflation rate. With an inflation rate of 6%, that means a 3% adjustment twice per year. With the simple calculator provided at the test center, you would take the initial $1,000 and multiply that by 103% and continue to do that 12 times (there are 12 semiannual periods in six years).

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest will be paid for the year? A) $64.11 B) $60.00 C) $65.40 D) $90.00

$64.11 TIPS bonds have a fixed coupon rate with a principal that varies each six months based on the inflation rate. With an annual inflation rate of 9%, each six months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is $1,000 × 104.5% = $1,045 × 3% = $31.35 plus $1,045 × 104.5% = $1,092 × 3% = $32.76. Adding the interest payments together results in a total of $64.11 for the year. You should be able to eyeball this. Any bond with a 6% coupon will pay $60 in one year ($30 × 2). Because the TIPS bond increases the principal after the first six months, the second interest payment will be slightly higher than $30. There is only one choice slightly higher than $60.00 and it would be that way on the real exam.

Why may the Administrator deny an application for registration as an agent? The applicant has been convicted of a misdemeanor involving securities fraud within the past 120 months. The applicant is insolvent. The applicant has been convicted of a felony within 10 years of the date of application. The applicant has filed an incomplete application.

) I, II, III, and IV A record of any felony conviction or misdemeanors involving securities fraud during the last 10 years is sufficient grounds for the Administrator to deny an application for registration in the securities industry. Insolvency and failure to file a complete application are also grounds for denial.

What is not a security

1. Collectibles 2. Commodities such as precious metals, and grains, including future contracts 3. Condos used as a personal residence 4. Currency 5. Interest in a retirement plan such as an IRA or Keogh plan 6. An insurance or endowment policy or fixed annuity contract

Which of the following is considered an associated person of a broker-dealer? A broker-dealer's officer who represents the broker-dealer in effecting or attempting to effect the purchase or sale of securities A secretary who assists brokers with clerical tasks A secretary to a general partner of a broker-dealer A clerical person who is not authorized to accept or execute orders for clients

A broker-dealer's officer who represents the broker-dealer in effecting or attempting to effect the purchase or sale of securities An associated person is either an officer or a broker-dealer employee who represents the broker-dealer in soliciting the purchase or sale of securities. Associated person also includes any individual authorized to accept customers' orders for the broker-dealer. LO 11.c

A broker-dealer with an office in this state would be defined as an investment adviser if it charges which of these? I. Commissions for selling securities II. Commissions for selling securities while offering investment advice incidental to the sale of the securities III. A fee for selling investment research and additional fees in the form of commissions for the sale of securities IVFees for investment research sold exclusively to institutions located in this state

A fee for selling investment research and additional fees in the form of commissions for the sale of securities Fees for investment research sold exclusively to institutions located in this state A broker-dealer would be considered an investment adviser if it has a place of business in this state and if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm meets the definition of an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer is not an investment adviser because it is not compensated for the research.

What Is a Non-Issuer Transaction?

A non-issuer transaction is a transaction involving a security that is not directly or indirectly executed for the benefit of the issuing company. Most deals that occur on the secondary market, such as stock exchanges, involve non-issuer transactions; secondary offerings; or share buybacks that will involve the issuer.

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) A loan is taken equal to 95% of the policy's cash value B) There is a cash withdrawal in excess of the cost basis C) The policy is surrendered D) The death benefit is paid

A) A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

Which of the following regarding the registration of investment advisers and their representatives is true? A) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. B) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. C) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. D) An investment adviser representative terminated his employment with ABC Advisers, Inc., a state-registered investment adviser and, six months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm

A) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator.

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the act. Excluded from the listing would be A) corporate debentures. B) securities issued by a credit union authorized to do business in the state. C) bonds issued by the District of Columbia. D) bonds issued by a Canadian province.

A) corporate debentures. Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.

If an agent chooses to appeal an Administrator's order, the agent must file for review of the order with the appropriate court A) within 60 days of order entry. B) immediately. C) within 180 days of order entry. D) within 30 days of order entry.

A) within 60 days of order entry.

If the Administrator believes that a violation of the act has occurred or is about to occur, the Uniform Securities Act grants the office which of these powers? I.The power to issue a cease and desist order II.The power to seek an injunction against the alleged violation III.The power to seek to have a receiver appointed over the violator's assets IIII.The power to seek to have the violator make restitution to investors A) I, II, III, and IV B) III and IV C) I and II D) I, II, and III

A) I, II, III, and IV The Administrator has the power to issue cease and desist orders, apply to courts for temporary or permanent injunctions or restitution to investors, and have the court appoint receivers over a violator's assets.

Over which of the following would the investment adviser representative have discretionary authority? An order that specifies the size of the trade and name of the security, but leaves the choice of price or time up to the investment adviser representative An account in which a customer has power of attorney over another individual's account An account in which the investment adviser representative chooses portfolio securities on behalf of the client An account in which a trustee has power of attorney over another individual's account

An account in which the investment adviser representative chooses portfolio securities on behalf of the client An order is discretionary when it is placed for a customer's account by the advisory firm or its representative, without the customer's express authorization for that trade (there is a written discretionary power in the firm's file). Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time or price is not considered to be an exercise of discretion. Because the question is asking about an investment adviser, the choices referring to a customer with a POA or a trustee don't deal with the question.

Which of the following statements is true? An agent may never be simultaneously employed by more than one broker-dealer. An agent must submit separate registrations for each broker-dealer with which she is registered. Certain states prohibit agents from dual or multiple registration. An agent who sells securities in several states must be registered with different broker-dealers in each state.

An agent must submit separate registrations for each broker-dealer with which she is registered. Certain states prohibit agents from dual or multiple registration. In general, an agent will only be registered with a single broker-dealer. However, the USA does permit registration with more than one under certain conditions. An agent must submit separate registrations for each broker-dealer with which she is registered, and an agent may be prevented from multiple registration in those states that prohibit dual or multiple registration.

Which of the following would meet the USA's definition of federal covered adviser? An investment adviser who is registered under Section 203 of the Investment Advisers Act of 1940 An investment adviser who serves as a consultant to pension funds with assets of $500 million An investment adviser who does business on an interstate basis An investment adviser who gives advice on federal covered securities

An investment adviser who is registered under Section 203 of the Investment Advisers Act of 1940 All investment advisers registered under the Investment Advisers Act of 1940 are federal covered advisers. Doing business in more than one state (interstate) does not necessarily mean that the investment adviser is required to register with the SEC. As long as the AUM is under $100 million, the adviser registers with the appropriate states. Pension consultants are eligible to register with the SEC once their AUM reaches $200 million, but it is not mandatory. LO 9.d

Which of the following accurately describes a cease and desist order as authorized by the Uniform Securities Act? A) An order from one brokerage firm to another brokerage firm to refrain from unfair business practices B) An order by the Administrator to refrain from a practice of business believed by that Administrator to be unfair C) An order issued by a court of competent jurisdiction in the state requiring a business to stop an unfair practice D) An order issued by a federal agency to a brokerage firm to stop an advertising campaign

An order by the Administrator to refrain from a practice of business believed by that Administrator to be unfair A cease and desist order is a directive from an administrative agency to immediately stop a particular action. The order can come from a federal, state, or judicial body; it is not exclusive to any single body. However, because this question is referring to the Uniform Securities Act, we focus on the actions of the Administrator, not a federal agency. Administrators may issue cease and desist orders with or without a hearing. Courts issue injunctions, usually when the cease and desist order is ignored. Brokerage houses cannot issue cease and desist orders to each other.

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a 501(c)(3) charity, how much can he claim as a tax deduction for this donation? A) $6,000 B) $18,000 C) $12,000 D) $0

B) $18,000 Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000. LO 16.g

you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about A) TIPS. B) ETNs. C) ETFs. D) REITs.

B) ETNs.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is true? A) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. B) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. C) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. D) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration.

B) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). 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 from whom substantial prepayment of fees is received. LO 12.b

Which of the following are exempt transactions under the Uniform Securities Act? I. XYZ Company signs an agreement to sell 1 million shares of its stock to ABC broker-dealer, who will then act as an underwriter in marketing the shares to the public. II. There is a nonissuer sale of securities listed on the Nasdaq Stock Market to several individual clients of the agent. III. Johan sells 100 shares of an unregistered security he owns to his next-door neighbor for $1,000. IV. A customer calls a registered agent and asks to buy 1,000 shares of SPHG, a company the representative is not familiar with, and the representative fills the order.

B) I, III, and IV

Which of the following statements regarding a qualified profit-sharing plan is true? A) It can permit regular direct cash payouts to participants before retirement. B) It must be established under a trust agreement. C) Contributions are required annually. D) It must define a specific contribution amount.

B) It must be established under a trust agreement. 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.

Which of the following statements best represents a bond's present value? A) Present value is the discounted future repayment of principal. B) Present value is the sum of all the discounted future payments. C) Present value represents the internal rate of return (IRR) of the bond. D) Present value is the sum of all the discounted future interest payments.

B) Present value is the sum of all the discounted future payments

An investment adviser holds a small position in the common stock of ABC Corporation, with a current market value of approximately $5,000. ABC Corporation will offer additional stock in a subsequent primary offering, and the adviser recommends the stock to several clients. Which of the following reflects the most appropriate behavior on the part of the adviser? A) The adviser should not recommend a stock in which she holds a position because it is a prohibited conflict of interest. B) The adviser may recommend the stock, provided she discloses to clients receiving the recommendation that she holds a small position in the stock. C) The adviser may continue to recommend the stock to her clients, provided she liquidates any current holdings in the recommended security. D) It is not necessary for the adviser to disclose she holds a position in the recommended stock because the adviser's position is obviously too small to

B) The adviser may recommend the stock, provided she discloses to clients receiving the recommendation that she holds a small position in the stock. It is not prohibited for an investment adviser to recommend that clients acquire shares in a corporation in which the adviser holds a position. However, the adviser should disclose to clients receiving the recommendation that she holds the stock in her account.

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) a majority of the board of directors. B) a majority of the outstanding shares. C) the Securities and Exchange Commission (SEC). D) the fund's investment adviser.

B) a majority of the outstanding shares. Explanation Changes in investment policy require a vote of the majority of outstanding shares for approval.

An investment advisory contract is considered assigned if an adviser formed as A) a corporation with five officers and adds two officers. B) a partnership with two partners and adds five partners. C) a partnership with five partners and adds two partners. D) a corporation with two officers and adds five officers.

B) a partnership with two partners and adds five partners. If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval of the contract assignment (not the addition of the partners) is required. This rule applies to partnerships. In the case of a corporation, a change in the ownership of a majority of the stock (or a pledge of a majority interest in the stock) would be considered an assignment.

All of the following are requirements to be a salesman of variable products except A) possession of a valid FINRA registration B) affiliation with a registered investment adviser C) affiliation with a registered broker-dealer D) possession of a valid life insurance license

B) affiliation with a registered investment advise Because variable contracts are securities as well as insurance products, it is necessary to have a life insurance license as well as a FINRA registration. There is no requirement to be affiliated with an investment adviser, but obviously one can't have a FINRA registration without being affiliated with a broker-dealer.

When referring to a federal covered investment adviser, all of the following are supervised persons except A) an investment adviser representative. B) an individual contracted to promote the firm to potential advisory clients. C) the chief securities analyst. D) the receptionist who works for the investment adviser and analyzes client financial profiles.

B) an individual contracted to promote the firm to potential advisory client All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted promoters are not employees of the adviser; therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the promoter complies with the federal law. Please be careful because this is not so under the USA. That act considers promoters (solicitors) to be supervised persons, whether employed by the adviser or not, and requires IAR registration.

With regard to a state-registered investment adviser using Form ADV, Part 2 as its brochure, it would be correct to state that A) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client. B) it is filed through the IARD system. C) it must be delivered to all new clients. D) if requested by a client, it must be sent within 5 days of the request. Explanation The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV, Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a five-day penalty-free withdrawal right. Annually, Part 2 (brochure), or a summary of material changes, must be delivered within 12

B) it is filed through the IARD system.

Regarding performance-based fees charged by ​covered ​investment advisers, all of the following statements are correct except A) performance-based fees are generally prohibited. B) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods. C) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark. D) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE.

B) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods. ​Covered advisers are those under federal jurisdiction rather than state. The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. ​ Please note that the NASAA Model Rule on Performance-Based Compensation would require the risk disclosure by state-registered investment advisers.​

A popular vehicle for saving for retirement is the variable annuity. An agent explaining the benefits of this product would probably be in violation of the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents by claiming that variable annuities offer A) the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035 B) lower overall expenses than a mutual fund with similar investment objectives C) the choice of a large number of different subaccounts with varying objectives D) tax deferral on earnings until withdrawn from the account

B) lower overall expenses than a mutual fund with similar investment objectives In general, and always on the exam, variable annuity expenses are higher than those of a mutual fund with similar objectives. That doesn't mean the fund is good and the VA bad, it is that there are guarantees and other features offered by the VA that a fund does not have and they have to be paid for.

The Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does not carry that exemption? A) Bank holding company stock B) Six-month commercial paper C) Tax-free municipal bond D) Canadian government bond

Bank holding company stock The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less is also included in the list of exempted securities. LO 8.c

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value B) A loan between a 401(k) plan and plan participant C) An investment adviser using the interest from plan assets to cover the adviser's office expenses D) None of these transactions constitute a prohibited transaction under the provisions of the legislation

C) An investment adviser using the interest from plan assets to cover the adviser's office expenses Explanation An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building). LO 18.g

Which of the following statements about dividends on common stock is not true? A) Dividends represent a pro rata distribution of corporate profits to shareholders. B) Only those who are owners of the stock on the record date will receive dividends. C) Corporations are contractually obligated to pay dividends to their shareholders each year. D) Dividends may be paid in cash, property, or stock.

C) Corporations are contractually obligated to pay dividends to their shareholders each year. Dividends are the share of a corporation's profits that the corporation pays to shareholders as owners of the corporation. Dividends are not paid to shareholders automatically, and shareholders have no contractual right to receive dividends. Instead, dividends must be declared by the corporation's board of directors. The board of directors may elect to pay a dividend in cash, property, or stock

s defined in the Uniform Securities Act, the term person would include: I.a limited partnership. II.a political subdivision. III. an unincorporated association. IV. the executor of an estate for a deceased individual.

C) I, II, III, and IV. All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged mentally incompetent. LO 9.a

Miranda is an employee of the First National Bank of State D. The bank is raising additional capital through an offering of 1 million new shares of common stock. Miranda will be paid a generous commission on all retail sales of the stock. Under the Uniform Securities Act, A) First National Bank of State D must register as a broker-dealer in order to pay employees a commission based on the sale of securities. B) Miranda must register as an agent in order to receive commissions. C) Miranda is excluded from the definition of an agent. D) Miranda must limit her sales to existing customers of the bank.

C) Miranda is excluded from the definition of an agent. The USA provides an exclusion from the definition of agent for those individuals selling securities on behalf of certain issuers. Included on that list are banks. The receipt of sales-based compensation is irrelevant, and there are no limits placed on who Miranda can approach about purchasing the stock. Banks are specifically excluded from the definition of a broker-dealer.

Which of the following statements correctly expresses requirements under the Investment Company Act of 1940? A) A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage. B) Renewal of the advisory contract can only be done with majority vote of the fund's board of directors. C) No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. D) No registered investment company may acquire less than 3% of the shares of another investment company.

C) No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. One of the provisions of the Investment Company Act of 1940 is that the maximum permitted termination notice is 60 days in writing. The custodial bank does not need FDIC coverage (this is not your local bank account) and the 3% limit is the maximum, not a minimum. In order to renew the advisory contract, it is either a majority vote of the fund's directors or by a vote of a majority of the outstanding voting securities of the fund.

The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)? A) Semi-weak form B) Weak form C) Strong form D) Semi-strong form

C) Strong form This statement is the definition of the strong form EMH. Private sources include insider information, such as persons holding non-public access to information relevant to the company. Weak includes historical pricing and volume information. Semi-strong includes all publicly-available information, such as earnings reports. There is no such thing as semi-weak.

Parker and Mary have recently divorced. For Mary to receive Social Security benefits based on Parker's earnings, which of the following conditions must exist? A) Parker must not be remarried. B) Mary must have worked at least 40 quarters to be eligible for benefits. C) The marriage must have lasted at least 10 years. D) Parker must already be at full retirement age.

C) The marriage must have lasted at least 10 years. The marriage of these two must have lasted at least 10 years. In addition, Mary cannot be remarried (Parker can be). It is Parker who must have at least 40 quarters to earn Social Security benefits. As long as Parker is drawing benefits, and one can start before full retirement age, benefits will be available as long as all of the conditions are met. LO 17.c

Fusion Financial is a broker-dealer registered in States A, B, and C, with its home office in State B. A complaint is filed against the firm by a client who resides in State A. Under the powers granted under the Uniform Securities Act, the Administrator of State B could do all of the following except A) gather evidence from State B. B) gather evidence from State A. C) issue an injunction against Fusion Financial. D) subpoena witnesses from State C.

C) issue an injunction against Fusion Financial. Explanation ​​An Administrator has the power to gather evidence both within and outside of the home state, as well as subpoena evidence and witnesses in any state.​ Only the courts can issue an injunction.​

An investment adviser representative, who also receives commissions as an agent at a brokerage firm, has opened an account with a client whose net worth is $200,000. The customer wants the account aggressively traded and wishes for the investment adviser to be compensated based on the account's performance. In this account, payment on a performance basis is A) permissible. B) permissible if the customer's net worth is a minimum of $1 million. C) not permissible. D) permissible with approval from the agent's supervisor and written permission from the customer at the time the account is opened.

C) not permissible. It is not permissible to trade this account on a performance basis; the investment adviser representative must be paid on commission or through a fixed-fee arrangement. Under both state and federal law, performance fees are allowed only for clients with a minimum of $1.1 million invested with the investment adviser or a minimum net worth in excess of $2.2 million.

Ana is a bond analyst who notices a wider credit spread between Treasury bonds and AAA corporate debt. From this, she would be most likely to infer A) interest rates on Treasury bonds are increasing. B) corporate bond prices are increasing. C) the economy is weakening. D) corporate earnings are reaching record highs.

C) the economy is weakening. The reason the spread gets wider is that investors are getting out of corporate bonds and getting into Treasuries. Why would they do that? Because, as the industry says, "It is an escape to quality." When there are economic clouds on the horizon, like a recession, you would much rather have your money invested in U.S. Treasuries because you know they will pay off. Higher corporate yields come from lower market prices.

Bryan, an agent registered with a broker-dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is A) only unethical if Bryan sells his shares after informing his clients of his intention to do so B) an illegitimate sales tactic C) not an unethical sales practice D) only unethical if investors lose money in the investment

C) not an unethical sales practice This practice is ethical, providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem.

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was A) $150.00. B) $300.00. C) $56.25. D) $168.75.

D) $168.75. Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of $0.25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - $0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.75 ($225.00 - 56.25).

There are several financial models that refer to the "risk-free" rate of return. Which of the following instruments is used to measure that rate? A) 30-year Treasury bond B) 1-year CD C) Federal funds D) 91-day Treasury bill

D) 91-day Treasury bill Explanation The standard benchmark used to measure the "risk-free" rate of return is the 91-day (13 week) Treasury bill.

What is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio?

D) Dollar-weighted return The dollar-weighted return measures the internal rate of return (IRR) of a portfolio's actual performance between 2 dates, including all cash inflow and outflows. Because of this, the IRR of a portfolio can be significantly affected by both the timing and the size of any contribution or distribution. Luck in the timing of the investor's inflows or outflows can drastically swing numbers one way or the other.

Which of the following statements regarding a mutual fund that offers Class A, B, and C shares are true? 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. Class B and C shares allow investors to put the shares back to the fund for their original purchase price for up to one year after purchase. A) I only B) I and II C) I, II, III, and IV D) I, II, and III

D) I, II, and III 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.

he terms offer, offer to sell, sale, and sell include which of the following? A) Any bona fide pledge or loan B) An act incidental to a class vote by stockholders pursuant to the applicable corporate statute on a merger C) A stock dividend for which the stockholders give nothing of value D) Preemptive rights

D) Preemptive rights Explanation The preemptive right frequently given to common stockholders allowing them to purchase shares of a forthcoming issue is considered to be an offer of that upcoming issue. The terms sale or sell include every contract of sale, contract to sell, or any disposition of a security for value. A gift of a security is not considered a sale. The terms offer and offer to sell represent any effort to dispose of a security for value. This does not include bona fide loans, stock dividends, or dispositions pursuant to corporate statutes.

An investor may expect to receive dividends from A) a warrant. B) a call option. C) a put option. D) an ADR.

D) an ADR. An American depositary receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock; one must own the security itself to be entitled to the dividend.

Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A) an IRA B) a margin account C) a discretionary account D) an options account

D) an options account Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer A) listed stock options. B) nonqualified stock options. C) portable stock options. D) incentive stock options.

D) incentive stock options. Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while nonqualified options are always treated as ordinary income.

It is unlawful for a state-registered investment adviser to do any of the following except A) fail to disclose the departure of a general partner of an investment advisory partnership who only had a minority interest in the firm. B) unilaterally transfer an account to another firm if the assets fall below a minimum level. C) share in the profits of an account in relation to the amount of time devoted to the account. D) take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator.

D) take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator. The NASAA Model Rule on Custody provides that an investment adviser may maintain custody over an advisory client's assets unless the Administrator, by rule, prohibits all advisers in a state from taking custody. Under the brochure rule, an investment adviser cannot share in the profits of an account based on time devoted and may not assign an account without the written permission of the client. An investment adviser organized as a partnership must disclose to clients when any partner, minority interest or not, departs from the firm.

One method of securities registration under the Uniform Securities Act is qualification. The effective date of a security registered using this method is A) within 2 business days of the filing of maximum and minimum proposed offering prices. B) when the offering is made effective by the SEC. C) by noon of the 30th day following the filing of the application. D) when so ordered by the Administrator.

D) when so ordered by the Administrator. Explanation Registration by qualification becomes effective on the date set by the Administrator. It is the registration of a security by coordination, where the effective date is contingent upon SEC effectiveness. Coordination also has the requirement of submitting the maximum and minimum offering prices at least two business days before the effective date. It is the registration of securities professionals that is effective at noon of the 30th day after the filing of a complete application.

Which of the following statements is true? An Administrator can suspend a pending registration on a summary basis. An Administrator may not issue a stop order without prior notice and opportunity for a hearing. An Administrator may cancel a registration for the same reasons he revoked or suspended a registration. A) III only B) I only C) II and III D) I and II

D) I and II An Administrator can, on a summary basis, suspend a pending registration but may not issue a stop order without a prior notice and an opportunity for a hearing. Cancellation is different from revocation and is not a result of disciplinary action; it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located. LO 12.b

Under the Uniform Securities Act, which of the following circumstances would exempt a security from registration? The security is exempt from registration under the act. The transaction in which the security is sold is exempt under the act. I only Either I or II II only Neither I nor II

Either I or II It is illegal to sell securities that are not registered unless the security or the transaction itself is exempt from state registration requirements. This applies to new issues (primary distributions) and secondary market transactions.

Which of these are true regarding a federal covered investment adviser? He has $110 million or more in assets under management. He manages an investment company registered under the Investment Company Act of 1940. He limits his advice to securities listed on the NYSE. He is affiliated with a federally chartered bank. I, II, III and IV II and III I and II I and III

I and II Federal registration is generally required of any investment adviser managing at least $110 million in assets. The NSMIA provides that any investment adviser under contract to a registered investment company under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Determining if one is a federal covered investment adviser is not based on affiliations; it is generally a function of AUM or managing an investment company. LO 9.d

As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences? I. Encourage the daughter to go to graduate school and use the money for qualified expenses there. II. Roll over the funds to a member of the beneficiary's family. III. Roll over the funds to a Coverdell ESA. UV. Roll over the funds to the donor's traditional IRA.

I and II. Encourage the daughter to go to graduate school and use the money for qualified expenses there. Roll over the funds to a member of the beneficiary's family.

Which of the following statements relating to Form ADV-E are correct? I. The form is completed by an investment adviser who maintains custody of customer funds and/or securities. II. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. III. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. IV. The form may be used to amend the investment adviser's registration.

I and III Form ADV-E (E for Examination) must be completed by investment advisers (IAs) 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, who examines client funds and securities in the custody of the IA, in compliance with the Investment Advisers Act of 1940 or applicable state law. 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.

Which of the following persons are included in the definition of an agent under the Uniform Securities Act? IAn individual who represents First Securities Brokers, Inc., in selling shares of XYZ Corporation, a New York Stock Exchange-listed company IIAn individual who, as part of the job description, represents the City of Chicago in selling its bonds to the public IIIAn individual who represents a corporation traded on the New York Stock Exchange in selling securities to the public IVAn individual who is employed by the Federal Reserve Board to sell Treasury bills to retail investors

I and III Under the USA, an agent is defined as an individual who represents a broker-dealer selling any type of security, whether that security is exempt or nonexempt. Individuals who represent issuers in trading exempt securities or exempt transactions are not defined as agents. An individual who represents an issuer selling nonexempt securities is an agent and must be registered.

With regard to taxation of distributions from a REIT, which of these are true? I. In the majority of cases, dividends are taxed as ordinary income. II. In the majority of cases, dividends are considered qualified for the lower tax rate. III.Capital gains distributions are treated as long-term capital gains. IV. Capital gains distributions are taxed as ordinary income.

I and III In the majority of cases, dividends are taxed as ordinary income. Capital gains distributions are treated as long-term capital gains.

The Administrator may require which of the following from a federal covered adviser? Copy of the IA's Form ADV Part 2A Filing of the IA's advertising in the state A copy of the IA's Form ADV Part 1B A filing fee

I and IV Even though Administrators have limited jurisdiction over federal covered advisers, they can require filing of a copy of the information filed by that IA with the SEC (Form ADV), as well as a filing fee. However, Form ADV Part 1B is filed only by state-registered investment advisers. Federal covered IAs do not have to file advertising with the states.

Which of the following statements regarding the Uniform Securities Act (USA) are true? State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. State securities Administrators may not deny, by rule or order, an exemption to an exempt transaction under the USA if the security involved is not covered by federal exemption. State securities Administrators may deny, by rule or order, an exemption to a federal covered security. State securities Administrators may not deny, by rule or order, an exemption to a federal covered security. A) II and IV B) III and IV C) II and III D) I and IV

I and IV State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA unless the security involved is covered by a federal exemption. State securities Administrators may not, however, deny an exemption provided to a federal covered security. Federal covered securities are granted exemption from state registration by federal law, so the state Administrator has no authority to deny the exemption granted by the federal government.

Under the Securities Act of 1933, which of the following are exempt securities? Securities issued by the U.S. government, government agencies, and any state or municipality Any security issued by a religious, educational, charitable, or not-for-profit institution Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution Any interest in a railroad equipment trust A) I and III B) I, II, III, and IV C) II and IV D) I, II, and III

I, II, III, and IV Most of the securities exempt from registration and prospectus delivery requirements in the Securities Act of 1933 are also exempt under the Uniform Securities Act. Securities exempt under the Securities Act of 1933 include government issues, commercial paper, securities issued or guaranteed by financial institutions, regulated common carrier issues, and nonprofit charitable or religious institutions. Three securities are exempt under the Uniform Securities Act and not exempt under the Securities Act of 1933: Stocks and bonds issued by insurance companies Securities issued by foreign governments Securities listed on certain exchanges not exempt under the Securities Act of 1933

Which of the following would be deemed to be an assignment of an investment adviser's contracts? All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc. The Lucky Seven Partnership is an investment adviser with seven partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. Albert is an investment adviser. His clients' accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan. A) I and II B) I, II, and III C) II and III D) I and III

I, II, and III It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment.

Which of the following would meet the USA's definition of person? IAn individual IIAn unincorporated association IIIA political subdivision

I, II, and III The USA's definition of person is extremely broad. Just remember the three nonpersons: minors, those who are deceased, and those declared mentally incompetent. LO 9.a

Identify the accredited investors from the list below. An individual with a net worth of $800,000 and an annual salary of $150,000 A married couple with a net worth of $2 million consisting of net equity in their primary residence of $500,000 and pension plans and other assets worth $1.5 million An insurance company A corporation with a net worth of $3 million

II and III Institutional investors such as insurance companies are regarded as accredited investors. An individual with a net worth of $800,000 and a salary of $150,000 does not meet either of the two qualification criteria for individuals, while the married couple with a net worth of $2 million, which is still in excess of $1 million after excluding the net equity in the primary residence, is accredited. In order for a corporation to meet the definition, it must have a net worth of at least $5 million. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. A natural person who has an individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.2

Limited liability is a characteristic of being an owner of I.a general partnership II.an interest in a limited partnership III.shares of an S corporation IV. a sole proprietorship

II.an interest in a limited partnership III.shares of an S corporation Limited partnerships and any corporate form of ownership offer limited liability. Such is not the case with a general partnership and certainly not the case with a sole proprietorship.

Which of the following are characteristics of negotiable jumbo CDs? Issued in amounts of $100,000 to $1 million or more Typically pay interest on a monthly basis Always mature in one to two years with a prepayment penalty for early withdrawal Trade in the secondary market

Issued in amounts of $100,000 to $1 million or more Trade in the secondary market

With regard to a state-registered investment adviser using Form ADV, Part 2 as its brochure, it would be correct to state that A) if requested by a client, it must be sent within 5 days of the request. B) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client. C) it is filed through the IARD system. D) it must be delivered to all new clients.

It is filed through the IARD system The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV, Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a five-day penalty-free withdrawal right. Annually, Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempt. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered. LO 13.g

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations (2023 and beyond), after deductions and exemptions, how will the income in the UTMAs be taxed? Josh's income is taxed at his tax rate. Drake's income is taxed at his tax rate. Josh's income in excess of $2,500 is taxed at Terry's marginal tax rate. Drake's income in excess of $2,500 is taxed at Terry's marginal tax rate.

Josh's income in excess of $2,500 is taxed at Terry's marginal tax rate. Drake's income in excess of $2,500 is taxed at Terry's marginal tax rate. Because the income on the UTMAs is not considered to be earned income, the kiddie tax rules apply. Currently, children younger than 19 having such income in excess of $2,500 are subject to tax at the parent's marginal tax rate. That means if the parent is in the 32% income tax bracket, the children's excess income will be taxed at 32%.

Which of the following statements is not true? A) Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days. B) The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus. C) Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares. D) Open-end investment companies must have a minimum of $1 million in assets to have a public offering.

Open-end investment companies must have a minimum of $1 million in assets to have a public offering. Minimum assets of $100,000 are required.

Which of the following statements regarding an agent's registration is correct? If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer. Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put on hold. If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days. Agents may be licensed in a state even if their broker-dealer is not.

Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put on hold. An agent of a broker-dealer is active only when that broker-dealer's registration is in force. The exam may refer to the agent's registration being placed into suspense or canceled; any of these has the same effect. 11f

John is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. He is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over John's advisory activities is the responsibility of MAS's CCO. John. SSC's CCO. the SEC.

SSC CCO It is common for independent financial planners to establish their own business entity and "hang" their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm's CCO in the same way that in-house IARs are.

Under the Uniform Securities Act, the Administrator has the power to deny or revoke exemptions for which of the following types of securities? Stock issued by a bank organized under the laws of another state Securities of nonprofit organizations Investment contracts issued by employee benefit plans

Securities of nonprofit organizations Investment contracts issued by employee benefit plans

Coordination Qualification

Securities sold in more than one state (interstate) but don't meet the definition of a federal-covered security are subject to registration by coordination.

An investor purchases a single premium deferred index annuity with a 6% bonus feature. The premium was $100,000. The annuity has an 80% participation rate with a 10% cap. If the underlying index increased by 15%, the account's value at the end of the year would be closest to A) $116,000. B) $116,600. C) $118,720. D) $110,000.

The 6% bonus means that the client's initial payment is increased by 6%. That means the account shows a starting balance of $106,000. Although the index increased by 15% and the participation rate of 80% would be a 12% growth rate, the cap of 10% comes into play. That makes the calculation: $106,000 x 110% or $116,600.

In which of the following cases would an individual representing an issuer in a transaction with a client be excluded from the Uniform Securities Act's definition of an agent? The individual sells shares of a public utility regulated in respect of its rates and charges by a governmental authority of the United States or any state. The individual sells shares of a federal credit union. The individual sells shares of a security issued by and representing an interest in a federal savings and loan association. The individual successfully solicits an order from an insurance company to purchase 10,000 shares of the issuer's stock.

The individual successfully solicits an order from an insurance company to purchase 10,000 shares of the issuer's stock. Individuals representing issuers in the sale of their securities may or may not be defined as agents. When the transaction is exempt, such as in the sale to an institution like an insurance company, the individual is not defined as an agent. There are two ways to earn the exclusion. One of them is when the transaction in the issuer's security is exempt. The other is when the issuer is in one of the five categories of exempt security listed in the USA. Each of the other three choices represents an exempt security, but none of the three are included in the USA's list of those where the individual representing the issuer is not an agent. LO 11.d

Under the Uniform Securities Act, each of the following statements regarding a sale, an offer, or an offer and sale is true except A) 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. B) 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. C) a bona fide pledge is considered an offer and sale. D) a purported gift of assessable stock is considered to involve an offer and sale.

a bona fide pledge is considered an offer and sale. 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 because 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.

Included in the Uniform Securities Act's definition of broker-dealer would be a broker-dealer with a place of business in the state whose only clients are insurance companies. savings institutions. individuals who are registered as agents. issuers of securities.

a broker-dealer with a place of business in the state whose only clients are insurance companies. When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies. 11c

An individual has been hired by a person to assist in the selling of securities it is issuing to residents of State A. The individual would be defined as an agent under the Uniform Securities Act if the issuer is issuing commercial paper in minimum denominations of $100,000 with a AA rating and a six-month maturity. a credit union organized and supervised under the laws of State A. the city of Saskatoon, Saskatchewan (Canada). a trust company organized and supervised under the laws of State B.

a credit union organized and supervised under the laws of State A. Please remember the broad definition of person—it does not mean an individual unless preceded by the word natural. When an individual represents the issuer of certain exempt securities in the sale of those securities to the public, that individual is not included in the USA's definition of agent. Credit unions are not in that list, so those individuals are agents and must be registered as such. Individuals representing banks, including savings institutions and trust companies when organized and supervised under the laws of any state (not necessarily the state in which the securities will be sold), are not agents. If the agent represents the issuer of commercial paper meeting the exemption requirements of the USA ($50,000 minimum denomination, top three grades, and maximum nine-month maturity), that individual is not an agent. Finally, representing the United States or Canadian federal government, or any of their political subdivisions, excludes one from the definition of agent.

The Uniform Securities Act requires all of the following to be registered as agents of a broker-dealer except a silent partner who has contributed most of the capital of the broker-dealer but takes no part in the firm's activities. a senior partner of a broker-dealer who actively manages the firm's day-to-day operations. an associated person of a broker-dealer whose primary function is to take orders from the public. an employee of a broker-dealer who only trades securities for the firm's proprietary account.

a silent partner who has contributed most of the capital of the broker-dealer but takes no part in the firm's activities. Employees who take orders from the public and who trade securities for the accounts of broker-dealers must register as agents. The USA requires any person who represents a broker-dealer in effecting securities transactions to register as an agent of their employing broker-dealer. Partners (officers, directors) who play an active role in the securities business of a broker-dealer must register as agents; those who don't are exempt from registration.

A consent to service of process required by an Administrator is an agreement to perform all services and duties that the USA requires of those individuals covered by the USA. a legal procedure that authorizes the Administrator to issue injunctions. an agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant. a formal statement declaring that an investment adviser will comply with all advertising requirements of the USA.

an agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant. A consent to service is a formal legal agreement whereby a registrant will be bound by a legal action or subpoena served on the Administrator as if it had been served on the registrant. A consent to service is not an authorization to issue an injunction.

an issuer transaction will never be considered

an exempt transaction a sale of a primary offering registered with the SEC.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following except A) whether or not the contract grants discretionary authority. B) that assignment of the contract cannot occur without client consent. C) the amount of prepaid fees to be returned if the contract is terminated. D) any record of securities industry violations by the investment adviser.

any record of securities industry violations by the investment adviser. VIOLATIONS ARE REPORTED IN FORM ADV An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. The investment advisory contract must include the amount of prepaid fees to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) ISOs may only be granted to employees, while NSOs may be given to virtually anyone. B) the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO. C) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. D) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation.

at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.

Securities exempt under the USA include

bank issues, savings and loan issues, and common carriers or public utilities regulated by the U.S. or Canadian federal government. Securities issued by bank holding companies that trade on SEC-regulated exchanges are federal covered securities and are not subject to state registration.

Under both federal and state law, an exemption from registration is granted to municipal bonds. Qualifying for that exemption would be all of the following except bonds issued by a state. bonds issued by a school district. bonds issued by the U.S. Treasury. bonds issued by a city.

bonds issued by the U.S. Treasury Municipal bonds are those issued by any governmental unit from the state level on down. This includes political subdivisions and local entities such as school, park, and road districts. Treasury bonds are government, not municipal, bonds. LO 8.c

First Fidelity Building and Loan Association, organized in State A and authorized to do business in State B, has an offering of common stock being made in State B. In order for an individual selling the offering to be excluded from the definition of agent in State B, the individual would have to be employed by First Fidelity. would have to be employed by a broker-dealer registered in the other state. cannot sell without being an agent. would have to be employed by a broker-dealer registered in this state.

cannot sell without being an agent. Included in the USA's list of exempt securities are those issued by any building and loan or similar association organized under the laws of any state and authorized to do business in this state. However, they are not included in the short list of exempt securities under which individuals selling on behalf of the issuer are excluded from the definition of an agent. Had this been a bank, savings institution, or trust company, then, as long as the individual was an employee of the institution, no registration would be necessary. 11c, answer i got wrong

A federally chartered credit union is domiciled in Texas. The credit union is making an offering of securities in Nebraska. To comply with the Uniform Securities Act's exclusion from the definition of agent, any individual offering the security in Nebraska will have to be an employee of a broker-dealer registered in Nebraska. cannot sell without being an agent. will have to be an employee of a broker-dealer registered in Texas. will have to receive only nominal commissions.

cannot sell without being an agent. It is unusual to have an answer set up this way, but it does happen sometimes on the exam—"to comply with"—and then there is no way to comply. First of all, the USA's exclusions from the definition of agent only apply to individuals working for the issuer, never broker-dealers. Then, the exclusion only applies when selling the following exempt securities in nonexempt transactions: U.S. government and municipal securities Securities of governments with which the United States has diplomatic relationships Securities of U.S. commercial banks and savings institutions or trust companies (when not engaged in securities-related broker-dealer activities) Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less Investment contracts issued in connection with employees' stock purchase, savings, pensions, or profit-sharing plans Selling other exempt securities, such as those issued by a federally chartered credit union, on behalf of the issuer, requires one to become registered as an agent of the issuer. Don't confuse this with the exemption offered in the case of exempt transactions. In that case, regardless of whether the security is exempt or not, if an individual's only sales activity while representing an issuer is in exempt transactions, then the exclusion from the definition of an agent applies. It is obviously a much broader exemption than when selling exempt securities.

An adviser has custody of a client's securities or funds if the adviser A) has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees. B) uses a broker-dealer to hold the customer's funds and securities and has limited trading authority over the account. C) accepts prepayment of advisory fees or has discretion over a customer's account. D) maintains the customer's funds and securities in a joint account with the registered investment adviser.

has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees. Custody is the physical possession of the asset. Discretion is the authority to make decisions independent of the authorization of the account holder on a trade-by-trade basis. Authorization is in a blanket form in the existence of either a limited trading authority or full trading authority. Acceptance of prepayment of adviser's fees or discretionary authority does not constitute custody. The ability to withdraw funds for the purpose of paying quarterly advisory fees from a customer's accounts is deemed to be custody of the funds. A broker-dealer holding a customer's funds and securities would have custody, but the adviser who has trading authority over the account would only have discretion. If the funds and securities of the client are held with the funds and securities of the adviser in a joint account, the adviser would be involved in commingling (or theft), not custody.

When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it, which is then divided by the original cost, the result is

holding period return

CONCEPT Which of the following does not register as an investment adviser under the Investment Advisers Act of 1940

insurance companies

Under Section 401 of the Uniform Securities act, the term agent does not include an individual who represents an issuer in effecting transactions in a security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association. issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state. issued or guaranteed by any f

issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state; issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing; any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor; a promissory note, draft, bill of exchange, or banker's acceptance that evidences an obligation to pay cash within nine months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization; or any investment contract issued in connection with an employee's stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan. It is not just any exempt security that qualifies the individual for the exemption—only the five listed here. A confusing point is that the individual is not an agent when the sales are made in any exemption transaction with no exceptions.

The powers of the Administrator include the ability to determine A) maximum net capital requirements for broker-dealers. B) minimum net worth requirements for investment advisers. C) minimum net worth requirements for agents who exercise discretion. D) surety bond requirements for investment advisers who do not exercise discretion or maintain custody.

minimum net worth requirements for investment advisers. The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

Under federal law, an application for becoming an associated person of a broker-dealer would be denied for an individual A) convicted of a felony 122 months ago. B) who is not a citizen of the United States. C) accused of a securities-related felony 110 months ago. D) pleading no contest to a misdemeanor involving a financial matter 65 months ago.

pleading no contest to a misdemeanor involving a financial matter 65 months ago. An individual who is convicted of, or has pleaded guilty or no contest to, any felony or certain misdemeanors in the previous 10 years (120 months) is subject to statutory disqualification. Therefore, the misdemeanor involving a financial matter within the past 10 years is a cause for disqualification. A conviction made more than 10 years ago is part of the record but not cause for disqualification. One is presumed innocent until proven guilty, so merely being accused is not the same as being convicted. There is no requirement that a registrant be a U.S. citizen.

A broker-dealer would most likely hire an agent to solicit for advisory clients. implement the firm's new recordkeeping program. engage in marketing for the broker-dealer. sell securities to clients.

sell securities to clients. The Uniform Securities Act defines an agent as follows: "'Agent' means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." They are not there to do marketing or handle recordkeeping. Soliciting for advisory clients would be done by an investment adviser representative, not an agent.

ll of the following statements regarding the selling of private placements under the Uniform Securities Act are true except that the seller must reasonably believe that all noninstitutional buyers are purchasing for investment purposes only. that no commission or other remuneration may be paid for soliciting noninstitutional buyers. that they can be offered without limitation to institutional investors. that they cannot be offered to more than 35 noninstitutional persons in 12 consecutive months.

that they cannot be offered to more than 35 noninstitutional persons in 12 consecutive months. Under state law, a private placement can be offered to no more than 10 noninstitutional investors in 12 consecutive months. LO 8.d

If the net present value of a series of discounted cash flows is less than zero, one could conclude that A) the return on investment is higher than the internal rate of return. B) the internal rate of return equals the discount rate. C) the discounted cash flows are lower than the investment outlay. D) the rate of return is higher than the cost of capital.

the discounted cash flows are lower than the investment outlay.

Net asset value per share for a mutual fund can be expected to decrease if A) the fund has experienced net redemptions of shares. B) the fund has made dividend distributions to shareholders. C) the issuers of securities in the portfolio have made dividend distributions. D) the securities in the portfolio have appreciated in value.

the fund has made dividend distributions to shareholders If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

Under the Securities Act of 1933, all of the following must sign a registration statement for a new issue of nonexempt securities except the managing underwriter of the issuer. the chief executive officer of the issuer. the chief financial officer of the issuer. a majority of the members of the board of directors.

the managing underwriter of the issuer. The registration statement, which is an issuer document, must be signed by members of the board, as well as by the CEO and the CFO. It is also signed by the lawyers and accountants representing the issuer who express their opinions on the legal and accounting aspects of the proposed new issue.

f a person offers to buy a security after reading a tombstone ad, the offer to buy would be considered null and void. solicited. illegal. unsolicited.

unsolicited. A client calling to buy based on reading a tombstone ad is considered an unsolicited order because, under the law, the tombstone ad is neither a solicitation to buy nor an offer to sell. If the question had stated that the agent had sent a prospectus out and the client was responding to that, it would have been a solicited order. LO 8.d