Practice Exam no retake
A client enters a buy stop order for 100 shares of ATL at 50. Trades then occur at 48, 49, 49.90, 50.05, 50.10 and 49.78. What is the likely price the client paid for the stock? A) $50.05 B) $49.78 C) $50.10 D) $49.00
C) $50.10 First, identify that this is a buy stop order. Clients enter buy stop orders at a price above the current market. The order is triggered as soon as the price gets to $50 or higher. That would be the trade at $50.05. At that time, a market order is entered and the client pays the next price (which could be more or less than $50). In this case, the next price is $50.10 and that is the likely price per share paid by the client.
One thing that futures and forwards contracts have in common is that A) contract terms are standardized. B) both are exchange-traded. C) both parties are obligated to perform. D) only the seller is obligated to perform.
C) both parties are obligated to perform. Unlike options contracts where only the seller is obligated to perform, both buyer and seller in futures and forwards contracts have obligations. Only futures contracts are standardized, and that is why they are only ones traded on exchanges.
ABC Advisers is registered with the SEC. On its annual updating amendment, it reports that its assets under management (AUM) have fallen from $125 million to $94 million. As a result, A) ABC can remain registered with the SEC. B) ABC must register in the appropriate states. C) ABC must increase its AUM to at least $100 million to remain registered with the SEC. D) ABC can no longer remain registered with the SEC.
A) ABC can remain registered with the SEC. This is a case where the "buffer" applies. Once registered with the SEC, an investment adviser's AUM, as reported on its annual updating amendment, can decline to $90 million. If it should fall below that, the firm has 180 days to register in the appropriate states.
When a portfolio manager wants to benchmark against the broadest measure of the U.S. equity market, she will use A) the Dow Jones Composite Index. B) the Wilshire 5000. C) the NYSE market index. D) the Russell 2000.
B) the Wilshire 5000. Once upon a time, the Wilshire 5000 really did have 5,000 stocks. Today, it is about 70% of that but it is still the broadest measure of equities traded in the United States.
One of your clients owns a variable life insurance policy with a face amount of $500,000. The most recent calculation of the cash value was $30,000. How many votes will this client be able to cast at the upcoming annual meeting? A) 5,000 B) 300 C) 500 D) 3,000
B) 300 Variable life insurance policyholders receive one vote for each $100 of cash value. Dividing the $30,000 by $100 results in 300 votes.
With the increase in the use of social media in the financial industry, compliance concerns are growing every day. One area requiring specific supervision is when a third party, not related to the investment firm, has posted information where the firm has played a role in the development of the material. This is known as A) coordination. B) entanglement. C) adoption. D) concealment.
B) entanglement. Entanglement is when an investment adviser or broker-dealer has participated in the development of content on a third-party site and then publishes a link to the site. There is nothing wrong as long as the content complies with advertising standards and disclosure of the relationship is disclosed. Adoption is a less serious concern because, although endorsed by the securities firm, it had no hand in the development of the content.
The XYZ Corporation has reported net income of $100 million. It has 10 million shares of a $25 par preferred stock with a 6% dividend rate. There are 17 million shares of common stock outstanding and the current market price is $47.50 per share. What is XYZ's P/E ratio? A) 2.8:1 B) 8.1:1 C) 9.5:1 D) 12.1:
C) 9.5:1 This requires multiple steps. First, find the earnings per share. The net income is $100 million. The preferred dividend is $1.50 per share times 10 million shares or $15 million. That means the amount available for common is $85 million. Divide that by the 17 million shares outstanding and the EPS is $5. Divide the market price of $47.50 by the $5 EPS and the P/E ratio is 9.5 to 1.
Part of the information-gathering function is developing a client's financial profile. One of the items viewed is the family balance sheet. On that balance sheet, you would expect to find all of the following liabilities except A) credit card debt B) a lien on the car title C) cash in the bank D) home mortgage
C) cash in the bank Cash in the bank is an asset, not a liability
If a client suffers financially from improper investment advice, under the Uniform Securities Act, the investor may recover all of the following except A) the cost of the advice. B) interest at the state's legal rate or as otherwise determined by the Administrator less any income received on the subject securities. C) the amount paid for any securities purchased as a result of the improper advice. D) reasonable attorney fees and court costs.
C) the amount paid for any securities purchased as a result of the improper advice. The assumption of the USA is that the client still owns the securities. Therefore, returning the losses has the same financial effect as buying them back for the original purchase price. In addition, the adviser must refund all advisory fees charged.
Outstanding performance would likely have the least effect on the management fee paid by A) a unit investment trust. B) an open-end investment company. C) a closed-end investment company. D) a hedge fund.
A) a unit investment trust. Because the portfolio of the UIT is fixed, there is no ongoing management fee as there would be with management companies or hedge funds. Hedge fund fees are most likely to be affected by performance.
Many bonds are quoted based on their yield to maturity. Mathematically, that yield is the bond's A) discounted cash flow. B) internal rate of return. C) adjusted rate of return. D) present value.
B) internal rate of return. The computation of a bond's yield to maturity reflects the bond's internal rate of return (IRR).
An investment adviser representative was charged by the Administrator with making unsuitable recommendations. The result of the hearing was a six-month suspension. Should the individual wish to appeal, A) filing the appeal acts as a stay of the order unless the court has ordered otherwise. B) the appeal must be made in writing in a court of competent jurisdiction within 60 days after the entry of the order. C) the appeal must be made in writing in a court of competent jurisdiction within 30 days after the entry of the order. D) approval must first be obtained by the employing investment adviser.
B) the appeal must be made in writing in a court of competent jurisdiction within 60 days after the entry of the order. The rules of the Uniform Securities Act require written filing of an appeal within 60 days after the entry of the order. It does not act as a stay of the order unless the court has ordered otherwise.
An investor who invests solely in 91-day U.S Treasury bills faces A) credit risk. B) liquidity risk. C) opportunity cost. D) business risk.
C) opportunity cost. Opportunity cost is the risk taken when choosing one investment over another. In this specific case, the investor has chosen ultimate safety of principal with a very low return. The opportunity cost is the difference between what could have been made by investing in equities or in longer-term debt securities.
A unique characteristic of Class B shares offered by an open-end investment company is that A) they have a conditional deferred sales charge. B) they can be referred to as no-load funds. C) they have a level 12b-1 charge. D) after a stated period, generally six to eight years, they convert to Class A shares.
D) after a stated period, generally six to eight years, they convert to Class A shares. Although sold without a front-end load, Class B shares have high 12b-1 fees and a deferred sales charge. But, that is the same case with Class C shares. They cannot be called no load because the 12b-1 charge exceeds 0.25%. What is special about Class B shares is that they automatically convert to Class A shares (with their lower or no 12b-1 charge). Note: Some funds are converting Class C shares to Class A, but that is not widespread. Should that happen, this question will be replaced.
A portfolio manager would most likely add precious metals to A) provide an alternative source of income. B) increase the correlation coefficient. C) increase the liquidity of the portfolio. D) hedge against inflation.
D) hedge against inflation. Tangible assets, such as precious metals, are frequently added to a portfolio as an inflation hedge. They produce no income and are not as liquid as stocks, bonds, or investment companies. The reason they serve as a hedge is because they have low or negative correlation.
Your high-net-worth client recently gave his granddaughter 1,000 shares of ABC stock. At the time of the gift, the stock was selling for $52 per share. In checking the account, you see that the stock was purchased five years ago at $35 per share. Which of the following statements is correct? A) For gift tax purposes, the stock's value is $52 per share. B) The client must report a $35,000 gift. C) The child's cost basis is $52 per share. D) If the child sells the stock six months later at a profit, it will be a short-term capital gain.
A) For gift tax purposes, the stock's value is $52 per share. There are two different tax considerations with gifts. The first is the gift tax. For purposes of determining if the gift exceeds the annual exclusion (currently $15,000), the current market value of the gift is used. In this case, it is a $52,000 gift. That exceeds the annual exclusion so that $37,000 excess may be used against the lifetime exemption. The second consideration is cost basis to the donee. That is the cost basis of the donor. In this case, $35 per share with a long-term holding period.
You have a recently approved an options client. The client is particularly interested in buying call options. In a discussion of the risks, the client mentions that he is aware that upwards of 70% of all options expire worthlessly. Still, even though knowing the odds of winning are against him, he is willing to take the risk. A behavioral economist would refer to his actions as A) regret aversion. B) herd behavior. C) overconfidence. D) anchoring.
A) regret aversion. Regret aversion is preparing yourself for the worst so that if it happens, you won't feel so bad. When the client believes the chances of losing are greater than winning, he'll be able to say to himself, "See, I told you so." By the way, not tested is the evidence that the popular belief is wrong. The OCC states that about 21% of all options expire worthlessly. Most are closed out before expiration.
A state-registered investment adviser maintaining custody of customer funds and securities discovers that its net worth is $32,000. Which of the following steps would be required? A) Returning the customer funds and securities within three business days of the discovery B) Increasing the net worth to $35,000 C) Increasing the net worth to $37,000 D) Filing a financial report with the Administrator by the close of business on the next business day following discovery
C) Increasing the net worth to $37,000 The minimum net worth for an investment adviser maintaining custody of customer assets is $35,000. When a firm discovers that its net worth is below the minimum, it must increase its net worth in $5,000 increments until reaches the $35,000 level. As in this case, it frequently results in the firm having excess net worth. Unless ordered by the Administrator, there is no requirement to return client assets to them. The financial report is filed the business day after notice of the deficiency is filed with the Administrator, not the day after discovery.
Kelly is registered as an agent in State W with Bond Investment Securities (BIS). Kelly would also have to register in A) State P if Kelly had a place of business there that was used solely for administrative work. B) State I if Kelly had no place of business in the state and only dealt with existing clients who were vacationing there. C) State C if Kelly had no place of business in the state and had five or fewer retail clients in the state over a 12-month period. D) State O if BIS had no place of business in the state and only dealt with institutions, some of whom were Kelly's clients.
C) State C if Kelly had no place of business in the state and had five or fewer retail clients in the state over a 12-month period. Unlike investment advisers and their IARs, there is no de minimis exemption for broker-dealers and their agents. If, as in State O, the BD is excluded from the definition of a broker-dealer, then any of its agents cannot be considered agents in the state. The snowbird exemption applies to agents, just as it does to other securities professionals. The only time an agent can have a place of business in a state and not be required to register in that state is if no securities transactions result from activity in that office.
An analyst might use the dividend growth model to value A) common stock. B) both common and preferred stock. C) preferred stock. D) growth stocks.
A) common stock. In order to use the dividend growth model as a valuation tool, there are two requirements. The first is that the dividend can increase. That is not possible with preferred stock because the dividend is fixed. The second requirement is that that company pays dividends. Growth stocks are known for paying little if any dividend.
One of the terms found in the Uniform Securities Act is guaranteed security. An investment adviser representative discussing a security with this kind of guarantee should explain that the guarantee does not extend to A) repayment of principal. B) capital gains. C) dividends. D) interest.
B) capital gains. A guaranteed security is one where a party other than the issuer makes the guarantee. If it is an equity security, typically a preferred stock, it is the dividends that are the subject of the guarantee. If it is a debt security, the guarantee refers to the interest and the principal. There is never a guarantee of a profit.
In order to receive favorable tax benefits, a REIT must A) pass through at least 90% of its income or loss. B) receive 90% or more of its income from real estate. C) pay out at least 90% of its taxable income in the form of dividends. D) pay out at least 75% of its taxable income in the form of dividends.
C) pay out at least 90% of its taxable income in the form of dividends. REITs do not pass through losses, only income. In order to avoid paying taxes on its income, the REIT must distribute at least 90% of its taxable income to investors.
A resistance level is the price range at which a technical analyst would expect A) the demand for a stock to remain constant. B) the supply of a stock to decrease substantially. C) the supply of a stock to increase substantially. D) the demand for a stock to increase substantially.
C) the supply of a stock to increase substantially. This question is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down within a narrow range. The lower limit to these fluctuations is called a support level—the price point where a stock appears cheap and attracts buyers. The upper limit is called a resistance level—the price point where a stock appears expensive and initiates selling. That selling pressure leads to an increase in the supply available and the price retreats from the resistance level. Generally, a resistance level will develop after a stock has experienced a steady rise from a lower price level. Technicians believe that, as the price increases towards a high, investors will sell and take their profits.
Alberto is an investment adviser representative for MNO Advisers, an investment adviser registered in three states. If Alberto voluntarily terminates his registration, A) MNO must notify the Administrator. B) both MNO and Alberto must notify the Administrator. C) Alberto must notify the Administrator. D) MNO must notify NASAA.
A) MNO must notify the Administrator. In the case of an IAR's termination, voluntary or involuntary, the notifying party depends on the registration of the investment adviser. When the IA is state-registered, as is the case in this question, it is the IA who notifies the Administrator. If the IA is federal covered, then it is the IAR who gives the notification.
Wilson Irving works for Wall Street Limited (WSL), an investment adviser registered with the SEC. Irving limits his advice strictly to securities issued or guaranteed by the U.S. government. Under the Uniform Securities Act, Irving A) must register as an IAR. B) would need registration as a federal covered IAR. C) is not covered by the anti-fraud rules, as these are federal covered securities. D) must not register as an investment adviser.
A) must register as an IAR. Because Wilson works for a registered investment adviser and provides advice on securities, he must register as an IAR. This is true regardless of the nature of the securities that are the subject of his advice. If the only securities that the firm (WSL) gave advice on were those issued or guaranteed by the U.S. government, it would not have to register on the federal or the state level and neither would Wilson. However, when the individual limits his advice to them, the exclusion does not apply. Wilson works for an investment adviser; he does not register as one. There is no such thing as a federal covered IAR, only a federal covered IA. If the advice relates to securities, no one is exempt from the anti-fraud rules.
Included in the Uniform Securities Act's definition of broker-dealer would be A) individuals who are registered as agents. B) commercial banks. C) corporations domiciled in the state who make an offering of their securities to the public. D) a broker-dealer with a place of business in the state whose only clients are banks and trust companies.
D) a broker-dealer with a place of business in the state whose only clients are banks and trust 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.
When it comes to using social media, the regulators believe that A) the delivery method is more important than the nature of the content. B) the most important factor is if the user is a broker-dealer or an investment adviser. C) the nature of the content is more important than the delivery method. D) both the nature of the content and the delivery method are of equal importance.
C) the nature of the content is more important than the delivery method. Ever since social media hit the scene, the regulators have focused on the content rather than how it is delivered. The only significant difference between the rules applying to broker-dealers versus those for investment advisers is that IAs cannot use testimonials and, under certain circumstances, BDs can.
In keeping with the nature of the fiduciary relationship between an investment adviser and its clients, there are certain disclosures that must be made. Among those are details about the adviser's compensation. Those details are not required to include A) the firm's policy on refunding prepaid advisory fees. B) any incentives or other compensation from the issuer of recommended securities. C) the method of computing compensation. D) the rate of compensation paid to the firm's investment adviser representatives.
D) the rate of compensation paid to the firm's investment adviser representatives. How the investment advisory firm pays its employees, including IARs, is not a required disclosure. What is important is the financial arrangement between the firm and the client.
The alternative minimum tax (AMT) is designed to capture revenue from those who report certain preference items on their tax returns. Examples of those preference items would include all of the following except A) nonqualified stock options to the extent of the excess of the market value over the strike price. B) interest on private activity municipal bonds. C) excess intangible drilling expenses. D) accelerated depreciation on certain property.
A) nonqualified stock options to the extent of the excess of the market value over the strike price. It is the incentive stock option (ISO) where the excess of the market value over the strike price is a preference item.
Investment advisers are required to make disclosure of material information to their clients. One of those disclosures is when the investment adviser has a financial condition that is reasonably likely to impair the ability of the firm to meet its contractual obligations to its clients. In the case of a state-registered investment adviser, this disclosure is mandatory in all of the following situations except A) when the investment adviser has been suspended by the Administrator within the past 10 years. B) when the investment adviser has custody of clients' funds or securities. C) when the investment adviser has discretionary authority over clients' accounts. D) when the investment adviser requires fees of more than $500 for services, six or more months in advance.
A) when the investment adviser has been suspended by the Administrator within the past 10 years. Disclosure of the suspension is required, but that has nothing to do with financial impairment.
Over the past year, the market has returned 15%. Under CAPM, which of the following stocks would be considered undervalued? A) ACR, beta 0.9, return 13.4% B) BED, beta 1.5, return 21.5% C) LQR, beta 0.7, return 11.0% D) RJP, beta 1.2, return 17.5%
C) LQR, beta 0.7, return 11.0% We compare the expected return to the actual return to determine if the security outperformed (making it undervalued) or underperformed (making it overvalued). LQR's beta of 0.7 would have led to an expected market return of 10.5% (70% of the 15% market return). The actual return of 11% was better than would have been expected, so the stock is undervalued. Each of the others had underperformance: RJP - 120% of 15% = 18%; BED 150% of 15% = 22.5%; ACR 90% of 15% = 13.5%.
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A sale of stock by trustee in bankruptcy B) Shares of common stock in the First National Bank of Gotham C) A sale of stock by a custodian for a minor under the UTMA D) Bonds issued by the U.S. Treasury
A) A sale of stock by trustee in bankruptcy A sale by certain fiduciaries, such as a trustee in a bankruptcy (the only trustee qualifying), or an executor or administrator of an estate, is an exempt transaction under the USA. Custodians, although having a fiduciary responsibility to the minor, are not eligible for the exemption. The Treasury bonds are an exempt security, not an exempt transaction. The same is true of the bank stock; it is an exempt security. The difference between identifying an exempt transaction and an exempt security is that there must be an action such as a sale or purchase for it to be an exempt transaction.
Ways in which a Coverdell ESA differs from a Section 529 plan include all of these except A) ESA contributions are made with after-tax dollars. B) ESA's generally offer greater investment flexibility. C) ESA contributions are limited to $2,000 per beneficiary while no such limit applies to 529 contributions. D) ESA funds must be used by age 30 while there is no age limit on 529 funds.
A) ESA contributions are made with after-tax dollars. Both the ESA and 529 plan contributions are made with after-tax dollars.
Among the many definitions in the Uniform Securities Act is that of a person. A person would include A) the estate of a deceased individual. B) a minor child of an investment adviser representative. C) a deceased individual. D) an individual who has been declared mentally incompetent.
A) the estate of a deceased individual. There are three "nonpersons." They are a minor, a deceased individual, and an individual declared mentally incompetent. The estate of a deceased individual is a legal person. When a client dies, the account still exists, but it is now under the control of the executor or administrator of the estate.
An investor whose primary goal was income with high safety would probably find which of the following corporate investments most suitable? A) Ba-rated equipment trust certificate. B) Aa-rated subordinated debenture C) A-rated collateral trust certificate D) BBB-rated first mortgage bond
B) Aa-rated subordinated debenture The first impression is to go for one of the secured bonds. However, when applying a rating, Moody's evaluates the collateral or lack of same when determining the safety of the debt. This is case where the more A's the better.
Most direct participation programs (DPPs) are structured as limited partnerships to A) provide limited liability to the limited partners. B) facilitate raising substantial sums. C) take advantage of the flow-through tax benefits. D) facilitate secondary market trading.
C) take advantage of the flow-through tax benefits. That is what DPP is all about. The ability for the investor to receive the tax benefits that flow through. Yes, there is limited liability for the limited partner, but there are other structures, such as the C corporation, that provide that without the flow-through.
Conundrum Advanced Securities Hedgers (CASH) is a federal covered investment adviser. During the 12-month period since the most recent brochure was prepared, nothing of material importance changed other than the termination of the firm's chief investment strategist. Under the brochure rule, A) it is not necessary to send a new brochure because there were no material changes. B) the brochure must be sent within 90 days of the end of the adviser's fiscal year. C) the brochure must be sent within 120 days of the end of the adviser's fiscal year. D) it is only the brochure supplement dealing with personnel that must be sent.
C) the brochure must be sent within 120 days of the end of the adviser's fiscal year. The time of delivery requirement is 120 days after the close of the investment adviser's fiscal year. It is correct that a brochure need not be sent if there are no material changes, but the termination of the firm's chief investment strategist is material.
An investor is holding a $10,000 note with annual interest at 5%. The note is due in four years and has a present value of A) $8,000.00. B) $8,227.03. C) $12,155.06. D) $9,523.81.
B) $8,227.03. The formula for present value four years hence is the future value ($10,000) divided by (1 + 0.05) to the 4th power. The calculator at the test center only allows you to do this manually. That is, take 1.05 × 1.05 × 1.05 × 1.05 and that comes out to be 1.2155062. If you divide the $10,000 by that number, it is $8,227.03. If the factor (1.2155062) looks familiar (like the highest answer choice), that would be the future value of $10,000 invested for four years at 5%. Understood that this is not easy to remember, so let's try a short cut. In the event a question like this should appear on your test, subtract the annual interest on a simple basis. That is, the bond is going to pay $500 in interest every year ($2,000 for the four years). If an investor is going to earn $2,000 in four years, investing $8,000 now (present) will result in $10,000. That does not account for compounding, so the actual PV is a bit more than $8,000 (you don't have to invest as much because of the compounding). On the exam, there would only be one answer choice slightly above the simple interest answer.
Over the past seven years, an investor's portfolio has generated the following returns: 6%, 19%, ‒11%, 6%, 8%, ‒3%, 10%. It would be correct to state that A) the median is higher than the mean. B) the median is higher than the mode. C) the mode is higher than the median. D) the mid-range is 6%.
A) the median is higher than the mean. The mean is the average of the seven values. Adding them together (keeping in mind that two are negative values), the total is +35. That is an average of 5. The median is the number with as many above as below. That number is 6, so the median is higher than the mean of 5. The mode is the number appearing the most often. That is also 6, so the median and the mode are equal. The range is the difference between the highest and lowest values. That is 30 (‒11 to +19). The mid-range is 15 above the low of minus 11 and 15 below the high of 30, or 4.
Which of the following is a prohibited action under the Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Borrowing money from an immediate family member who is not in the business of lending money B) Maintaining custody of customer funds and securities without authorization from the Administrator C) Using discretion to make a trade in an advisory client's account 2 business days after receiving oral authorization D) Renewing an advisory contract with oral authorization
D) Renewing an advisory contract with oral authorization The NASAA Model Rule requires that all advisory contracts, initial and renewal, must be in writing. It is the federal law that permits oral or written renewals. The Model Rule permits the use of oral discretion for the first 10 business days after the initial discretionary trade in the account. Keeping custody requires notifying the Administrator, not receiving authorization. The limits on borrowing (or lending) money apply only when borrowing from (or lending to) a client. Nothing in the choice indicates that the immediate family member is a client.
Under the Uniform Securities Act, all of the following persons with a place of business in the state must register as an investment adviser except A) investment advisers who deal exclusively with federal covered investment advisers located in the state. B) investment advisers who deal exclusively with banks and trust companies. C) investment advisers who have conducted business with no more than five clients, other than institutions, in the state within the past 12 months. D) an investment adviser whose only client is a registered investment company with less than $100 million in assets.
D) an investment adviser whose only client is a registered investment company with less than $100 million in assets. When an investment adviser has a place of business in the state, there are very few exceptions from registration. The most common of those is when the investment adviser is federal covered. Any investment adviser to a registered investment company is federal covered, regardless of the AUM of the fund. Therefore, no registration on the state level is required. The de minimis rule for a registered investment adviser only applies when there is no place of business in the state. The same is true when the adviser's only clients are institutions or other investment advisers.
Some investment advisers have government entities as their clients. To avoid undue influence, the SEC passed the "Pay to Play" rule dealing with political contributions. Under that rule, an advisory firm is not permitted to receive any compensation from a subject client when A) one of the firm's investment adviser representatives has made a $150 contribution to a candidate in a neighboring state. B) the firm hires a new employee in a clerical capacity who has made a $1,000 contribution to that client within the previous six months. C) one of the firm's investment adviser representatives has made a $300 contribution to a candidate in the representative's voting district. D) the firm hires a new employee to solicit business who has made a $1,000 contribution to that client within the previous six months.
D) the firm hires a new employee to solicit business who has made a $1,000 contribution to that client within the previous six months. The rule permits covered associates, such as IARs and those soliciting business from a government entity, to make de minimis contributions up to $350 when the associate is eligible to vote for the candidate and $150 when ineligible. When hiring a new associate who will be soliciting for new business, contributions during the previous six months trigger the restriction.
Broker-dealers, unless excluded from the definition or qualifying for an exemption, are required to register in each state in which they do business. Under the Uniform Securities Act, registration in the state would be required of each of the following except A) a broker-dealer with an office in the state whose only transactions were with banks and insurance companies. B) a broker-dealer with no office in the state whose only transactions in the state were with the issuers of the security. C) a broker-dealer with no office in the state whose only transactions in the state were with five or fewer retail investors during any 12-month period. D) a broker-dealer with no office in the state whose only transactions with retail customers in the state were limited to securities issued or guaranteed by the U.S. government.
B) a broker-dealer with no office in the state whose only transactions in the state were with the issuers of the security. Those meeting the definition of broker-dealer are always going to have to register in any state in which they have a place of business. An exemption is available to a broker-dealer with no place of business in the state who limits its transactions in the state to those with the issuer of those securities. Unlike investment advisers, there is no de minimis exemption. Unlike investment advisers, there is no exclusion for those limiting their transactions to U.S. government securities.
Unless an exception exists, investment advisers are not permitted to charge performance-based compensation. The exceptions are largely limited to certain wealthy or knowledgeable investors. Not included in the exception would be which of the following clients? A) A married couple whose annual joint earnings of more than $300,000 per year for the past two years with the same expected for this year qualify them as accredited investors B) A natural person or company that immediately after entering into the contract has at least $1 million under the management of the investment adviser C) An individual registered with the investment adviser who has been employed in the industry at least 12 months D) A natural person or company that the IA has reason to believe that immediately prior to entering into the contract has a net worth exclusive of the primary residence in excess of $2.1 million
A) A married couple whose annual joint earnings of more than $300,000 per year for the past two years with the same expected for this year qualify them as accredited investors Although the accounts of some accredited investors would be eligible for performance-based compensation, making the cut based on earnings is not one of the acceptable reasons.
Which of the following statements concerning market efficiency is most accurate? A) If semi-strong form market efficiency holds, technical and fundamental analysis cannot be used to earn abnormal returns over the long run. B) If strong form market efficiency holds, only insider information can be used to earn abnormal returns over the long run. C) An efficient market assumes one can generate abnormal returns with active portfolio management. D) If weak form market efficiency holds, technical analysis can be used to earn abnormal returns over the long run.
A) If semi-strong form market efficiency holds, technical and fundamental analysis cannot be used to earn abnormal returns over the long run. The only correct statement is semi-strong, which says that neither technical nor fundamental analysis will produce excess returns. Under the efficient market hypotheses, market efficiency assumes that active portfolio management cannot help earn abnormal (excess) risk-adjusted returns. The weak form indicates that technical analysis does not work. The same is true for the use of inside information under the strong form.
An investment adviser is required to make disclosure to the client when the investment adviser provides a research report prepared by a third party with whom the adviser is not affiliated. the investment adviser recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale by the client's insurance agent. a security recommended to clients has been the subject of a recent underwriting by a broker-dealer affiliated with the investment adviser. transactions recommended to the client are inconsistent with those for the investment adviser's own account. A) I and III B) I, III, and IV C) II and IV D) II and III
B) I, III, and IV An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest or opportunity for misunderstanding. There is nothing wrong with providing material provided by a third party as long as the authorship is disclosed. Otherwise, it would appear that the IA is taking credit for someone else's work. Necessary disclosure will include the case where a recommended product will generate a commission or other source of income to the adviser. However, when the sale of the insurance will generate commission for someone other than the IA or someone affiliated with the firm, disclosure is not required. Another potential conflict is recommending a security where an affiliated broker-dealer has self-interest, such as underwriting an offering for the issuer. Release IA-1092 states that an investment adviser must disclose if his personal securities transactions are inconsistent with the advice given to his clients.
An individual has been hired to represent an SEC-registered investment adviser whose principal office is located in State L. The individual works out of the office in State M and, on occasion, visits the principal office for training. The individual attended college in State N and has used alumni connections to build a substantial client base there. This individual would be required to register as an investment adviser representative in A) State M. B) States L, M, and N. C) States M and N. D) States L and M.
A) State M. An individual who represents a federal covered investment adviser is required to register as an IAR only in those states in which the person has a place of business. For this individual, that is State M. The fact that visits are made to State L for training does not mean a place of business exists for the individual. When dealing with clients in other states, if there is no place of business in that state, registration is not required.
