STC Series 7 Final Exam #3
An investment adviser representative is reviewing the account of two clients, a husband and wife in their 70s who are retired. Their investment profile indicates that they have an annual income of less than $30,000 per year, which consists of a small pension and Social Security benefits. They have investable assets of $225,000. Which of the following investment allocations should the IAR recommend?
25% domestic equities, 5% international equities, 60% domestic fixed-income securities, and 10% cash Considering the customers' ages and limited incomes, investing a greater portion of their assets in bonds and cash is prudent. The fixed-income securities will provide additional income, while the equities will provide the potential for growth. One rule of thumb used by many professionals is to subtract a client's age from 100 to determine the percentage of assets that should be invested in stocks—the older the client, the less their risk tolerance and the less money that should be invested in equities. Only a small percentage of a client's assets should be allocated in the international marketplace.
Jonah has recently retired at age 65. He is receiving a large lump-sum retirement payout from his former employer. Although he has only a small investment portfolio, he has accumulated savings that would cover six months of expenses. Which of the following combinations would be an appropriate allocation of Jonah's lump sum in an investment portfolio if his primary interest is income and his secondary interest is growth for inflation protection?
85% bonds, 15% equities While a portfolio that consists of 75% equities (25% cash and 75% equities) might be too volatile for a 65-year-old retiree, increased life expectancies have made some exposure to equities justifiable for such investors. Since equities provide much more inflation protection than bonds or cash (money-market investments), a small portion in stocks would generally be suitable. Based on the fact that this investor already has a six-month liquidity cushion in the form of savings, a large additional allocation to cash (either 100%, 50%, or 25%) may not provide enough income or inflation protection in the long run.
A corporation has the following financial information: $3 million in cash $5 million in accounts receivable $8 million of inventory $7 million of equipment $2 million in short-term debt $40 million in long-term debt $4 million accounts payable What's the corporation's current ratio?
8:3 The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $16 million ($3 million cash + $5 million accounts receivable + $8 million inventory). Current liabilities include short-term debt and accounts payable, totaling $6 million ($2 million short-term debt + $4 million accounts payable). Therefore, the current ratio is 8:3 ($16 million ÷ $6 million, which reduces to 8/3 or 8:3). For anyone who's not comfortable reducing fractions, use the decimal method. Since the current ratio can also be stated as 2.6 ($16 million ÷ $6 million), simply calculate the decimal version of the answer choices to determine which answer matches this number (e.g., 8 ÷ 3 = 2.6, which is the correct response, while 4 ÷ 3 = 1.33 and is incorrect).
Under the USA, which of the following is NOT considered a state?
A Canadian municipality Under the Uniform Securities Act (USA), the definition of a state includes any state (including the District of Columbia), territory, or possession of the U.S. (e.g., Puerto Rico, U.S. Virgin Islands, Guam, and American Samoa). Although securities that are issued by Canadian municipalities are considered exempt securities, the USA does not recognize Canadian municipalities as states.
Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)?
A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.
Under the Securities Act of 1933, which of the following would MOST LIKELY be included in the definition of an underwriter?
A broker-dealer A broker-dealer is considered an underwriter when it helps issuers raise capital through the sale of their new issues. Agents (of broker-dealers) and investment adviser representatives (of investment advisers) are the individual employees of their respective firms and are, therefore, not considered broker-dealers.
Which of the following investments would qualify to pass through both income and losses?
A hedge fund Most hedge funds are structured as limited partnerships and raise capital by selling units or interests in the partnership to investors. A limited partnership is permitted to pass through both income and losses to investors. A REIT and a regulated investment company (for example, a mutual fund) must pass through a minimum percentage (90%) of their income but are NOT permitted to pass through losses. A company that is subject to SEC Section 12 reporting requirements refers to a company that, due to the number of its shareholders and value of its securities outstanding, is required to file reports with the SEC. This type of company would distribute cash dividends to shareholders and would not be permitted to pass through losses.
Which of the following choices would be considered a prohibited transaction under ERISA?
A loan to the plan's trustee from the plan A trustee is clearly a fiduciary. ERISA prohibits plan fiduciaries and parties of interest from engaging in certain transactions with retirement plans. These prohibited transactions include: the sale, exchange, or lease of property, lending money or extending credit, furnishing goods, services, or facilities, and transferring or using plan assets for plan fiduciaries' own benefit. ERISA does not place a per se prohibition on any particular type of investment for retirement plans. A fiduciary may appoint an investment manager to oversee the investment of the plan's assets.
Which of the following choices is guaranteed in an equity-indexed annuity?
A minimum rate of return In an equity-indexed annuity, the insurance company guarantees a minimum rate of return (typically 87.5% of the premium payments plus 3%).
The owner of a sole proprietorship is responsible for which of the following activities?
Accurately maintaining all of the necessary business records A sole proprietorship does not have stockholders, federal reporting requirements, or a chief financial officer. Partnerships and S Corporations file Form K-1, not sole proprietorships. The owner is required to maintain all necessary books and records in the event of an audit by the IRS or State Department of Revenue
An IAR is experiencing financial difficulties and asks one of his clients for a loan. After the client tells the IAR that she does not have any funds available to loan, the IAR recommends that the client sell some of her securities holdings and then lend him the money. According to the Uniform Securities Act, the IAR has:
Acted in an unethical manner and violated his fiduciary duty These actions are unethical and possibly illegal. However, since the IAR is not recommending that the client trade excessively in an effort to generate commissions, this is not a case of churning. Additionally, it is not commingling or conversion since the customer being asked to lend money to the IAR.
When recommending a hedge fund as an investment vehicle, an adviser would disclose all the following points to her client, EXCEPT:
All the securities owned by the Hedge Fund Hedge funds make few public disclosures, so it can be difficult for an investor to assess the diversification of the portfolio or its trading strategies. Because hedge funds are exempt from registration with the SEC, there is a lack of regulatory oversight. Unlike mutual funds, their shares are not publicly traded and they often have relatively high performance fees.
Which of the following is a measure of non-systematic risk?
Alpha Alpha is a way to measure risk that's association with a single investment, which is better known as non-systematic risk. On the other hand, systematic risk is associated with all investments and is measured by beta. Gamma and theta are both risk measurements, but they're specific to option contracts.
Which of the following statements is TRUE regarding an omitting prospectus for an investment company?
An investor must be informed that she should read the full prospectus Certain investment company advertising may be published even if it meets the definition of a prospectus. An omitting prospectus is an exempt investment company advertisement that only includes information available in the full prospectus (such as performance). An application to invest may not be included. The customer must be informed as to how she may obtain the actual prospectus, and that the prospectus should be read prior to investing any money. An application to receive a prospectus may be included.
For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT:
An offense that's punishable by a fine of at least $500 All the choices are considered felonies, except an offense that's punishable by a fine of at least $500. A felony is an offense that's punishable by a prison sentence of at least one year and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial or an offense that's punishable by a prison sentence of less than one year and/or a fine of less than $1,000.
The benefit of creating an irrevocable trust is that:
Assets will be excluded from the donor's estate In an irrevocable trust, the donor typically gives up all claims to assets that are placed in the trust. Also, assets in this type of trust are typically not included in the donor's estate. This reduction of assets will reduce any potential estate taxes that are payable by the donor's estate. Losing control of the assets is not a benefit to the donor, it is a drawback.
Under the Investment Advisers Act of 1940, offering which of the following goods or services would be a violation of soft-dollar practices if the broker-dealer provides them to the adviser in exchange for executing transactions?
Assistance concerning its compliance responsibilities An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors.
Which of the following advisory fees is prohibited?
Charging the client a flat fee regardless of how much management has been provided Advisory fees must be appropriate for the service being provided. Charging a flat fee, regardless of how much management has been provided, is prohibited. Investment advisers are allowed to charge flat fees for creating financial plans, as well as hourly fees or fees that are based on assets under management, provided they're not excessive for the service being provided. Charging a 1% fee based on assets under management is roughly the industry average and acceptable.
An IAR's client has inherited $10 million and wants to give it to a charity. The client wants to retain complete control of the money and be able to make all decisions regarding how the money is spent. What should the client establish?
Charitable trust As implied by their name, charitable trusts are established for charitable purposes. This is unlike a typical trust which is established for a specific beneficiary. In most cases, the person that creates the charitable trust can maintain control over the investments of the trust and make decisions regarding how the money is spent. As with other types of trusts, charitable trusts provide certain tax breaks.
After examining a broker-dealer, the Administrator sanctioned the firm for keeping stock owned by customers and stock owned by the broker-dealer together in a way that did not clearly indicate who owned which shares. This prohibited practice is called:
Commingling Commingling refers to the practice of intermixing securities belonging to customers with securities belonging to the broker-dealer. This is prohibited in an attempt to assure that customer securities are not misused.
An IAR has very little experience in the industry, but has a client enter his office with assets totaling $45 million. After completing a client profile, the IAR determines that the client has a high risk tolerance and her objective is capital appreciation. What should the IAR do in this situation?
Consider consulting with a seasoned IAR or manager since he has little industry experience When an investment adviser representative opens an account with a significant amount of money, he should be familiar with his firm's policies and procedures. In a situation like this, the IAR may not have enough industry experience to recommend the appropriate investments. For this reason, it may be best if the inexperienced representative solicits the assistance of a seasoned IAR or manager.
An investment adviser is registered in State A and transacts business through a broker-dealer that is registered in State A and with the SEC. What may the Administrator in State A require the broker- dealer to file with its office?
Copies of all financial statements that are required by the SEC State Administrators may not require broker-dealers to provide more documentation than what is required under federal (SEC) guidelines
According to the Investment Advisers Act of 1940, an IAR's personal securities transactions involving which of the following securities are subject to the reporting requirement?
Corporate stocks and bonds Personal securities transactions involving the following securities are excluded from the reporting requirements: Direct obligations of the U.S. government Money-market instruments Shares of money-market mutual funds Shares of unit investment trusts Shares of other types of mutual funds provided the adviser is not the underwriter or adviser to the fund There is no exclusion provided for transactions involving corporate bonds.
A client has a traditional IRA and she just turned 75. She must take the required minimum distribution (RMD) no later than:
December 31 of the current year The first Required Minimum Distribution (RMD) must be taken by April 1 after the IRA owner turns 72. Subsequent RMDs must be withdrawn by December 31 each year. Since the client is 75, she has already taken the initial RMD, so her deadline for the current year is December 31st.
An advisory client is discussing the purchase of AA-rated, 15-year municipal bonds with his adviser. The bonds offer a coupon rate of 3.2% and can be purchased at a small premium to par. The adviser is not certain if the bonds are trading at an advantageous price. Which calculation would provide the BEST method of determining whether the bonds should be purchased?
Discounted cash flow Discounted cash flow evaluates each coupon payment 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 her client.
When an individual invests a constant dollar amount over a fixed period, which of the following activities is he engaging in?
Dollar cost averaging Dollar cost averaging calls for a client to invest a fixed dollar amount in a particular investment over a regularly scheduled period. This approach results in purchasing more shares when prices are low and fewer shares when prices are high. Dollar cost averaging is a long-term investment strategy that many investors find beneficial but does not guarantee profitability, due to the fact that the security purchased could still drop in value by the time the investor liquidates the position
According to the Uniform Securities Act, investment advisers are required to maintain their books and records for:
Five years with the most recent two years in an appropriate office According to the Uniform Securities Act, investment advisory firms are required to maintain their books and records for a minimum of five years with the most recent two years in an appropriate office of the investment adviser.
In order to clarify items in the balance sheet or income statement, a corporation may include them as:
Footnotes Footnotes on a financial statement are used to provide additional information or to clarify information, i.e., methods of depreciation used, inventory valuation methods, reserves for future events, etc.
One of the main differences between futures contracts and forward contracts is that:
Forward contracts may not be offset without permission One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.
Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services?
Giving a client a list of mutual funds with the lowest expense ratios for the past five years Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security.
If the NPV (net present value) of an investment is greater than zero, the investment will provide a return:
Greater than the discount rate used If the net present value of an investment is greater than zero, the investment will generate a positive return. Net present value is used in discounted cash flow (DCF) analysis. It is a standard method for using the time value of money to evaluate investments. For example, if an adviser wants to purchase a portfolio of bonds, she would discount the cash flows of those bonds into one present value amount, for example, $1,300,000. If the adviser can purchase the bonds for less than that amount, then the investment has a positive net present value. This would mean that the return on the portfolio would be greater than the discount rate used to arrive at the net present value. If the adviser could not locate the bonds for a total price of less than $1,300,000, then the purchase would not be completed.
Both variable life insurance and variable annuities have all of the following features, EXCEPT:
Guaranteed cash values Variable life insurance and variable annuity products do not provide guaranteed cash values. When investors buy variable products, they invest in a separate account and assume market risk.
Under the Uniform Securities Act, which TWO of the following transactions would be considered a sale? The exercise of an option A gift of assessable stock A stock dividend Lending stock to short sellers
I and II only Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend. If an option is exercised, one party to the contract is selling the underlying securities.
Two months ago, Jason, one of your agents, put five of his clients in an in-state-sponsored mutual fund under a Section 529 plan for their children's college education. They each have a $100-per-month payroll deduction set up at their place of employment. Last week, Jason called each of them and convinced them to roll over their holdings into a prepaid tuition plan while continuing their payroll deductions. Yesterday, he called them again to sell them on a rollover to a new Coverdell Education Savings Account that your firm is offering. What's wrong with this course of action on the part of the agent? It suggests excessive activity and may be considered churning the accounts. A 529 plan cannot be rolled over into a Coverdell ESA. There's no violation since all of the plans are different. There's no problem since the investments are made through payroll deduction.
I and II only Since three different investments were suggested within a two-month period, this could be considered excessive activity (churning the accounts), especially if the investments were in mutual funds. Additionally, the provisions of Section 529 plans provide for a rollover without a change of beneficiary only once within a 12-month period, but not into a Coverdell ESA.
Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state? Foresight limits its practice to wealthy individual investors with $1 million or more in net assets who are domiciled in New Mexico. Foresight only advises government entities. Foresight solicits its services to eight retail customers in New Mexico. Foresight has assets of $103.4 million under management.
I and III only Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration.
According to the NASAA Recordkeeping Rule, which of the following documents must be retained in a file by an investment adviser? Correspondence Photos of all employees The registration applications of its IARs Employment applications
I and III only NASAA's Recordkeeping Requirements for investment advisers include the retention of all documents that are filed with either the state or federal regulators regarding the adviser and its representatives. Some of the required documents are registration applications, amendments, renewal filings, and correspondence. However, there is no retention requirement for employee photos and employment applications.
Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk ETFs may be sold short and ETNs may not ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate ETNs have a maturity date and ETFs do not
I and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.
While attending an investment symposium, an investment adviser representative overhears a phone conversation of the keynote speaker. The conversation centers on regulatory problems of a publicly traded company. The representative knows the information is not public. Which of the following actions by the representative would be acceptable? The representative informs the compliance officer of his firm about the conversation. The representative may ask the speaker about the company during a question-and-answer period and then inform his clients. The representative may include his thoughts about the company within his personal blog. The representative may not enter trades for his own account based on the information, but may accept unsolicited trades by his clients.
I and IV only The representative may inform his compliance officer of the information. Additionally, the representative should accept unsolicited orders from his clients. The representative could ask the keynote speaker about the subject company, but the response by the speaker would not be viewed as widely (publicly) disseminated. Therefore, it is unacceptable for the representatives to inform clients about the information overheard in the speaker's phone conversation. Publishing his personal thoughts about the company in a blog is not acceptable.
Which of the following choices would be considered a person under the USA? A customer A broker-dealer An estate An issuer
I, II, III, IV Under the USA, a person is defined as a legal entity, which would include individuals (natural persons) and business entities such as corporations, broker-dealers, partnerships, and investment advisers.
In reviewing and analyzing a customer's financial status, which of the following choices are important considerations? Discretionary income available for investment Insurance needs or policies in place Participation in retirement plans Anticipated expenditures
I, II, III, and IV All of the information presented should be considered before suggesting or implementing an investment plan.
According to SEC Release 1092, an attorney is excluded from the definition of an investment adviser in all the following circumstances, EXCEPT: The attorney charges a separate fee for investment advice and offers these services only to existing legal clients The attorney's website indicates that he is available to offer investment advice on any judgments that his clients win The investment advice being offered by the attorney is incidental to his law practice The income that the attorney generates from providing investment advice is less than 1% of his gross income
I, II, and IV only According to SEC Release 1092, lawyers, accountants, teachers, and engineers are excluded from the investment adviser definition, as long as the advice being provided is incidental to their professional activities (Choice III). The advice being provided by the professionals is not considered to be incidental if they charge a separate fee for the investment advice (Choice I) or advertise publicly that they provide investment advisory services (Choice II). Choice (IV) indicates the attorney derives less than 1% of his gross income from investment advice, but there is no dollar amount or percentage of income that is identified as incidental service. If an attorney is involved in the activities that are referenced by choices I, II and IV, he is required to register his business as an investment adviser
Apex Partners, an aggressive, newly established IA with $5 million in assets under management, is looking to triple its asset base within the next few months. The firm is planning to use outside accountants and attorneys to direct business to it in return for a flat 1% referral fee. Which of the following statements concerning this activity is TRUE?
IAs are permitted to pay referral fees only if a written contract exists between the adviser and the outside solicitor A solicitor is a person who solicits clients for, or directs clients to, an investment adviser. Solicitors do not need to be employees of the firm. If a solicitor receiving a cash fee is not an employee of the adviser, a written agreement between the adviser and the solicitor must exist. The agreement must describe the activities in which the solicitor will engage for the adviser and also describe the compensation to be paid.
Under the Uniform Securities Act, which of the following choices would fall under the definition of an agent? A trust company, bank, or savings institution A sales assistant authorized to accept client orders Any person other than a broker-dealer who acts on behalf of a broker-dealer or issuer in effecting sales or purchases of securities
II and III only Anyone transacting securities business (i.e., accepting orders) on behalf of a broker-dealer or issuer is generally considered an agent. This would include sales assistants who take client orders, as well as registered representatives. A trust company, bank, or savings institution would not be included.
William purchased $10,000 worth of VULC when he was 60 years old. At the age of 98, William dies and leaves the shares of VULC to his grandson James. James learns that the shares are now worth $300,000. According to the IRS, which TWO of the following statements are TRUE regarding the shares of VULC? The cost basis of the shares is $10,000 The cost basis of the shares is $300,000 The holding period of the shares for James is short-term The holding period of the shares for James is long-term
II and IV According to the IRS, when securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.
An agent would like to leave his firm, create his own broker-dealer, and do business as a sole proprietor. This would be allowed
If the agent registers with the Administrator as a broker-dealer and fulfills any additional requirements imposed by the USA Individuals are not allowed to simply leave their firm and begin transacting business independently as a broker-dealer. They must be affiliated with a broker-dealer or issuer. In this case, the agent must first create and register as a broker-dealer and fulfill whatever conditions are required in his state. The firm may also be required to register with the SEC and join FINRA. The agent would also need to become a registered principal. However, a surety bond might not be required.
The Big Brain Inc. Defined Benefit Retirement Plan maintains a written statement for the plan's fiduciaries that provides them with information concerning various categories of investments and guidance concerning investment decisions. The common name for this document is the:
Investment policy statement Every retirement plan must maintain a written statement of investment policy. This document provides the fiduciaries with guidelines concerning various categories of investment management decisions. Two of the main issues addressed in the statement are proxies and the activities of the investment manager.
According to the USA, if an investment adviser wants to charge a fee based on the average value of a client's portfolio, the fee:
Is permitted unless prohibited by the Administrator Asset-based fees are one of the most common methods that investment advisers use to charge their clients. Under the Uniform Securities Act, these types of fees are allowed provided they have stated time periods. Since Administrators may create rules prohibiting any type of fee, it would be incorrect to state that they are always permitted.
Under the Uniform Securities Act, which of the following statements is TRUE regarding the posting of a surety bond by a broker-dealer?
It is used to cover the costs of possible legal actions A bond may be required by an Administrator to cover possible legal costs that arise from violations of the Uniform Securities Act. The Administrator may accept cash or securities in lieu of a bond; however, property may not be accepted. A surety bond is not required of all broker-dealers; it is only required for those that have custody of or discretionary authority over client funds and securities and do not meet the minimum financial requirements.
If a new investment advisory firm is created and registered with the SEC, which of the following statements would be TRUE?
It may not register unless it has $100 million or more under management Under the Investment Advisers Act of 1940, advisers that manage assets of $100 million or more generally register with the SEC and are referred to as federal covered advisers. IAs are not required to register with both the state and federal regulators and there is no one-year business requirement. The SEC has created a buffer for investment advisers with assets under management (AUM) between $90 million and $110 million and clarifies with whom they should be registered. An adviser may register with the SEC once it reaches AUM of $100 million. However, an adviser must register with the SEC if it has AUM of $110 million or more. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. This means that a mid-sized adviser that is currently registered with the SEC may remain registered with the SEC if it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level.
The Dow Jones Industrial Average is considered an index of:
Large-capitalized stocks The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE
According to modern portfolio theory, a diversified portfolio should be comprised of assets that are:
Largely uncorrelated Ideally, a diversified portfolio should be composed of assets that are largely uncorrelated--i.e., do not move in the same direction.
The Uniform Securities Act authorizes the Administrator to waive the surety bond requirement for a broker-dealer if the firm:
Maintains a sufficient level of net capital The Administrator may waive a surety bond requirement if a broker-dealer maintains a sufficient dollar amount of net capital.
If an investment adviser representative receives a subpoena to testify at an investigative hearing and disregards the subpoena, the representative:
May be found in contempt of court If a court order to appear and testify at a hearing is ignored, the person may be found in contempt of court.
A broker-dealer has offices in States X and Y. One of its agents is registered in State X where the agent's primary office is located. The agent often travels to State Y and uses the broker-dealer's office there to meet with clients. The agent:
Must register in State Y, since the agent uses an office there The agent must register in State Y since the agent has a place of business (office) in State Y
Over the most recent 18 months, a U.S. computer manufacturer repurchased one million shares of its outstanding common stock. The company will be required to take which of the following actions if it intends to distribute these shares in the form of a stock dividend?
No special action is required by the company. When a company repurchases shares its shares in the secondary market, they're referred to as treasury stock. As long as the company remains current on its filings, SEC registration of securities doesn't expire. The distribution of treasury stock to existing shareholders doesn't require the shares to be registered once again with the SEC, since the stock dividend will not constitute the issuance of new shares.
If FINRA disqualifies a broker-dealer or agent, may the Administrator overrule FINRA?
No, not under any circumstances The Administrator has no jurisdiction beyond enforcing state securities laws
Carrie has been a client of an investment adviser that is established as a partnership for four years and is happy with the performance of her account. If she wants to renew her contract with the firm, which of the following provisions is NOT required in the contract?
Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change in the partnership (ownership) within a reasonable period. Whether a partner who leaves or dies is responsible for managing a client's assets is irrelevant to the notification provision. If the IAR that manages Carrie's account leaves to start a new advisory firm, notification is not required since the IAR is not a partner of the firm. However, it is certainly a good practice for the advisory firm to notify Carrie that her IAR has left the firm
Which one of the following statements regarding variable annuities is FALSE?
On average, variable annuities have lower fees and expenses than mutual funds Mutual funds are often an investment selection within a variable annuity contract. And, since the investor would pay for the cost of the annuity in addition to the costs associated with operating the mutual fund, variable annuities typically have higher fees and expenses.
Precision Investment Partners is a broker-dealer registered in Tennessee. A recent restructuring at the firm caused a significant portion of the information on the firm's last application filed with the Administrator to no longer be valid. What action must the firm take to be in compliance under the USA?
Precision must file an amendment to its application promptly According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.
A married couple just received a small inheritance and want to use a portion of it to pay off their mortgage in the future. They ask their investment adviser representative how much of the inheritance they need to invest based on an estimated rate of return of 7% annually to be able to pay off their mortgage balance in 15 years. The adviser tells them $18,122. This amount is referred to as the payoff amount's:
Present value The amount of money that must be invested at an expected rate over a specified number of periods to produce a sum of money is referred to as the present value. In this question, if the married couple invests $18,122 today with a 7% annual return, they will have $50,000 in 15 years. Obviously, the setup of the question did not provide the future mortgage payoff amount, but based on a present value of $18,122 and a 7% return, it's $50,000. The formula for calculating present value from a known future value is: P0 = Pn / (1 + r)n In this example, P0 = Pn / (1 + r)n = $50,000 / (1 + .07)15 = $50,000 / 2.759 = $18,122
An adviser could recommend the purchase of a bond to a client, if its:
Present value is more than its current market value In evaluating the value of fixed-income securities, one method is discounted cash flow (DCF). Each future cash flow (interest payments and principal) is discounted to its present value and the present value of each cash flow is combined to determine the bond's present value. If the present value of future cash flows is less than the current market value of the bond, the investor would be paying a premium to acquire the bond and the net present value would be less than zero. If the current market value of the bond is less than the bond's present value, the bond can be purchased at a discount to its present value resulting in a net present value greater than zero. The future value of an investment is not considered in the DCF calculation.
One of your clients anticipates a significant decline in XYZ stock. The client would like to establish a position to take advantage of this, but not expose himself to significant risk. Which of the following actions would best satisfy your client's needs?
Purchase an XYZ put A long put would allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is only at risk for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium
All of the following risks are associated with bonds, EXCEPT:
Put risk Some bonds contain a put feature, which allows the holder to put the bond or redeem it with the issuer at a put price before maturity based on a specific event. Being able to redeem the bond before maturity is not a risk.
The stock market recently experienced a severe correction and an IAR receives a letter from a client who is complaining about the losses that he has suffered as a result of the adviser's investment decisions. The client later calls the adviser to apologize for the letter and tells the IAR to return it since he wants to withdraw the complaint. What should the IAR do?
Return the original letter to the client, but keep a copy The NASAA Recordkeeping Requirements for Investment Advisers Model Rule states that advisers must maintain a file which contains copies of all written client complaints. However, if a client requests that the original complaint be returned, the firm and the IAR should follow the client's instructions, document that the original was returned at the client's request, and retain a copy for their records
A portfolio manager has recently taken his client's equity holdings out of technology stocks and moved them into manufacturing stocks. The manager has historically moved client funds from one industry to another during defined periods. What is this type of strategy called?
Sector rotation Sector rotation is the switching from one industry (sector) into another as the economy changes. Dollar cost averaging is investing the same dollar amount over a fixed period, regardless of the price changes. Rebalancing strategies involve buying and selling to keep the portfolio's asset mix consistent over the long term.
Which of the following statements is a disadvantage of investing in a C Corporation?
Shareholders pay tax on income that was already taxed to the company A disadvantage of investing in a C Corporation is the double taxation of income that's paid to shareholders in the form of a cash dividend. Since a C Corporation is a taxable entity, the income was first taxed at to the corporation. Thereafter, the shareholders must also pay income tax on the portion they receive as a cash dividend. For individuals, the maximum tax rate on this double-taxed income is usually 20%. C Corporations do offer limited liability to their shareholders, but it is an advantage rather than a disadvantage.
According to the Uniform Securities Act, which of the following securities are exempt from registration?
Stock issued by a state-regulated railroad company Common carriers, such as railroads and shipping companies, are exempt from registration under the Uniform Securities Act. While securities issued in the same state in which the firm is incorporated may be exempt from the Securities Act of 1933, they are usually required to register with the state. Agencies of the Canadian government and domestic U.S. banks are also exempt from registration, but securities issued by Canadian banks receive no such exemption.
An investor who believes in the inherent efficiency of the markets would be least likely to adopt which of the following strategies?
Tactical asset allocation Tactical asset allocation is a form of asset allocation that is based on the belief that markets are NOT efficient and that market timing can be beneficial (i.e., altering a portfolio to take advantage of changing economic conditions). For example, an investor who believes that interest rates are going to rise soon might reduce the number of fixed-income securities in his portfolio. (An increases in interest rates will cause existing bond prices to decrease.) A person who believes that the markets are inherently efficient (the efficient market hypothesis) is unlikely to engage in a market timing strategy. Instead, this type of investor is more likely to use a passive approach to investing, such as strategic asset allocation or indexing. Some proponents of the efficient market hypothesis do believe that fundamental analysis can be a useful tool in identifying investments that will outperform the market.
A client wanting only financial protection for her family in case of her premature death should buy:
Term life insurance Term life insurance buys protection at the lowest cost. If the insured does not die within the policy period, the policy expires without any cash value accumulation.
An investment adviser has begun to experience difficulties in collecting fees from the accounts of clients that do not elect to have the fees deducted directly from their accounts. As a result, the firm has decided to raise its fees and require a larger up-front deposit from all new accounts for the upcoming year. However, to reward its current clients, the adviser has decided to waive the fee increase and will not change the terms of their contracts. For this situation, what is the adviser required to do?
The IA must make all of the necessary changes and promptly file amendments to its Form ADV In this question, since the contracts of the current clients are not being changed, the adviser is not required to provide them with written notification or obtain their consent. However, changing the fee structure for new clients is considered a material change to the adviser's business and the adviser is required update and promptly file the amended Form ADV. For any change that is considered to be routine, the adviser may be file an amended Form ADV within 90 days of the adviser's fiscal year.
Who is responsible for filing estate income tax returns and making sure that the payments are made on the estate's behalf?
The administrator or executor An executor or administrator is responsible for managing the estate's assets and distributing the property to the heirs. These responsibilities include paying any estate taxes that are due as well as income taxes that might be due on income earned by the estate before the assets are distributed to the heirs.
According to the Uniform Securities Act, which of the following conditions constitutes completion of the registration application process?
The application, any other documents, and fees have been received by the Administrator An application for initial or renewal registration is not considered filed until the Administrator has received all of the required fees and documents. Remember, state Administrators receive, process, and grant registration; however, they do not approve these
A trustee would most likely NOT consider which of the following factors when managing a trust's assets?
The beneficiaries' normal trading practices in their own brokerage accounts A trustee has a fiduciary responsibility to manage assets in a way that is reasonable. Before investing, a reasonable person would consider the general conditions of the economy, the strength of financial markets, and the current effect of inflation on the markets. How one beneficiary invests in her personal brokerage account has little to do with the needs of the other beneficiaries of the trust.
Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation?
The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder's tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder's net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.
Which of the following statements is TRUE regarding the grantor of a trust?
The grantor may be the trustee and/or the beneficiary of a trust if desired
Which of the following statements regarding the differences between an annual rebalancing strategy and a buy-and-hold strategy over a 30-year period is FALSE?
The risk in a buy and hold strategy portfolio will match the investor's risk tolerance The risk levels in a buy and hold portfolio will rise and fall, while a rebalanced portfolio will be adjusted periodically to meet the investor's risk tolerance. Rebalanced portfolios will also attempt to maintain the percentage of equity and debt in the portfolio, while buy and hold portfolios will allow the percentages to drift. One of the advantages of a buy and hold strategy is that transaction and tax expenses are minimized since there is generally no continuous buying and selling.
One element in preparing a financial plan for a client is to determine the appropriate type and amount of life insurance. If a client is conservative, 30 years old, and married with 2 young children, whose income is unpredictable, the IA may recommend what type of life insurance policy?
Universal life insurance Since the client is conservative, with unpredictable income, universal life may be more suitable, since the premiums can be increased, decreased, or skipped, by using the cash value to fund the policy. The insurance company guarantees a minimum return on the cash value, which can be used to increase the death benefit. With whole life or term life, any premiums not paid may result in a lapse of the policy. Variable life would not be suitable for a conservative client, as the cash value may increase or decline based on the performance of the separate account. If a client is single with no dependents, life insurance may not be a concern for the client when creating the plan.
Sources of risk for investors in limited partnerships include all of the following situations, EXCEPT:
Unlimited liability Some other sources of risk could be unpredictability of income, rising operating costs, and the nonliquid nature of the limited partnership units
Which of the following life insurance policies is considered a security under the Securities Act of 1933?
Variable life Of the choices listed, only variable life insurance policies carry investment risk and are considered securities. Traditional life insurance policies provide a stated rate of return and the policyholders do not assume the investment risk.
When trading authorization is granted to a third-party for accounts held at an investment adviser, NASAA's model rules state that:
Written authority is required for third party trading Third-party trading authorization must always be in written form. Investment advisers may act in a discretionary capacity based on verbal authorization for up to 10 days, but thereafter written authorization is required.
A broker-dealer is registered in every state, but its only office is located in State X. The Administrator in State X sends a notice to the broker-dealer's compliance department indicating that it is going to audit the books and records of the firm. Does the Administrator in State X have the authority to audit the firm?
Yes, because the broker-dealer is registered in State X Administrators have jurisdiction or authority over all securities professionals who are registered in their state or who offer, sell, or hold themselves out to potential clients in their state. Since the broker dealer is registered in State X, the Administrator in State X has the ability to audit and subpoena its books and records and to compel testimony.
Zweispiel Company is registered as both a broker-dealer and an investment adviser. As a broker-dealer, the firm makes a market in WXYZ stock. Zweispiel believes that this stock would be a very good investment for one of its advisory clients and would like to sell shares to a client from its market-maker account. Which of the following statements is TRUE?
Zweispiel may sell the stock to the client as long as it discloses, prior to the completion of the transaction, that it is acting as a principal and it obtains the client's written consent An investment adviser that wishes to act as principal for its own account must (1) disclose the capacity in which it is acting prior to the completion of the transaction, and (2) obtain the client's written consent.
Under the Uniform Securities Act, what information is NOT disclosed in an investment advisory contract?
any other state in which the investment adviser is registered. The investment advisory contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains.
