Series 66 Checkpoint Set 1
Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for both exempt and nonexempt securities B) not fraudulent if there was willful intent to omit the information C) fraudulent for exempt securities only D) fraudulent for nonexempt securities only
A) fraudulent for both exempt and nonexempt securities Material facts are facts that an investor relies on to make investment decisions. The willful omission of a material fact in the sale, purchase, or offer of a security is fraudulent. This applies whether the security offered is exempt or nonexempt.
C) All of Paula's clients are private funds, and she has total assets under management of $200 million with less than $25 million of that belonging to foreign investors. D) All of John's clients reside in his home state, and John offers no advice on any exchange-listed securities. He manages $50 million in assets, and none of his clients are private funds.
C) All of Paula's clients are private funds, and she has total assets under management of $200 million with less than $25 million of that belonging to foreign investors. The exemptions from the SEC registration requirement under the Investment Advisers Act of 1940 include advisers who render no advice on any exchange-listed security and whose clients are all in a single state as well as certain foreign advisers who do not hold themselves out as investment advisers and have fewer than 15 clients per year. In order to qualify for the private fund adviser exemption, total assets under management (AUM) must be less than $150 million. There is also an exemption for investment advisers, regardless of the number of states where offices are maintained, who limit their clientele to insurance companies.
Unless renewed, the registration of which of the following securities professionals expires on December 31? i. Agents ii. Broker-dealers iii. Investment advisers iv. Investment adviser representatives A) I and II B) II and III C) I, II, III, and IV D) III and IV
C) I, II, III, and IV All registrations of securities professional expire on December 31 unless renewed.
An individual registered as an agent with ABC broker-dealer has an independent financial planning practice. Hourly fees are charged for developing financial plans, and if the client wishes, he refers transactions to ABC broker-dealer and is paid commissions for products sold. The Investment Advisers Act of 1940 requires A) that ABC register as an investment adviser but not the financial planner. B) neither the financial planner nor ABC to register as an investment adviser. C) that the financial planner register as an adviser but not the broker-dealer. D) that ABC register as an investment adviser because it sells securities.
C) that the financial planner register as an adviser but not the broker-dealer. The agent is receiving compensation for rendering advice. A broker-dealer is excluded from the definition of an investment adviser unless it receives special compensation (typically a fee) for the advice.
Exercise of which of the following would not result in a change on the issuer's balance sheet? A) A call option B) Convertible preferred stock C) Rights D) Warrants
A) A call option When a call option is exercised, the strike price is paid to the seller of the option, not the issuer. The issuer is not involved in any way, so there is no effect on the company's financial statements. When the holder of a convertible preferred stock exercises the conversion privilege, the equity portion of the balance sheet shows a reduction in the preferred stock outstanding and an increase to the common stock outstanding. When rights or options are exercised, assets increase due to the cash paid for the stock and the equity portion of the balance sheet reflects an increase to the number of shares of common stock outstanding.
The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 was a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A) $8 B) $6 C) $12 D) $16
B) $6 Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share.
Your client is interested in investing in preferred stocks in an effort to receive dividend income. The client's target goal is a 6% current return on investment (ROI). If the RIF Series B preferred stock is paying a quarterly dividend of $0.53, your client's goal will be achieved if the RIF can be purchased at A) $22.55. B) $8.83. C) $35.33. D) $50.00.
C) $35.33. First, take the quarterly dividend and annualize it (4 × $0.53 = $2.12). Dividing that number by 6% gets you $35.3333, which rounds down to $35.33. Alternatively if you wish (but which takes more time), multiply each of the choices by 6% to see which of them equals $2.12.
Which of the following can issue stock? A) A state B) A city C) The U.S. Treasury D) A corporation
C) The U.S. Treasury Corporations issue stock. Federal and state governments, including municipalities can issue debt securities, but not equity securities. Even though the Savings Bonds advertisements read, "Take stock in America, buy U.S. Savings Bonds," that is a fiction because you can't buy stock in a government and, of course, buying bonds is lending money.
Each of the following persons is able to issue securities except A) a corporation B) a partnership C) an individual D) a credit union
C) an individual Individuals (natural persons) cannot issue securities. You can't sell stock in yourself.
An investment adviser is required to disclose any financial condition that is reasonably likely to impair its ability to meet contractual commitments to their clients in any of the following cases except when the adviser A) maintains custody. B) has discretionary authority. C) charges performance-based fees to qualified clients. D) requires substantial prepayment of fees.
C) charges performance-based fees to qualified clients. In an effort to protect customers, investment advisers must give prompt notice to their regulator in the event of a financial impairment that could cause the adviser to be unable to meet contractual obligations to clients when the adviser has discretion, maintains custody, or receives substantial prepayments of fees ($500, six or months in advance for state; $1,200, six or more months in advance for federal). This rule does not apply if the only condition existing is performance-based compensation.
Which of the following statements is true? A) A futures contract always requires delivery of an asset. B) A futures contract does not involve obligations to buy or sell an asset. C) Unlike forwards, futures are not traded on an exchange. D) A futures contract has standardized terms.
D) A futures contract has standardized terms. Futures contracts are traded on exchanges and, therefore, have standardized terms. In forwards, the terms of each contract are separately negotiated.
Asset-based sales charges will generally be lowest when holding A) Class R shares. B) Class B shares. C) Class C shares. D) Class A shares.
D) Class A shares. Class A shares have a front-end load but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load but do have a higher asset-based sales charge. Class R shares invariably have a 12b-1 charge higher than that of Class A shares but lower than that of Class B and Class C shares.
Under federal law, which act regulates the activities of broker-dealers and associated persons? A) Investment Company Act of 1940 B) Trust Indenture Act of 1939 C) Uniform Securities Act D) Securities Exchange Act of 1934
D) Securities Exchange Act of 1934 The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.
Buying a put option on a security one currently owns allows an investor to A) receive the premium for the purchase of the put. B) buy more stock if he exercises the put. C) increase his profit if the security declines in price. D) participate in additional gains if the security continues to increase in price.
D) participate in additional gains if the security continues to increase in price. This is an example of a protective put, that is, purchasing a put option on a stock the investor already owns. This allows the stockholder to lock in a sale price (the strike price of the put). If the market price of the stock continues to rise, the investor would not exercise the put. The put would expire, and the long stock would remain in the account at the higher market price. The investor could hold the stock or sell it at the higher market price.In either case, the investor would continue to participate in the additional gains. The protection (the hedge) occurs if the price of the stock falls. Then the investor would be able to exercise the right to sell the stock at the strike price. That would offset the loss on the long position, not generate additional profit. Remember that options buyerspay the premium; they do not receive it. Exercising a put gives the holder the right to sell the stock, not buy it. Perhaps reviewing an example will help.
A recession is defined as a drop in GDP for: A) four consecutive quarters. B) three consecutive quarters. C) six consecutive quarters. D) two consecutive quarters.
D) two consecutive quarters. A recession is a drop in GDP for two consecutive quarters.
Gibraltar Investment Advisers opened for business last week. Because of the clients brought over from previous affiliations of their investment adviser representatives, they have started with $94 million under management for various individual and corporate clients. They also signed a contract to manage an additional $10 million for a wealthy individual. Gibraltar will begin managing that individual's portfolio at the beginning of the next calendar quarter. Which of the following best describes Gibraltar's investment adviser registration requirements?
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The Uniform Securities Act provides for a number of cases where an investment adviser representative is not defined as such in a specific state. One of those cases is when A) the individual represents a federal covered investment adviser and has two retail clients in a state in which she has no place of business. B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B.
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Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if A) its only place of business is outside of the United States, deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the United States. B) it has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management.
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Which of the following would be most likely to increase a bond's liquidity? A) A longer maturity B) A higher rating C) A lower rating D) No call protection
B) A higher rating. Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it or that a very large purchase or sale would not be possible at the current price. The available pool of purchasers for bonds with a low credit rating is much smaller than for those with investment-grade ratings. (Many institutions are only able to purchase bonds with higher credit ratings.) As a result, the lower the credit rating is, the greater the chance is of the bond having liquidity issues. Similarly, bonds with short-term maturities attract many more investors than those with long-term maturities, causing the long-term bonds to be less liquid. The absence of call protection is negative to many investors, thus limiting the number of potential investors.
The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? A) Only investment advisers B) Broker-dealers and investment advisers C) Broker-dealers, agents, and investment advisers D) Only broker-dealers
B) Broker-dealers and investment advisers Only broker-dealers and investment advisers are required to maintain financial records. There are no financial inspections of agents or investment adviser representatives as there are with broker-dealers and advisers.
Because of failing economic conditions, KAPCO Advisers, an adviser with slightly less than $120 million in assets under management, lays off a registered investment adviser representative. In this case, who would notify the state Administrator of the termination? A) The IAR's new employer B) The IAR C) KAPCO Advisers D) Both KAPCO and the IAR
B) The IAR With more than $110 million in assets under management, KAPCO is a federal covered adviser. In that case, the IAR is the one who notifies the Administrator of being terminated.
C) the individual maintains an office in State B, but his only clients in that state are institutions. D) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has six or fewer retail clients in State B.
B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B. Those individuals representing a state-registered investment adviser (IA) can take advantage of the de minimis exemption. That is, if the individual has no place of business in a state and conducts business with no more than five retail clients in the state, registration is not required. Be sure you understand that "no more than five," "fewer than six," and "five or fewer" mean the same thing. Six or fewer is too many. The representative of the covered IA would not have to register; but that is not part of the USA, it is part of the federal law. There are never any exceptions for those with a place of business in the state.
All of the following must be specified in the state registration statement of the security except A) all other states where the security is currently registered or will be registered B) the total amount of the security that will be offered in each state C) a stop order from any other state that affects the offering of the security within that state D) the total amount of the security that will be offered in this state
B) the total amount of the security that will be offered in each state It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes the amount to be sold in this state must be disclosed.
Which of the following is not traded on any exchange? A) Closed-end funds B) ETFs C) Forward contracts D) Futures contracts
C) Forward contracts Forward contracts are nonstandardized and, as such, do not trade on any exchange.
The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next 2 months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firm's customers who actively invest in common stocks? A) Corporate bonds B) Cyclical stocks C) Aggressive growth stocks D) Defensive stocks
D) Defensive stocks The concept of sector rotation involves moving assets from those sectors that are close to their peak and moving into those who will benefit from the next move in the business cycle. Defensive stocks such as those in the food, pharmaceuticals, and public utilities would most likely be suitable for investors who believe the cycle is near its peak. Defensive stocks are least likely to be affected by a reversal in the business cycle.
Although many advisers to private funds are exempt from registration, larger ones generally register with the SEC. SEC-registered investment advisers with at least $150 million in private fund assets under management use which form to report information about the private funds that they manage? A) Form PF B) Form D C) Form 13F D) Form ADV Part 1A
A) Form PF Logically enough, the lettersPF stand for private fund, and that is the form used. The ADV Part 1A is used by any investment adviser registering with the SEC (or the states); it is not unique to private funds. Form 13F applies to any institutional investor with discretion over $100 million or more in certain equity securities. Those are on a list published by the SEC and are called13F securities. Form D is used under Rule 506 for private placements and has nothing to do with investment advisers.
When investors tend to increase their investments in debt securities on the short end of the spectrum, it generally leads to A) a positive yield curve B) an inverted yield curve C) a flat yield curve D) short-term yields that exceed long-term yields
A) a positive yield curve Investors buying short-term debt rather than long-term debt will have the effect of driving the prices of short-term instruments up and, as a result, their yields down. This will produce a normal, or positive, yield. It is when the demand for bonds on the long end of the spectrum exceed demand for those in the near term that short-term yields exceed those of long-term yields. This creates an inverted or negative yield curve.
During the application process for registration as an agent, the Administrator may request information about the applicant's A) citizenship. B) financial condition as disclosed on the agent's most recent balance sheet. C) record involving a non-securities misdemeanor conviction five years ago. D) marital status.
A) citizenship. Individual registrants may be asked about their citizenship but not their marital status. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers.
Each of the following would be excluded from the definition of agent except A) the president of the state university who sits on the broker-dealer's board of directors. B) a sales assistant who is authorized to take orders from existing clients only. C) an individual who is the secretary of a broker-dealer's largest branch office. D) a partner in a broker-dealer whose only connection with the firm is her contribution of capital.
B) a sales assistant who is authorized to take orders from existing clients only. It doesn't make any difference if the clients are new or existing—anyone accepting orders must be registered as an agent. Silent partners and outside directors are not included in the definition of agent. The size of the branch office is irrelevant; as long as the individual's function is limited to clerical activity, registration as an agent is not required.
All of the following corporate actions would have the effect of increasing the firm's net worth except A) issuing convertible preferred stock. B) issuing convertible debentures. C) purchasing some of the corporation's outstanding bonds at a discount. D) issuing common stock.
B) issuing convertible debentures. Issuing a debt security, such as a debenture, will bring in cash (an asset) but will be offset by an equal amount: the debt. Therefore, the net worth will remain the same. Issuing any equity security, preferred or common, increases the owners' equity (net worth), while being able to pay off a debt at a discount means that the current asset (cash) went down less than the long-term liability (the bond) resulting in an increase to net worth.
An investment adviser (IA) is registered in States A and B, with its principal office in State B. The Administrator of State A can request to see A) proof that the IA meets State A's financial and recordkeeping requirements. B) sales records relating to clients who are residents of State B. C) advertisements run in State A. D) internal communications regarding the company's participation in a local charitable event.
C) advertisements run in State A. The Administrator of State A can request that advertisements placed in his state be filed because that is business relating to his state. As long as the IA meets the home state's financial and recordkeeping requirements (which is State B in this question), that is good everywhere.
Under current law, which of the following would not be required to register as an investment adviser in a state? A) A person who has directed advice relating to securities to six individuals in that state within the past 12 months even though he has no place of business within the state B) A person whose home office is in the state and who manages less than $90 million in assets
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When a security is being registered under coordination, all of the following are required EXCEPT: A) filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. B) none of these are exceptions. C) prompt filing with the Administrator of any amendments filed with the SEC. D) a description of the proposed use of the proceeds of the underwriting.
A) filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least 2 full business days before the effective date, not with the initial filing.
C) A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein D) A person who deals exclusively with broker-dealers in that state but maintains no place of business within the boundaries of the state
D) A person who deals exclusively with broker-dealers in that state but maintains no place of business within the boundaries of the state Issuers of securities are not included in the list of advisory clients where an exemption from registration is granted when the investment adviser does not have a place of business in the state. Persons having no place of business in a state can qualify for the de minimis exemption as long as they have fewer than six retail (individual) residents of that state as clients within any 12-month period. Unless an exception applies, and that would have to be stated in the question, investment advisers who have less than $100 million in assets under management (AUM) must register on the state level. Once they reach $100 million of assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC. Once registered with the SEC, if the AUM falls below $90 million, the adviser can no longer remain SEC registered and must register on the state level.
An investor using yield curve analysis would expect to view bonds of A) similar quality over varying maturities B) varying quality of similar maturities C) varying quality over a number of maturities D) a single issuer over varying maturities
D) a single issuer over varying maturities The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the yield spread, but that is going beyond the scope of this question.
With respect to the recordkeeping rules under the Uniform Securities Act, which of the following statements is not correct? A) Investment advisers must maintain records of electronic communications for a minimum of five years from the end of the year in which the communication was made. B) Investment adviser representatives have no recordkeeping responsibilities.
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Which of the following describe requirements of the Investment Advisers Act of 1940 concerning the firm and customer records of an investment adviser? i. They must be maintained in the principal office of the adviser for two years. ii. They must be maintained in the principal office of the adviser for three years. iii. They must be readily accessible for two years. iv. They must be readily accessible for five years. A) I and IV B) I and III C) II and IV D) II and III
A) I and IV An investment adviser's records must be maintained for two years in the principal office and must be readily accessible for five years.
Your customer is interested in a leveraged fund and makes the following statements about leveraged funds to you. All of the statements regarding leveraged funds are true except A) there are no unusual risks associated with these funds other than those one would incur with any index tracking fund. B) these funds sometimes use derivatives products to achieve their stated goals. C) some leveraged funds are exchange-traded products. D) the funds attempt to return a multiple of the return of a benchmark index they are tracking, perhaps two or three times.
A) there are no unusual risks associated with these funds other than those one would incur with any index tracking fund. Because the fund's objective is to achieve returns that are a multiple of the returns of the benchmark index, the result could be a multiple of any loss incurred by the benchmark index as well. In addition, because these funds utilize derivatives products to achieve their stated objectives, they may not be suitable for anyone who derivatives products are not suitable for, given the additional risks associated with those products.
Which of the following activities is most likely to be considered by the SEC as meeting the business standard element in the definition of an investment adviser? A) Giving specific investment advice on only rare and isolated occasions B) Advertising investment advisory services to the public and providing them routinely C) Issuing reports on macroeconomic conditions D) Providing investment advisory services but limiting the clientele to immediate family members
B) Advertising investment advisory services to the public and providing them routinely Routinely providing investment services meets the business standard element, which the SEC describes as giving advice such that it constitutes a business activity conducted with some regularity. In addition, offering services through advertising suggests that the adviser is publicly in the business of offering investment advice. Providing advisory services solely to immediate family members is not viewed as being in the business of offering investment advice. Giving advice on the economy (macroeconomic conditions) is not equivalent to giving advice on specific investment recommendations and therefore is not a covered activity under the Investment Advisers Act of 1940.
When comparing exchange-traded funds (ETFs) to mutual funds, a feature available in ETFs that is not found in the mutual funds would include the ability to A) correlate to a specific index. B) be bought and sold at a profit the same day. C) represent an entire portfolio or basket of securities. D) reinvest dividend distributions.
B) be bought and sold at a profit the same day. Unlike mutual fund shares, ETF shares can be traded on an intra-day basis. Mutual funds are priced once per day, after the market closes, but, with an ETF, you can buy and then sell an hour or two later at a profit or a loss. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index. Dividend reinvestment is available on ETFs and mutual funds, although the process tends to be more efficient with the funds.
C) it limited its clients to insurance companies only D) it would be required to register in 15 or more states.
B) it has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management. An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the United States and their accounts under management (AUM) in the United States are less than $25 million. When an investment adviser is required to register in 15 or more states, it is eligible but not required to register with the SEC.
Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) The publisher of an investment advisory newsletter who plans issues based on market events B) A broker-dealer that manages clients' portfolios for a fee C) A bank that charges a fee for providing investment advice D) An individual who makes recommendations regarding which types of securities would meet a client's investment objectives but who does not recommend specific securities
C) A bank that charges a fee for providing investment advice A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Investment Advisers Act of 1940. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if the mention of particular securities is avoided.
For a customer interested in buying an inverse exchange-traded fund (ETF) tracking the performance of the Standard & Poor's 500 Index, which of the following market views would make that purchase most inappropriate? A) Bearish B) Neutral C) Bullish D) Bullish or bearish
C) Bullish Inverse (short) ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 Index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value.
Quick and Fast Executions, Inc., a broker-dealer registered with the Administrator, maintains a website describing the services offered by the firm. Which of the following statements would be in compliance with the requirement to maintain certain books and records? A) Because websites tend to be fluid, Administrators only require that they be available for spot-checking. B) The original website design must be retained for a period of at least five years from initial use. C) The original website design must be retained for a period of at least three years from initial use. D) Retention of any revised design must be kept for a period of at least three years after the initial design's retention period ends.
C) The original website design must be retained for a period of at least three years from initial use. Websites, like any other advertisement, must be retained for a period of at least three years from initial use. Because they are fluid (frequently changing), each design change must be filed after first use beginning a new 3-year holding period.
Under the Uniform Securities Act, the definition of a broker-dealer includes A) a person in the business of making trades in his own account or for the accounts of others B) a trust company when executing transactions in accounts in which it does not act in a fiduciary capacity C) an agent handling principal transactions with major institutional clients D) an authorized representative of the issuer who receives a commission
A) a person in the business of making trades in his own account or for the accounts of others A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others. Agents and banks, including trust companies, are specifically excluded from the definition of broker-dealer.
Ownership in a corporation is evidenced by holding shares of the company's A) common stock only. B) bonds with a first mortgage on the property. C) warrants. D) common or preferred stock.
D) common or preferred stock. If you have equity in a corporation, it means you have an ownership interest. Equity securities (common and preferred stock) represent ownership in a corporation. A mortgage bond is a debt security, and a warrant gives the holder the right to acquire equity, but, in itself, is not equity.
Parker Abernathy is a partner at Abernathy and Wilkins Advisers (AWA), an investment advisory firm registered in three states. Parker's primary responsibility is supervising the firm's investment adviser representatives. On a personal level, Parker has no advisory clients and never has dealings with the public. Under the Uniform Securities Act, Parker A) must register as an investment adviser principal due to having supervisory responsibilities. B) is exempt from registration because there are no dealings with the public. C) must register as an investment adviser. D) must register as an investment adviser representative.
D) must register as an investment adviser representative. On the list of those who meet the definition of investment adviser representative are those individuals who supervise IARs. Unlike FINRA, there is no principal designation and AWA is the investment adviser, not Parker.
A bond with a par value of $1,000 and a coupon rate of 6% paid semiannually is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A) Future value of $1,200 B) 15 payment periods C) Present value of $1,050 D) Interest payments of $30
D) Interest payments of $30 The yield to call (YTC) computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon will make $30 semiannual interest payments. With a 15-year call, there are 30 semiannual payment periods, not 15. The present value is $1,200 and the future value is $1,050, which is the reverse of the numbers indicated in the answer choices.
Under the USA, which of the following is considered a broker-dealer in a state? A) ABC broker-dealer with no place of business in the state who only does business with other broker-dealers in the state B) First Federal Trust Company, specializing in underwriting new municipal issues C) An agent effecting transactions for a broker-dealer D) XYZ broker-dealer with an office in the state whose only clients are insurance companies
D) XYZ broker-dealer with an office in the state whose only clients are insurance companies Any broker-dealer with an office in the state, regardless of the nature of its clients, is defined as a broker-dealer under the USA. If the firm did not have an office in the state and its only clients were institutions such as insurance companies, or other broker-dealers, it would be excluded from the definition. Banks or trust companies and agents are never broker-dealers.
An analyst reviewing a company's financial statements would examine the footnotes to A) compute the net worth B) determine the average age of the receivables C) identify the authors of quoted information D) discover any pending legal action against the company
D) discover any pending legal action against the company Footnotes to the financial statements are used to convey "off-book" information such as pending lawsuits.
Section 401(b) of the Uniform Securities Act defines an agent as an individual who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. However, the term agent would not include an individual A) employed by a broker-dealer selling securities on behalf of an issuer. B) employed by the investment banking firm engaged to underwrite a new issue of nonexempt securities. C) representing a non-exempt issuer in the sale of the issuer's securities in a non-exempt transaction. D) employed by an issuer to research industry trends.
D) employed by an issuer to research industry trends. Employees of issuers who are not involved with the sale or purchase of their employer's securities are never agents. When individuals represent an issuer in the sale of its securities, they are agents, unless it is one of a small group of exempt securities (e.g. US and Canadian government or municipal securities), or the transaction is exempt. On the other hand, there is almost no case where an individual active in the securities business of a broker-dealer is not an agent.
For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A) common. B) cumulative. C) participating. D) convertible.
B) cumulative. Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed and, regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock.
One way in which the method of capitalization of closed-end companies differs from that of open-end companies is that the closed-end company can A) permit reinvestment of dividends. B) continuously offer additional shares. C) issue more than one class of stock. D) be listed on an exchange.
C) issue more than one class of stock. Unlike open-end companies, which can only issue one class of stock (don't confuse this with different sales charge classes), closed-end companies can issue preferred stock. It is only the open-end company that continuously offers new shares, and both permit reinvestment of dividends. The fact that closed-end companies can be listed on an exchange is not a method of capitalization.
Which of the following is an exempt security under the Uniform Securities Act? A) Commercial paper maturing in 12 months. B) Negotiable certificates of deposit with $100,000 denominations. C) Common stock traded on the London Stock Exchange. D) Shares of a U.S.-based insurance company not authorized to sell policies in that particular state.
B) Negotiable certificates of deposit with $100,000 denominations. A negotiable certificate of deposit issued by a bank is an exempt security. Insurance company shares are nonexempt if the issuer is not authorized to do business in that particular state. While debt securities issued by the United Kingdom are exempt, corporate securities issued by British companies are not. Commercial paper loses its exemption if the maturity is longer than 270 days.
Under the Investment Advisers Act of 1940, which of the following investment advisers is not exempt from federal registration? A) ABC Advisers, with offices in four states, deals exclusively with insurance companies. B) Marie maintains her only office in Paris, France, deals with fewer than 15 clients (none of whom is a registered investment company) in private funds advised by Marie, has AUM in the United States of less than $25 million, and does not hold herself out as an investment adviser in the United States.
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Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? A) In its capacity as a market maker, LMN Securities Co. sells 200 shares of GEMCO common stock to the corporate treasurer of GEMCO, buying for the company's investment account. B) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm.
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In general, an investor wishing to gain economic exposure to commodities would find it easiest to do so by A) investing in futures contracts. B) investing in forwards contracts. C) growing the commodity. D) buying the commodity directly.
A) investing in futures contracts. It is generally agreed that using commodity futures is the easiest and most common way to gain economic exposure to commodities. Forwards are more commonly used by producers or users because, unlike futures, most forwards contracts result in the delivery of the actual commodity. Only about 1% of all futures contract positions involve the delivery of the underlying commodity.
As defined in the Uniform Securities Act, which of the following statements is true regarding an agent? A) An agent may be a broker-dealer. B) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. C) If someone meets the definition of an agent, that person is exempt from registration requirements. D) An agent may be an individual or a firm.
B) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. The text in Section 401(b) of the Uniform Securities Act reads, "Agent means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." There are cases where an individual representing an issuer would not be considered an agent, such as if the transaction is exempt, but that doesn't change the definition.
Why do some mutual funds offer Class A and Class B share options? A) To differentiate between those shares sold directly from the fund's principal underwriter and those sold by broker-dealers B) To give investors the option of purchasing shares prior to or after 4:00 pm ET C) To give investors the option of choosing how they wish to be charged for the purchase of their funds D) Class A shares have lower management fees, while Class B shares have lower administrative costs
C) To give investors the option of choosing how they wish to be charged for the purchase of their funds Class A shares have a front-end load while Class B shares have a back-end load. The operating and administrative expenses are always higher on the Class B shares, but management fees are generally the same.
States may require investment advisers who are registered with the SEC to do each of the following except A) file any documents with the state that are filed with the SEC. B) pay state notice filing fees. C) maintain net capital requirements. D) file a consent to service of process.
C) maintain net capital requirements. The state may require federal covered advisers to pay notice filing fees, provide a consent to service of process, and submit copies of documents filed with the SEC but cannot determine net worth or net capital requirements for federal covered investment advisers. The administrator can require a minimum net worth for state-registered advisers but, under the NSMIA, cannot do so for federal covered ones.
A client has indicated that his primary objective is maximizing current income regardless of the risk. Which of the following mutual funds would probably be most suitable for achieving that goal? A) GHI Index Fund B) JKL Municipal Bond Fund C) DEF High-Yield Bond Fund D) ABC Growth and Income Fund
C) DEF High-Yield Bond Fund High-yield (junk) bonds, although carrying more risk, produce higher current income than other funds.
Registration with the state as an investment adviser would be required for a person with an office in this state who A) gives advice only on securities issued by or guaranteed by the government of the United States. B) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million. C) manages $13 million in assets for four clients. D) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets.
C) manages $13 million in assets for four clients. Under the NSMIA, as amended by Dodd-Frank, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with more than $200 million in assets, the person has the option of registering with the SEC or the states. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.
Investing in commodities could involve investing in any of these except. A) animals. B) industrial metals. C) agricultural items. D) consumer durables.
D) consumer durables. Commodity contracts are not available on consumer durables such as refrigerators and washing machines. They are available on agricultural items, such as corn, wheat, and soybeans. Likewise, investing in animal items such as cattle and pork bellies is possible. Finally, industrial items—primarily metals such as lead, zinc, and aluminum—are popular investments.
Under the Uniform Securities Act, a private placement is considered an exempt transaction if: A) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. B) no payment is made with any purchase. C) the security is rated in the top three grades by a recognized rating agency. D) the sale is unsolicited.
A) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. The transaction exemption available to private placements requires that no more than 10 offers be made in any 12-month period to noninstitutional (retail) purchasers. Whether individual or institutional, payment is made, but commissions may be paid only on institutional sales.
Which of the following individuals does not come under the supervisory regimen of an investment adviser? A) A CFA® preparing the firm's research reports B) The CPA engaged to perform the annual audit C) An individual in the mailroom who has fewer than six retail advisory clients D) A financial planner registered with the firm as an IAR but who maintains a separate financial planning practice as an independent contractor
B) The CPA engaged to perform the annual audit The annual audit must be performed by an independent accountant. Therefore, this CPA would have no advisory responsibilities requiring supervision. Independent contractors registered as investment adviser representatives (IARs) are supervised just as would be any other IAR. Research reports carry the name of both the firm and the preparer and need adequate supervision. If the mailroom person has clients (the number isn't relevant because there is obviously an office in the state), registration as an IAR is required.
Which of the following is not an accredited investor? A) An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year. B) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. C) A registered open-end investment company with net assets of $600,000. D) An individual with a net worth, including the value of her primary residence, that is greater than $1 million.
D) An individual with a net worth, including the value of her primary residence, that is greater than $1 million. An accredited investor can take different forms: an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past 2 years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.
A fixed-income investor notices that the short, intermediate, and long ends of the yield curve reflect a similar return. This would be typical of A) an inverted yield curve B) a normal yield curve C) a positive yield curve D) a flat yield curve
D) a flat yield curve If you were to plot this curve, what would it look like? It would be a flat line because, regardless of the maturities, all of the yields are the same. In an inverted (or negative) yield curve, the short end of the curve has higher yields than the long end. A normal (or positive) yield curve slopes upwards, with lower yields at the short end and higher yields at the long end.
Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? C) Barb, the largest shareholder in XYZ Corporation, purchases an additional 50,000 shares on the NYSE. D) Ken, the largest shareholder in ABC Corporation, sells 100,000 shares in a registered secondary transaction.
B) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm. An issuer transaction is one in which the issuer receives the proceeds of the sale. When GEMCO sold those donated shares to the market maker, the proceeds were received by the issuer (GEMCO). When stockholders sell their shares, they are the ones who receive the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in.
C) Investment advisers must maintain copies of all powers of attorney and other evidence of the granting of any discretionary authority by any client to the adviser for a minimum of five years. D) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years.
D) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. Emails are treated as any other communication: five years from the end of the year in which the record originated for investment advisers. There are no recordkeeping requirements specified for investment adviser representatives under the Uniform Securities Act. It is the investment adviser, not its representatives, that is required to maintain records.
When making a sales presentation to a prospective client, an agent of a broker-dealer would not be exempt from the anti-fraud provisions of the Uniform Securities Act if the product being offered was a A) futures contract B) fixed annuity C) forex contract D) federal covered security
D) federal covered security The anti-fraud provisions of the Uniform Securities Act apply whenever an offer or sale is made of a security. The only one of these choices that is a security is the federal covered security. Although federal covered securities are exempt from the registration requirements of the Act, they are not exempt from the anti-fraud statutes.
A) Gibraltar would be eligible to register at the federal level. B) Gibraltar's only option is to register at the state level because it currently manages less than $100 million in client funds. C) Gibraltar must register with the state(s) and then, within 90 days of the receipt of the additional $10 million, must register with the SEC. D) Gibraltar need not register as an investment adviser because it will manage funds for an institutional investor.
A) Gibraltar would be eligible to register at the federal level. If an investment adviser anticipates having at least $100 million under management within its first 120 days, it is eligible to become a federal covered adviser by registering with the SEC. Even though Gibraltar will have accounts under management (AUM) in excess of $100 million by the beginning of the next quarter, registration with the SEC is not mandatory until the AUM reaches $110 million. That the advisory firm will manage some institutional funds does not exempt the organization from investment adviser registration.
Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A) An individual who renders fee-based advice on precious metals B) An agent who offers incidental advice on securities and whose sole compensation is from commissions on transactions C) An employee whose only role is soliciting new investment advisory clients for the firm D) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser
C) An employee whose only role is soliciting new investment advisory clients for the firm Soliciting for advisory clients on behalf of an investment adviser is considered one of the functions describing an investment adviser representative under the Uniform Securities Act. An employee who performs only clerical or administrative functions is not an investment adviser representative. Precious metals are not securities and, therefore, a person advising on them is not considered an investment adviser representative. An agent is a representative of a broker-dealer, and as long as the only form of compensation is sales commissions based upon transactions, registration as an investment adviser representative is not required.
An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working 1 day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Comply with the notice filing requirements of the state B) Register as an investment adviser representative in State B C) Pass an examination D) Become licensed as a broker-dealer
B) Register as an investment adviser representative in State B Individuals managing client assets while employed by federal covered investment advisers must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state. It is the investment adviser who may be required to notice file with the Administrator.
KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Claire has 10 clients who reside in Ohio; IAR Sean has 6 clients who live in Kentucky; and IAR Felicia has 3 clients who are Georgia residents. In addition, Felicia conducts a quarterly presentation at the Augusta, Georgia National Golf Club where she discusses current market developments. The seminar is restricted to club members only. Which of the following is correct? A) Felicia must register in Georgia. B) Sean must register in Kentucky. C) Claire must register in Ohio. D) Because all 3 are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs.
A) Felicia must register in Georgia. Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state even when the number of clients they have in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to club members only—they are still members of the general public).
An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, the USA would require the firm to do which of the following? i. Cancel all discretionary powers ii. Immediately raise an additional $1,500 iii. Send notice to the administrator before the close of business on the day following discovery iv. Send a financial report to the administrator before the close of business on the day following the sending of notice A) III and IV B) I and IV C) II and III D) I and II
A) III and IV State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to send notice to the administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the administrator.
Under the Uniform Securities Act, which of the following would be considered an agent? A) A broker-dealer who buys and sells registered securities with the general public B) An individual who represents an issuer of a security issued by a Canadian province C) An individual limiting his sales activity to selling federal covered securities while representing a broker-dealer D) An individual who represents an issuer in an exempt transaction
C) An individual limiting his sales activity to selling federal covered securities while representing a broker-dealer An individual employed by a broker-dealer who sells securities to the public is an agent under the Uniform Securities Act. The USA defines an agent as, "any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." The law excludes those individuals from the definition of an agent who represent an issuer in exempt transactions, selling certain exempt securities (Canadian provincial securities are on that list), and transactions with issuers' employees when no commission is paid. There is virtually no case in which a salesperson representing a registered broker-dealer is not an agent.
Each of the following persons would meet the definition of a person associated with an investment adviser who needs registration as an investment adviser representative except A) an employee who solicits potential clients to open advisory accounts B) an agent of an affiliated broker-dealer who manages wrap fee programs C) a typist responsible for operating the desktop publishing system that prepares the investment adviser's weekly research bulletins D) a registered investment adviser's vice president of sales
C) a typist responsible for operating the desktop publishing system that prepares the investment adviser's weekly research bulletins Individuals associated with registered investment advisers in strictly clerical or administrative positions are specifically excluded from the definition of an investment adviser representative. Remember that, unlike FINRA where supervisory personnel register as principals, under state law, there is only one class of registration, the IAR. A broker-dealer offering wrap fee programs loses the exclusion, and its agents would have to register as IARs of the BD investment adviser.
The term exempt reporting adviser refers to A) advisers who are registered on the state level but who file their Form ADVs through the IARD. B) broker-dealers who are considered investment advisers solely because they offer wrap fee accounts. C) advisers whose only clients are insurance companies. D) advisers who rely on either the venture capital fund adviser exemption or the private fund adviser exemption.
D) advisers who rely on either the venture capital fund adviser exemption or the private fund adviser exemption. Exempt reporting advisers (ERAs) are defined as investment advisers but, because they either are private fund advisers or advise venture capital funds, are exempt from registration on either the state or federal level. However, even though they are exempt from registration, they must file certain portions of Form ADV—hence the name exempt reporting advisers.
In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable-rate preferred stock, changes in interest rates would be most likely to affect the market price of the A) adjustable rate preferred stock. B) common stock. C) straight preferred stock. D) convertible preferred stock.
C) straight preferred stock. Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.
(con't) Buying a put option on a security one currently owns allows an investor to A) receive the premium for the purchase of the put. B) buy more stock if he exercises the put. C) increase his profit if the security declines in price. D) participate in additional gains if the security continues to increase in price.
D) participate in additional gains if the security continues to increase in price. The investor owns 100 shares of ABC stock currently trading at $50 per share. Since he wants to protect against a drop in price, the investor purchases an ABC put option with a strike price of 50 and pays a premium of 3. If the stock's price rises to $60 per share by the expiration date, the put option will expire worthless. (Who wants to put [sell] stock at $50 when it is selling for $60?) In this case, the investor has paid a premium of 3 points to ensure that the stock can always be sold (during the life of the option) for a price of $50 while still having the opportunity to participate in future price increases of the stock. In our example, the investor has gained $7 per share (the difference between the increase from $50 to $60 less the premium paid for the option).
Which of the following does not meet the compensation test for defining investment advisers under SEC Release IA-1092? A) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. B) An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice. C) Subscription payments are received by a publisher of a newsletter providing impersonal securities-related advice. D) A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists.
A) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent; she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation.
A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly B) must register as an agent of the issuer whether or not compensation is involved C) need not register as an agent of the issuer because the offering is limited to current employees of the issuer D) may receive commissions, but not a salary, without registration
A) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly Under the USA, an individual employed by the issuer is an agent when effecting transactions with the issuer's existing employees if sales-related compensation is paid. As a practical matter, the employee would be on straight salary.
The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Commercial paper with no more than 9 months to maturity that is in 1 of the 3 highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000 B) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency C) Bonds that are obligations of the People's Republic of North Korea D) Common stock issued by life insurance companies authorized to conduct insurance sales in that state
D) Common stock issued by life insurance companies authorized to conduct insurance sales in that state A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates, but if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries who do not qualify.
An individual is currently registered as an agent with a broker-dealer. The firm recently began offering wrap fee programs to select clients. If the agent would like to offer these wrap fee programs through the firm, all of the following statements are correct except A) the agent would now come under a greater fiduciary responsibility. B) the broker-dealer would have to be registered as an investment adviser. C) the agent would have to become registered as an investment adviser representative. D) the agent would have to become registered as an investment adviser.
D) the agent would have to become registered as an investment adviser. Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. In order to offer these programs to clients, the agent would now have to become an IAR of the advisory firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.
