Finals

An individual buys stock from a distant family member for $2,000. The family member paid $1,000 for the stock and held it for many years before selling it. A short while later, the same individual inherits $3,000 of the same stock. 6 months later the stock has doubled in value, and the individual sells all the shares. The tax consequence is:

$2, 000 short-term capital gain; $3,000 long-term capital gain The stock that was purchased at $2,000 was held for about 6 months and then sold for double that amount, or $4,000, for a $2,000 short-term capital gain. When stock is inherited, the market value at the date of death is the cost basis. The holding period of inherited assets is always considered long term. So the $3,000 of inherited stock is sold for double that amount, or $6,000, for a $3,000 long-term capital gain. Thus, the individual has a $2,000 short-term capital gain and a $3,000 long-term capital gain.

Which of the following are NOT defined as securities under the Uniform Securities Act? I Individual Retirement Accounts II Keogh Plans III Commercial Paper IV Real Estate Condominium Investments

1+2 . Individual Retirement Accounts and Keogh Plans are specifically excluded from the definition of a security. Real Estate Condominium investments can be considered to be a security when the condominium is managed by a third party for profit. Commercial Paper is also defined as a security. However if it has a maturity of nine months or less, is issued in amounts of $50,000 or more, and is rated in one of the top 3 ratings categories, it is exempt from registration.

Which of the following statements concerning 457 plans are TRUE? I They can be restricted to highly paid employees II They are set up for government employees III The employer receives an immediate tax deduction IV They are qualified retirement plans

1+2 A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers). These are non-qualified plans because they are discriminatory. They generally are only available, as an added benefit, to higher earning government employees. The maximum contribution is the same as for 401(k) and 403(b) plans - $19,500 in 2021. The amount contributed is a salary reduction. Earnings build tax deferred. When distributions are taken, they are 100% taxable. A major difference is that there is no 10% penalty tax for early withdrawals from 457 plans. This is the case because 457 plans often cover senior firemen and policemen, who might be forced to take early retirement due to disability, and if this occurs, there is no 10% penalty tax. The employer receives no tax deduction - remember that the contribution is being made out of the employee's income, and is not being made by the employer.

Which of the following corporate distributions are taxable to the recipient? I Cash dividend II Stock dividend III Product dividend IV Stock split

1+3 Stock dividends and stock splits are not "taxable;" the recipient reduces his or her cost basis per share for the additional shares received. Cash dividends and product dividends received, are taxable.

The effectiveness of a registration may be summarily postponed or suspended as long as the Administrator: I upon entry of the order promptly notifies each person specified II files a copy of the order in each State where the security has been offered III gives the reasons for the postponement or suspension IV within 5 days after the receipt of a written request from a person that is the subject of the order, sets the matter down for a hearing

1+3 The Administrator is empowered to summarily postpone or suspend the effectiveness of a registration statement filed in the State for a securities offering pending a final determination in an administrative proceeding (that means, a hearing). Upon entry of the order, the Administrator must promptly notify each person specified that the order has been entered and must give the reasons for the postponement or suspension. The Administrator must, within 15 days (not 5 days) after receipt of a written request from any person specified in the order, set down the matter for a hearing. If no hearing is requested and none is ordered by the Administrator, the order remains in effect until it is modified or vacated by the Administrator.

A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action is: I allowed II not allowed III considered to be "soft dollar" compensation IV not considered to be "soft dollar" compensation

1+4 There is no prohibition on a broker-dealer compensating its agents with prizes for meeting a sales contest requirement. The broker-dealer will have to report the compensation value as taxable income to the IRS, but this is not part of the question. Soft dollar compensation is where a broker-dealer offers "free" services to a mutual fund or investment adviser in return for "directed brokerage" (which is the mutual fund or investment adviser directing its portfolio trades at full commission rates to that broker-dealer). The SEC requires that mutual funds can only accept soft dollars if the services benefit all shareholders of the fund. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific.

A broker-dealer that is registered in New York and that is not registered in any other State may effect transactions in securities in the other States: I with any existing customer that is a New York resident II with any new customer that is a New York resident III while the customer is temporarily on vacation in the other State IV if the customer has relocated to the other State

1,3 An exemption from registration is given to broker-dealers that have a place of business in a State (thus they must be registered in that State) that are dealing with pre-existing customers who are temporarily visiting other States. This addresses the fact that people travel widely throughout the United States and if that citizen who is on vacation in another State effects a securities transaction with his or her existing broker-dealer, then the State where the customer is vacationing will not require the broker-dealer and its agents to register. Note that the exemption does not apply to new customers; only to pre-existing customers.

A customer has invested in a Direct Participation Program and is a limited partner with a 10% interest. In November 2021, the partnership sold assets and realized a gain. It made a cash distribution to the partners using the proceeds generated from the asset sale in January 2022. How is this reported for tax purposes on the K-1 distributed to the customer/partner?

10% of the gain is reported as a capital gain in 2021 Under partnership taxation rules, each item of income and loss to the partnership "flows through" directly on a pro-rata basis onto the partner's tax return for that tax year. Because the partnership realized the gain on the sale of the asset in November, it will be reported on the K-1 sent to the limited partner by the partnership for that year ending December 31st. Because this was a gain from the sale of an asset, it is a capital gain. The fact that a cash distribution resulting from the gain was made in the next tax year is irrelevant.

Which is NOT a feature of a safe harbor 401(k) plan?

100% of eligible employees must choose to participate . A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a Traditional 401(k), the employer must complete an annual "top heavy" benefits test.

A corporate investor may exclude from taxation, part of: I dividends received from common stock investments II dividends received from preferred stock investments III dividends received from convertible preferred stock investments IV interest received from convertible bond investments

123 Corporate investors may exclude 50% of dividends received (both common and preferred) from taxation. Interest income received is 100% taxable (unless it is tax free municipal interest income). Whether a security is convertible or not has no bearing on the dividend exclusion.

Which statements are TRUE? I Investment advisers with a place of business in the State that are not registered with the SEC must register in the State II Investment advisers with a place of business in the State that are registered with the SEC must file notice in the State III Investment adviser representatives with a place of business in the State that are affiliated with advisers that are not registered with the SEC must register in the State IV Investment adviser representatives with a place of business in the State that are affiliated with advisers registered with the SEC must register in the State

1234 States require registration of investment advisers that are not "federal covered advisers." Choice I is not a federal covered adviser; Choice II is a federal covered adviser since it is registered with the SEC - so it is not required to register in the State; but it is still required to file notice in the State. Even though State registration is not required for federal covered advisers, each State can still require the registration of any investment adviser representative - whether they are affiliated with a federal covered adviser or a state registered adviser. This is State law because the SEC only requires the registration of the adviser - not its representatives - at the Federal level. There would be no supervision of investment adviser representatives unless the State filled that role; and the State is happy to be the "local policeman on the beat" doing just that.

Which of the following statements are TRUE about Individual Retirement Accounts? I Contributions are allowed based solely upon personal service income II Contributions may be made if the individual is covered by another type of retirement plan III All contributions reduce the individual's taxable income IV To remain tax deferred, distributions from other retirement plans must be rolled over within 60 days

124 Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan; however, they may not be tax deductible if the person's income is too high (making Choice III wrong). IRA "rollover" rules allow pension plan distributions rolled over into an IRA within 60 days to remain tax deferred.

Which statements are TRUE regarding investment advisory contracts under the Uniform Securities Act? I Assignment of the contract is not permitted unless the customer consents II If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment III If the investment adviser is a partnership, the death or withdrawal of a minority of the partners constitutes an assignment IV If the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time

124 It is true that assignment of an investment advisory contract is not permitted unless the customer consents (after all, the customer hired a specific firm as the adviser for that firm's expertise; he does not want someone else to manage his funds unless he approves!). If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment. However, the death or withdrawal of a minority of the partners does not constitute an assignment. Finally, if the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time.

Under the Securities Exchange Act of 1934, which of the following MUST register with the Securities and Exchange Commission? I Broker-Dealers II National Securities Exchanges III Investment Advisers IV Securities Information Processors

124 The Securities Exchange Act of 1934 requires the registration of exchanges and makes them "self-regulatory organizations" under SEC oversight. The Act also requires the registration of broker-dealers, their officers, and their sales personnel. Note that the 1934 Act does not require the registration of investment advisers - instead this is required under the Investment Advisers Act of 1940. Finally, the Act requires the registration of securities information processors.

Misstatements of material fact in a securities registration are violations of the Act for which of the following persons? I Broker-dealer underwriting the securities II Agents of the broker-dealer underwriting the securities III Issuer of the securities IV Directors of the issuer of the securities

134 Agents are not involved in the filing of registration statements for securities; therefore, they are not responsible for the contents of the registration statement. However, issuers, directors of issuers, and underwriters are all involved in preparing a securities registration statement and have liability for material omissions under the Act.

A customer, age 40, has 2 children, ages 6 and 8. The customer wishes to start funding for the children's college education. The time horizon that should be used is:

15 YEARS This customer has children that will start college in 10 years, but youngest child who is now 6 years old, will not finish college until age 21, which is 15 years from now. This is the proper time horizon to be used.

XYZZ stock has a beta of +2. The expected market rate of return is 9% and the risk-free rate of return is 1%. The standard deviation of returns is 2%. Using the Capital Asset Pricing Model (CAPM), what is the expected rate of return for XYZZ stock?

17 CAPM finds the "expected return of an investment" using the formula: Expected Return of An Investment =Risk-Free Rate of Return + Risk Premium* *Risk Premium is: Beta x (Expected Market Return- Risk-Free Rate of Return) Basically, the Risk Premium is the excess of the expected market rate of return over the risk-free rate of return multiplied by the risk level of the investment as measured by beta. Because the expected market rate of return is 9% and the risk-free rate of return is 1%, the risk premium is 8% x 2 beta = 16%. Thus, the Expected Return of The Investment is: 1% Risk-Free Rate of Return + 16% Risk Premium = 17%. Note that Standard Deviation has nothing to do with the formula and is a distractor in the question.

Ms. Muffy Vanderbilt is an entrepreneurial socialite who has successfully worked as a fund raiser for a not-for-profit organization for the past 10 years. Because of her success at raising money and her extensive list of social contacts, she is recruited by an investment advisory firm to become a representative. Ms. Vanderbilt would be permitted to: I state to customers that she has 10 years of experience in the industry II use the title "investment adviser representative" on her business card III state to customers that she is registered as a representative with the SEC

2 his representative did not work for an advisory firm for the past 10 years. She worked for a not-for-profit organization as a fund raiser - so choice I is a misrepresentation and is prohibited. Choice II is fine - she is an investment adviser representative and can put this on her business card. Choice III is another misrepresentation. Only the investment advisory firm registers with the SEC - there is no registration of adviser representatives with the SEC. The representatives are only registered in each State where they are located, or where they solicit business.

Buy and hold is an appropriate strategy when investing in: I stocks II stock mutual funds III stock exchange traded funds IV stock options

2+3 Because funds are managed by an investment adviser, they are designed to be a "buy and hold" investment. The fund manager is constantly deciding which securities positions to add to, or subtract from, the portfolio to maximize returns. Therefore, the investment is continually rebalanced. Direct investments in specific assets, such as stocks or corporate bonds, require that the investor rebalance periodically to maximize returns.

Which statements are TRUE about an issue that is registered in a State by Coordination? I The statutory cooling off period under the Securities Act of 1933 is 10 days II The statutory cooling off period under the Securities Act of 1933 is 20 days III The statutory cooling off period under the Uniform Securities Act is 10 days IV The statutory cooling off period under the Uniform Securities Act is 20 days

2+3 In order for Registration by Coordination to be effective in a State, the registration statement used for the SEC filing must have been filed with the State 10 business days prior to the proposed sale date. In contrast, the Securities Act of 1933 requires that the registration statement be filed with the SEC at least 20 days prior to the proposed sale date.

Dollar cost averaging will result in a lower cost per share when: I a fixed number of shares is purchased periodically II a fixed dollar amount is invested periodically III the price of the investment is stable IV the price of the investment is volatile

2+4 "DCA" - Dollar cost averaging - is the periodic investment of a fixed dollar amount (say a monthly or quarterly investment) in either a single security or a mutual fund. As long as share prices are fluctuating over this time frame, the weighted average cost per share will be less than the mathematical average price per share over the same period.

Which statements are TRUE regarding Equity Indexed Annuities (EIAs)? I In a year of sharply rising stock prices, EIAs will match the positive return of the Standard & Poor's 500 Index II In a year of sharply rising stock prices, EIAs will not match the positive return of the Standard & Poor's 500 Index III In a year of sharply falling stock prices, EIAs will match the negative return of the Standard & Poor's 500 Index IV In a year of sharply falling stock prices, EIAs will not match the negative return of the Standard & Poor's 500 Index

2+4 Equity Indexed annuities are an insurance product and are currently not defined as a "security." They give a return tied to the performance of the Standard and Poor's 500 Index, but this is subject to an annual cap of typically 7-9%. Thus, in a year of sharply rising stock prices, they will not give the return of the index. However, they are protected in a falling market and guarantee a yearly minimum return of 1-3%. Thus, they will give a better return than the Standard and Poor's 500 Index when the market is falling sharply.

Which of the following statements are TRUE regarding customer funds or securities and broker-dealer's funds or securities? I Broker-dealers are allowed to commingle customer funds or securities with their own funds or securities positions II Broker-dealers are prohibited from commingling customer funds or securities with their own funds or securities positions III An agent can take customer securities into his or her own possession to deliver to the broker-dealer IV An agent cannot take customer securities into his or her possession to deliver to the broker-dealer

2+4 Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take these customer securities into his possession - this is a violation. He can have the customer send them directly to the broker-dealer for delivery on the sale, however.

An investment of $100,000 is worth $105,000 after 3 months. If the investment keeps growing at the current rate, at the end of one year, the annualized rate of return will be:

21.55% This investment grew at a 5% rate over 3 months, from $100,000 to $105,000. If this growth rate continues over the next 3 quarters, the investment will be worth: 2nd Quarter:$105,000.00x 1.05 = $110,250.003rd Quarter:$110,250.00x 1.05 = $115,762.504th Quarter:$115,762.50x 1.05 = $121,550.63 Thus, an original $100,000 investment is worth $121,551 at the end of the year, for a growth rate of 21.55%.

Which of the following individuals are defined as an agent under the Uniform Securities Act? I An individual who represents an issuer in selling exempt securities II An individual who represents an issuer in selling non-exempt securities III An individual who represents a broker-dealer in selling exempt securities IV An individual who represents a broker-dealer in selling non-exempt securities

234 An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt. Individuals who represent issuers in trading exempt securities or in exempt transactions are not defined as agents. However, an individual who represents an issuer selling non-exempt securities is an agent, and must be registered.

A customer places an order on the NYSE to sell bonds. The order reads "Sell 5M ABC 9s M '42 @ 90 GTC." At which of the following prices may the order be executed? I 89 II 90 III 91 IV 92

234 The customer places a limit order to sell 5M - or 5 $1,000 par bonds at 90% of par value or more, if possible. The order must be executed at 90% or more, so selling at 90, 91 and 92 are OK. Selling at 89 is not high enough to satisfy the customer's limit.

A customer, age 65, is in the 30% tax bracket. The customer has a non-tax qualified variable annuity separate account to which he contributed $12,000 that has a current market value of $30,000. The customer takes a distribution of $10,000 from the account. The tax that will be due on this distribution is:.

3000 Distributions from non-tax qualified variable annuity separate accounts are taxed on a LIFO (Last In First Out) basis. The original non-tax deductible contribution of $12,000 was the first in. The tax-deferred build up of $18,000 occurred second. When distributions are taken, the "build-up" portion comes out of the account first and is taxed at regular tax rates. After the build-up is depleted, the original investment of $12,000 comes out of the account and is not subject to tax. The customer is withdrawing $10,000 - which is all counted as "build-up" for tax purposes (last in - first out). This is taxable at 30% without any penalty tax due since the customer is older than 59½. The total tax due is 30% of $10,000 = $3,000.

Under the Investment Company Act of 1940, what percentage of a management company's Board of Directors can be affiliated with the investment company?

60% Under the Investment Company Act of 1940, at least 40% of a management company's Board of Directors must be "non-affiliated" persons. Thus, up to 60% of the Board can be "affiliated" persons. An "affiliated" person is basically someone who is financially remunerated by the investment company, such as the management company's lawyers or accountants; or someone who is both an employee of a broker-dealer and an affiliated investment company.

If a registered investment adviser takes custody of client funds or securities and deposits them with a qualified custodian, which statement is NOT true?

A written discretionary authority must be obtained from each client for whom funds are being held in custody . If an investment adviser wishes to take custody of client funds or securities: It must notify the Administrator in writing on Form ADV that it has, or may have, custody; Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients; Prompt notice must be given to the clients in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained; Account statements must be sent at least quarterly to clients; The IA must be audited annually on a surprise basis to verify customer funds and securities positions. Exercising discretion in an advisory account is a totally different idea. The adviser needs the written consent of the client to exercise discretion, but that adviser who has discretion may, or may not, take custody.

Which of the following securities is EXEMPT under the Uniform Securities Act?

AMEX (NYSE American) issues Exchange listed and NASDAQ listed issues are exempt securities under the Uniform Securities Act under the "blue chip" exemption (note that they are not exempt from Federal registration under the Securities Act of 1933, however). Only NASDAQ issues are exempt - other "OTC" issues such as stocks listed in the "Pink Sheets" are non-exempt. Limited partnerships are non-exempt; and mortgage bonds (a type of corporate bond) are non-exempt as well.

What constitutes "taking custody" under the NASAA rule for investment advisers?

An employee of an advisory firm acting as a trustee for a firm Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Finally, having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have access to client funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

The formula for Total Return is:

Annual Income + Annual Capital Gain / Original Investment Total return takes into account the 2 components of an investor's return - dividend or interest income; and any capital gain or capital loss in the investment (annualized). These dollar values are added and then divided by the original investment amount to arrive at Total Return as a percentage.

An Investment Adviser wishes to refer its largest and most sophisticated customers to a third party market timer to maximize their investment returns. Which statement is TRUE?

Any arrangement between the IA and the market timing firm must be disclosed in the Form ADV Part 2A Market timing firms use technical factors to determine when to buy or sell securities (e.g., time the market). Advisers can use timing services to help manage their clients' money - the argument being that an early sell signal given by a timing service reduces losses in a bear market and an early buy signal increases gains in a bull market. However, the market timing firm often pays the adviser for client referrals - and this creates an inherent conflict of interest. (Did the adviser refer the client to the timing firm because it was in the client's best interest, or did the adviser refer the client to the timing firm for the payment?) The ADV Part 2A must detail any business relationships that the adviser has that could result in potential conflicts of interest - so the relationship between the adviser and the timing firm must be disclosed in the ADV Part 2A that is given to the customer.

A customer who earns $80,000 per year is 35 years old, married to a non-working spouse, has a 5-year-old child, has no retirement savings and does not have a will. This customer receives $250,000 in a single stock as an inheritance from her deceased aunt. What is the first thing that the customer should do?

Diversify the stock position, because it should not be in a single stock holding What is concerning about this customer is 2 things - the fact that she does not have a will and the fact that her only investment holding is now $250,000 in a single stock position, which if the stock tanks, will result in a big loss. The first thing to do is to diversify the stock holding, to reduce the risk of loss of capital. This is more immediate than establishing a will, which usually takes some thought, lawyer's advice and a bit of time. There will be no capital gains tax on the stock position, since securities are inherited at the market value as of the date of death with no tax due by the recipient. If there was any appreciation in the stock until the date of death, that position's value is included in the estate and estate tax may be due - but this is paid by the estate.

The settlor of a trust is the:

Grantor The "settlor" of a trust is the person who grants property to the trust for the benefit or one or more beneficiaries. The settlor is also called the grantor, donor or trustor. The trustee is appointed by the settlor to manage the assets of the trust in the best interest(s) of the beneficiaries. The trustee is a fiduciary.

Which of the following are defined as a "State" under the Uniform Securities Act?

Hawaii, Puerto Rico, Virgin Islands "State" is defined under the Act to be any state, territory, possession of the United States, the District of Columbia, and Puerto Rico. Key West is part of the State of Florida; it is not a territory or possession.

Under NASAA rules, an: I agent is permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed II agent is not permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed III investment adviser representative is permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed IV investment adviser representative is not permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed

I and IV Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in the gain or loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

A person who is in the business of giving advice about which of the following is defined as an "investment adviser" under SEC Release IA-770? I Stocks II Corporate bonds III Options IV Real Estate

I, II, III To be defined as an investment adviser that must register with the SEC, one must be giving advice about securities. Stocks, bonds, and options are securities. Real estate is not a security. If one gives advice about real estate, that person is NOT an investment adviser.

Under NASAA's rules on Unethical Business Practices for Registered Investment Advisers and Investment Adviser Representatives, which of the following client information is permitted to be disclosed to a third party without first obtaining client consent? I Account information directed to be disclosed by the client's CPA in a written letter signed by the CPA II Aggregated and averaged account information that the adviser wants to use in an advertisement III Account information directed to be disclosed by the investment adviser by the State Administrator IV Account information directed to be disclosed by the investment adviser by the client's spouse

II and III only Customer privacy rules only cover information that can be linked to a specific client. Aggregated or averaged information is not private and can be disclosed at anytime, to anyone. Otherwise, customer account information can only be disclosed if the customer permits (not if the customer's spouse says so!); or if the request is made by a regulator (such as the State Administrator) or a court of law.

What is the difference between Joint Tenancy and Tenants in Common when referring to a brokerage account?

Joint Tenancy gives each owner an undivided interest in the account while Tenants in Common gives each owner a divided interest in the account n a Joint Tenancy, each person owns 100% of the account. If one dies, the other 100% owns the account. This is the typical ownership option for a husband and wife. Each one has "rights of survivorship" to all account assets. In contrast, an account held as Tenants in Common specified an ownership percentage for each Tenant. If that person dies, the percentage goes to that person's estate and is passed by will. While Joint Tenancy is most common for married couples, there is no limit on the number of participants in either type of joint account.

The Investment Company Act of 1940 requires that which of the following register with the SEC as an investment company?

Management companies The Investment Company Act of 1940 requires that investment companies (management companies, unit investment trusts and face amount certificate companies) register with the SEC.

Which of the following are needed to determine tax filing status?

Marital status on the last day of the year Cost of home upkeep When filing a tax return, a "filing status" must be chosen. There are 5 possible filing statuses: Single; Married Filing Jointly; Married Filing Separately; Head of Household; Qualifying Widow(er) With Dependent Child. Determination of marital status is based on the person's marital status as of the last day of the year. If one is not married at that date, that person cannot file using Married Filing Jointly or Married Filing Separately status. If that person is not married, then he or she must choose Single, Head of Household, or Qualifying Widow(er) with dependent child. These last 2 get a higher standard deduction and lower tax rates than choosing Single status. To get Head of Household status, that person must be unmarried at year end, must pay for at least 1/2 of annual housing expenses; and that home must be the principal home of that person's child. To get Qualifying Widow(er) with Dependent Child status, that person's spouse must have died within the past 2 years (after 2 years from the spouse's death, this status can no longer be used); that person must pay for at least 1/2 of annual housing expenses; and that person must have a dependent child living at home.

A securities firm that stands ready to buy and sell a security for its own account is a(n):

Market Maker A market maker or dealer is a firm that sells securities out of its own account or buys securities into its own account on a principal basis. The profit to the market maker is the "spread" (the difference) between the market maker's buy price and sell price. You could argue that principal is a true answer as well, but "market maker" is the better choice since this is a definitional question. Brokers effect trades for the account of customers on an agency basis, where the firm acts as a middleman, charging a commission to the customer.

A broker-dealer located in New York makes an offer of securities to a customer whose principal residence is in New Jersey. The customer has temporarily moved to Ohio and has asked the post office in New Jersey to forward the mail to the customer's address in Ohio. Which State Administrator(s) has (have) jurisdiction over the offer?

NYC Because the broker-dealer is located in New York, that State Administrator has jurisdiction. Normally, if an offer is received in a State (New Jersey in this case), then New Jersey's Administrator would have jurisdiction. But the offer was never received in New Jersey because it was forwarded by the post office on to Ohio. Thus, an offer was never made in New Jersey and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in Ohio, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to Ohio and should not be subject to the law of Ohio on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

What rate would be used to find the present value of a TIPS?

Real Rate of Return at the time the bond was issued

Which records MUST be retained in a state-registered investment adviser's principal office?

Records of customer purchases and sales orders NASAA rules require that State-registered advisers keep, in their principal office, records of: customer purchases and sales; and customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator. Also note that NASAA sets detailed rules for records to be retained by State-registered advisers. Federal law already covers the recordkeeping rules for broker-dealers (where the recordkeeping rules are set under the Securities Exchange Act of 1934) and for investment advisers (where the recordkeeping rules are set under the Investment Advisers Act of 1940).

All of the following are federal covered securities EXCEPT:

SEC registered issues Federal covered securities that cannot be required to be registered in each State include NYSE listed issues, NASDAQ listed issues and registered investment company issues. SEC registered issues are not necessarily "federal covered" securities. For example, issues listed in the OTCBB or Pink Sheets are SEC registered, but they are not "federal covered" securities. These issues represent the speculative (risky) side of the marketplace, and it is specifically these issues that are in the state regulators' crosshairs. These issues are SEC registered, but they also are required to be registered in each State where offered.

Changing the mix of a portfolio that has been structured to meet specific financial goals is called:

Strategic allocation Strategic portfolio management is the determination of the percentage allocation to be given to each investment vehicle within an asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments10%Corporate Bonds30%Large Cap Equities50%Small Cap Equities10% Changing these percentages as conditions change is part of ongoing strategic asset management. Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.

What item could a State Administrator require a broker-dealer operating as a sole proprietor to file with the State that would not be required to be filed with the SEC?

Surety Bond Unlike Investment Advisers, who register either with the SEC or the State, Broker-Dealers are required to register with BOTH the SEC and in each State in which they have an office or solicit or conduct securities business. The form that is filed to register with the SEC is the Form BD (Broker-Dealer). The same form is filed in each State, along with the payment of a registration fee. The BD's balance sheet and computed Net Capital (liquid net worth) are filed with both the SEC and the State. The item that only the State can require (not the SEC) is the posting of a surety bond. A surety bond posted in the State is a dollar amount ($10,000 is the recommended amount stated in the Uniform Securities Act, but each State sets its own requirement) that the State can seize if it finds that the BD has violated State law.

A Canadian broker-dealer has a client who comes to the United States for 4 months as a contract employee for an American company. Which statement is TRUE about the Canadian broker-dealer doing securities business with the client in the United States?

The Canadian broker-dealer can continue to do business with the client in the United States without taking any further action A NASAA interpretation that only applies to Canadian broker-dealers says that Canadian BDs can contact existing customers who are temporarily residing in the United States without having to register in a State, as long as the client is in the U.S. for less than ½ year and intends to return to Canada. Since this Canadian client will only be in the U.S for 4 months, the Canadian BD can continue to do business with the client while he or she is in the U.S. without having to register in the State where the client is working. Note that the Canadian BD cannot contact prospective clients in the U.S - only existing clients can be contacted. And also note that this rule does NOT apply to a U.S. BD registered in one State that contacts an existing client who is temporarily in another State. In this case, if the client spends more than 30 days in the other State, that BD must be registered in the other State.

An agent of a broker-dealer is told by a wealthy, well-connected client that "I just talked to the president of ABCD Corp. (an NYSE listed company) and was told that this quarter's results are going to be lousy." Which statement is TRUE?

The agent can discuss this phone conversation with his branch manager . The agent has just received "inside information." The problem is that if the agent tells others about the information, and those people trade on it, then not only are those who traded deemed to be "insiders," but the agent can be deemed to be an insider as well (under the "tipper-tippee" doctrine, that holds the tipper that gave the information that resulted in the trade as liable). While Choice D is a plausible answer, Choice A is better. The agent should discuss the conversation with his or her branch manager - since the regulators have rules requiring inside information to be reported to the exchange where that security trades. The branch manager would discuss the situation with the firm's compliance department; which in turn would notify the regulator.

Which of the following information MUST be included on a customer confirmation?

The customer name and account number The price of execution Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.

Which statement is TRUE about the grantor of a trust?

The grantor can be the grantor only, the trustee or the beneficiary The parties to a trust are the: Grantor: The person who owns property that is to be managed, controlled, protected and ultimately transferred to heirs by a trust. Trustee: The legal administrator of the trust and the holder to the title of the property of the trust. Beneficiary: The individual(s) to receive benefits or income from the trust property and ultimately to receive the trust property itself. In a "living trust," the grantor holds all 3 positions. Living trusts are most often used to make sure that assets can be passed to heirs upon death without having to go through probate. The grantor is also the trustee, thus this individual maintains control over the trust assets. During the life of the grantor, the grantor is the trustee and also the beneficiary. When the grantor/trustee/beneficiary dies, then the assets are passed to the other named beneficiaries of the trust without going through probate court.

An insurance agent refers potential clients to an investment adviser and receives a referral fee from the adviser for each client that signs an advisory contract. Which statement is TRUE?

The insurance agent must disclose the fact that he or she will receive a referral fee at the time of the referral Regarding the payment of referral fees, this is covered under the Investment Advisers Act of 1940. Rule 206(4)-3 prohibits an adviser from paying a fee to a solicitor (any person who solicits a client for, or refers a client to, an investment adviser) unless "a copy of the adviser's disclosure statement and a copy of the agreement between the adviser and the solicitor are provided to the prospective client at the time of the referral." Thus, the insurance agent must give this written disclosure to the client at the time that the referral is being made. In addition, the adviser must obtain a signed and dated acknowledgment, stating that the new client has received these disclosures from the solicitor.

Which statement is TRUE about taking a loan from a 401(k) account?

The loan must be repaid in equal quarterly installments within 5 years A loan can be taken from a 401(k) or 403(b) account for any reason. The maximum amount that can be borrowed is $10,000 or 50% of the account asset value, whichever is greater, capped at a $50,000 maximum loan. The loan must have an interest rate that is based on current market rates, and must be repaid within 5 years. Repayment must be made in quarterly installments of "substantially equal amounts." If any portion of the loan is not repaid, the unpaid amount becomes taxable income, and if the account owner is under age 59 1/2, then the 10% penalty tax applies as well.

A customer who lives in Minnesota buys a Florida General Obligation bond with a 4.5% coupon at par. The customer is in the 30% federal tax bracket and the 5% Minnesota state tax bracket. What is the customer's equivalent taxable yield?

This bond is not fully tax-free. The customer must pay 5% state tax on the 4.50% yield, so the customer keeps 95% of the return after tax = .95 x 4.50% = 4.275%. This is the customer's return on the municipal bond after taxes are paid. If the customer bought a taxable bond, 35% of the return would go to tax (interest income would be taxable at both the federal and state level), and 65% would be kept after tax. Therefore, to find the equivalent taxable yield, you would take the municipal yield after all taxes - 4.275% - and divide by .65 = 6.577% If the customer bought a 6.577% taxable bond, 30% of the return would go to federal tax and 5% of the return would go to state tax, leaving the customer with 65% of 6.577% after tax = 4.275%. This is a VERY nasty question! But, hey, you can always get it down to 50/50 by knowing that the taxable yield must always be higher than the tax-free yield!

An agent is conducting securities activities on the premises of a bank. Which statement is TRUE?

This is permitted if the agent discloses both orally and in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value This is the "NOT-NOT-MAY" Rule. When a broker-dealer offers securities in a bank setting, it must be disclosed both verbally and in writing that securities are NOT bank products; that securities are NOT FDIC insured: and that they MAY lose value. In addition, the agent must attempt to get the customer to sign a statement that he or she understands this.

A customer wishes to make an investment that provides liquidity, marketability and current income. The BEST recommendation is:

Treasury Note This customer is looking for current income, so growth stocks are inappropriate. This customer is looking for ready marketability and CDs are not very marketable - they are typically held to maturity. Both preferred stock and Treasury notes provide current income, but Treasuries are more marketable and more liquid. This is the best of the choices offered.

Which statement is TRUE about claim priority in a corporate liquidation?

Unsecured creditors are paid before bondholders The priority of claim to corporate assets in a liquidation is: Secured creditors, unpaid wages and taxes, trade creditors (these are all unsecured creditors), unsecured bondholders, preferred stockholders, common stockholders.

What is a characteristic of a dark pool?

Users are not aware of the size or identity of available orders Dark pools are private trading platforms, usually run by broker-dealers for institutions that wish to avoid attempting to have very large orders filled on public exchanges. The exchanges' electronic order books are designed to handle a large volume of smaller orders. Very large orders (e.g., over 1,000,000 shares for market orders) cannot be entered into these systems. If very large orders are routed to a single exchange, it can result in an inferior fill when it electronically "sweeps" the order book - at ever higher prices for market orders to buy or ever lower prices for market orders to sell. To avoid this risk, institutions can use dark pools run by broker-dealers, where their large orders are kept "hidden" from view. The user of the system (another institution) does not know the order size or the identity of the institution that placed the order in the dark pool - orders are hidden from view, hence the name "dark pool." Thus, the institution that placed the order in the system is not showing its hand (the fact that it either wants to buy or sell a large block). This lack of transparency is attractive to institutions because if they were to place a large order to sell in a public market, that alone could force prices down; and it could force prices up if it were a large buy order. Once an order is filled in a dark pool, it is reported to the tape like any other trade.

Insurance companies may invest premiums into their general accounts for all of the following types of life insurance policies EXCEPT:

Variable Life Variable contracts (either variable life or variable universal life) have the premiums deposited to a separate account. The performance of the separate account determines the ultimate death benefit, so the policyholder bears the investment risk. Flexible premium variable life is another name for variable universal life, which gives policyholders the right to skip a premium payment. Term life, whole life, and universal life premiums are deposited to the insurance company's general account. The death benefit is fixed based upon premium contribution and is not subject to investment risk. The insurance company invests the premiums collected through its general account and bears the investment risk.

Time Weighted Return will be the same as Dollar Weighted Return for an individual customer that has a mutual fund holding if:

actual cash deposits into the mutual fund and actual withdrawals out of the mutual fund are ignored

A broker-dealer uses summer interns who answer the telephone, give stock quotes, and take messages from clients. The summer interns:

are not required to be registered as agents in the State because they are performing clerical functions Summer interns are only required to be registered if they are taking orders from customers; soliciting customers; or making recommendations to customers. If they only perform clerical duties, then no registration is required.

12b-1 fees are assessed by investment companies:

as shares are held SEC Rule 12b-1 allows management companies to charge against total net assets, an annual fee for the cost of soliciting new investors to the fund. In reality, though the fee is expressed as an annual percentage of total net assets, it is imposed pro-rata for every day that the investor holds the shares.

The purchase of a put is a:

bear strategy

An analyst evaluates individual companies within an industry focusing on the company's business model, management, product line, growth prospects and historical performance, to accumulate information that will be used to make recommendations of investments to be included in customer portfolios. This is an example of:

bottom-up investment strategy A "bottom-up" investor evaluates individual companies within an industry focusing on the company's business model, management, product line, growth prospects and historical performance, to decide from the "bottom up" which are the best investments. In contrast, a "top-down" investor first looks at the market sectors that he or she thinks are likely to outperform the overall market, and then focuses on the specific sector, and then the companies in that sector, to find the best "picks."

An investment adviser registered in State Y effects all of its portfolio transactions through a broker-dealer registered with the SEC and State Y. Regarding required filings from the broker-dealer in State Y, the Administrator of State Y:

can only require the filing of the broker-dealer's reports that are filed with the SEC Broker-dealers are registered federally with the SEC under the Securities Exchange Act of 1934 and, additionally, must register in each State where they have a physical presence or where they solicit securities business. As part of the National Securities Markets Improvements Act of 1996, it was made clear that because broker-dealers are regulated at the federal level, the States cannot require anything that is already required federally. Broker-dealer recordkeeping and reporting rules are set under Section 17 of the Securities Exchange Act of 1934 - so these rules prevail. All that the State can do is ask for a copy of any record or report that the broker-dealer keeps in accordance with the 1934 Act.

A woman, age 45, has just inherited $5 million from a deceased relative. She already has substantial assets and income and does not need the money. She wants to give it all to charity so that she can get a tax deduction, but she wants to remain in complete control of the money, how it is invested and how it is spent. The best recommendation is that she establish and donate into a:

charitable lead trust The grantor of a trust can be the trustee - and the trustee gets to make all of the decisions regarding the actions of the trust. This meets the customer's requirement that she retain control of the assets. When assets are donated to a foundation, the foundation has a Board of Trustees that makes the decisions. The customer could "influence" those decisions and could be on the Board of Trustees, but the majority vote of the Board (with at least 3 trustees) determines the actions taken by the foundation. So to retain control, it must be a trust. The next question is: "What type of trust?" A testamentary trust is one that is created when an individual dies (as in "last will and testament"). The customer must create a living trust (inter-vivos) to retain control and furthermore, it should be a charitable lead trust to get a tax deduction. In a charitable lead trust, the donor retains control of the contributed assets and gets a tax deduction for the contribution, with any income from those assets going to the specified charity for a set number of years. When the trust expires, the remaining assets go to a party of the donor's choosing - usually family members. In this case, the trust would make payouts annually to deplete the assets over the life of the trust. A charitable remainder trust is often viewed as the opposite of a charitable lead trust. In a charitable remainder trust, the annual income from the trust goes to a designated beneficiary(ies) such as children of the grantor, and then upon death of the grantor, the "remainder" is given to a charity. In such a trust, the tax deduction is lower, because it is based on the expected "present value" of the remainder that will go to charity at the termination of the trust.

The Investment Policy Statement would include the:

customer investment objectives and goals The Statement of Investment Policy documents the asset allocation plan that has been created for the client. It details the portfolio goals such as expected returns and investment strategies. It typically specifies the asset allocation plan, identifies acceptable levels of risk, and acceptable investment types. The investment manager's compensation has nothing to do with this document. The investment adviser's mission statement and the adviser's specific portfolio review procedures also have nothing to do with the document.

Under Uniform State law, civil liability exists in all of the following circumstances EXCEPT when:

customer margin securities are commingled with those of other margin customers There is no prohibition on commingling one customer's securities with those of other customers - this is just fine. The prohibition is on commingling customer securities with proprietary (firm) positions. Unregistered agents cannot sell any securities (exempt or non-exempt) in a State, so Choice B is a violation. Choice C is clearly a violation - agents cannot make misleading statements to induce a purchase or sale. Offers of unregistered non-exempt securities that result in sales are also violations (for example, an offer of unregistered common stock (a non-exempt security) is not permitted in a State unless the transaction is exempt).

A person who renders investment advice relating solely about municipal securities is:

defined as an investment adviser and must register under the Act A person who gives investment advice relating solely to municipal securities is not exempted from registering as an investment adviser under State law. (Please note, however, that a person who gives advice solely about U.S. Government guaranteed securities is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. This is another type of federal covered adviser, for which there is no state registration.)

A registered investment adviser located in State A only sells its services to registered investment companies. The RIA has a client with its home office in State B. The client also has an office in State C. State C can:

do nothing Because the adviser is located in State A, it must file notice there (since it is a federal covered adviser.) There is no mention of the adviser having a location in State C. Since the adviser's only client in the State is an investment company (an institutional investor), and the adviser has no location in the State, State C has no jurisdiction over the adviser. Note that if the adviser either had an office in State C, or if the adviser had more than 5 retail clients in State C, then it would have to file notice in State C as well.

An order ticket to sell may be marked "long" in all of the following circumstances EXCEPT the customer:

holds fully paid warrants to buy the underlying stock in custody of the broker-dealer . A customer is "long" if the customer owns an option, right or warrant on that stock and has exercised (so we know that the stock is actually coming in). Similarly, if a customer is short a put and it has been exercised, we know that the customer will be receiving the stock - so the customer is "long." A customer is "long" if the customer owns a convertible security (into that stock) and has given irrevocable instructions to convert. If a customer simply owns a right, call, or warrant; is short a put; or owns a convertible; this is not considered to be "long" the underlying stock until the action is taken to turn that instrument into that stock.

Under the Uniform Securities Act, an investment adviser is prohibited from taking custody of a client's funds unless:

in the absence of a rule prohibiting custody, the adviser gives the Administrator notice that it may take custody Under Uniform Securities Law, an investment adviser is prohibited from taking custody of customer funds and securities if:the Administrator prohibits this by rule; orif there is no rule, the adviser fails to notify the Administrator that he has, or may take custody.Thus, the Administrator does not have to issue a rule permitting such action, making Choice A incorrect. Nor is there a requirement to give 10 days' advance notice of such action, making Choice B incorrect. Choice C is correct - that adviser is prohibited from taking custody unless, in the absence of a rule prohibiting custody, the adviser gives the Administrator notice that it may take custody. Whether the adviser is registered with the Securities and Exchange Commission (under the Investment Advisers Act of 1940 - Federal law) has no bearing on whether the adviser can take custody. Thus, Choice D is incorrect.

All of the following individuals would be allowed to effect transactions in the account of a customer who is mentally incapacitated EXCEPT a(n):

individual named in the customer's living will A "living" will appoints an individual to make only "end of life" medical decisions, not financial decisions. A durable power of attorney granted by the customer prior to his or her mental incapacitation appoints an individual to make decisions for the incapacitated customer, so this works. A court appointed conservator over the account is authorized to trade. If the account was held as joint tenants, the other party in the account is still authorized to trade.

Bond portfolio immunization protects the portfolio against:

interest rate risk Portfolio immunization is the strategy of managing a portfolio to make it worth a specific amount at a stated date in the future. This strategy is typically used to fund a known future liability. Assume that a customer needs $50,000 in 10 years. If the customer buys a safe 10-year zero-coupon obligation with a $50,000 face amount such as Treasury STRIPS, then the customer will have the needed principal amount 10 years from now. (Note that the duration of the 10 year zero coupon bond is 10 (years) - exactly the same amount of time until the debt must be paid.) The intent of bond portfolio immunization is to eliminate interest rate risk. If the customer were to buy, say, a conventional 30-year Treasury bond to pay off this liability in 10 years, and interest rates rose substantially in the meantime, those bonds would drop in value, and the needed funds would not be there in 10 years. The bottom line is that to immunize a portfolio, the duration of the bonds used to fund the future liability must match the length of time until the liability must be paid.

An investment adviser is considered to "take custody" of funds or securities from a customer if it:

is appointed as trustee for a customer's trust account under a legally binding trust document Taking custody means that the adviser is holding customer funds or securities. The securities must either be held in customer name, or held in adviser name, with the adviser being the trustee for the customer. Thus, if the adviser is appointed as trustee over the customer's account, custody has been taken. Exercising discretionary authority limited to trading only and accepting commissions are not "taking custody." Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

The provisions of the Securities Exchange Act of 1934 apply to all of the following activities EXCEPT:

issuance of municipal bonds The Securities Exchange Act of 1934 relates to the secondary (trading) market; it does not cover the issuance of securities. Trading of both corporate and municipal bonds is covered under the "anti-fraud" provisions of the Act. Corporate financial reporting standards and public disclosure of financial reports is another part of the '34 Act.

An investment adviser has decided to move its headquarters into a new office building that is directly across the street from the existing office. The investment adviser should:

mail a letter to all of the adviser's clients detailing the upcoming change of address and amend Form ADV disclosure document promptly If an investment adviser changes its street address, the Form ADV filed with either the SEC or State (depending on whether the adviser is Federal registered or State registered) must be amended. This is required because the regulators need to know the physical location of the adviser if they wish to audit or inspect the adviser's books and records; plus they need to know the address if the adviser is going to receive legal papers or other such notices.For Federal Covered advisers, the SEC rule is that the amendment must be filed "promptly, while the NASAA rule for filing an "other-than-annual" updating amendment by a State registered adviser is that it be filed in 30 days. While it is not stated in any rule that customers must be notified of a change of address, this one is common sense. Customers must know the adviser's current address (and it must be on any correspondence sent to customers) so they know where the correspondence came from, and where they can forward a response, if needed, to the communication.

A private fund adviser with less than $150 million of assets under management:

must report to the SEC Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing.

All of the following statements are true regarding an investment adviser that wishes to take custody of clients funds under the Investment Advisers Act of 1940 EXCEPT the investment adviser:

must segregate each customer's funds from those of other customers . If an investment adviser wishes to take custody of client funds or securities, under the Investment Advisers Act of 1940, the investment adviser must deposit customer funds and securities in an account that is separate from the adviser's account. It is permitted to "commingle" all customer positions together in one account, as long that there is a record of each customer's individual positions. However, customer securities positions cannot be commingled with the investment adviser's positions. Each customer must get a quarterly account statement; and the adviser must be audited, on a surprise basis, at least annually. If the investment adviser is already a broker-dealer, it is complying with these requirements under a similar SEC rule for broker-dealers (SEC Rule 8c-1); so this is not required for investment advisers that are also registered as broker-dealers.

An investment in Treasury Bills has:

no risk Treasury Bills are considered to be free of credit risk (Treasury debt is rated AAA). They do not have purchasing power risk because they are short term and they have virtually no interest rate risk because they are short term. The best choice is that they have "no risk." It could be argued that they have a small amount of interest rate risk, but "no risk" is the best choice offered.

The President of an investment club makes recommendations of securities to the club's members. The securities to be purchased are chosen by a majority vote of the club's members. The President is not paid for this; but does get to eat free snacks that are bought by the other members at the monthly meetings The President is:

not defined as an investment adviser under IA-1092 This one is slightly judgmental, but getting a "free snack" does not meet the compensation test to be considered to be "in the business" of giving investment advice under IA-1092.

The purchaser of a futures contract has the:

obligation to buy a specific commodity at a certain price and grade at a specific date and location through an organized futures exchange A futures contract differs from an options contract because the buyer of an option has the right to exercise, but does not have to do so at expiration, while the holder of a futures contract has agreed to buy the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading. Similarly, the seller of a futures contract must deliver the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading.

A hedge fund is a:

private investment fund for sophisticated, accredited, investors

The Net Present Value of an investment is lower than "0." This means that the:

rate of return from the investment is lower than the discount rate used in the computation Net Present Value takes all the cash flows that will be generated by an investment and discounts them back to their "present value." The rate of interest used to discount the cash flows to be received is the current market rate of interest. If the computation results in an NPV of "0," then the rate of return of the investment equals the discount rate used. If the computation results in an NPV of more than "0," then the rate of return of the investment exceeds the discount rate used. If the computation results in an NPV of less than "0," then the rate of return of the investment is lower than the discount rate used. The computation has nothing to do with the inflation rate.

Under the "Brochure Rule," existing customers of an investment adviser MUST:

receive a "Brochure" at least annually only if there are material changes New customers of the investment adviser must receive the "Brochure" at or prior to entering into an advisory contract. Existing customers must be sent an updated "Brochure" at least annually if there are material changes. As an alternative, the customer can be sent the "Summary of Material Changes" section of the current brochure along with the offer of the revised Brochure.

Under the Investment Advisers Act of 1940, if an adviser accepts prepaid advisory fees of $1,200 or more, 6 months or more in advance of services rendered, each new client MUST:

receive a copy of the adviser's balance sheet If an investment adviser accepts prepaid advisory fees of $1,200 or more, for 6 months or more of services to be rendered; then the adviser must include a balance sheet in the ADV Form Part 2A that constitutes the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract.

An investment adviser is considered to "take custody" of funds or securities from a customer if it:

receives quarterly management fees from the custodian by direct deduction with client consent Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account. Exercising discretionary authority limited to trading or accepting commissions are not "taking custody." This is a limited power of attorney which limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody. Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

A 20-year, 5% bond is quoted by a dealer on a 6% basis. The bond is callable in 10 years at par. To calculate the dollar price for the bond, the dealer would use the:

redemption date to find the number of years over which the discount would be earned This is a discount bond. To approximate the price for a long-term bond, divide the coupon by the basis = 5/6 x $1,000 par = $833. A discount bond is one that the issuer would not call - because market interest rates have risen. To bring a 5% coupon up to a 6% yield implies that 1% will be earned each year = 1% of $1,000 = $10 annual earning of discount. If the bond were called early (not likely), the discount would be earned faster and the customer would get a higher yield than the 6% promised. The worst case scenario for the customer is the bond being held to maturity. If it were called early, the yield would actually improve. For bonds quoted on a yield basis, dealers must use "yield to worst" pricing. For discount bonds, this is the case if the bond is held to maturity - this is where the discount would be earned at the slowest rate.

A customer holds 1,000 shares of ABC stock valued at 80 in a margin account. The debit balance in the account is $35,000. ABC declares and pays a 20% stock dividend. The tax consequence of the distribution to the investor will be:

reduction of cost basisper share Under IRS rules, stock dividends are not taxable at the time of receipt. This is true, because, in essence, the shareholder received nothing from the company, except for the possibility of increased future share price appreciation. The stock dividend results in the cost basis per share being reduced, with the number of shares held increased proportionately. In aggregate, the customer's cost basis remains the same.

A Registered Investment Adviser (RIA) has managed $5,000,000 of a customer's funds successfully for many years. The customer asks the RIA to prepare a revocable trust for his children and tells the RIA to transfer $2,000,000 of his funds into the trust and trade the new account in the same manner as the existing account. The RIA should:

refer the client to an attorney that can set up the trust Trusts must be established as legal entities in a State, similar to establishing a corporation or partnership in a State. The best choice is to have the customer contact an attorney who is qualified to establish such a trust.

Under the provisions of the Uniform Securities Act, the Administrator, in connection with a securities registration, is prohibited from revoking a:

registration retroactively The Administrator cannot revoke a registration retroactively; and cannot revoke a registration in the future; based upon facts known at the time that the registration was granted. The Administrator can revoke a registration as long as an opportunity for a hearing is provided within 15 days. The Administrator can modify the definition of an exempt transaction; or can deny an exempt transaction. The Administrator cannot deny the registration in a State of an exempt security, such as a U.S. Government bond or a municipal bond. The Administrator can, however, require the person selling the securities in the State to be registered.

ERISA requirements regarding the investments that are suitable for a retirement account stress:

safety of principal ERISA rules regarding retirement plans stress that investments should be "safe."

A lawsuit filed alleging violations of the Uniform Securities Act:

survives the death of the plaintiff survives the death of the defendant If a customer files suit (the customer is the plaintiff) against an agent (who is the defendant) alleging a violation of the Uniform Securities Act and if either dies before the matter is resolved, the suit lives on! (Hey, we need to keep the lawyers working!)

The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. If this action is taken by the manager, this is termed:

tactical asset management The selection of the percentage of total assets to be allocated to a given asset class is called "strategic asset management" - that is, setting the investment strategy. The permitted variation from this percentage that is given to the asset manager, so that the manager can take advantage of market opportunities, is called "tactical asset management."

A gift of property from one family member to another is:

taxable at gift tax rates . Gift and estate taxes have their own tax rate schedule, which caps out at 40%. The first $15,000 of a gift to any person is excluded from tax (in 2021). Any amount given above this is subject to gift tax paid by the donor. Also note that there is an unlimited marital exclusion from gift and estate taxes.

Under partnership democracy provisions, the partnership agreement must give detailed disclosure of all of the following EXCEPT:

the procedures for allowing limited partners to assign specific properties Limited partners cannot assign properties or perform management functions. Performing these actions would cause that person to be viewed as a general partner - who takes on unlimited liability. Partnership agreements will include provisions on allocating profits; compensation to the general partner; and claim to assets upon dissolution.

Under NASAA rules, investment advisers must annually:

update the Form ADV disclosure document and send it to existing customers if there is a material change Under NASAA rules, investment advisers must update their Form ADV annually within 90 days of fiscal year end to reflect current and accurate information, and must send the updated Form ADV to its existing clients, if there is a material change. The Form ADV is stored in the IARD (Investment Adviser Registration Depository) system. It is used to register both State registered advisers and Federal covered advisers, and to send notice filings to States by Federal covered advisers. Account statements must be sent quarterly if the adviser takes custody. Annual updating of suitability information makes sense, but is not a rule.