Interim Qbank
One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, 1. the RMD from each IRA is computed and may be made from one or both of them. 2. the RMD from each IRA is computed and must be paid from that IRA. 3. both 401(k)s are combined to compute the required distribution which may be made from one or both of them. 4. the RMD from each 401(k) is computed and must be paid from that 401(k).
1&4. For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has a RMD that can only be paid from that account. U24LO4
Under the Investment Advisers Act of 1940, it is legal for an investment adviser to 1. rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice 2. keep the commission on a mutual fund sale when the client who purchased the shares has already paid for investment advice 3. reduce a client's advisory fee by any commissions earned on mutual fund sales to that client
2&3. Rebating commissions on mutual fund sales is prohibited. However, because mutual fund commissions are not negotiable (as are secondary market transactions), the adviser may reduce the client's advisory fee by the commission or, with appropriate disclosure, keep the commission. U7LO1
Which of the following activities would have an effect on the NAV of a mutual fund? 1. The sale of securities from the portfolio 2. Automatic reinvestment of dividends by the shareholders 3. Market appreciation of portfolio securities 4. Market decline in the value of portfolio securities
3&4.
Under the Uniform Securities Act, if sent to 2 or more persons, a file must be maintained containing a copy of which of the following? Bulletins Newspaper articles Notices Websites
All of these types of communications, unless sent to persons connected with the investment adviser, require maintenance of a file containing a sample copy. U1LO5
A support level is the price range at which a technical analyst would expect A) the demand for a stock to decrease substantially. B) the demand for a stock to increase substantially. C) the supply of a stock to increase substantially. D) the supply of a stock to decrease substantially.
B. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock will now buy. When the price reaches this support price, demand surges, and price and volume begin to increase again. U12LO6
Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act? A) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3) B) Variable annuities issued by an insurance company authorized to do business in this state C) Common stock issued by a public utility company whose rates are subject to state regulation D) General obligation bonds issued by a city located in this state
B. Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA. U4LO3
Which method of securities registration would most likely be used to register an initial public offering that is intended to be offered for sale in several states? A) Notice filing B) Qualification C) Coordination D) Registration by publication
Because the offering will be made in more than one state, registration with the SEC is required. Coordination is concurrent registration with the SEC and the state for public offerings. Notice filing pertains to certain federal covered securities, primarily by investment companies (mutual funds). U4LO3
Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A) A-rated general obligation municipal bond B) Ba-rated corporate mortgage bond C) Aa-rated corporate debenture D) Baa-rated municipal revenue bond
C. A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk. U13LO4
Under the USA, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities? A) Solicited transactions with individual clients located within the state B) Rights offering to existing shareholders with underwriting compensation of $.05 per share to the soliciting broker-dealers C) Private placement offered to more than 50 institutional purchasers in the state D) Public offering of stock in a new corporation
C. Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions. U4LO3
Under the USA, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective? A) Application B) Coordination C) Qualification D) Notice filing
D. Under the NSMIA, the Administrator may request copies of the documents filed with the SEC by federal covered securities, but does not review them because of lack of jurisdiction. There is greater review of the information filed in a registration by coordination, but because the primary responsibility falls upon the SEC, the states sometimes just spot check the documents. However, registration by qualification or application for professional licensing becomes effective only after an active review of registration information and upon order of the Administrator. U4LO3
529 Plan vs. Coverdell ESA:
Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan. U24LO6
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) It cannot be determined from the information given B) increase C) remain unchanged D) decrease
Most mutual funds do not have 100% of their assets in securities, and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income. U14LO3
A participant in an ERISA qualified retirement plan is studying the investment policy statement (IPS) prepared by the plan's fiduciary. The contents of the IPS would not include A) specific security selection B) methods for monitoring procedures and performance C) determination for meeting future cash flow needs D) investment philosophy including asset allocation style
One thing that could never be in an IPS is a listing of the securities that will be purchased in the future. Types of securities, yes, but not the specific ones. U24LO5
Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X B) Sharon must be registered in State X in order to accept the order C) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them D) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X
Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside. U3LO5
In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is A) passbook savings account B) demand deposit account (DDA) C) revocable trust D) Totten trust
The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same. U18LO5
Although there may be some slight differences in methodology, when S&P or Moody's evaluate a security in order to assign a rating, they would be least likely to consider the issuer's A) cash flow to debt ratio B) profitability ratio C) liquidity ratio D) asset turnover ratio
The rate at which assets are turned over is not nearly as important to determining a rating as the other three. U10LO7
All of the following actions must be completed prior to customers entering their first option trade EXCEPT A) receipt of a completed options agreement B) approval by a designated options supervisor C) delivery of the options disclosure document (ODD) D) completion of the new account form
A. Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval. U18LO2
Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in 5 states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its A) Form ADV Part 2A and Part 2B B) Form ADV Part 1 and Part 1B C) Annual renewal form provided to the SEC D) Form ADV Part 2, Appendix 1
A. The Form ADV Part 2 (both parts) is acceptable for use as the firm's brochure. Part 1 is for registration purposes, and Part 1B is only used by state-registered advisers (as this firm is). Part 2, Appendix 1 is used for investment advisers who offer wrap fee programs. As a state-registered investment adviser, SCAM does not file any forms with the SEC. U6LO4
Under SEC Release 1A-1092, which of the following has (have) met the test of providing advice or analysis concerning securities? 1. A stockbroker calls a client and recommends the purchase of a certain stock. 2. A lawyer recommends against purchasing shares of a mutual fund in favor of another investment. 3. A publisher of an investment newsletter provides general information and recommendations concerning specific securities.
All. Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect. U1LO2
Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) It can permit regular direct cash payouts to participants before retirement. B) Contributions are required annually. C) It must be established under a trust agreement. D) It must define a specific contribution amount.
C. All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement. U24LO2
Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) Signing an investment advisory contract that did not outline the compensation arrangements B) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody C) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees D) An owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan
C. Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The Uniform Securities Act also requires investment advisers to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is considered an assignment of the IA's contracts. U6LO4
The statute of limitations for criminal offenses under the USA is A) 5 years B) 10 years C) 2 years D) 3 years
Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years. U5LO4
An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify, A) neither the private fund adviser nor any of its advisory affiliates have been convicted of a felony within the past 12 years B) every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million C) the fund's outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are individuals with at least $5 million in investments D) the private fund adviser must have less than $110 million in private fund assets under management
The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified buy meeting the net worth or assets managed by the adviser as stated. The $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors. Conviction of a felony within the past 10 years, not 12, will generally make one a "bad actor" and cause the exemption to be forfeited. Private fund advisers must keep the AUM under $150 million, not $110 million. U1LO5
Capital Asset Pricing Model (CAPM)
The model is made up of two separate components. One component is known as the stock risk premium and is the part of the model reflected by the following formula: (market return − the risk-free return) × beta of the stock. The other component is the market risk premium and is the part of the model reflected by the following formula: (market return − risk-free return). The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock, whereas the market risk premium is the incentive required for the individual to invest in the securities market in general. U20LO8
The Uniform Securities Act considers certain securities to be exempt from the registration requirements of the act. Under the USA, which of the following is an exempt security? A) Equipment trust certificate issued by a railroad that is regulated by a state's regulatory body B) Preferred stock C) Corporate bonds D) Commercial paper with a term of more than 1 year
A. Several types of securities are specifically exempt under the act, including equipment trust certificates issued by a state-regulated or federally regulated railroad. High-quality (receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization) commercial paper is exempt if the term is 9 months or less and it is issued in denominations of $50,000 or more. U4LO3
Regarding the use of testimonials in advertising, all of the following are true EXCEPT A) an investment adviser representative may only use a testimonial from an existing client B) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial C) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial D) an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm
A. Testimonials are prohibited under any circumstances for investment advisers and their representatives. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards. U6LO5
An agent making a sales presentation to a client about a mutual fund's historical returns is required to explain to the client the difference between the fund's A) current yield and holding period return. B) current yield and real return. C) current yield and total return. D) total return and risk-adjusted return.
C. When comparing to a benchmark, it is common to show various return computations. In connection with the solicitation of investment company shares, it is considered an unfair business practice to discuss returns without fully explaining the difference between current yield and total return. U23LO1
