Final Exam 2
Bypass Trust
(or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent's death. The key to this specific question is to identify the ages of the beneficiaries. Since both children are in their 40s, a growth investment is the most appropriate. The focus must be on the beneficiaries, not the grantor.
accredited investors
1. Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future 2. A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future 3. An individual or a couple with a net worth of at least $1 million
Unacceptable because the trustee is not acting in the best interest of the trust
A CPA who specializes in tax and estate planning is serving as a trustee. Since the CPA will be charging a minimal fee for his services, he chooses not to perform a complete tax analysis for the trust. Under the Uniform Prudent Investor Act, the CPA's actions are considered:
The appropriate registration fee must be paid
A broker-dealer located in State A, in business for three years, goes out of business in July. Some of the principals at the firm start a new broker-dealer in August of that year. Which of the following statements is TRUE concerning the broker-dealer's registration fee?
Liquidity
A client of a registered representative owns a small business. The business produces strong cash flow during the holiday season, but negative cash flow for the rest of the year. This may indicate a need for which of the following choices?
Notice Filing
A company issued $50 million of common stock in a private placement under Regulation D. In order to sell the stock initially in any state, the Administrator requires the filing of:
the e-mail must be approved by a principal
A registered representative has written an electronic marketing piece that recommends the purchase of a new variable annuity being offered by his firm. He wants to send it by e-mail to 40 retail clients. If the product is suitable for each of the clients on the RR's distribution list, which of the following statements is TRUE?
policies are term life
A small business owner enters your office with multiple insurance policies issued by many different companies. She has over $600,000 of coverage that expires in five years. Which of the following statements BEST describes the policies?
Federal covered security and not subject to registration with the Administrator
A technology company's stock is listed on an exchange and is also traded over-the-counter by a small number of market makers. The stock is considered by the Administrator to be a:
Reports or recommendations prepared by another party may be provided to clients if the adviser discloses their source
According to NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding the use of reports or recommendations prepared by someone other than the investment adviser using such information?
weak form efficiency
According to the efficient market hypothesis, which form of efficiency asserts that using technical analysis in identifying securities which may be undervalued is of no benefit?
Growth stocks, since the beneficiaries will not need the funds for several years
An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate investment in a bypass trust?
Investigate the complaint
An Administrator in State Y who receives a complaint regarding an advertisement that originated in State X will take which of the following actions?
More investment options
An advantage of a Coverdell ESA over a 529 plan is:
sector rotation
An advisory client is concerned that the economy is close to reaching its peak. He instructs his adviser to sell his holdings in automobile stocks, and invest the proceeds in consumer staples. This strategy is known as:
Since the exchange is done within the same fund family, there are no additional sales charges; however, it may be a taxable event
An agent recommends that her client exchange her shares in XYZ's Income Fund for shares in XYZ's Growth Fund. Which of the following is TRUE of this recommendation?
It provides immediate access to the books and records
An investment adviser may store its books and records on electronic media if:
three years
Any person who willfully violates the Uniform Securities Act may be fined up to $5,000 and imprisoned for up to
Luro's clients
Arnold is the sole shareholder of Luro Trading Corporation, a small investment advisory firm registered with the states of New York, New Jersey, and Connecticut. Arnold decides to sell 60% of his shares to another investment adviser and retire to Hawaii. This transaction would require the approval of:
Opportunity cost
Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation?
1. Colleen's father may give her a gift without limitation 2. Colleen's father may give her a loan
Colleen is an agent for a broker-dealer. She is buying a condominium but needs additional cash for the down payment. Her father, who is also one of her clients, has offered to help. Which of the following is TRUE?
Bring an action in court to impose a fine but not a prison sentence
During the course of an investigation under the Uniform Securities Act, the Administrator finds that an investment adviser representative has engaged in fraudulent activities. The representative says that he is unaware of any fraud and was only following the directions of his firm. He produces a written recommendation list issued by his firm upon which he based his recommendations. What action would the Administrator most likely take in this situation?
part of each payment is taxable earnings and part is a tax-free cost basis
If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed?
Form ADV-E
If an IA acts as a qualified custodian and holds customer cash and securities, the assets must be subject to an unannounced annual audit by a CPA (not by the SEC). At the completion of the audit, the CPA (not the IA) must file
The solicitor's disclosure document
If an investment adviser has an arrangement with a third-party solicitor, what must the adviser maintain?
The IA acts as a broker-dealer to the buyer of the securities without written consent and disclosure
If an investment adviser sells a security that it owns to an advisory client, which of the following scenarios would violate the Uniform Securities Act?
five years
If an investment adviser uses a social media site as a form of advertising, all records of its use must be maintained for at least:
next business day
If an investment adviser's net worth drops below the required minimum (as set by the Administrator), the adviser must file a deficiency notice with the Administrator within one business day and also file a report on its financial condition by the
1. Life expectancy 2. Inflation rate 3. Investment return
In order to determine the lump-sum amount that a person will need at retirement, what elements are required for an investment adviser to make the projection?
Minimum Net Capital
Investment advisers and broker-dealers may be required to maintain
dollar cost averaging
It is a systematic, fixed-dollar method of investing
Be terminated through the filing of Form U5
Jim is an agent of a broker-dealer who has received an employment offer from another broker-dealer. If Jim resigns from his present firm, his registration will:
Paid by the wife
Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is:
Under Section 404(c) of ERISA, fiduciaries are:
Not liable for investment losses provided that certain requirements are met
Not recommend this strategy since buying on margin may not increase the return received by this client
One of your clients has heard that the use of leverage can increase his portfolio's return. This client normally buys securities that have high dividend payout ratios and uses the dividends to supplement his income. He wants to open a margin account and asks you to use his existing securities as collateral to purchase additional shares of the same stocks that you have in your portfolio. You should:
generally, you should never take this action
One of your clients would like to buy 100,000 shares of Smallco Industries, a thinly traded OTC security. You would like to purchase a nominal amount of shares ahead of the client for your own account, since his prior picks have proven to be profitable. Under which of the following conditions is this action acceptable?
Verify client funds and submit to an unannounced annual audit by a CPA
Rather than utilizing a custodian, an investment adviser chooses to maintain custody of customer assets. According to the Investment Advisers Act of 1940, the adviser is required to:
1. The offer and acceptance occur in State Z. 2. The offer originates over the phone from State Z and is directed to State A. 3. The offer is mailed from State A, directed to State Y, and accepted in State Z.
Related to a transaction, which of the following actions would cause it to be subject to the laws of State Z?
Begin by April 1 of the year following the one in which the individual turns 70 1/2
Required minimum distributions (RMDs) from a traditional IRA account must:
discounted cash flow analysis
Research analysts use ________ to determine the value of many different investment opportunities in the marketplace
retail communication
Since the communication is being sent to more than 25 retail investors, it is considered a
She provides mutual fund timing and sector rotation advice to her clients
The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if:
person
The USA has a broad definition of the term ______. Natural persons (individuals) and legal persons (partnerships and corporations) are included in this definition. Minor children, incompetent adults, and deceased persons are not considered persons under the USA.
unsolicited, non-issuer transactions
The USA provides a specific exemption to
the ability to limit risk
The advantages of investing in a limited partnership include:
principal
The biggest disadvantage of investing in a growth mutual fund is the potential loss of:
Cyclicals, such as transports and technology
The economic cycle consists of four stages--full recession, early recovery, late recovery, and early recession. Since the market tends to move ahead of the economic cycle, an adviser who believes the economy is in a full recession may advise clients to rotate into what sector?
Manner in which the sales charges are collected
The following two funds are listed in a mutual fund's prospectus: —Short-term Global A —Short-term Global B The difference between these two funds is likely the:
lack of liquidity
The major disadvantage to a limited partner in a DPP is:
Business risk
The possibility that a company may perform poorly, causing its stock to decline in value is called:
IAR
The reason that the senior partner is not considered a registered investment adviser representative is that there's no indication that this person has any of the responsibilities of an
Tactical Asset Allocation
Those investors, who believe markets are not perfectly efficient, may use an active strategy in which the asset mix of a portfolio is altered in anticipation of economic events. This market timing approach is known as:
Deviation in returns
Under the Capital Asset Pricing Model, risk is defined as:
Maturities of no more than nine months
Under the USA, which of the following characteristics is required for a banker's acceptance to be exempt from registration?
1. pass an exam 2. pay a filing fee
Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to:
The Securities Act of 1933
Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under:
Within three years of occurrence and two years of discovery, whichever comes first
Under the Uniform Securities Act, in the absence of fraud, when must action be taken for recovery on a transaction made in violation of a state registration provision?
Never, since this practice is prohibited under industry rules
Under what circumstances may a variable annuity be recommended as a short-term investment?
Tenancy by the entirety
Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse?
Low price/earnings ratio
Value stocks are characterized by a:
Modern Portfolio Theory (MPT) defines risk as
Variability of expected returns about the mean
investor's basis
What is the liability for loss for an investor in a limited partnership?
Tax ID
What's required to be obtained by an investment adviser when it engages with a new client?
investment risk
When investing in a variable annuity, investors would be MOST concerned with which of the following risks?
the client's
When sharing in the profits of a customer's account, whose approval is required?
1. They are used to fund retirement. 2. They grow tax-deferred.
Which TWO of the following statements are TRUE concerning Section 457 plans?
real estate
Which of the following choices is an asset class?
1. An investment of money 2. An expectation of profits 3. A common enterprise 4. Efforts made by a third party
Which of the following elements are required for an investment contract to be considered a security?
General advertising is permitted, but all investors must be accredited.
Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?
A person who pleaded guilty to stock manipulation five years ago
Which of the following persons would be subject to statutory disqualification under the Securities Exchange Act of 1934?
t-bonds
Which of the following securities is most susceptible to interest-rate risk?
Both provide flow-through of losses
Which of the following statements BEST describes the similarities between an S Corporation and a general partnership?
All public and private information is reflected in securities prices.
Which of the following statements describes a strong form efficient market?
Futures contracts are standardized, and forward contracts are not standardized
Which of the following statements is TRUE regarding futures and forward contracts?
An advertisement that lists an adviser's credentials
Which of the following types of internet-based advertisements are permitted for an investment adviser?
Information this particular investor needs in order to make an investment decision
While acting in a fiduciary capacity, what must an investment adviser provide to a customer who's intends to make an investment?
structured product
With a $1,000 investment, a brokerage client purchases a security that consists of a zero-coupon bond for $750 and an equity call option for $250. At maturity the investor receives the bond's principal plus any appreciation in the option. What is this investment?
bond index fund
Your client John has a portfolio of large-cap stocks representing companies in many different industries. You want to help him reduce his exposure to market risk by recommending investments that are negatively correlated with his current holdings. Of the following investments, you would most likely recommend a(n):
Under the Uniform Prudent Investor Act (UPIA)
a trustee managing an account that has multiple beneficiaries must act impartially when investing and managing the trust's assets. When making investments, a trustee must take into account the different interests of all beneficiaries.
exempt transactions
also include any offer to an investment company or other institutional investor as well as a transaction by an executor of an estate or a trustee involved in a bankruptcy.
401(k) plan
an employee can usually make a pretax contribution to the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions, but may do so.
SEC
believes that hedge clauses that limit the adviser's liability or the investor's potential right of actions against the adviser may violate the antifraud provisions of the Investment Advisers Act.
Discounted cash flow (DCF) analysis
evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond.
Term Life policy
expires at the end of a period.
Dividends
from all sources, including life insurance policies, would be included in the income section of a personal income statement, not in the expenditures section.
non-qualified annuity
has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annualized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt
may not be imposed
if the person proves that he had no knowledge of the fraudulent activities or that he was not aware or could not have been reasonably aware of what was going on, then a prison sentence
general partnership
involves full liability of all the partners
Discounted cash flow (DCF) analysis
is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued.
sector rotation
is a strategy often used in anticipation of changes in the business cycle. If it is believed the economy is about to slow, profitable sectors to invest in would be consumer staples, or defensive stocks.
Opportunity cost
is a term used in a variety of ways in economics. For purposes of the question, the focus here is on investment choices. Is the difference in return between an investment made and one that is not made.
Form ADV-NR
is filed by investment advisers that have principal officers who are not residents of the United States
grantor trust
is one in which the grantor retains a right to any income generated by the trust, as well as the power to revoke the trust. The income generated by the trust must be included in the grantor's taxable income. The grantor is responsible for paying all taxes on any funds the trust distributes or retains for future distribution. For tax purposes, it is irrelevant that the income is used to pay the premiums on insurance policies owned by the grantor or the spouse.
Form 8-K
is the report that companies must file with the SEC to announce material corporate events that shareholders should know about. A change in the location of a minority owned subsidiary is not a material event which may affect the company or its shareholders.
Capital Asset Pricing Model (CAPM)
measures risk using beta to measure systematic risk and alpha to measure nonsystematic risk. Risk is the variance in expected return, not the loss of client funds or failure to meet an objective.
Section 404(c)
provides a limited exception to the normal rules governing fiduciary responsibility under ERISA for plans that provide for individual, self-directed accounts, such as 401(k) plans. Fiduciaries are not held responsible for investment losses if certain conditions are met.
S Corporation
provides limited liability to its shareholders
Variable Universal Life policy
the performance of the separate account could increase or decrease the cash value. Loans against the policy would reduce the cash value available.
structured product
typically consists of a debt instrument (note or bond) and a derivative product (e.g., an option). The debt instrument provides a guaranteed principal payment, while the derivative provides a variable payment at maturity.
Investment adviser representative
who work for federal covered investment advisers must register in every state in which they maintain a place of business.
