Custom exams from Ch 9,2,&5
Based on the past performance of XYZ stock, an investment adviser has determined that there is a 25% chance that in a bull market, XYZ stock will return 20%. In a flat market (50% probability), the return should be 5%. The likelihood of a bear market is 25%, and expected returns would be a loss of 10%. What is the expected return for XYZ stock? A) 5% B) 10% C) 15% D) 20%
A) 5% **According to modern portfolio theory, the expected return is the sum of the weighted average of an investment's return. To find each weighted return, multiply the return by the likelihood of that return. For XYZ stock, the expected return is as follows. Return Likelihood Weighted Return 20% x 25% = 5% 5% x 50% = 2.5% (10%) x 25% = (2.5%) Expected return = 5% (5% + 2.5% - 2.5%)**
Under the Uniform Securities Act, what information would NOT need to be disclosed when filing a registration by qualification? A) A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors B) The capitalization and long-term debt of the issuer and any significant subsidiary C) The estimated cash proceeds to be received by the issuer from the offering D) The general character and location of the issuer's business and a statement of the general competitive conditions within the industry or business in which it operates
A) A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors **An analysis of the issuer's profit margin as compared to its competitors would not be required. All other items listed would be required when filing a registration by qualification.**
Under the USA, which of the following choices is considered an offer of securities? A) An investor purchased bonds and received a warrant as a bonus B) An investor receives additional shares due to a stock split C) An investor receives a stock dividend D) An investor receives a tender offer
A) An investor purchased bonds and received a warrant as a bonus **According to the Uniform Securities Act, any security that an investor receives as a bonus for purchasing another security is considered an offer of that security. The USA specifically states that receiving shares due to a stock dividend or other corporate action (e.g., stock split) is never considered an offer or offer to sell that security. A tender offer is an offer to buy a security from existing shareholders.**
If a new investment advisory firm is created and registered with the SEC, which of the following statements would be TRUE? A) It may not register unless it has $100 million or more under management B) It must register with both the SEC and the Administrator C) It may not register with the SEC until it has been in business for one year D) It may register with the SEC at any time without restriction under the Investment Advisers Act of 1940
A) 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.**
Under the USA, which of the following characteristics is required for a banker's acceptance to be exempt from registration? A) Maturities of no more than nine months B) Issued by a blue-chip company C) Rated in the highest category by at least three ratings companies D) Minimum denominations of $100,000 or more
A) Maturities of no more than nine months **Short-term, corporate, fixed-income securities such as commercial paper and a banker's acceptance may qualify as an exempt security. The maximum maturity is nine months. The minimum denomination is $50,000 and it must be rated in one of the three highest rating categories by a nationally recognized statistical rating organization.**
Which of the following securities or transactions are subject to the registration provisions of the Uniform Securities Act (USA)? A) Public offerings of securities B) Transactions with financial institutions C) Unsolicited private placement transactions D) Unsolicited non-issuer transactions
A) Public offerings of securities **Public sales (offerings) are typically subject to registration requirements. Private placements, unsolicited non-issuer transactions, and transactions with financial institutions are exempt from the registration provisions of the Uniform Securities Act. However, no transaction is ever exempt from the antifraud provisions of the Act.**
Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration? A) A transaction executed on a national securities exchange B) A Rule 147 offering C) The sale of securities by a sheriff D) An isolated, non-issuer transaction
B) A Rule 147 offering **The Rule 147 (intrastate) exemption is a federal or SEC exemption and does not apply to the Uniform Securities Act. For that reason, an issuer conducting an offering of securities in one state is required to register the offering in that state. On the other hand, a transaction by a fiduciary, such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, is exempt from state registration. Additionally, isolated, non-issuer transactions and transactions executed on the New York Stock Exchange, Nasdaq, or any other recognized national or regional exchanges are exempt from state registration.**
Which of the following transactions meets the definition of an exempt transaction under the Uniform Securities Act? A) An issuer transaction of a security filed under the Securities Exchange Act B) A nonissuer transaction of a security filed under the Investment Company Act C) An isolated issuer transaction D) Any sale of a security for which a registration statement has been filed with both the Administrator and the Securities and Exchange Commission
B) A nonissuer transaction of a security filed under the Investment Company Act **Any nonissuer transaction of a security registered under the Securities Exchange Act, Investment Company Act, or an isolated nonissuer transaction would be considered exempt transactions. Any offer, but not sale, of a security filed with both the Administrator and SEC would be considered an exempt transaction.**
Registration by coordination would most likely be used to register what type of offering? A) A new issue of mutual fund shares B) An initial public offering C) A new issue of shares listed on Nasdaq D) An intrastate offering
B) An initial public offering **Under normal circumstances, the method of registration most often used by the new issuers of securities is registration by coordination. Mutual funds are federal covered securities. All listed securities, such as Nasdaq securities, are also federal covered and, therefore, exempt from registration with the states. Intrastate offerings are commonly registered by qualification.**
A technology company's stock is listed on an exchange and is also traded over-the-counter by a small number of market makers. The stock is considered by the Administrator to be a: A) Non-exempt security and subject to registration by coordination B) Federal covered security and not subject to registration with the Administrator C) Federal covered security and subject to registration by qualification D) Federal covered security and subject to notice filing with the Administrator
B) Federal covered security and not subject to registration with the Administrator **Securities that are listed on the NYSE, Nasdaq, or other national exchanges are considered federal covered securities and exempt from registration with the Administrator. This federal covered status applies regardless of where other trades may take place. Although notice filing does apply to certain federal covered securities, it does not apply to listed securities. Investment company securities and securities that are issued under Regulation D Rule 506 are considered federal covered securities (exempt from state registration), but subject to notice filing.**
A Suspicious Activity Report (SAR) should be filed: A) For transactions of more than $2,000 B) For transactions of $5,000 or more C) Only for transactions of more than $10,000 D) Only for transactions of more than $25,000
B) For transactions of $5,000 or more **A firm must file an SAR whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm suspects any of the following wrongdoing: The client is violating federal criminal laws. The transaction involves funds that are related to illegal activity. The transaction is designed to evade the reporting requirements (structured transactions). The transaction has no apparent business or other legitimate purpose and the broker-dealer cannot determine any reasonable explanation after examining all the available facts and circumstances surrounding the transaction. (17208)**
Bill is an investment adviser representative for an advisory firm that has satellite offices in Florida and California, but its principal office is in New York City. The adviser has assets under management of $63,000,000 and its largest client is the Aquarius SmallCap Growth Mutual Fund. Bill works in the New Jersey office and has clients that reside in Florida, New York, and New Jersey. In which of the following states must Bill register as an investment adviser representative? I) California II) New Jersey III) New York IV) Florida A) I, II, and III only B) II only C) II, III, and IV only D) I, II, III, and IV
B) II only **Although Bill's advisory firm has less than $100 million under management, it is an adviser to a registered investment company. For that reason, the firm is considered a federal covered investment adviser and is only required to register with the SEC (i.e., it is exempt from registration at the state level). The IARs of federal covered advisers are required to register with the Administrator in any state in which they maintain an office. In this question, since Bill only maintains a place of business in New Jersey, he is required to register as an IAR in New Jersey.**
Although an exempt reporting adviser (ERA) is not required to register, it must still satisfy which of the following requirements? A) File Form ADV Part 2 with the SEC B) Notice file with the Administrator C) Amend its ADV within 90 days if material information changes D) Prepare an annual brochure
B) Notice file with the Administrator **Exempt reporting advisers are required to file Form ADV Part 1A with the SEC and must notice file with the Administrator. Any material information changes must be reported promptly. As is the case with other investment advisers, an ERA is required to amend its Form ADV within 90 days of its fiscal year end.**
If an agent unknowingly misrepresents the risk associated with a security, which of the following statements is correct according to the Uniform Securities Act? A) This is considered an act of fraud. B) Since the agent unknowingly made misrepresentations regarding a security, the agent is not subject to disciplinary action. C) Unknowingly making misrepresentations will result in the denial, suspension, or revocation of the agent's registration. D) Unknowingly making misrepresentations will result in the denial, suspension, or revocation of the registration of the security.
B) Since the agent unknowingly made misrepresentations regarding a security, the agent is not subject to disciplinary action. **In this question, since the agent did not willfully intend to mislead an investor, unknowingly making misrepresentations regarding a security is not considered fraudulent. For this reason, the agent is not subject to disciplinary action by the Administrator. However, if the misrepresentations were intentional, the Administrator may deny, suspend, or revoke the agent's registration. If action is ever taken against an agent, it will not have an effect on the registration of the security.**
Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under: A) The Investment Company Act of 1940 B) The Securities Act of 1933 C) The Securities Exchange Act of 1934 D) The Investment Advisers Act of 1940
B) The Securities Act of 1933 **The Securities Act of 1933 regulates the federal registration of newly issued securities. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933.**
According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning a private placement offering? A) The offer may not be made to more than 10 retail investors in the state during any 12-month period. B) The offer may not be made to more than 35 retail investors in the state during any 12-month period. C) The offer may be made to an unlimited number of institutional investors during any 12-month period. D) Commissions may not be paid if the buyers are non-institutional investors.
B) The offer may not be made to more than 35 retail investors in the state during any 12-month period. **Under the Uniform Securities Act, a private placement offering is one that involves no more than 10 retail investors; however, there may be an unlimited number of institutional investors. The offering is considered an exempt transaction if the following conditions are met: The seller believes that all of the retail (non-institutional) buyers are purchasing for investment purposes only and, No commission or other remuneration is being paid for soliciting retail (non-institutional) buyers Any reference to a private placement that's limited to no more than 35 retail (non-institutional) investors is a condition for a private placement being conducted under Regulation D of the Securities Act of 1933, which is a federal regulation.**
Registration of a security in a state is not required for ALL of the following reasons, EXCEPT: A) The instrument does not meet the definition of a security B) The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 C) The security is exempt D) The security is offered in an exempt transaction
B) The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 **Under the Uniform Securities Act, a security is not required to be registered if: The security is exempt; or The security is non-exempt, but is being offered in an exempt transaction; or The security is a federal covered security; or The instrument does not meet the definition of a security Whether a security has been registered with the SEC (under the Securities Act of 1933) has no bearing on the state registration requirement.**
Which of the following would most likely be registered with the state Administrator? A) An NYSE-listed company's common stock B) A mutual fund C) A distribution of an interest in a mining or real estate venture D) A municipal revenue bond
C) A distribution of an interest in a mining or real estate venture **Interests in mining or real estate ventures are examples of partnership offerings. General and limited partnerships are often registered with the Administrator in the state in which they are offered. Municipal bonds are not subject to registration requirements since they are categorized as exempt securities under the Uniform Securities Act. Also, mutual fund shares and securities listed on the NYSE are federal covered securities, since these issues are only required to be registered with the SEC.**
Under NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding investment advisory fees charged to customers? A) There is no limit on the fee charged, provided the customer agrees to the method of computation and the method is disclosed in writing to the client B) Investment advisory fees may not exceed an annual rate of 5% of the total assets under management, with assets valued at the end of the computation period C) Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services D) As long as the fees charged by an investment adviser (IA) are based on a percentage of the assets under management, and not on a percentage of profits, and are agreed to by the client, there is no limitation on the size of fees charged
C) Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services **Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical.**
Under the Investment Advisers Act of 1940, which of the following is required to register with the SEC? A) An investment adviser with clients in 13 states B) An investment adviser that recommends exchange-traded securities C) An investment adviser that manages more than $110 million ($110 MM) in assets D) An investment adviser that only manages the money of a few wealthy clients
C) An investment adviser that manages more than $110 million ($110 MM) in assets **Unless exempt from registration, advisers are required to register with either the state Administrator or the SEC, but not both. An adviser has a choice and may register with the state Administrator or the SEC once it has assets under management (AUM) of $100 million. Once the adviser s AUM reaches $110 million, it is categorized as a federal covered adviser and is required to register with the SEC. In addition, firms that provide advice to an investment company, or firms that provide advisory service in 15 or more states, are also categorized as federal covered. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided 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.**
According to Sarbanes-Oxley, a public corporation's financial statements must be certified by the corporation's: I) Chief auditor II) Chief executive officer III) Legal counsel IV) Chief financial officer V) Compliance officer A) I only B) I and II only C) II and IV only D) II, III, and V only
C) II and IV only **Sarbanes-Oxley is a federal law that, among other things, requires a corporation's annual and quarterly financial reports to be certified by the CEO and CFO of the corporation.**
Under the Uniform Securities Act, an institutional investor: A) Has more than $2.1 million of net worth B) Has a minimum of $1 million under management with an investment adviser C) May be designated as such by rule or order of the Administrator D) Is any financial institution or trust
C) May be designated as such by rule or order of the Administrator **The best answer to this question is that, by rule or order, the Administrator has the power to designate a person as an institutional investor. A client with net worth of more than $2.1 million or a client with a minimum of $1 million under management with an investment adviser is defined as a qualified client, not necessarily an institutional investor. Both financial institutions and trusts may be considered institutional investors, but there is a financial requirement that must be met.**
According to the Investment Advisers Act of 1940, when must an access person submit a transaction report? A) No later than 10 days after the end of the calendar quarter in which the transaction was effected B) Promptly C) No later than 30 days after the end of each calendar quarter D) Within 90 days of the end of the adviser's fiscal year
C) No later than 30 days after the end of each calendar quarter **The Investment Advisers Act of 1940 requires an access person of an adviser to report his personal securities transactions by no later than 30 days after the end of each calendar quarter. On the other hand, the Uniform Securities Act requires an adviser to maintain a record of all personal securities transactions by no later than 10 days after the end of the calendar quarter.**
Which of the following is an example of an exempt transaction under the Securities Act of 1933? A) U.S. Treasury securities B) Municipal securities C) Reg. D D) Railroad equipment trusts
C) Reg. D **Since this question is asking about an exempt transaction at the federal level (Act of 1933), the only appropriate answer is Regulation D. A Regulation D offering is also considered private placement and represents a federal exempt transaction. Under the Securities Act of 1933, U.S. Treasuries, municipal securities, and railroad equipment trusts are all exempt securities (not transactions).**
According to the Securities Act of 1933, a pooled investment fund is considered a federal covered security when it: A) Registers as a hedge fund B) Is managed by a federal covered adviser C) Registers with the SEC under the Investment Company Act of 1940 D) Files an application with an Administrator seeking an exemption
C) Registers with the SEC under the Investment Company Act of 1940 **An investment pool is considered a federal covered security when recognized as an investment company under the Investment Company Act of 1940 and when its offering is registered with the SEC. Requesting an exemption or employing a federal covered adviser does not make an investment pool an investment company.**
The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if: A) On rare occasions, she renders advice that is incidental B) She provides general advice on stocks, bonds, and tangible assets C) She provides mutual fund timing and sector rotation advice to her clients D) She provides advice in isolated instances as part of another service
C) She provides mutual fund timing and sector rotation advice to her clients **Investment advisers provide advice that is timed and tailored to each client. An investment adviser's advice is not general, isolated, or occasionally offered. An adviser is considered in the business of providing advice when it holds itself out as an adviser or makes recommendations that are client-specific.**
Which of the following choices would NOT meet the definition of an exempt transaction? A) A transaction by a trustee involved in a bankruptcy B) An unsolicited nonissuer transaction with a retail investor C) Transactions between an issuer and retail investors D) A transaction executed by a bona fide pledgee
C) Transactions between an issuer and retail investors **Any transactions by trustees involved in a bankruptcy--sheriffs, marshals, guardians, and other fiduciaries are considered exempt transactions. Unsolicited nonissuer transactions whether with retail or institutional investors and transactions executed by a bona fide pledgee are also considered exempt transactions. However, transactions between issuers and retail investors are not exempt from registration. A transaction between an issuer and underwriter would be an exempt transaction.**
A company issued $50 million of common stock in a private placement under Regulation D. In order to sell the stock initially in any state, the Administrator requires the filing of: A) Registration statement B) Form 10-K C) Form ADV - NR D) A Notice Filing
D) A Notice Filing **Since stock that's issued under Regulation D is federal covered, the shares do not need to be registered at the state level. However, state Administrators can require the issuer to complete a Notice Filing. Form 10-K is a financial report that corporations file with the SEC. Form ADV-NR is filed by investment advisers that have principal officers who are not residents of the United States.**
Which of the following transactions requires the registration of securities according to the Uniform Securities Act? A) An unsolicited transaction of an exchange-traded stock where the customer normally purchases only investment-grade bonds B) An offer to sell out-of-state municipal bonds to a bank C) An agent of a broker-dealer selling a private placement to five retail investors D) A purchase of securities offered for sale in an out-of-state newspaper
D) A purchase of securities offered for sale in an out-of-state newspaper **Although an offer to sell securities that appears in a newspaper that's published outside a state is not considered an offer in that state, securities sold in a state are subject to registration. Although the sale of equity securities to a client who has only purchased investment grade bonds may not be suitable, the transaction was done on an unsolicited basis and is an exempt transaction. A private placement offering to a maximum of 10 retail investors within a state is also an exempt transaction.**
Which of the following employees of an investment adviser are not considered a registered investment adviser representative? A) An individual who manages the investment adviser representatives B) A junior partner that makes investment recommendations C) A portfolio manager D) A senior partner
D) A senior partner **An investment adviser representative (IAR) is considered any person who is associated with an investment adviser and manages client accounts or portfolios, makes investment recommendations, or gives advice about securities. The IAR definition also includes any person who determines the type of investment advice to give to clients, any person who solicits or negotiates the sale of these services, as well as any person who supervises the personnel performing these job functions. The reason that the senior partner is not considered a registered investment adviser representative is that there's no indication that this person has any of the responsibilities of an IAR.**
Which of the following transactions would NOT be considered exempt under the Securities Act of 1933? A) A private placement B) An intrastate offering C) An unsolicited brokerage transaction D) An initial public offering of an investment company's common stock
D) An initial public offering of an investment company's common stock **With the exception of the public offering of investment company shares, all of the transactions listed are exempt from the Securities Act of 1933. Generally, when investment company shares are offered to the public, they must be registered and sold with a prospectus.**
Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D? A) The securities may only be offered to accredited investors. B) The securities may only be sold to no more than 35 non-accredited investors. C) General advertising is prohibited. D) General advertising is permitted, but all investors must be accredited
D) General advertising is permitted, but all investors must be accredited **Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors.**
An initial public offering (IPO) is being sold in one state only and is not being submitted for registration with the SEC under the Securities Act of 1933. According to the provisions of the Uniform Securities Act, what method of registration would be used for this offering? A) Notification B) Coordination C) Subordination D) Qualification
D) Qualification **The notification and coordination methods of state registration may only be used when the issuer also files a federal registration statement under the Securities Act of 1933. The qualification method of registration may be used in any state for any issuer that is not seeking federal registration.**
