Exam 1&2
characteristic of a Monte Carlo simulation
- It is a technique used to model uncertainty in retirement planning. - The user gets a best-case scenario and a worst-case scenario. - It provides insight into the range of outcomes. - Small changes in the projected rate of return will make large differences in the outcome.
Under the USA, which of the following statements regarding the posting of surety bonds is NOT true? A) The Administrator requires all broker-dealers to post bonds even if they maintain net capital in excess of minimum amounts. B) The Administrator requires the posting of bonds primarily to cover the cost of civil liabilities associated with violations of the Uniform Securities Act. C) The Administrator can accept securities instead of cash if the posting of a bond is required. D) Bonds may be required for agents of broker-dealers.
A. Firms that maintain net capital in excess of minimum requirements may be exempted from the requirement of posting surety bonds. Agents exercising discretion over client accounts may be required to post a surety bond.
Which of the following are nonissuer transactions? 4. An investment manager purchases 100,000 shares of XYZ on the NYSE. 1. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. 2. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. 3. Dot.com purchases its own shares on the open market in order to place them in treasury.
All of them. The PROCEEDS have to GO to the Issuer. #3 the issuer buys so proceeds go to investor
Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) The trust officer of a commercial bank who manages investment accounts for clients B) A lawyer who specializes in consulting on investing in securities C) A syndicated columnist who gives weekly reports and recommendations on investments D) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities
B. Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty. U1LO3
Which of the following practices is prohibited under the Uniform Securities Act? A) Altering the customer's order prior to execution at the request of a customer, which subsequently results in a substantial loss B) Actively trading a security in which an unusually high trading volume has occurred C) Offering services that an agent cannot realistically perform because of his broker-dealer's limitations D) Failing to inform the firm's principal of frequent oral customer complaints
C. An agent may not offer services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. At the client's request, an agent can alter a client's order, even if the change results in a loss. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints. U7LO4
A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A) is a member of FINRA B) is licensed/registered in its state of residence C) is a member of the New York Stock Exchange D) does no business in that state other than with institutional clients
D. A broker-dealer must be registered in every state where it sells or offers to sell securities, unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required. U3LO2
Fusion Financial is a broker-dealer registered in States A, B and C, with its home office in State B. A complaint is filed against the firm by a client who resides in State A. Under the powers granted under the Uniform Securities Act, the Administrator of State B could do all of the following EXCEPT A) issue an injunction against Fusion Financial B) subpoena witnesses from State C C) gather evidence from State B D) gather evidence from State A
A. An Administrator has the power to gather evidence both within and outside of the home state, as well as subpoena evidence and witnesses in any state. Only the courts can issue an injunction. U5LO2
As a federal covered security, the KAPCO Growth Fund is required to notice file under the laws of State A. State A's Administrator can require the issuer to provide copies of A) a listing of the officers and directors of the issuer B) proxy statements C) a report of the amount of the federal covered security sold in the state D) the schedule of compensation to the fund manager
Because those companies that are required to notice file are levied a fee based on the amount of securities sold in the state, information relating to the amount of sales in the state must be reported. U4LO3
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advertisements must comply with rules set out under the Investment Advisers Act of 1940. Those rules include A) a prohibition against reduced-fee introductory offers B) a prohibition against showing the adviser's past performance C) a requirement that a copy of all advertisements be sent to the SEC at the time they are disseminated to the public D) a prohibition against testimonials from clients
D. Advertisements may not contain false statements, include testimonials from clients, refer selectively to past recommendations, refer to a chart or device for evaluating securities without explaining its limitations and difficulties, or offer anything free of charge if in fact there will be some requirement, however minor, for obtaining the free item. There is no federal filing requirement for advertisements of investment advisers (although filing may be required by the state Administrator). As long as the past performance is displayed in a manner consistent with the rules, there is no problem. U6LO5
Palpable Retirement Options (PRO) is a sole proprietorship investment adviser registered in States M and P. The owner of PRO is also a registered agent with Magnificent Financial Futures (MFF), a large broker-dealer registered with the SEC and many states. After a hearing conducted by the Administrator, PRO's owner has been found guilty of selling away to clients in state M. What effect might that have on MFF? A) Disciplinary action brought by the Administrator of State P if it is found that MFF failed to supervise its agent's activities B) Disciplinary action brought by the SEC if it is found that MFF failed to supervise its agent's activities C) None because PRO is a separate legal entity responsible for the activities of its CEO D) Disciplinary action brought by the Administrator of State M if it is found that MFF failed to supervise its agent's activities
D. Under the doctrine of respondeat superior, a broker-dealer is responsible for the actions of any of its registered agents, even those who operate an independent investment advisory firm. In this case, because the agent's violation occurred in State M, only that state's Administrator has jurisdiction. Selling away is the prohibited practice of an associated person, such as an agent, engaging in private securities transactions without the knowledge and consent of the employing broker-dealer. This violates the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. This is not a federal violation which is why the SEC doesn't get involved here. U7LO5
If the required rate of return is higher than anticipated in a present value calculation, the effect would be that A) the yield to maturity would increase B) the present value would be higher C) the future value would be higher D) the present value would be lower
the present value would be lower. You need to deposit less because the return is greater.
All of the following actions, if performed by a registered agent, would be considered a prohibited activity under the Uniform Securities Act EXCEPT A) the agent backdates customer confirmations in order to enable the client to achieve a long-term holding period, thereby saving considerable income taxes B) the agent saves the client money by deliberately withholding the client's buy order for a stock when the agent sees the stock price is trending down. When the order is finally placed later in the day, the execution price is $1 less than when the agent received the order. C) accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state D) the client informs the agent that the appropriate written discretionary authorization forms are being hand-couriered to the agent and should arrive within the hour. Knowing the required paperwork is on its way, the agent begins discretionary trading in the account.
C. An unsolicited order is an exempt transaction, so accepting this from the agent's client would not be a prohibited practice. There is never a case when backdating of confirmations is permitted, even by 1 day. No discretionary activity may take place until the written authorization is actually received by the firm. Although an agent can use discretion as to time and price without written authority, oral instructions from the client are required, and nothing in the question indicates that the client instructed the agent to "buy when you think the price is right."
If an index annuity has a participation rate of 80%, it means A) the investor's account will never be less than 80% of the initial investment. B) the investor's account will participate in 80% of the gains and losses of the index. C) the investor's account will be charged with 80% of the amount lost by the index. D) the investor's account will be credited with 80% of the growth of the index.
D. The participation rate of an index annuity is the percentage of the growth of the index credited to the investor's account. For example, if the index had a return of 10% and the participation rate is 80%, the investor's account is credited with 8% growth. This may be limited by a cap (a maximum), but unless a cap rate is stated in the question, there isn't one. One of the benefits of an index annuity is that it only shares in the growth, never any losses. U15LO3
Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax? A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 B) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000 C) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000 D) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000
D. These are the current numbers used by the IRS to determine if Social Security benefits are taxable. It is interesting that the computation indirectly can cause tax-exempt interest to become taxable. Once the couple's income under this computation exceeds $44,000, 85% of it is taxable. If the question dealt with a single person, the limit would be $25,000 rather than $32,000. U21LO5
One of the advantages of using a 529 plan rather than a Coverdell ESA to fund higher education is A) contributions to a 529 plan are tax deductible. B) the 529 allows you to change the beneficiary to another member of the beneficiary's family. C) the 529 plan is a security while the ESA is not. D) there is no age limit by which time the funds must be used.
D. Unless the child is a special needs case, funds in a Coverdell ESA must be used by age 30. Contributions to neither program are tax deductible and both plans allow changing the beneficiary to another member of the beneficiary's family. Although the 529 plan is technically a municipal fund security, that is neither an advantage nor disadvantage to the investor. U24LO6
