65 Midterm Exam
The NASAA Model Rule dealing with business continuity plans is NOT concerned with A) ensuring that the investment adviser continues to generate profits during a business interruption B) assignment of duties to qualified individuals in the event of the death or unavailability of key personnel C) the protection, backup, and recovery of the investment adviser's books and records D) office relocation in the event of temporary or permanent loss of a principal place of business
Although it would be nice if the IA could continue to be profitable, that was not NASAA's concern when drafting this Model Rule. All of the other choices are important concerns.
Under the Uniform Securities Act, which of the following would be least likely to be civilly liable for making false registration statements, using a prospectus that is untrue, or failing to meet the prospectus delivery requirements of the act? A) Every stockholder named in the registration statement B) Every expert who is named in the registration statement C) Any and every person who has signed the registration statement D) Every underwriter of the security
Anyone who has signed the registration statement, anyone who is named in the statement as an expert, and every underwriter may be liable to the purchasers of the securities if the statement contains false information. Although a registration statement contains the names of stockholders who own 10% or more of the issue, they are not liable unless they fall into one of the other categories (officer, director, or expert). Anyone who sells the underlying security without providing a valid prospectus, uses a prospectus that is false, or omits material information is also civilly liable to the purchaser.
An investment adviser reviewing the past performance of a portfolio observes that annual returns have been 6%, 11%, -5%, 8%, 14%, 1%, and 7%. From this information, the adviser would determine that the median value was A) 6.0% B) 7.0% C) 19.0% D) 7.4%
C)
Which of the following firm's earnings are likely to exhibit the greatest degree of sensitivity to the business cycle? A) Furniture producer B) Telecommunications provider C) Entertainment producer D) Food and beverage producer
Consumers buy fewer durable goods, such as furniture, during recessions and buy more during expansions. As a result, producers of these goods tend to have cyclical demand, revenues, and earnings. People do not decide to go to a movie (or rent one) based on the economy. Food and beverages is the stereotypical defensive industry and people use their phones regardless of the economic cycle.
Seven years ago, Sarah Smith was convicted of possession of a controlled substance in a state where that violation is considered a felony. Sarah has just filed an application for registration as an agent with Kapco Securities, a registered broker-dealer in a state where that violation is only considered a misdemeanor. When viewing this agent's application, the Administrator will A) treat the crime as a financial misdemeanor B) treat the crime as any felony C) treat the crime as a nonfinancial misdemeanor D) censure the broker-dealer for even thinking of employing this individual
Even though the crime is a misdemeanor in the state where registration is being sought, the applicant's record shows a felony conviction and, therefore, this individual would be subject to statutory disqualification.
A consent to service of process allows the Administrator to A) ensure that the legal appeal process is expedited as a result of the Administrator's access to information B) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant, or the registrant's successor C) verify the accuracy and completeness of registration without obtaining the registrant's prior approval D) terminate a registrant's application
The consent to service of process provides the Administrator with power of attorney to accept legal papers on behalf of registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process.
Which of the following pairs of assets provides the greatest level of diversification? A) Assets 5 and 6, with a correlation coefficient of -0.42 B) Assets 1 and 2, with a correlation coefficient of -0.78 C) Assets 7 and 8, with a correlation coefficient of +0.37 D) Assets 3 and 4, with a correlation coefficient of 0.0
The greatest level of diversification will occur when the correlation coefficient is closest to -1.0. Therefore, Assets 1 and 2 offer the greatest level of diversification.
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? A) Clearance and settlement services provided by the broker-dealer B) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers C) Rent-free use of unused space in the broker-dealer's office D) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements
A) Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.
stock traded on the Nasdaq Stock Market has a beta of 1.20. One could expect the stock's volatility compared to the S&P 500 would be A) 20% more volatile B) 20% less volatile C) too variable to tell D) negatively correlated to the S&P
Beta is a measurement of a security's volatility when compared to the overall market, best measure by the S&P 500. The "market" is assigned a beta of 1.00, so when the beta is higher than 1.00, the stock has greater volatility, and when lower than 1.00, the volatility is less.
An investment adviser structured as a partnership lends money to a customer to buy recommended securities. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this activity is A) acceptable, provided the securities are used as collateral for the loan B) acceptable, provided the loan is made under the provisions of Regulation T of the Federal Reserve C) unethical D) acceptable, provided the securities are used as collateral for the loan and the loan conforms to the provisions of Regulation T Explanation
C) An investment adviser cannot lend money to a customer unless the loan is made through a regulated lender such as an affiliated broker-dealer or an affiliated bank.
Following the rules of the Uniform Securities Act, an investment adviser ensures that all clients receive a written contract prior to the firm engaging in advisory activities in their accounts. The contract clearly states all of the account details, including the services to be provided, the fees to be charged, and the procedure for handling early terminations. Because the IA has a tendency to pursue some rather unorthodox methods of analysis, the contract provides that the clients waive their right to sue in the event that the IA violates any provision of the USA. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) the contract is only enforceable if signed by the client B) the adviser has met the requirements of providing a written contract C) waivers of this type are never permitted D) the contract is misleading and could lead to action by the Administrator
C) There is no way—NEVER, NEVER—that a waiver of legal rights is ever enforceable.
An investment adviser who has custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must do which of the following? Notify the Administrator by the close of business on the day after discovery File a report of its financial condition with the Administrator no later than the close of business on the day after notification Cease doing business A) II and III B) I, II, and III C) I and II D) I and III
C) When an investment adviser fails to meet its minimum financial requirements, it must notify the Administrator by the end of business on the day after discovery and then must file a report of its financial condition by the end of the next business day. Included in the report must be the number of client accounts.
Anyone who represents an issuer in effecting transactions between the underwriter and the issuer A) must be registered as an agent B) must be registered as an Administrator C) is excluded from the definition of agent under the Uniform Securities Act D) must be registered as an investment adviser
C) Explanation: Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the act.
ABC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities would not be defined as a broker-dealer in State N under the Uniform Securities Act if it had no offices in State N and its only clients were insurance companies it had contact with fewer than 6 State N residents in any 12-month period its only solicitation of State N residents was through radio advertisements originating in State M but received in State N it occasionally engaged in firm commitment underwriting with issuers based in Nebraska A) I and IV B) III and IV C) II and III D) I and II
D) A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state.
While searching for a suitable investment for your client, you narrow the choice to the following four companies: Company A with returns over the past 4 years of 12%, 4%, 8%, and 6% Company B with returns over the past 4 years of 7%, 8%, 9%, and 6% Company C with returns over the past 4 years of 10%, 12%, -2%, and 10% Company D with returns over the past 4 years of 15%, 20%, -8%, and 3% Which of these choices has the highest standard deviation? A) Company C B) Company B C) Company A D) Company D
D) Although the exam will not ask you to compute standard deviation, you are required to know that it measures the deviation from the mean (average). In all four of these examples, the mean is 7.5% (30 divided by 4). In which of the choices do the returns occur furthest from that mean? In choice D, they range from 12.5% higher to 15.5% lower. In choice A, the range is from 4.5% higher to 3.5% lower; in choice B, the range is from 1.5% higher to 1.5% lower; in choice C, the range is from 4.5% higher to 9.5% lower. That should clearly point out that the greatest volatility, or dispersion from the mean, is choice D, while choice B would have the lowest standard deviation.
Which of the following statements is CORRECT regarding an unsolicited trade in an unregistered nonexempt security? A) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. B) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. C) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. D) It is only an exempt transaction if it is an order to buy; orders to sell an unregistered, nonexempt security would not be an exempt transaction.
D) Ex. The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgment of unsolicited orders be recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another.
An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following? A) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. B) Registration is required only if an offer is directed, accepted, and paid for in that state. C) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly. D) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities.
A) Both the broker-dealer and the agent must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g., they have no place of business in the state and their only clients are institutions). At the time the broker-dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents.
When a corporation files for bankruptcy, heading the priority for payment would be A) holders of secured debt B) common stockholders C) taxing authorities D) employees for their wages
A) In the case of a corporation's liquidation, here is the order that is followed for paying off creditors and stockholders: 1) secured claims like mortgage bonds, equipment trust certificates, and collateral trust bonds; 2) unpaid wages; 3) taxes; 4) unsecured liabilities (debentures) and general creditors; 5) subordinated debt; 6) preferred stockholders; and 7) common stockholders.
An investment adviser representative may share in the profits and losses of a customer's account A) under no conditions B) if the investment adviser representative deducts the advisory fee charged the customer from any profits earned C) provided a written contract is executed between the investment adviser and the client D) as long as both the customer and the representative's employer give written consent
A) Investment adviser representatives are not allowed to share in the capital appreciation or depreciation of their customers' accounts in the same manner as agents.
Federal covered securities, as defined under the Uniform Securities Act, A) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 B) must be registered with the SEC before they can be offered in the state C) would not include securities senior to a common stock listed on the NYSE D) must be registered in the state before they can be offered within the state
A) It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered.
Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules B) customer permission was obtained prior to entering into the contract C) permission was obtained from the Administrator and custody was not prohibited by that state's rules D) the IA maintained adequate net worth or a surety bond
A) It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if the Administrator, by rule, prohibits custody; or in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers.
The consumer price index is best described as A) a weighted average cost for a basket of goods and services B) an unbiased estimate of changes in the cost of living C) a measure of transactions between a country and the rest of the world over a period of time, D) the inflation rate for a given period of time E) usually a year
A) The consumer price index (CPI) is the average cost of a basket of goods and services, weighted to represent the purchases of a typical household and indexed to a reference base period. The inflation rate is a percentage change in a price index such as the CPI. The balance of payments tracks transactions between a country and the rest of the world over a period of time, usually a year.
Whippet Bus Lines, Inc., serving most of the country, has just been informed by the Surface Transportation Board of the United States that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in Whippet's net income. If one was an investor in Whippet Bus Lines, Inc., this would be an example of A) regulatory risk B) market risk C) business risk D) country risk
A) When an action by a regulatory agency, such as the STB, leads to increased costs and lower income, we call that regulatory risk.
A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should A) reject the order because she is not registered in State B B) accept the order because it is unsolicited C) accept the order because her broker-dealer is registered in all 50 states D) accept the order because she received it in State A
B) Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.
The term used to describe the processes and policies followed by a financial institution to protect firm and customer data in electronic form from criminal or unauthorized use is A) business continuity planning B) cybersecurity C) identity theft D) antivirus software
B) From the smallest to the largest, investment advisory firms have confidential information relating to their clients. As today's recordkeeping procedures are more likely to be in electronic form, the threats from the outside are increasing at a rapid rate. The role of cybersecurity is to protect against those threats. Identity theft is a part of the cybersecurity program, and one of the tools used to protect is antivirus software.
The XYZ Corporation's income statement contains the following information: Total revenue$200,000Cost of goods sold60,000Administrative expenses30,000Depreciation10,000Miscellaneous expenses3,000Taxes paid5,000 Based on this information, XYZ's gross profit is A) $110,000 B) $140,000 C) $97,000 D) $100,000
B) Gross profit is sales (or revenues) minus the cost of goods sold (COGS). When the depreciation expense relates to the equipment used directly in the production of the sales, it is included in COGS. In this question, there is no choice of $130,000 (which would include depreciation in COGS). Clearly, by not including that choice, NASAA is taking the position that depreciation is excluded from COGS.
Which of the following persons is required to register with the SEC as a federal covered adviser? A) A publisher that gives incidental investment advice only B) An adviser that gives advice to registered investment companies only C) An adviser that manages assets of $90 million or more D) An adviser who gives advice only related to U.S. government securities
B) Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. Don't be tricked by the $90 million. Only those with at least $110 million under management (using AUM as the deciding factor) are required to register with the SEC. Once that level has been reached, the IA may remain SEC registered as long as its AUM does not drop below $90 million.
MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation C) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price D) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price
B) Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, (that is their underwriting compensation), and market makers buy at the bid and sell at the ask earning the spread.
The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents includes prohibitions against certain practices designed to manipulate market prices of securities. An activity that would fall within the spectrum of the prohibitions would be A) front running B) wash trades C) churning customer accounts D) guaranteeing customers against loss
B) Performing wash trades involves the simultaneous or near-simultaneous selling and repurchase of the same security for the purpose of generating the appearance of trading activity and increasing the price. This is one of the most common forms of market manipulation. Churning, front running, and guaranteeing customers against loss, although prohibited practices, are not considered market manipulation.
If the yield curve becomes inverted, a likely cause would be that the Fed has A) loosened long-term credit B) tightened short-term credit C) tightened long-term credit D) loosened short-term credit
B) The Fed's influence on rates is primarily on the short end of the yield curve. Both the discount rate, which it sets, and the federal funds rate, which it influences, are short-term rates. The Fed tightens short-term credit when the economy appears to be overheating. To slow things down, the Fed raises short-term rates to extremely high levels.
The Uniform Securities Act permits amendments to a registration statement after its effective date so as to change which of the following? A) The underwriter's discounts and commissions B) The number of shares to be offered C) Changes may not be made by amendment; filing of a new registration statement is required. D) The public offering price
B) The Uniform Securities Act permits filing an amendment to an existing registration, increasing the number of shares to be offered and sold, if the public offering price and underwriter's discounts and commissions remain unchanged.
An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm, A) the agent must register as an investment adviser because the research is being done after hours B) neither the agent nor his employing broker-dealer need register as an investment adviser C) the broker-dealer must register as an investment adviser and the agent as an investment adviser representative D) the agent must register as an investment adviser representative
B) The exclusion from the definition of investment adviser is lost only when an agent (or broker-dealer) receives special compensation for rendering investment advice. In this case, the agent is only receiving commissions when the clients make a trade. If there are no trades, there is no compensation for the advice. It is only when the compensation is not transaction-based that it becomes special.
XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wished to examine certain financial records of XYZ's, the Administrator would be able to do all of the following EXCEPT A) do so during normal business hours without prior notice B) examine those records located in State U C) ask the State C Administrator to perform the examination D) ask FINRA to perform the examination
B) This broker-dealer does not have a place of business in State U so there are no records located there. How can an Administrator examine records that don't exist. All records are kept in the principal office and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator.
Which of the following statements are TRUE? When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. A) II and IV B) I and II C) III and IV D) I and III
B) When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required.
A corporate executive decides it is in the company's best interest to purchase a yacht. Over the years, the company has built up substantial retained earnings and will use accumulated funds to make the purchase. An analyst interested in how this purchase will affect the company's debt to asset ratio would examine A) the income statement B) the balance sheet C) the seaworthiness of the ship D) the statement of cash flows
B) Where do we find a company's assets, liabilities, and retained earnings? On the balance sheet.
After an investigation, the Administrator wishes to have the registration of an investment adviser revoked. In order to do so, all of the following are true EXCEPT A) an appeal may be filed within 60 days of the final order B) the investment adviser may elect to withdraw its registration C) the Administrator must be able to point to specific facts of law violated by the investment adviser D) the investment adviser has a right to a hearing
B) Withdrawal is a form of non-punitive termination and cannot be employed once an investigation has begun.
The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is a broker-dealer an insurance company an investment company a person receiving impersonal advice for which the annual fee is less than $500 A) I and II B) III and IV C) I, II, III and, IV D) I, II, and III
B) There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year.
The Uniform Securities Act requires that broker-dealers and investment advisers maintain certain records relating to their business operations. If the firm wished to upgrade to a modern system, such as disk storage, A) the most modern form currently permitted is microfilm or microfiche B) it must keep its records in paper form C) it could do so if the system met certain requirements, including that the information on the disk could not be altered D) it must obtain approval from the Administrator prior to determining its method of record retention
C) Computer disk storage is acceptable provided a printed copy can be readily obtained and the information on the disk cannot be overwritten.
Which of the following statements best explains an agency cross transaction for an advisory client? A) A sales transaction where the investment adviser receives a commission rather than a fee B) A broker-dealer activity that involves selling securities from one client to another client of the firm C) An agency cross transaction for an advisory client means a transaction in which a person acts as an investment adviser in relation to a transaction in which the investment adviser, including an investment adviser representative, acts as a broker-dealer for both the advisory client and another person on the other side of the transaction D) A transaction in which an investment adviser offers securities in exchange for securities owned by another registered investment adviser
C) Explanation: In an agency cross transaction, an investment adviser affiliated with, or under the control of, a broker-dealer represents both sides of a transaction. Therefore, in addition to the advisory fee, commissions are earned. When executing an agency cross transaction, prior written approval from the client is required. Agency cross transactions are prohibited when the securities in the transaction have been recommended to both parties by the adviser.
An investment adviser may borrow from all of the following clients EXCEPT A) a commercial bank in conjunction with a mortgage on the office building from which the advisory operates B) a savings and loan association that has offered to finance new computers for the adviser's office C) a mortgage broker who helped the adviser negotiate mortgage terms for its office building D) a broker-dealer in conjunction with a margin account
C) Mortgage brokers are not in the business of lending money; they help parties negotiate terms of a loan, which is why they are called brokers. The bank, brokerage, and savings and loan association are in the normal business of lending. Investment advisers generally may borrow funds from clients that are in the normal business of lending.
Under the Investment Advisers Act of 1940, which of the following would NOT meet the criteria of persons associated with an investment adviser? A) A manager in an investment advisory firm who supervises 5 investment adviser representatives B) The individuals responsible for bringing new clients to an advisory firm C) An individual whose only function is posting trades to client accounts D) An individual whose only connection to the firm is a position on the board of directors
C) Persons associated with an investment adviser include members of the board of directors, officers, partners, or managers of an investment advisory firm. Sales representatives and other employees whose duties are not limited to clerical or ministerial functions are included as well. In most, but not all, cases, associated persons are required to register as investment adviser representatives.
An agent discovers that he has sold a customer an unregistered, nonexempt security that she thought was exempt. The broker-dealer offers to buy it back on behalf of the agent. Under the Uniform Securities Act, A) a customer rejecting the offer within 30 days forfeits the right to sue B) this cannot be done under any circumstances C) this is legal and is called rescission D) the offer also cannot include interest
C) Provided the agent sold the security with no intent to defraud, rescission may be offered. Rescission is the return of the customer's money, plus interest, less any income received from the investment. The customer has 30 days to accept or reject the offer. After that, all rights of recovery are forfeited.
When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT A) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering B) all other states in which the security is to be registered C) the effective date of the offering D) the amount of securities to be offered in the state
C) The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering.
Which of the following corporate actions would have an effect on the company's working capital? A) Paying a utility bill B) Declaring a 15% stock dividend C) Calling in a portion of a 20-year bond at par D) Borrowing money from the bank on a 90-date note
C) Working capital is the difference between the corporation's current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash.
The registration requirements of the Securities Act of 1933 would NOT apply to which of the following? A) Stocks and bonds issued by insurance companies B) Stocks listed on the New York Stock Exchange C) Securities issued by foreign governments with whom the United States has diplomatic relations D) Fixed annuities and other fixed insurance contracts
D) Although federal covered securities, such as those listed on the NYSE, and securities issued by insurance companies and foreign governments are exempt under the Uniform Securities Act, they are not exempt under the Securities Act of 1933. The registration requirements never apply to non-security products, such as fixed annuities.
Which of the following statements regarding investment risk is NOT correct? A) The beta coefficient measures an individual stock's relative volatility to the market. B) Investors expect to earn a higher rate of return for assuming a higher level of risk. C) A stock's level of risk is a combination of market risk and diversifiable risk. D) Systematic risk may be reduced or eliminated by effective portfolio diversification.
D) It is only unsystematic (diversifiable) risk that may be effectively managed through portfolio diversification. Standard deviation measure a stock's combined systematic (market) and unsystematic (diversifiable) risk. Beta indicates the relative volatility of a stock or portfolio to the market and MPT preaches that higher returns are accompanied by higher levels of risk.
A broker-dealer (BD) registered in multiple states must meet the record retention requirements of A) the state where the BD is incorporated B) the state where the principal office of the BD is located C) the state with the most stringent requirement D) the SEC
D) One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located.
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only An adviser with a place of business in the state whose total fee income in the state amounts to $150 An adviser with no place of business in a state who only provides advice on fixed annuities An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940 A) I, II, and IV B) I, II, and III C) I only D) I and II
D) Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable.
Centripetal Investment Advisers (CIA) has it principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT A) CIA's advisory contract calls for the automatic deduction of advisory fees B) CIA has a power of attorney granting authority to withdraw funds from the custodian C) checks made out to CIA are deposited within 3 business days D) checks made out to 3rd parties are forwarded within 3 business days
D) When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody.
An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments? A) Treasury notes B) Direct participation programs (DPPs) C) Municipal bonds D) Common stock
D) The internal rate of return (IRR) is the discount rate that makes the future value of an investment equal to its present value. Because this computation involves the time value of money, in order to reasonably compute present value, there must be either a maturity date or some other kind of ending date, such as that which is usually projected in a DPP. Common stock has nothing comparable to that.
