Practice Test
"Broker-dealer" does not include
1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company.
A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend? A) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds B) A diversified open-end investment company concentrating in small-cap stocks C) A government bond fund D) A high-yield bond fund
A) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.
Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) Living will B) Durable power of attorney C) Living trust D) Incapacitated will
A) Living will The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug".
SEC Release IA-1092 requires an investment adviser to make each of the following disclosures except A) annual compensation for the past five years or initial registration if that is shorter. B) any compensation received from an issuer of a security being recommended to clients. C) if his personal securities transactions are inconsistent with the advice given to clients. D) that the investment adviser may structure his personal securities transactions to trade on the market impact caused by his recommendations to clients.
A) annual compensation for the past five years or initial registration if that is shorter. An investment adviser must disclose his methods of compensation and must disclose compensation received from the issuer of any recommend security. However, investment advisers are under no obligation to disclose their annual income
If a customer buys a 6% bond maturing in 8 years on a 7.33 basis, the price of the bond is A) below par B) inverted C) at par D) above par
A) below par a bond with a basis or YTM above par is issued at a discount
When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) disclaiming the IRA B) becoming the executrix of the estate C) contesting the estate D) accepting the estate
A) disclaiming the IRA
An adviser has custody of a client's securities or funds if the adviser A) has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees B) uses a broker-dealer to hold the customer's funds and securities and has limited trading authority over the account C) maintains the customer's funds and securities in a joint account with the registered investment adviser D) accepts prepayment of advisory fees or has discretion over a customer's account
A) has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees
The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight, this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an investment adviser representative, you would A) not be permitted to contact your clients until it was ascertained that the report was general public knowledge B) be required to send your clients to the firm's website before making comments regarding this security C) be permitted to contact your clients with this recommendation tomorrow D) be permitted to contact your clients with this recommendation right now
A) not be permitted to contact your clients until it was ascertained that the report was general public knowledge
Under the USA, a person who is in the business of providing advice on trading futures contracts in addition to advising clients on securities issued or guaranteed by the U.S. government is A) not required to be a registered investment adviser in the state B) required to be a registered agent in the state C) required to be a registered investment adviser representative in the state D) required to be a registered investment adviser in the state
A) not required to be a registered investment adviser in the state The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of "investment adviser" a person whose securities advice is confined to securities issued or guaranteed by the Treasury.
In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) purchasing shares directly from advisory clients B) directing securities transactions to an affiliated broker-dealer C) engaging in an agency cross transaction D) the trade is being executed by an officer or partner of the firm
A) purchasing shares directly from advisory clients In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.
The portfolio manager of a bond fund believes that interest rates are going to increase in the near future. As such, it would be wise for that manager to A) shorten the average duration of the portfolio. B) lengthen the average duration of the portfolio. C) increase the equity portion of the portfolio. D) shift into higher-rated bonds.
A) shorten the average duration of the portfolio.
There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT A) hourly fees B) 1% of the increase in account value over the next quarter C) 0.25% of the asset per quarter D) 1% of the average annual assets
B) 1% of the increase in account value over the next quarter Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation.
A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) ETFs B) ETNs C) Insured bank CDs D) Treasury bonds
B) ETNs Treasury bondsBecause ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved.
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a long-term government bond fund B) an intermediate-term, high-grade corporate bond fund C) an intermediate-term government bond fund D) a large-cap growth fund
B) an intermediate-term, high-grade corporate bond fund The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.
In an effort to benefit from the economies of scale, Liquid Assets Management, Inc. (LAMI) and Strategic Assets Management Company (SAMCO), both registered with the Administrator as investment advisers, have merged into a new firm with the name of Strategic and Liquid Assets Management Company (SLAMCO). This would A) require notification to the clients within a reasonable period of time. B) be considered an assignment of the advisory contracts and would require consent of the clients. C) require the filing of a new Form ADV along with the proper registration fee. D) be an unethical business practice.
B) be considered an assignment of the advisory contracts and would require consent of the clients. A change of management control is deemed to be considered an assignment of the advisory contracts held by LAMI and SAMCO. In order for those contracts to be continued by SLAMCO, consent of the clients is required. Although SLAMCO would have to register with a new FORM ADV, as a successor company, no registration fees would be due until renewal on December 31.
A variable annuity annuitant bears all of the following risks EXCEPT A) market risk B) mortality risk C) inflationary risk D) interest rate risk
B) mortality risk The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The investor in a variable annuity bears inflationary risk, market risk, and interest rate risk.
Each of the following terms is commonly found in modern portfolio theory EXCEPT A) the capital asset pricing model B) the internal rate of return C) the efficient set D) the feasible set
B) the internal rate of return
Both state and federal law have record keeping requirements for broker-dealers. When it comes to email correspondence, the requirements are A) that a receipt that the email has been read is sufficient. B) the same as they would be for written correspondence. C) only that the correspondence be reviewed by a principal. D) the firm must keep the correspondence in cloud storage for three years.
B) the same as they would be for written correspondence.
It has been a great year at Capital Funding, Inc., an SEC-registered broker-dealer that is also registered in 22 states. The company decides to share its good fortune with employees by paying a year-end bonus equal to 31% of annual salary. In order for clerical personnel to receive this bonus, A) they must be licensed as agents B) they must be employees of the broker-dealer C) the bonus must be sales related D) they must be licensed as investment adviser representatives
B) they must be employees of the broker-dealer Unregistered personnel may be paid a bonus as long as it is not directly related to any specific sales activity.
What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received. B) Proceed with the account; the signature is not required. C) Proceed with the account, but make a supervisory person aware of this. D) Only unsolicited orders may be accepted until the signed receipt is received.
C) Proceed with the account, but make a supervisory person aware of this.
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond's internal rate of return is A) 4%. B) 0%. C) 8%. D) 6%.
D) 6%. When a bond is selling at its present value, the NPV is zero. A bond's present value should be equal to a market price giving a yield to maturity equal to the current market interest rates NPV=CMP IRR=0
When it comes to borrowing and lending money, the Uniform Securities Act (USA) prohibits activity that would compromise the objectivity of securities professionals. Which of the following is (are) NOT a prohibited practice(s)? A broker-dealer lending money to a client to purchase additional securities An agent taking out a car loan from a bank whose branch manager is a client of that agent An investment adviser borrowing money from an affiliated broker-dealer An investment adviser lending money to a client to enable that client to maintain the minimum required asset level in the account A) II and IV B) I and III C) I, II, III, and IV D) I, II, and III
D) I, II, and III
Which of the following statements is TRUE? A) The state Administrator has authority to amend federal law to meet the needs or special circumstance in his state. B) The USA only provides for civil liabilities for persons involved in illegal securities transactions in their state, while federal law provides criminal penalties. C) The Uniform Securities Act is national law that each state enforces through a state Administrator. D) State Administrators are permitted to establish regulations relating to the registration, testing and fees for broker-dealers, agents, investment advisers and investment adviser representatives.
D) State Administrators are permitted to establish regulations relating to the registration, testing and fees for broker-dealers, agents, investment advisers and investment adviser representatives. The state Administrators are permitted to establish the requirements for broker-dealer, agent, investment adviser and investment adviser representative registrations, including testing, filing, and fee regulations. The Uniform Securities Act is model legislation for state regulation (not federal regulation) that each state may adapt to its own needs. The state Administrator does not have authority to amend federal law to meet special circumstance in his state.
One of your very generous clients has used up her lifetime gift exclusion. Continuing to make gifts, she gives $50,000 to a grandchild and $18,000 to the child of a friend. What are the tax consequences of these gifts? A) If the children use the money for tuition at a qualified educational institution, there is no tax. B) The tax rate on both gifts will be the same. C) Only the gift to the child of the friend will be taxed because one can make unlimited gifts to grandchildren. D) The tax rate on the $50,000 gift will be higher than that on the $18,000 gift.
D) The tax rate on the $50,000 gift will be higher than that on the $18,000 gift. gift tax and estate tax are progressive so bigger is taxed more
Your high-net-worth advisory client has a large cash position in his money market account and is considering using the cash to purchase an investment property. You believe that the real estate investment will not provide the same returns that can be realized by investing in bonds, so you prepare a proposal that estimates the income stream and potential capital growth of a portfolio of convertible bonds currently in the firm's inventory. The recommendation is quite suitable for the client based on his current objectives. If the transaction is completed and you fail to disclose that the bonds were sold in a proprietary transaction and receive client consent, you would have A) misrepresented a material fact B) to disclose the amount of commission on the trade confirmation C) not breached your fiduciary duty D) committed a prohibited practice
D) committed a prohibited practice
The nondiscrimination rules imposed on qualified retirement plans by the Internal Revenue Code are intended primarily to ensure that retirement plans do not discriminate A) against employees over age 40 B) against a company's owners, top executives, and key employees C) against female employees D) in favor of a company's owners, top executives, and key employees
D) in favor of a company's owners, top executives, and key employees
durable power of attorney grants authorization to a person to legally act
act on behalf of someone unwilling to do so
A living trust deals with how assets are
distributed
However, interest rate risk increases as the maturities
lengthens
t is only when a change to a minority interest in an advisory firm organized as a partnership that
notification within a reasonable period of time is required
A retirement plan that excessively benefits key employees is said to be top-heavy and must meet additional
special requirements.
Private funds invest into companies where the objective is to
use their money and business acumen to grow the company to the point where the fund's holding can be sold at a large profit.
