Test questions #2
If the Administrator wishes to conduct an examination of an investment adviser's books and records, how much advance notice must be given? A) None B) 30 days C) 15 days D) 60 days
A
Under modern portfolio theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as A) the feasible set B) the capital market line C) the efficient set D) the correlation coefficient
A
Which of the following statements regarding a QDRO is correct? A) A QDRO applies only to assets in a qualified employer plan. B) A QDRO applies to assets in a qualified employer plan and a traditional IRA. C) A QDRO must comply with ERISA to be effective. D) A QDRO applies only to assets in a traditional IRA.
A - A QDRO applies only to assets in a qualified employer plan; it would not be applicable to an IRA or a SEP. Under IRS regulations, early distributions that are taken pursuant to a qualified domestic relations order, or QDRO, are exempt from the 10% penalty. A QDRO is a court-issued order that gives someone the right to an individual's qualified plan assets, typically an ex- (or soon-to-be-ex-) spouse, and the QDRO is usually issued in the course of divorce proceedings or to satisfy child support obligations.
Under the Uniform Securities Act, the requirements for filing of advertising and sales literature dealing with an exempt security with the Administrator A) do not apply B) always apply C) apply only to sales literature D) apply only to advertising
A - An exempt security or transaction is exempt from the registration requirements and the requirements for filing of advertising and sales literature.
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $0.00 B) $90,000.00 C) $50,000.00 D) $100,000.00
A - Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
All of the following must be specified in a security's state registration statement EXCEPT A) the total amount of the security that will be offered in other states B) the expected use of the projected proceeds of the offering C) the amount of securities to be offered in the state D) a stop order from another state that affects the offering of the security within that state
A - The total amount of the security to be offered in other states need not be specified although identifying those states is required.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A) have a check drawn on the account payable to the trustee for trustee expenses B) arrange to have the trust's funds pledged to support a loan for the trustee C) have funds withdrawn from the account at the direction of the beneficiary D) place the securities in the trust fund in a noncustodial brokerage account
A - The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.
All of these are true about a traditional 401(k) plan EXCEPT A) the employer can contribute more than 25% of total payroll B) employees can choose from a variety of investment options C) in service employees may be eligible for hardship withdrawals D) employees may have a portion of their contribution matched by the employer
A - There are exceptions to this, but, in general (and on the exam), you will have to know that the employer share of the contributions to a traditional 401(k) plan (or any other DC plan) may not exceed 25% of total payroll.
Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act? The value of a client's account at the start of the year is subtracted from the value at the end of the year. The adviser's compensation is 5% of the difference. The adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. The adviser charges a fee of 1% of the average value of the account portfolio during the year. The adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. A) III and IV B) I and IV C) I and II D) III only
A - Unless the question states that it relates to the exception for wealthy investors ($1.1 million under management of the adviser or more than $2.2 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.
GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to A) permit the loan because the CFO is the plan trustee B) refuse to allow this to happen because it would be a violation of your fiduciary responsibility C) refuse to allow this to happen because the plan assets will suffer D) permit the loan once you have been satisfied that there is adequate collateralization in place
B
Information required on an application for registration as an agent would include the form of business (corporation, partnership, LLC, etc.). felony convictions, whether securities related or not. a statement of financial condition. citizenship information. A) I and II B) II and IV C) III and IV D) I and III
B
One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as A) a sellout B) a house call C) a Regulation T call D) a margin call
B
A client of your broker-dealer, currently long 1,000 shares of DEF Corporation common stock, wishes to liquidate the position. Based on the following market maker quotes, it would be expected that the firm's trader would direct a market order to A) MMB: 9.65 - 9.75, 10 x 10. B) MMC: 9.75 - 9.85, 20 x 20. C) MMD: 9.75 - 9.90, 5 x 10. D) MMA: 9.65 - 9.85, 5 x 5.
B - A market order to sell 1,000 shares should be directed to the market maker with the highest bid price that is firm for at least 1,000 shares. The highest bid price is $9.75 by both MMC and MMD, but MMD's quote is only firm for 500 shares.
Federally registered investment advisers are obligated to maintain certain books and records as specified by the SEC. Which of the following statements regarding adviser recordkeeping is NOT true? A) Records are subject to surprise audits by the SEC. B) Records originally created on computer may be stored in electronic media. C) Records must be kept for 6 years. D) Written records may be reduced to microfilm.
C
In general, a broker-dealer will disclose its fee schedule A) within 30 days following any changes in fees or charges B) when requested by the client C) at the time of the account opening D) to its agents who are then responsible for sharing with client
C
Under the Uniform Securities Act, certain transactions are exempt from the sales literature and advertising filing requirements. Which of the following would be included in that category? Any isolated, nonissuer transaction Any sale to a financial institution Any transaction by the executor of an estate Any transaction between an issuer and underwriters A) I, II, and IV B) II and III C) I, II, III, and IV D) I and III
C - All four options describe exempt transactions. Exempt transactions are not subject to the advertising and sales literature filing requirements of the Administrator.
The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities A) at the bottom. B) halfway between the middle and the top. C) at the top. D) in the middle.
C - The risk/return pyramid shown in your LEM places commodities at the very top, the point of the pyramid.
An intrastate offering is exempt from A) all registrations B) state registration C) blue-sky registration D) federal registration
D
FinCEN Form 112, the Currency Transaction Report, is filed with A) the SEC B) the Federal Bureau of Investigation (FBI) C) the National Security Agency D) the Department of the Treasury
D
An individual may NOT act as an agent for more than one broker-dealer A) under any circumstances B) unless the broker-dealers are exchange members C) unless the broker-dealers are unrelated D) unless the Administrator, by rule or order, authorizes such employment
D - An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment.
Review of an SEC-registered investment adviser's policies and procedures designed to prevent violation of the federal securities laws must take place no less frequently than A) quarterly B) annually C) monthly D) semiannually
b
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) markups and markdowns on trades done as a principal B) interest on debit balances in margin accounts C) safekeeping of customer funds and securities D) the cost of overnight delivery services
A
Hugh Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners A) need not notify its clients of Clark's departure because Clark was only a minority partner B) must notify its clients of Clark's departure within a reasonable period C) must change its name because the partnership has a new mix of partners as a result of Clark's departure D) must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period
B - ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period.
Jasper Quartermaine is interested in using the options market to create "insurance" against a severe drop in the value of a stock portfolio that he owns. How could he best accomplish this goal and what is this type of strategy called? Type of option Strategy A) Buy call options Protective call B) Buy put options Protective put C) Write call options Protective call D) Write call options Covered call
B - An investor who is long securities can obtain portfolio insurance by purchasing put options. Losses in the underlying portfolio are offset by gains in the put position. This is known as a protective put strategy. Writing covered calls provides downside protection to the extent of the premium received, but if you want real insurance, you have to buy it.
An unintentional omission of material facts when offering or selling a security may result in civil liabilities criminal liabilities criminal penalties A) I, II, and III B) I only C) II only D) II and III
B - An unintentional omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties.
Which of the following is (are) exempt from the registration requirements of the Uniform Securities Act? Securities issued by a nonprofit organization Securities guaranteed or issued by a federal savings and loan T-bills Unit investment trusts registered with the SEC A) II, III, and IV B) I, II, III, and IV C) I, II, and III D) I only
B - Securities issued by nonprofit organizations, federal savings and loans, and the U.S. government (i.e., Treasury bills, Treasury bonds) are exempt from the registration requirements of the Uniform Securities Act. Unit investment trusts that are registered under the Investment Company Act of 1940 are federal covered securities and, therefore, are exempt.
An agent is registered in Montana and North Dakota. While working in his North Dakota office, he places a call to the cell phone of one of his Montana resident clients who happens to be on vacation in Wyoming. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Idaho. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrator of North Dakota Idaho Montana Wyoming Illinois A) I, II, III, IV and V B) I, II, and III C) I and IV D) II and III
B - The Administrator has jurisdiction from the state in which the offer originated (ND), was directed (MT), and was accepted (ID). Mailing of the certificate is of no consequence. Wyoming does not have jurisdiction because the client was merely traveling and the call was directed to the Montana number.
Which of the following is NOT considered to be in the business of investment advising? A) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance B) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only C) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business D) A person who prepares reports about securities in general
B - asking about one of the 3 prongs - being in the "business". The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies.
The Administrator may require which of the following from a federal covered adviser? copy of the IA's Form ADV filing of the IA's advertising in the state a listing of the IA's fee schedule a filing fee A) I, II, III, and IV B) I and II C) I and IV D) II and III
C - Even though Administrators have limited jurisdiction over federal covered advisers, they can require filing of a copy of the information filed by that IA with the SEC (the Form ADV), as well as a filing fee.
Securities traded in which of the following marketplaces would be excluded from the definition of federal covered securities? A) NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) B) New York Stock Exchange C) Toronto Stock Exchange D) Nasdaq Stock Market
C - Federal covered securities include those on exchanges registered with the SEC, such as the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market, as well as investment companies registered under the Investment Company Act of 1940.
A pattern of currency deposits designed to avoid currency reporting requirements is termed A) laddering. B) layering. C) structuring. D) spinning.
C - Structuring describes any attempt to circumvent the currency reporting rules
Under the Investment Advisers Act of 1940, which of the following statements is not true regarding custody of a client's funds or securities? A) The adviser must be named as agent or trustee for a client's account or else use a qualified custodian. B) The adviser must arrange for an audit of the client's accounts at least once annually and arrange for the results to be forwarded to the SEC. C) The adviser must report the location of funds or securities at 6-month intervals. D) Client securities must be segregated and kept safe.
C - The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account.
During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is A) 4.26% B) 6.34% C) 2% D) 2.13%
C - The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.
Jane and Malka are discussing the possible form of efficient markets. Jane states that, "A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data." Malka retorts that she is not sure of Jane's thoughts and says, "If markets are weak form efficient, we cannot consistently outperform the market based on technical analysis." A) Both are incorrect. B) Jane is correct, but Malka is incorrect. C) Malka is correct, but Jane is incorrect. D) Both Jane and Malka are correct.
D - A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data. Therefore, successive future share prices should move independently of this past data in a random fashion, thereby nullifying any perceived informational advantage from adopting technical analysis to analyze trends.
NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would likely consider which of the following to be prohibited activities? A client is rather insistent on purchasing a security deemed unsuitable by the agent. In an effort to dissuade the client, the agent furnishes several websites of analysts who have issued negative reports on that security. An agent takes an order from the client's attorney without written trading authorization. An agent takes an order from the secretary of a nondiscretionary client who is too busy to give the order herself. An agent encourages a client to acquire a security on the basis of research recently published by the broker-dealer for its institutional clients. A) I and III B) II, III, and IV C) I and II D) II and III
D - An agent cannot take trading orders from anyone but the client unless he has written authorization on file. Using publicly available information to encourage clients to change their opinion about an unsuitable investment is acting in the clients' best interest and there is nothing wrong with using "house" research reports to develop client recommendations, as long as they are suitable.
Which of the following is (are) not exempt from registration as an investment adviser representative in the state in which they conduct business? A Certified Financial Planner who, while affiliated with a broker-dealer and an investment adviser, prepares comprehensive financial plans and whose only compensation is commissions generated from the purchase of recommended securities. An insurance agent affiliated with the company's advisory division, who prepares comprehensive financial plans and receives compensation only on insurance products purchased by his clients A broker-dealer with extensive business in the state A mutual fund company with offices and clients in the state A) III and IV B) I, II, III, and IV C) I only D) I and II
D - An insurance agent affiliated with an investment adviser, who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities
The RAN Corporation's common stock is listed on the New York Stock Exchange. To raise additional working capital, RAN's board of directors has authorized the sale of $75 million in subordinated debentures. Under the Uniform Securities Act, which of the following is NOT a true statement? A) The Administrator can require that the issuer provide a notice filing in the state. B) The Administrator may require a filing fee be paid prior to sales taking place in the state. C) The Administrator can bring an enforcement action against the issuer if it is deemed that the issue is fraudulent. D) The Administrator can require the RAN Corporation to register the debentures prior to an offering in the state.
D - Because the RAN Corporation's common stock is listed on the NYSE, it, and any security equal or senior to it, is a federal covered security. As such, the state has no registration authority over the security. However, notice filing and payment of fees may be required. The Administrator always has the power to enforce antifraud statutes.
ERISA regulation does not apply to public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans A) I and II only B) I, II, and III C) I only D) I and III only
D - ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.
A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend? A) A diversified open-end investment company concentrating in small-cap stocks B) A government bond fund C) A high-yield bond fund D) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds
D - Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.
The most common way in which to distinguish whether social media content is static or interactive is A) the ability for others to comment on it B) the ability for others to link to it C) the ability for others to like it D) the ability for others to change it
D - Static content can only be changed by the originator (or someone under that person's control).
An application has been filed with the Administrator of State A for registration as a broker-dealer by Assured Success Investments (ASI), a broker-dealer registered in States B, C, and D. While the application is pending, a lawsuit against ASI is filed in civil court in State B. The effect of this would be A) ASI's registration in State B would be suspended B) ASI's application in State A would be put on hold C) ASI's application in State A would be denied D) ASI's application in State A would proceed as normal
D - The filing of a lawsuit would have no immediate effect on a broker-dealer's application for registration. After all, one is innocent until proven guilty. Even a guilty verdict might not lead to any action, because we don't know whether the lawsuit is connected to the brokerage activities.
A broker-dealer acting as a principal in a trade would A) must always disclose the amount of markup on a client's confirmation statement B) add a markup to the bid price when offering shares to a client C) must disclose to clients the amount of earnings he made on principal transactions in excess of the amount he would have made had he charged a commission D) add a markup to the offering price when selling shares to a client
D - When selling a security to a public customer, the broker-dealer adds his markup to the ask price (offer price), not the bid price
