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Which of the following statements is true regarding the registration of investment advisers? 1. If they are required to be registered with the state, they must also be registered with the SEC. 2. If they are registered with the SEC, state registration is not required. 3. Whether a person is registered with the state or with the SEC depends on the type and scope of the person's advisory business. A) II and III B) I only C) I and II D) II only
A) II and III Registration with the state only or with the SEC only depends on the type and scope of the person's advisory business.
Damon is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) Only if the client terminates the advisory relationship B) When the client has given ABC blanket permission to engage in this type of transaction C) When the trade that is made is unrelated to the advisory relationship D) Never
C) When the trade that is made is unrelated to the advisory relationship Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this, where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary. Blanket permission is never permitted for this type of transaction. Do not confuse this with the prospective consent given for agency cross transactions, which is a different relationship.
If the Consumer Price Index (CPI) rose 5% during the past year, during which time your client held a 6% bond, what would be the approximate annualized inflation-adjusted return? A) 6% B) 5% C) 0% D) 1%
D) 1% Because inflation, as measured by the CPI, rose by 5% during the year and the client's bonds returned 6% annually, inflation would have reduced the client's purchasing power by 5%, leaving an inflation-adjusted return of 1% for that year.
A client calls to say he has just read about a European option and doesn't know what it is. You would explain that it is a derivative because A) the currency used is generally something other than the U.S. dollar. B) intrinsic value does not affect the premium. C) it can only be exercised on the expiration date. D) its value is based on some underlying asset.
D) its value is based on some underlying asset. Although the unique characteristic of a European option is that it can only be exercised on its expiration date, that doesn't answer this question. It is a derivative like any other option because its value is based on the underlying asset.
When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would not be considered? A) Net present value B) Interest coupon C) Current market price D) Dividends paid
A) Net present value The current yield of any investment is the income return (dividends on equity; interest on debt) divided by the current market price. The NPV is a tool that evaluates the reasonableness of the price of an investment.
A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a tax credit on the investor's U.S. tax return. B) a tax credit on the investor's Canadian tax return. C) a reduction in the investor's ordinary income. D) a nonrecoverable loss on the investor's U.S. tax return.
A) a tax credit on the investor's U.S. tax return. An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability.
If the goal of a business is to raise substantial amounts of capital, it will probably be organized as A) an LLC. B) a general partnership. C) an S corporation. D) a C corporation.
D) a C corporation. Because of the nature of the entity and its ability to issue common and preferred stock as well as debt instruments, C corporations are the appropriate business structure for a business seeking to raise a lot of capital.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about an investment adviser's fees is true? 1. Fees that are excessive compared to fees charged by other advisers for comparable services are unethical. 2. The Administrator may investigate excessive fees by a comparison of services offered and fees charged. 3. If a client agrees to a certain fee, the adviser may not be held for unethical conduct. A) I and II B) I only C) II only D) III only
A) I and II An adviser is entitled to charge reasonable fees for services provided, but unreasonable fees are unethical. The Administrator may survey the market to establish fees charged against services provided in determining whether an adviser's fees are excessive. Fees that are determined to be excessive are unethical, even if the client agrees to them in the contract.
Given the following information, calculate the risk-adjusted return. 91-day T-bill rate: 4% Actual return: 14% Beta = 1.4 CPI: 3% Standard deviation: 5.0 A) 11% B) 2% C) 5% D) 10%
B) 2% Any question asking about the risk-adjusted return is going to be referring to the Sharpe ratio. This is shown as a simple number and is calculated by subtracting the risk-free rate (91-day T-bill) from the actual return and dividing that remainder by the standard deviation. In this example, 14% − 4% = 10% divided by 5 = 2. A positive number is good and the higher the better.
Over which of the following would the investment adviser representative have discretionary authority? A) An account in which a customer has power of attorney over another individual's account B) An account in which the investment adviser representative chooses portfolio securities on behalf of the client C) An account in which a trustee has power of attorney over another individual's account D) An order that specifies the size of the trade and name of the security, but leaves the choice of price or time up to the investment adviser representative
B) An account in which the investment adviser representative chooses portfolio securities on behalf of the client An order is discretionary when it is placed for a customer's account by the advisory firm or its representative, without the customer's express authorization for that trade (there is a written discretionary power in the firm's file). Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time or price is not considered to be an exercise of discretion. Because the question is asking about an investment adviser, the choices referring to a customer with a POA or a trustee don't deal with the question.
An investment adviser must disclose which of the following legal or disciplinary actions to clients and prospective clients if they occurred within the last 10 years? 1. Conviction of a misdemeanor involving an investment-related business 2. SEC or other federal regulatory agency proceedings in which the person was found in violation of an investment-related statute 3. A proceeding before FINRA in which the adviser was barred or suspended from membership 4. Conviction of a misdemeanor in a civil action regarding payment of motor vehicle violations A) I and II B) I, II, and III C) II and III D) I, II, and IV
B) I, II, and III An investment adviser must disclose adverse regulatory events to clients and prospective clients if they occurred within the last 10 years, such as a conviction relating to a misdemeanor involving an investment-related business; SEC or other federal regulatory agency proceedings in which the person was found to have violated an investment-related statute; or proceedings before FINRA in which the adviser was barred or suspended from membership. Misdemeanors regarding non-investment-related actions are not considered material and need not be disclosed (e.g., a motor vehicle violation).
Kapco Advisers registers with the Administrator on April 1. Pete Patel, an IAR with Kapco, registers on the same day. Both of them file renewal papers, accompanied by the appropriate fees, on March 31 of the following year. Which of the following statements are true? 1. Kapco's renewal was timely. 2. Kapco's renewal was late. 3. Patel's renewal was timely. 4. Patel's renewal was late. A) II and III B) II and IV C) I and III D) I and IV
B) II and IV Regardless of when initial registration occurs, the renewal date for all professionals is December 31.
When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, A) the investment adviser representative and the employing adviser must notify the Administrator promptly. B) only the investment adviser representative must notify the Administrator promptly. C) the investment adviser representative and the federal covered advisers must notify the Administrator promptly. D) only the terminating investment adviser must notify the Administrator.
B) only the investment adviser representative must notify the Administrator promptly. If you are working for a registered investment adviser within a specific state, that state securities Administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the state securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the state securities Administrator that you are working there, as well as when you terminate.
An advisory client of yours dies in 2022, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will A) notify the executor of the estate that he is able to do any trades to rebalance the account, and that taxes will be of no consideration. B) inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months. C) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor. D) tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account.
C) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor. Unless the advisory contract has a termination upon death provision or the executor wishes to assume management of the account, the investor adviser may continue to manage the account of the estate. Trades made in the account must take into consideration tax implications as with any other account. Estate taxes are due nine months after death, and unless there are other assets not listed here, no tax is due because this estate is significantly less than $12.06 million (the amount exempt from taxation for 2022).
As appropriate to the scale and complexity of a firm's business, elements of an effective practice framework for managing conflicts of interest include all of the following except A) avoiding severe conflicts, even if that avoidance means foregoing an otherwise attractive business opportunity. B) training staff to identify and manage conflicts in accordance with firm policies and procedures. C) ensuring that the firm remains solvent for protection of customers and employees alike. D) establishing mechanisms to identify conflicts in a firm's business as it evolves.
C) ensuring that the firm remains solvent for protection of customers and employees alike. Managing conflicts of interest does not take into consideration making enough money to remain solvent.
A portfolio manager who believes equity securities are overvalued in the short term reduces the weight of equities in her portfolio to 35% from its longer term target weight of 40%. This decision is best described as an example of A) rebalancing. B) strategic asset allocation. C) tactical asset allocation. D) contrarian investing.
C) tactical asset allocation. Tactical asset allocation refers to deviating from a portfolio's target asset allocation weights in the short term to take advantage of perceived opportunities in specific asset classes. Strategic asset allocation is determining the target asset allocation percentages for a portfolio and remaining there. Rebalancing is periodically adjusting a portfolio back to its target asset allocation. In this question, the portfolio manager changed the target allocation - no rebalancing is necessary. Contrarian investing is doing the opposite of what most others are doing.
A money market mutual fund would be least likely to invest in which of the following assets? A) Jumbo CDs B) Newly issued U.S. Treasury bills C) Repurchase agreements D) Newly issued U.S. Treasury notes
D) Newly issued U.S. Treasury notes A money market mutual fund typically invests in money market instruments—those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years.
Which of the following methods of calculating investment returns are discounted cash flow (DCF) techniques? 1. Net present value (NPV) 2. Holding period return (HPR) 3. Internal rate of return (IRR) A) I and III B) I, II, and III C) II and III D) I and II
A) I and III A discounted cash flow (DCF) technique is one that takes into account the time value of money. Holding period return (HPR) is the total of the income cash flows and capital growth earned by an investment during the period for which it is held. It does not take into account the time value of money. Both net present value (NPV) and internal rate of return (IRR) take the time value of money into account.
Which of the following are regulated under the Securities Exchange Act of 1934? 1. Broker-dealers 2. Investment advisers 3. Pension plans 4. OTC markets A) I and IV B) III and IV C) II and III D) I and II
A) I and IV The Securities Exchange Act of 1934 regulates broker-dealers and the securities marketplaces (exchanges and OTC). Investment advisers are regulated under the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940), whereas pension plans in the private sector are regulated under ERISA.
Which of the following does not meet the compensation test for defining investment advisers under SEC Release 1A-1092? A) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. B) A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists. C) An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice. D) Subscription payments are received by a publisher of a newsletter providing impersonal securities-related advice.
A) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent—she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation.
Under the Uniform Securities Act, which of the following is a broker-dealer? A) An issuer B) A corporation that sells interests in an oil and gas limited partnership to investors, with the proceeds going to the issuer C) A credit union that sells its own stock D) An agent
B) A corporation that sells interests in an oil and gas limited partnership to investors, with the proceeds going to the issuer A broker-dealer is any person that buys or sells for the accounts of others or for his own account. In this case, an entity structured as a corporation is selling, on behalf of the issuer, a security in the form of limited partnership units and is therefore a broker-dealer. A broker-dealer is not an issuer or an agent.
Which are true? 2. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940, who offers investment advice to individual investors residing in this state and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator. 3. A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator. 4. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration. A) I and IV B) III and IV C) II and III D) I and II
B) III and IV A person who conducts business exclusively with banks and savings institutions is an investment adviser under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers.
According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, all of the following practices are considered unethical for an agent except A) determining the quantity of a specific security to purchase once the client has designated that security and the action to be taken. B) selling 3,000 shares of ABC at a price the agent determines is the best the client can get, without oral or written discretionary authority. C) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. D) receiving written discretionary authority from a client within 10 business days of first executing a discretionary trade with oral authority from the client.
C) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. It is not unethical for an agent to choose time and price of a trade as long as the client has determined the asset, the action, and the amount. Discretionary authority must be received by agents in writing prior to any discretionary trading taking place in the account. Please note that it is investment advisers and their IARs, not broker-dealers and their agents, who are allowed to use oral discretion for the first 10 business days after the initial discretionary trade.
Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for A) five years after the dissolution. B) the lifetime of the firm. C) three years after the dissolution. D) five years from the date of organization.
C) three years after the dissolution. Both the Investment Company Act of 1940 (applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than three years after dissolution.
According to the Investment Company Act of 1940, all of the following statements are true except A) mutual fund shareholders must be sent semiannual statements that identify compensation paid to directors, officers, and other affiliated persons. B) persons convicted within the past 10 years of a securities industry crime are not allowed to serve as directors without SEC permission. C) investment companies can own no more than 3% of the shares of another investment company. D) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors.
D) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors. 12b-1 fees are subject to annual approval by a vote of the board of directors of the company and of the directors who are not interested persons (outside directors) of the company.
According to the Uniform Securities Act, an offer or a sale does not exist if it is which of these? 1. A reclassification of the issuer's securities 2. A bona fide pledge or loan 3. An act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares 4. A stock dividend of stock other than the issuer's for which nothing of value was given A) I, II, III, and IV B) II and IV C) I and II D) II and III
A) I, II, III, and IV The Uniform Securities Act specifically excludes these four choices from the definitions of offer and sale.
In cases of fraudulent sales practices or advice with respect to securities, which of these are true? 1. State securities Administrators may not take enforcement action against federal covered investment advisers. 2. State securities Administrators may take enforcement action against federal covered investment advisers. 3. State securities Administrators may not take enforcement action against state-registered investment advisers. 4. State securities Administrators may take enforcement action against state-registered investment advisers. A) II and IV B) I and III C) II and III D) I and IV
A) II and IV State securities Administrators have jurisdiction over any securities transaction or investment advice that involves fraud, whether or not the person involved is a federal covered investment adviser. If it involves a security, there are no exemptions from the Uniform Securities Act for fraud.
Which of the following is a motivation for creating structured products? A) Structured products improve market completeness. B) Structured products are less expensive for investors to buy and trade. C) Structured products reduce costs to issuers. D) Structured products improve profits for broker-dealers.
A) Structured products improve market completeness. The primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer.
An investment adviser representative (IAR) prepares a comprehensive financial plan for a new client. Part of the plan includes detailed portfolio recommendations. Seeing a negative reaction from the client, it becomes obvious to the IAR that he is dealing with an ignorant person who is filled with many market misconceptions. It would be reasonable for the IAR to A) prepare a new portfolio that is more in line with what the customer has indicated he is comfortable with B) drop the client C) tell the client he will make some changes, but keep the original portfolio because that really is in the client's best interest D) attempt to educate the client to correct those misconceptions, but leave the final decision up to the client
D) attempt to educate the client to correct those misconceptions, but leave the final decision up to the client All decisions are ultimately up to the client, but there is nothing wrong with the IAR attempting to educate the client, especially when it could lead to greater investment success.
The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices. However, it would not be considered a violation A) when a broker-dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity. B) to borrow money from a client who is not in the lending business. C) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account. D) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client.
D) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client. Properly registered individuals employed by the same or an affiliated broker-dealer are permitted to split their commissions. Because there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only be done with the written consent of the client and the agent's broker-dealer. It has nothing to do with the time spent on the account. A broker-dealer selling out of inventory must disclose that the firm acted in a principal capacity. No broker-dealer or agent may ever borrow money from a client who is not in the money-lending business unless that client is an affiliated person.
A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at a discount. B) selling at NAV. C) an open-end investment company. D) selling at a premium.
D) selling at a premium. When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the assets are the $100 million portfolio value and the liabilities are $10 million for the unpaid securities plus the $5 million in accrued management fees. Subtracting the $15 million in liabilities from the $100 million in assets leaves $85 million. Divide that by the 2,611,437 shares outstanding, and the quotient is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price ($3.83 ÷ $36.38), which is well in excess of the maximum 8.5% permitted.
Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) ISOs may only be granted to employees, while NSOs may be given to virtually anyone. B) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. C) the holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO. D) the recipient of the grant of the ISO has no income tax consequences at the time of the grant.
D) the recipient of the grant of the ISO has no income tax consequences at the time of the grant. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.
